How to Find the Most Effective Day Trading Strategy

“90% of day traders lose money. 8% are successful. 2% make money consistently.”

By Ed Emerson

The concept of day trading, buying and selling stocks during the course of a single trading day, is simple enough, but how do you find the best day trading strategy that will work for you in particular?

There are a number of ways of looking at this, but for today’s piece we’ll consider the principles you need to guide you and help you find that potentially ideal and game-changing strategy. Then it’s your job to start by testing it, and then stick to it.

First, a review of the basics and why we’re here talking about this. This is never a bad idea. It’s easy to get lost in all the daily noise and forget why we do what we do: Passion and profit, in that order.  

We’re looking for profits by leveraging (trying to take a positional advantage) our money on relatively small price movements in markets that we care about and are interested enough in to educate ourselves on. And in order to do so we need two things: Liquidity and volatility, those high volumes of market activity and a roller-coaster of movements in which we find our advantages, and subsequently our profits. 

“If you’re interested in finding out how these secular waves of change can produce long term advantages then check out this short video here

What day trading is not is a casino. This is not a game of emotions or about taking on 50 or 100 trades per day, every day. I’m not aware of anyone who does that successfully. Those are the cowboys, and they live and die on their horses. Day trading requires a strategy. Casinos only require a lot of stupid people with cash. 

And this is usually the point at which we see high volumes of market entrants and exits – new day traders who see this as an exciting and overnight path to wealth. To be fair, I have seen some folks make small killings over short periods of time on what appears to be little more than gut instinct. But don’t be fooled by the stories or even the short-term paycheques. It never lasts, and they never walk away; sure in the belief that the streak they were on will return if they just take on one…more…trade…

“Liquidity allows you to enter and exit a stock at a good price (i.e. tight spreads, or the difference between the bid and ask price of a stock, and low slippage, or the difference between the expected price of a trade and the actual price a stock trades at). Volatility is simply a measure of the expected daily price range—the range in which a day trader operates. More volatility means greater profit or loss.” – Investopedia

So where’s the door you might want to open into the day trading market? And what tools do you use once inside?

Your strategy is your foundation of how you move forward in your day trading activity and the steps you take to do so. As such, and before all the talk about intraday candlestick charts, real-time news services, and the real-time access to Level II trading quotes and ECNs (connecting major brokerages with individual investors), you need to define your principles. 

Have you ever really thought about your path to financial security? You can do that here.

HNW suggests the following, and that you carry each of these with you into every trade:

  • Be Contrarian – moving with the market consensus is why only 2% or so of day traders make profits consistently. Think away from the market and the noise.
  • Be Unemotional – the best way to keep your “instincts”, knee-jerk reactions and personal worries about how much income you think you need to generate each day (the worst trade killer of all) at bay is by having a plan, reading it every day and sticking to it.
  • Test Before You Buy – Few do it and yet everyone should. Take up to three months to try out your strategy without putting your money on the line to do so. Trade within the parameters you set yourself and measure its effectiveness. Then make corrections and, if necessary, do another test run. Once you’re happy in that skin, do it for real and don’t deviate from the trading precedent you’ve set.  
  • Learn Relentlessly – Day trading is, as I said above, about passion first and then profits. If you have no passion for this and are simply looking for the potential of a quick buck, pack up your kit and head to the casino. You probably have a better chance there than here. Study your markets. Read every day and apply the first three principles above to what you’re learning. 

This is the foundation of a good day trading strategy.

Remember, before you go-live test what you think is going to work for you for three months without trading and, if you’re having consistent success, load your account and do it for real. But don’t deviate from what you’ve practiced just because you’re then using real money.

As always, hold yourself accountable for your trades. Flinching from the best day trading strategy that you’ve found for yourself will be your own fault, and not something you can later blame on the market.

In our next installment we’ll start to look at the strategies themselves and how well or otherwise your foundation and your personality and passion support the direction you choose to take. 

Now, why not have a look at The No. 1 Reason Why Day Traders Lose Money here, which focuses on the how people don’t hold themselves accountable for their actions, deviate from their trading strategies and then blame the market for the losses that pile up.

Next, you can see a selection of other helpful articles on day trading strategy in the HNW Magazine’s “For Day Traders” section.

Then do this – Make sure you don’t miss these signposts. Sign up to get HNW Magazine sent to you every week. It’s free, it’s easy and you can do it right here.


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