Every successful day trader has multiple successful strategies they follow to make consistent profits. The number one reason why 90% of traders in Ireland fail is because they have no strategy and make trades based on instinct rather than data. The first time I started trading, I made the exact same mistake. I quickly realised without a plan you are destined for failure in the long run.
The Strategies mentioned below all require a good understanding of technical analysis! Also, I highly recommend testing out each strategy by paper trading before risking real money!
Momentum Trading
Momentum trading involves focusing on volatile stocks moving up or down based on strong volumes. Every day there are dozens of stocks moving 30% in a single day but there are also boring companies that move 1-2%. Momentum traders will look for stock prices to break a certain range and will ride the trend until it continues. Momentum trading is suitable for novice traders with smaller accounts as it’s possible to bank 3-10% per trade. To find these kind of stocks, use a stock scanning tool such as Trade Ideas.
Criteria for Momentum Stocks:
- Float under 100 million shares, the lower the float the easier it is for stocks to move.
- Strong daily charts – must be significantly above moving averages with no nearby resistance.
- Volume must be twice the average daily volume.
- An upcoming catalyst that will impact the stock price, this can be an earnings report or press release.
Range Trading
Range trading involves identifying stocks that are overbought or oversold based on moving averages. A moving average is a technical indicator used to determine the average price of a share over a particular time period. For example a 20 day moving average calculates the average price for the last 20 days. What moving average you follow depends on your trading objectives. The 20 day MA is generally used by short-term trades. When a stocks price moves well above the moving average line there’s a chance the price will fall, as prices tend to revert back to their mean. Stocks markets are inefficient so there are opportunities to leverage this strategy to make fast profits.
Scalping
Scalpers are referred to traders looking to earn quick profits, buying and selling positions in a matter of seconds to lock in profits or cut their losses short. Scalping is risky because it requires strong risk management skills. Without proper risk management you could end up blowing up an account because of one stupid trade. In recent times scalping has become an ineffective tactic due to the rise of algorithmic trading. In addition you would need a brokerage with excellent executions to get in and out of trades.
Fading
Fading is a strategy, where traders look for stocks that made big moves and the price slowly declines with the volume slowing down as well. This works when some positive news about a company will trigger a lot of emotional buyers who are chasing the stock not wanting to miss the big move, which will drive the price up too much. Sooner or later the price will return to the norm. Another good fading opportunity is when stocks that are heavily shorted will go through a short squeeze resulting in traders that were short being forced to cover their short. This will increase the stock price without a fundamental reason, in most cases the price will eventually fade back to where it was previously.
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