Day trading requires a sound and rehearsed method to provide a statistical edge on each trade and should not be engaged on a whim. The following are several basic
trading strategies by which day traders attempt to make profits. In addition, some day traders also use
contrarian investing strategies (more commonly seen in
algorithmic trading) to trade specifically against irrational behavior from day traders using the approaches below. It is important for a trader to remain flexible and adjust techniques to match changing market conditions.
Swing trading Swing trading is a trading strategy that involves holding a financial instrument for one or more days in an attempt to profit from price changes, or "swings". While day trading focuses on intraday volatility and requires all positions to be closed before the market session ends, swing traders hold positions for several days to weeks. This approach typically utilizes technical analysis to identify trends and patterns, but may also incorporate fundamental analysis to gauge a security's value. Compared with day trading, swing trading generally involves a lower frequency of trades, which may reduce transaction costs, but it also carries overnight risk, including the possibility of significant price gaps occurring while markets are closed.
Trend following Trend following, or momentum trading, is a strategy used in all trading time-frames, assumes that
financial instruments which have been rising steadily will continue to rise, and vice versa with falling. Traders can profit by buying an instrument which has been rising, or
short selling a falling one, in the expectation that the trend will continue. These traders use
technical analysis to identify trends. Szakmary and Lancaster (2015) validate the effectiveness of trend following in the U.S. stock market, demonstrating its potential for generating positive returns. Similarly, research by Blackstar Funds highlights rigorous applications of trend following in commodities, financial futures, and currencies, although its application to stock trading presented challenges.
Contrarian investing Contrarian investing is a
market timing strategy used in all trading time-frames. It assumes that
financial instruments that have been rising steadily will reverse and start to fall, and vice versa. The contrarian trader buys an instrument which has been falling, or short-sells a rising one, in the expectation that the trend will change.
Range trading Range trading, or range-bound trading, is a trading style in which stocks are watched that have either been rising off a support price or falling off a
resistance price. That is, every time the stock hits a high, it falls back to the low, and vice versa. Such a stock is said to be "trading in a range", which is the opposite of trending.
Scalping Scalping was originally referred to as spread trading. Scalping is a trading style where small price gaps created by the bid–ask spread are exploited by the speculator. It normally involves establishing and liquidating a position quickly, usually within minutes or even seconds. It applies technical analysis concepts such as over/under-bought, support and resistance zones as well as trendline, trading channel to enter the market at key points and take quick profits from small moves. The basic idea of scalping is to exploit the inefficiency of the market when volatility increases and the trading range expands. Scalpers also use the 'fade' technique, when stock values suddenly rise, they short sell securities that seem overvalued.
Rebate trading Rebate trading is an equity trading style that uses ECN rebates as a primary source of profit and revenue. Most ECNs charge commissions to customers who want to have their orders filled immediately at the best prices available, but the ECNs
pay commissions to buyers or sellers who "add liquidity" by placing limit orders that create "market-making" in a security. Rebate traders seek to make money from these rebates and will usually maximize their returns by trading low priced, high volume stocks. This enables them to trade more shares and contribute more liquidity with a set amount of capital, while limiting the risk that they will not be able to exit a position in the stock.
Trading the news Price action trading Market-neutral trading Market-neutral trading is a strategy that is designed to mitigate risk in which a trader takes a long position in one security and a short position in another security that is related. ==Cost==