3 Best Day Trading Strategies for 2022 • Benzinga
Want to jump straight to the answer? The best day trading strategy is the Market Opening Gap strategy.
As the name suggests, day trading refers to a strategy in which a trader opens and closes positions in a particular trading vehicle during the day but typically holds no positions overnight.
This type of popular trading strategy tends to suit more experienced short-term traders who prefer to avoid managing open positions when they are not actively monitoring the market.
Although once mainly practiced by professionals, day trading has become increasingly popular with retail traders who wish to speculate in the financial markets for their own account. The relatively recent advent of online trading platforms and the brokers that support them has given rise to a new generation of day traders eager to profit from market fluctuations.
Read on for our picks for the best day trading strategies and more useful day trading information.
Best Day Trading Strategies:
- Day Trading Strategy 1: Market Opening Spread
- Day Trading Strategy 2: Ichimoku Kinko Hyo Indicator
- Day Trading Strategy 3: News
Good Day Trading Strategies
Day traders use different strategies in their trading plans. Their choice of strategy will generally depend on their business and educational background, as well as their personality type. They might also need quick reactions to take advantage of rapid intraday market movements.
Despite all the differences in their actual strategy, a unifying characteristic among most successful day traders is that they first grow and then discipline themselves to stick to a reasonably profitable trading plan.
Most day traders use technical analysis as the basis of their trading plans because of the objective trading signals it can provide under normal trading conditions that help improve your chances on a day trade. Other day traders may use fundamental information and news releases to trade, especially when the assumptions behind the technical analysis break down.
To help you get started with some great ideas that you can incorporate into your own trading plan, several popular day trading strategies are discussed in more detail below.
Strategy 1: Market Opening Spread
In general, technical analysts believe that most smaller opening gaps are filled, while larger breaking gaps tend to indicate that the market will continue in that direction. So you can look for opening price gaps in stock markets that exceed certain percentage criteria, such as 5% for example.
If you trade on the stock market, pre-market stock analysis tools can usually be used to do this quickly. The chart below shows an example of a roughly 80% open gap in pharmaceutical stock Aprea Therapeutics Inc. (NASDAQ: APRE) after a negative result in a trial of its key investigational drug used to treat myelodysplastic syndrome (MDS).
The open gap down is highlighted by a blue line on the Aprea Therapeutics Inc. daily candlestick chart after a negative Press release outside market hours. Source: Trading View.
Once you find a stock that is moving strongly when its stock market opens, you can look for timely news causing the move to make sure it makes fundamental sense. The next step is to find a suitable entry point and place your stop loss below the support. Your criteria for selecting these points should be as objective as possible.
As an example of a market opening spread strategy, you can observe the pre-market high point and then place a limit order to buy at that point if a retracement occurs. Another option could be to look at the opening range for the first minute of trading. You can then enter and order to buy at the high of the market’s first 1-minute candle, while simultaneously placing your stop loss order at the low of that candle.
Strategy 2: Ichimoku Kinko Hyo Indicator
The Ichimoku Kinko Hyo or the Ichimoku Cloud indicator can be used on its own to provide intraday technical trading signals that you can act on. You will see 2 of his 5 lines form the “cloud” or Senkou Span, while his Kijun Sen line gives trading signals and an appropriate stop loss region.
For example, day traders using this indicator can enter a trade when the price breaks out of the cloud to suggest a new trend. This trade can be held until the end of the trading day to take profit or until the Kijun Sen line is crossed to take a loss. Traders can therefore use a trailing stop loss that follows price action and is on the other side of the Kijun Sen line.
The Ichimoku Kinko Hyo indicator overlaid on the EUR/USD exchange rate with the Kijun Sen signal line displayed in blue. Source: MetaTrader.
Strategy 3: News
The initial release of news about current events often directly and significantly influences the prices of stocks, commodities and currency pairs. Many financial market traders who trade economic data releases wait for the market to show a consolidation pattern like a trading range just before the expected release. This price behavior suggests that traders remain undecided ahead of the release before then jumping into the market in an appropriate direction.
Once the news is released, the news trader waits for the market to break out of its previously observed consolidation pattern. They then initiate a position consistent with the breakout direction of the consolidation pattern.
The news trader usually places their stop loss at what looks like a safe point below the breakout level. If the consolidation pattern was a triangle, they would measure the initial width of the triangle and project that distance from the breakout point to suggest a take profit target. If the pattern was a range, then they would use the width of the trading range to project instead.
Keep in mind that markets can be exceptionally volatile when major news is released, as shown in the chart below. News traders should therefore approach exiting stop loss orders with caution as they may be subject to substantial slippage in such fast moving markets.
A 15-minute candlestick chart of EUR/USD shows the sharp move in the market on the release of Nonfarm Payrolls (NFP) data on December 4, 2020. Source: TradingView.
Before day trading
Before you start as a day trader, remember that day trading typically involves investing a significant amount of time each day to select trade opportunities and then monitoring the resulting positions.
You’ll want to have decent research tools and a clear, objective way to decide which trades to take. Your general trading methodology should be practiced before using a live account and should be incorporated into your overall trading plan.
Another key way to prepare yourself for day trading is to gain knowledge of the fundamental market movement factors that govern the financial markets in which you intend to trade.
Avoid trading in markets that you do not yet fully understand – even if you intend to use a strategy based on technical analysis – because the assumptions underlying technical analysis tend to break down briefly as the market rapidly assimilates new information.
Best online brokers for day trading
Traders often have different priorities when selecting a broker depending on their level of experience and level of trading activity. You will want to select a broker that suits your particular needs and preferences.
Discover our selection of the best online brokers for day traders.
Best Day Trading Chat Rooms
A number of providers offer online chat platforms where traders can chat and exchange trade ideas with each other in a timely manner. These rooms can also serve as an educational and peer-based feedback tool for newbie traders who can learn from more experienced traders and ask questions.
Check out our picks for the best trading chat rooms below.
Best Day Trading Research Platforms
Various research platforms give you the ability to quickly collect and review relevant information about the day trading opportunities you identify in the financial markets. The best day trading research platforms for you will depend on the trading strategy you plan to use and the market you intend to employ it in.
Benzinga has put together a list of search platforms below for easy comparison.
All trading levels
Is day trading for you?
Day trading tends to suit observant people who can handle the stress of intense risky activity. Successful day traders will generally be more experienced market traders who have traded for several years and have the right type of personality to deal calmly and objectively with the volatility often seen in financial markets.
As a day trader, you may also need to spend a lot of time monitoring the markets and managing your positions. You will also need to be disciplined enough to stick to your trading plan and good enough at market analysis and research to improve your chances of success when taking a position.
Want to learn more about day trading? Check out Benzinga’s guides to the best day trading software, best day trading brokers, and day trading rules.