14.4 Intraday trading strategies
Intraday traders use different strategies to maximize the profit. However, identifying the price target will depend largely on your trading style. Here is a brief overview of some common day trading strategies. Even though in some cases the terminology may change, the strategies may be more or less the same.
Trend following, a strategy used in all trading time frames, assumes that financial instruments which have been rising steadily will continue to rise, and vice versa with falling. The trend follower buys an instrument which has been rising, or short sells a falling one, in the expectation that the trend will continue.
Scalping is one of the most popular strategies, and it involves selling almost immediately after a trade becomes profitable. Here the price target is obviously just after profitability is attained.
Fading involves shorting stocks after rapid moves upwards. This is based on the assumption that
- they are overbought,
- early buyers are ready to begin taking profits and
- existing buyers may be scared out.
Although risky, this strategy can be extremely rewarding. Here the price target is when buyers begin stepping in again.
This strategy involves profiting from a stock’s daily volatility. This is done by attempting to buy at the low of the day (LOD) and sell at the high of the day (HOD). Here the price target is simply at the next sign of a reversal, using the same patterns as above. Pivot is a technical indicator obtained by calculating the numerical average of a particular stock’s high, low and closing prices.
Range trading, or range-bound trading, is a trading style in which stocks are watched that have either been rising off a support price or falling off a resistance price. That is, every time the stock hits a high, it falls back to the low, and vice versa. Such a stock is said to be ‘trading in a range’, which is the opposite of trending. The range trader therefore buys the stock at or near the low price, and sells (and possibly short sells) at the high.
This strategy usually involves trading on news releases or finding strong trending moves supported by high volume. One type of momentum trader will buy on news releases and ride a trend until it exhibits signs of reversal while the other type will fade the price surge. Here the price target is when volume begins to decrease and bearish candles start appearing.