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Day trading strategies: for the short term

by Jens Clever
Copyright 2003

Momentum trading

A momentum trade usually lasts anywhere from 30 seconds to about 1 hour. Momentum trading is based on strong price movements and counter price movements often caused by news. Day traders use them.

Breakout trading

Breakout trading means to buy stock after it has broken out above a certain price. (Vice versa for shorts.) Breakouts (or breakdowns) can occur over any time frame. Popular charts for breakout day traders are 5 minute and 15 minute charts. The holding period is anywhere from a few seconds (breakout scalp) up to the end of the day.

Pullback trading

Pullback trading is the opposite of breakout trading. Pullback day traders are looking for stock prices to pull back a significant enough amount (usually into support) in order for them to justify an entry. (Vice versa for shorts.)

This is classic day trading, and personally I am more of a breakout trader since I like the confirmation of the stock price's movement that I get thru the breakout; although pullback trading often has smaller stops. The holding period is usually a few seconds up to an hour.

Scalping

Scalping describes “ultra short term” day trading. Scalpers try to take advantage of very small price movements and sell their shares immediately when they have a big enough profit or the stock isn’t moving in their direction or goes against them.

Cutting the spread

Cutting the spread can be seen as a variation of scalping. Cutting the spread means to take advantage of the spread (the price difference between the bid and the ask price). It means to buy a stock on the bid side and to sell it immediately afterwards on the ask side for a small profit.

Since the decimalization of the markets this type of day trading has become much more difficult, because spreads have gotten much smaller. However I still see day traders implementing this strategy pretty successfully.

Recommendation

I suggest that every day trader experiment with different strategies and then decide for himself what day trading strategies he is most comfortable with.

The day trading strategies presented here are by no means the “holy grail”. Trading setups have to be monitored and adjusted continuously. But this article will give you an overview into how day traders work. (More articles on day trading.)

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