Intraday Trading Strategies

Intraday trading strategies are ways to improve your chances of making a profit by trading on the markets while they are open, and not allowing any positions to remain open overnight. You may also hear this type of trading referred to as “day trading”, though where you are in the world and the markets you choose can mean that it is not daytime while you are active.

Regular day traders often use vast sums of money to buy and sell stocks, looking for a slight edge each time. Prices do not change dramatically in the period of the day, so such traders must have access to significant funds to make a decent profit. Fortunately, when you are spread betting you can choose the leverage that you want to use over the market prices, simply by selecting an appropriate size of bet, so you do not need the same type of resources to make the same profits.

With day trading or intraday trading a trader abandons the buy and hold investing methodology and seeks to profit from short term movements in the ‘sentiment’ or ‘momentum’ of a market – usually no longer than a trading day and in some instances, just minutes! Market trends are examined, jumped onto, and ridden until they have no more momentum.

As we have pointed out, a day trader will be looking to extract quick profits from a market on small movements with large sums at stake meaning that in most cases the trader will make ample use of leverage to magnify his market exposure. As always, this advantage comes in with a warning that leverage is also dangerous, and can lead to large losses if you are not careful. Be warned that if you do not take this seriously, you are very likely to finish up with the majority of traders who lose money.

When you are looking for markets to trade and particular securities for intraday spread betting, you have to find both volatility and liquidity. Volatility is a measure of how much the price will typically vary, and is necessary so that you can make a profit, and liquidity reflects how much trading there is in a particular security, which will often be reflected as a small spread in the price. If you’re looking at moves during the day’s trading, the spread can swallow a significant part of it.

Here’s some end-of-day rules from an intraday trader – however do REALISE these are just thoughts from the trading plan of a fellow trader and this should not be construed as advice!

  • Only trade setups that offer at least a 2:1 risk:reward.
  • Only execute trades that are in the same direction of the prevailing trend i) Check for trend of main market ii) Check the higher time frame of the instrument
  • If there is no prevailing trend, then utilise other methods such as stochastic – stochastic can be good for spotting potential divergence – but in general beware of setups which exhibit little by way of a trend.
  • Once a setup is activated do not place any further trades until your initial trade has completed a 100% move in the preferred direction taking into account your stop. Once this move completes bring stop loss to Buy/Sell point. (I always have stops – in my case the stop loss, risk/reward is calculated for me by the software I use). In terms of money I risk £50 per trade.
  • Do not move stop again until price target is reached. i) Once price target is hit bring stop to low/high of previous bar ii) If instrument is in a strong trend use trailing stop such as ATR signals as it can be that using first method will take out your trade sooner.

Some general points

  • Do not expect to trade every day.
  • Avoid stocks with recent plunges/spikes in the pattern.
  • Try not to let trading become an obsession!.
  • Expect to give the spread betting companies some money for their willingness to provide a service!

Before considering intraday trading, you must first ask yourself whether you are the type who can make snap decisions and keep a cool head when things start going wrong. Inevitably, day trading is fast action, and you are likely to lose if you do not have the temperament to cope with this.

There are many different strategies that can be used for intraday trading. You should narrow down the number of indicators you look at to three or four, and in practice on any particular trade you should not switch between indicators, but use the same one for the length of the spread bet. Based on your risk tolerance you may choose to use the MACD, which will give you a relatively slow indication of a reversal, and thus is less likely to give you a false signal; or the stochastic indicator which reacts faster giving you more betting opportunities for larger amounts, but with a greater likelihood of the reversal failing.

Another good indicator for spotting spread trading opportunities is the Bollinger Band. This has the added advantage that you can see the amount of volatility that the security is currently displaying by the width of the bands. When the bands are far apart, volatility and also risk is relatively larger; if the bands are close together, this demonstrates a lower current volatility. Be aware that if the bands are narrowing, this can sometimes signal that a breakout is more likely, so is not necessarily a lower risk trade.

Strategies include identifying a trend as early as possible, and then trading to ride the trend until it looks like it will fail; or the alternative of looking for possible reversals in trend, and placing a spread bet to profit from them as soon as you have a reasonable expectation that they are occurring. In each case, you would use conventional indicators to determine if the financial security was becoming overbought or oversold.

Because of the short time span that you may hold a bet open when you are trading intraday, you may choose not to place stop loss orders, but simply to maintain a stoploss level in your head, and act if it is reached. Alternatively, you may also choose to set an actual stop loss order for the absolute maximum loss, but maintain a mental stoploss in your head that may close your bet earlier, if the price action suggests that the trade was misplaced. As you are watching the market during intraday trading, one of the traditional reasons for setting a stop loss order, that it will take care of limiting your losses when you are away from your computer, does not apply. However, you must be prepared to act quickly if your stoploss position is reached.

Finally, it can be informative to include candlestick charting in your analysis. For instance, if a reversal seems likely and you see a Doji candle on high-volume, this would be a confirming factor. Other candlestick patterns that you may watch for include the engulfing patterns, which have a fair degree of reliability.

Day Trading is the opposite of long-term investing, but it does force a trader to understand how a market moves and how the price reacts to newsflow – and it also makes a trader put serious consideration into into decision making. Intraday trading is even riskier than day trading and is not for everyone particularly as it requires almost full-time attention. There is a big risk that a trend could fail and this can result in significant losses unless you are quick to close positions. However, if you are the type who likes fast action and you can maintain your head when inevitably sometimes things start falling apart, then it may be that you would find day trading a valuable and worthwhile addition to your repertoire.

Guys, I’m wondering/asking if you could tell/write a little bit about your strategy and your trading method and send me a message as I’m currently looking into day trading. In particular, what time frame(s) do you use, do you backtest your method?

Comment from Tim: I like to use the 1 hour time frame for entries/exits and I use both the 1 hour and daily chart to determine what I think the overall trend is. All my entry/exit patterns for AUDUSD were developed from scratch. I found them by putting in a lot of screen time. I guess when you sit there hours and hours a day watching the same thing, you start to notice recurring things.

Me: I see. I’ve heard that before from other traders, and all of them say the same thing like you did, to understand truly price action, you have to focus on one currency pair alone, watching it and understand its habits and recurring patterns.

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