Day traders try to accumulate profits by performing numerous trades and betting on the minute price movements of stocks and indices during market hours.
Varied strategies are developed and performed by day traders to make the most of the live sessions. Many traders even come up with their own rules to follow for day trading.
The strategies used traditionally for day trading don’t give a 100% profit-earning result. The accuracy is far less and proper execution of the strategy depends on a lot of factors other than what the graph shows.
The Margin facility by brokers does add the profit amount when the trade ends well. However, it also increases the exposure and when it ends a losing trade, the losses also add up accordingly.
A margin shortfall is a serious issue for day traders and it has the potential to make them lose all their shareholdings in the account.
Day trading involves real financial risks. Only a fraction of day traders actually make money and they are the best-experienced minds speculating and watching each market movement closely every day.
Table of Contents
Strategies for Day Trading
Over the years, many day traders have come up with full-fledged trading strategies to perform during live sessions and make a consistent profit daily. With the evolution of the markets, any individual holding a trading account has access to day trading and value investing, whichever is convenient. Here are some of the intra-day trading strategies used by traders traditionally:
Open High-Low Strategy
The name itself reveals that the strategy is for the opening hours of the stock market. Within 15 mins of the open live session, if the stock price has given the high for the day and starts falling due to the selling pressure, the particular stock should be short-sold. On the other hand, when the stock price is at the lowest point in the beginning and rises later with more buyers, it indicates a support point, and the script must be chosen for a buying order.
Breakout Strategy
Every stock price has support and resistance levels given daily, weekly, fortnightly and monthly. These points at specific levels act as indicators for traders to take action. When the price rises above the resistance level, it means a buy order for that script, and similarly, when the price hits below the support level and keeps breaching it, a sell order for that script is the right option.
Pullback Strategy
Only experienced, well-informed traders adopt the pullback strategy. It involves catching the right price level. When the stock price hits a high, with resistance, it pulls back. The trader can assume the best point for entering a buy side to make the profits after exiting on the highest high of the day and vice-versa for stocks hitting the lowest lows of the day.
News-based Strategy
This type of trading involves buying and shorting stocks based on the news of the day or the previous day. Stocks with good positive news are selected for buying, and stocks with negative or quarterly/monthly losses, are for short selling.
Risks involved in day trading
Low Probability
It is proven that more than 90% of traders in the market consistently lose money, and only the skilled 10% can make profits. It’s extremely stressful and involves constant capital fusion. For a trader to succeed in intraday trading, they need to overcome severe financial losses during the process.
Borrowed Money
Brokers are allowed to offer margin facilities to the traders performing day trades. It means a trader can trade five times the amount they have in the trading account. The total value of the trade rises, and at the same time, the profit or loss also escalates five times. This facilitates 80% of the total trade value on borrowed money from brokers.
Margin Calls and Penalties
The margin facility is almost 80% of the total trade. Hence, when a trader utilises the margin to make the trade, they are obligated to make payments once the trade ends. If there aren’t sufficient funds for repayment within 2 days of those trades, a margin call penalty is levied with interest charged every day till full repayment.
Conclusion
The accuracy rate for day traders is very low. The returns earned through day trading can end up being a loss for the next or some other day. The risks involved during volatile sessions are very high and one small mistake might take all the profits earned during the day.
