Last Updated on September 27, 2023 by BFSLTeam BFSLTeam
Intraday trading is a unique trading technique where you buy and sell stocks and other securities on the same day. The primary objective is to capture minor price movements that routinely occur in an asset. However, compared to other trading techniques, intraday trading is often considered to be riskier.
Therefore, it is crucial to use the right strategy for intraday trading. This ensures you satisfy your financial goals without taking on too much of a risk. Here are some popular intraday strategies that you can consider using when trading.
Best Intraday Trading Strategies
The type of strategy you need to use may vary depending on factors like volatility, liquidity and price movement exhibited by the security. Scalping, momentum trading, reversal trading, breakout trading, gap trading, pullback trading and moving average crossover trading are a few of the most commonly used intraday trading strategies.
- Scalping
Scalping is the best intraday strategy for high-frequency traders. It involves purchasing and selling quickly to capture micro-price movements in a security. The average holding period for this particular type of strategy often ranges from a few seconds to a few minutes. Since the profit potential for each trade is very low, traders who use this method generally make multiple trades throughout the day to compensate.
One of the prerequisites for scalping is liquidity. A highly-liquid security makes it easy to enter and exit positions quickly. However, since the potential for losses is also high with this strategy, it is crucial to use strict stop losses and other risk management practices to mitigate risk and lower the potential for losses. Many highly-experienced traders use sophisticated algorithms and programs for scalping. These automated programs execute hundreds of trades per day, following a certain specific set of instructions.
- Momentum Trading Strategy
Also known as the trend-following strategy, this strategy for intraday trading involves entering into positions that match the current market trend. For instance, if the market trend is bullish, you enter into a long position and if the trend is bearish, you enter into short positions instead. The average holding period for this strategy could range from a few minutes to a full trading session.
Traders typically use this strategy to hold onto their positions until they hit their profit targets or until the prevailing trend reverses. If you want to use this strategy, you must track the security you wish to trade in for a while before you enter into a position. By getting to know the current trend of a security and its potential reversal points, you can make an informed trading decision. Additionally, you should also keep an eye out for news that may potentially impact the price of a security. The news could pertain to relevant earnings reports, economic data and the overall geopolitical scenario.
- Reversal Trading Strategy
One of the best intraday trading strategies is the reversal strategy. It involves entering into a position at or near the point of a trend reversal. For instance, if a stock is on a bullish trend, the strategy would require you to wait until the trend reverses from bullish to bearish before entering into a short position. On the other hand, if a stock is on a bearish trend, you would enter into a long position as soon as the trend reverses from bearish to bullish.
The reversal strategy is considered to be very risky since it may occasionally require you to go against the trend. In such situations, the losses can be significant if the trend doesn’t reverse. Also, the success of the strategy depends primarily on your ability to accurately determine the potential trend reversal or pullback points. To increase the chances of success, it is advisable to use technical indicators and candlestick patterns to confirm trend reversals before entering into a position.
- Breakout Trading Strategy
A breakout is a market situation where a security’s price breaks out of a trading range. This includes breaking out of either a support or a resistance level. A breakout trading strategy involves entering into a position at or near a potential breakout point. Once the price breaks out of the range as expected, the trade would start becoming profitable.
For instance, let’s say a stock is declining and it reaches its immediate support level. Due to the intense selling pressure, the stock breaks its support level and continues its decline. In this case, you enter into a short position at or near the price point where the stock breaks out of its support level. You can continue to hold your short position until the price reaches your target or till the next support level. The same logic applies to a stock that’s rising. The only difference is that you need to enter into a long position once it breaks out of its resistance level.
- Pullback Trading Strategy
A security trending in a particular direction may briefly go against the trend before continuing its original trend. This temporary switch in the trend is what market experts call a pullback. A pullback trading strategy involves entering into a position right when the pullback ends. Here’s an example to help you understand how this strategy for intraday trading works.
Assume a stock is going through a bullish phase. Fueled by intense buying pressure, the stock breaks out of a resistance level and rises further. However, within a short while, it falls back down briefly but still remains above the resistance level. This particular scenario is an example of a pullback.
After the short pullback, the stock then continues to rise once again. The pullback strategy requires you to enter into a long position at or near the point where the stock continues to rise again after experiencing the brief market correction.
- Moving Average Crossover Trading Strategy
A moving average is a technical indicator traders use to identify potential buy or sell signals. A moving average crossover, on the other hand, is a market phenomenon where two moving average lines of different time frames (one shorter and the other slightly longer) crossover one another. The type of position you need to enter depends on how the moving averages cross over one another.
For example, if the moving average line of a shorter time frame crosses above the moving average line of a longer time frame, the market sentiment is said to be bullish. You can enter into a long position at or near the point of the crossover. On the other hand, if the shorter moving average line crosses below the longer moving average line, the market sentiment is said to be bearish. In such a situation, you can enter into a short position at or near the point of the crossover.
Conclusion
The intraday trading strategies outlined above are far from the only ones traders use. There are several others that rely on the appearance of certain specific candlestick patterns to produce trading signals. Once you’ve mastered these, you can gradually move towards more complex intraday strategies.
That said, before executing a strategy, make sure to have a proper risk management plan in place. This includes restricting position sizes based on the risk-reward ratio of the trade and placing appropriate stop-loss orders. This way, you can reduce the risk and the quantum of losses in case the market goes against your expectations.
