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Intraday trading strategies

Intraday traders, often also referred to as day traders, normally open and close their trades on the same day. They will not go to bed at night with any open positions, and their risk appetite is such that they want to cut any losses before they become too big.

An intraday trader therefore usually has to be content with much smaller profits than someone who trades in a longer timeframe.

Another factor to take into account with intraday trading is that commissions will play a much bigger role in determining the eventual profitability of your trading activities. If you regularly make trades with a 10% profit ratio, paying 1% in commissions is not much of a problem. If you are lucky to make 2% profit on a good trade, that 1% commission suddenly becomes a much bigger hurdle on the road to a net profit.

This is why a pre-determined exit strategy is of crucial importance in day trading. You have to know beforehand when you are going to exit the trade if things go wrong and also preferably when they go right. Stop Loss and Take Profit levels, based on a percentage of the trade, will go a long way to ensuring that you are not faced with a series of small wins and one or two large losses wiping out any profits.

Something else that is especially important here is position sizing. The old adage of ‘never put all your eggs in one basket’ is particularly relevant in day trading. Base your position size on a percentage of your investment and take into account your risk appetite.

Overtrading is a common problem for many novice day traders. They make large numbers of trades in a single day, all of which bear commissions. Combined with these commissions, a single significant loss can wipe out all the ‘profits’ they make on their other trades. It is not unheard of to have an 80% success rate and still make a net loss as a result of this error.

Scalping is very popular among day traders. This is, in all respects, virtually the opposite approach to the ‘let your profits run’ used by most longer-term traders. The trader cashes in the moment he or she makes a profit, not giving the trade any time to ‘go wrong’. This strategy requires strong discipline and a clear exit strategy to succeed.

Breakout trading can be very useful for a day trader. If we look at the 15-minute chart of Brent below, we see that at point A the price suddenly surged downwards after apparently heading for the Ichimoku cloud. This was a good entry point for a breakout short trade. Closing the trade at point B would have given the trader quite a decent profit. The bottom of the cloud would have made a good exit point in case things went wrong.

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Candlestick patterns are hugely popular with intraday traders. These are based on the belief that certain price patterns precede specific price movements. These patterns are given names such as the hammer, the hanging man, the morning star, the evening star etc.

If we look the 15-minute chart of EUR/USD below, we see that the price opened at point A, very near to the closing price of the previous period. The thin red upper end of the chart indicates that initially the bulls controlled the market and it went up to point B. After that, the bears took control and pushed the price down to point C, where it closed. A trader using point C as an entry point for a short trade and the hammer pattern at point D to exit the trade would once again have made a very useful profit for the day.

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A simple 14-period simple moving average would have achieved very similar results. In this case our entry point for the short trade would have been point A in the chart below and our exit point would have been point B. This would have realised only a slightly smaller profit than the approach using candlestick patterns.

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Another important point to keep in mind is that with intraday trading you should use charts with shorter timeframes; in the examples above we used 15-minute charts. Some scalpers even use five-minute charts. Although a one-hour chart might still be useful, anything with a timeframe above that will be of little use to intraday traders.

Where a longer-term trader might well be perfectly happy with daily closing prices, an intraday trader will find it very difficult to trade without live market prices.

Published: 5 December 2011

You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.

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