Day Trading Strategies for Beginners

Day trading is the opening and closing of your trading positions within a short period, typically the same day. Also known as intraday trading, the goal of using this trading style is usually to take small profits which eventually add up to bigger gains over time.

Naturally, the aim is to rake in profits – but the possibility of incurring losses is perpetual. However, if things don’t add up for you, you could limit your losses through the signature same-day exit.

Day trading can also help you dodge costs required to keep your position open into the next day and any unfavorable overnight market movements. So, calling it a day might just mean that time is not money.

As per its definition, day trading means you’re holding positions for the day, ie within the same trading day or market session. But, there’s an exception; if you decide to add to a position you held overnight, keep in mind that if you decide to close any of that position the same day, it will count as a day trade.

So, why not sleep on it if you don’t want to start entirely fresh the next day?

Discover how to count your day trades at tastytrade

Day trading works, ordinarily, by capitalizing on small market movements. Rapid market fluctuations, when the level of volatility is high, present more opportunities for this. With more trades per day, come increased potential for profit. But, this is also the case for possible losses.

Indeed, if the rewards are high, so are the risks.

Another aspect that affects both the profits and losses of day traders is leverage, which refers to getting full exposure while only committing a fraction of the amount. This is called margin trading. You get to open your position using only an initial deposit, but both profits and losses are increased to reflect the full value of the trade.

While day trading equities is particularly popular, you can also buy and short-sell across markets at certain brokerage firms. Further, the time limit means certain trader characteristics and skills are needed to better the chances of success. Increasing the likelihood of profiting and – in the cases where it’s a successful trade – the amount earned, a trader would need focus, dedication, fast but careful decision-making, to name a few.

Day trading is often considered to be the opposite of investment strategies, where the aim is to make profits from the sale of assets that were owned over a long time.

Finding some of the best day trading strategies for beginners can make a world of a difference in your long-term success. So, what better way to kick off and follow through on your day trading journey than with a strategy that can guide you to success? Some popular day trading strategies include:

Trend trading

News trading

Scalping

Mean reversion

Money flows

Trend trading relies on the mantra ‘the trend is your friend.’ Trend traders focus on directional price movements and take a position according to the prevailing trend. If you choose this strategy, you’d go long when there’s a general upward movement in price, and sell if it’s the opposite.

Bull markets and bear markets can present the perfect opportunity to ride the wave of the trend. While bull markets can be characterized by higher highs and lower lows over a prolonged period of time, a bear market is typically indicated by a 20% drop in price following recent highs.

But these might not affect price movements when put into context – within the space of one day. In fact, the day might fall within a market correction stage, which would mean a loss for day traders who are trying to ride the trend wave.

The good news, though, is that the trend doesn’t have to be classified as a bull or a bear market. Shorter trends could also benefit day traders.

As its name suggests, news trading involves taking positions based on news stories that are likely to affect the financial markets. These often include binary events such as inventory reports, Federal Open Market Committee (FOMC) meetings, earnings announcements and elections.

Whichever market is making the headlines, any publicity is good publicity – at least for traders. If sentiments are bullish due to good news, traders can go long. Conversely, if they are bearish as a result of bad news, traders have the opportunity to go short.

News runs round the clock across various mediums such as TV channels, websites, radio stations and different social media platforms. So, day traders who opt for the news trading strategy will have no problem finding an information source of their preference.

Remember, while it’s likely for news broadcasts to have a certain impact on the markets, there’s still a chance that market performance doesn’t measure up to the expectations.

Learn more about scalping

Mean reversion is focused on the theory that the price of an asset will eventually return to its historical average level. So, the trader will make decisions based on the speculation that prices will go back to that average.

Not to worry – you don’t have to be a mathematician to find the mean of an asset’s price. Technical analysis tools such moving average (MA) can be used for this – from there, you can determine how far off, whether higher or lower, the price is from the mean.

This strategy is based on the money flow index (MFI), a technical indicator that shows whether an asset is currently overbought or oversold. Instead of looking at price alone, the money flow indicator considers volume too, based on the previous day’s number of trades.

The indicator signals an asset as overbought with a reading of at least 80 – traders using the money flows strategy will sell in this case. On the other hand, an oversold market condition is reflected by a reading of 20 and below – a signal to buy. 

Day trading and swing trading have some notable differences, even though traders often use a technical analysis to identify patterns, trends and key price points in both.

Here are some of the differences between day trading and swing trading:

Let’s take a closer look at swing trading…

SWING TRADING

Swing trading involves holding a position for days, or weeks, in an effort to lock in profits from short- and medium-term market movements.

The assumption that an asset’s price rarely has consistent movement in the same direction at any given time rings true in most instances. Swing traders use this as their basis for decision-making – they aim to spot a pattern, watching the swings closely to choose their entry and exit points.

All this can happen in the space of a day. Even though it’s typical for traders to use this style over several days or weeks, trends can also occur within minutes or hours – making it possible to swing trade and day trade simultaneously.

Day trading rules have been created by the Financial Industry Regulatory Authority (FINRA). In addition to regulating the practice, the rules also serve to educate traders on the significant risk that’s involved. They are called pattern day trader (PDT) rules.

PATTERN DAY TRADER RULES

It’s important to know the day trading requirements before you get started. This will depend on your account type as well as the brokerage firm where your account is held, so it's always best to confirm based on your specific situation. While cash account rules are based on good faith violations (GFV), margin accounts are subject to PDT rules. For margin accounts, these include:

• PDT applies to you if you perform over 3 trades in a rolling 5-business day period
• You need to have a minimum of $25,000 in your account before starting to day trade on any given day
• PDT rules don’t apply to futures trading or crypto trading, but both can affect whether your account meets the net liquidation requirements for PDT rules

Learn more about the pattern day trader rules (PDT)

These rules will differ from GFVs. For instance, you aren’t limited to a number of trades when using a cash account, but you can’t trade with unsettled funds.

Learn more about good faith violations