9 min read

Best Day Trading Trading Strategies Explained

Day trading is a popular trading style because of its fast-paced trading approach and the plethora of trading opportunities. However, finding the right trading strategy can be a daunting task because there are countless day trading strategies that an aspiring day trader will find searching the internet or going through trading books. Without proper guidance, a day trader may find himself system-hopping, missing important trading rules, and not achieving consistency in his trading.

In this article, we are going to explore six different day trading strategies where each methodology is broken down with step-by-step chart examples, supported by detailed trade illustrations, and offers an in-depth walkthrough of strategic application.

 

Fakeout, Trap, and Liquidity Grab

We are starting with a simple, yet effective day trading strategy which also utilizes a multi-timeframe approach. A multi-timeframe approach whereby a trader uses a higher timeframe to determine the overall trend direction and searches for important price structures may enhance the robustness and the results of a day trading strategy.

Let´s start with the first screenshot which was taken on the higher timeframe, in this case, the Daily timeframe. 

The downtrend that started on the left seemed to have bottomed out, which means that the price was not yet able to continue the downtrend further. The black horizontal line marks the lowest low of the downtrend. We use this as a reference point for further price analysis and we want to observe how the price reacts when it reaches the level next time.

Level Fakeout (6)

 

The price formed a Daily pinbar at the last swing low, which is a strong rejection signal. In trading, this is called a fakeout because it initially may have looked like a breakout below the last low, but the price was not able to close below the level and turned higher. There was not enough selling interest in the market to advance the price below the last low point.

 

 

Other traders may refer to this as a liquidity spike or liquidity grab. The reason is that you may expect other traders to place their stop loss or breakout limit short orders below the support level. When there are not enough sell orders at or around the level, the price cannot advance lower and, therefore, shoots back up.

The fakeout, or liquidity spike, is a bullish signal. It indicates that there might be a higher chance that the price may rise, away from the failed breakout attempt, going forward. 

Level Fakeout (5)

 

With the bullish signal in mind, traders can then go to a lower timeframe. For a day trading strategy, traders typically go to the 5min or 15 min timeframe. In this example, we are now taking a look at the 5min timeframe to find bullish trading opportunities.

As a day trader, you do not just blindly buy the market after identifying a bullish fakeout signal on the higher timeframe, but you also look for shorter-term bullish trading signals on the lower timeframe. The reason is that such an approach allows day traders to adapt their trade idea to a lower timeframe, getting a more precise entry point and, therefore, optimizing the reward:risk ratio of their trades. 

In this scenario, the chart shows a broader invested Head and Shoulders pattern. The blue horizontal resistance level allows day traders to plan their trading plan around this structure. 

For a bullish trading signal, traders typically wait for the price to fully close above the blue resistance zone. Since the blue resistance zone has repeatedly caused the price to move lower, exhibiting bearish selling interest at the zone, traders may choose to wait for the price to get above this zone before entering buy trades.

Level Fakeout (4)

 

The next screenshot shows the completed bullish breakout above the black horizontal resistance zone. This is the final bullish signal that day traders have been waiting for.

Level Fakeout (3)

 

When creating your trading plan, day traders typically zoom out to look for important historic price levels. In the chart example below, a trader may choose to place the target order below a recent high as indicated by the black horizontal arrow. There might be a higher chance for the price to reject a previous high and, therefore, getting out before the high might improve the chances of realizing a profitable trade.

Level Fakeout (2)

 

The next screenshot shows the final outcome. The price eventually made it through the ultimate target level. However, the price moved extremely volatile between the entry and the exit. 

Looking closer, a trader could have used a more conservative target strategy by targeting the first resistance peak, marked with the lower arrow. A closer target is, in theory, easier to reach for the price and, therefore, might lead to a higher winrate. For traders struggling with longer holding times, a closer target strategy might be a better fit.

Level Fakeout (1)

 

Daily High-Low Trend-Following

Many day trading strategies use the concept of "daily high and low" which means looking at the highest and the lowest price of yesterday´s price action. In Tradingview, there is a freely available indicator that plots the high and the low of yesterday´s price action on your charts. I made a YouTube video explaining it here: https://youtu.be/bqzdNO2N24I?t=9

One way to use the concept of the daily high and low is within a trend-following day trading strategy. In the example below, the green channel visualizes the high of yesterday´s price action. What we can see is that the price has recently only pushed into the green channel and did not move into the red channel (yesterday´s low). This indicates an overall bullish market. Therefore, looking for bullish trading signals may provide the best opportunities.

A potential idea for a day trading trend-following entry is to wait for a clear breakout above the green yesterday´s high. This might foreshadow a bullish trend continuation.

Daily Highä (1)

 

In the next screenshot below, this is what happened. The price broke the daily high with strong momentum, providing an entry opportunity. You want to be wary of stronger than usual selling at the green yesterday's high level. Since many traders use the daily high for target placement, the price occasionally reacts strongly to the level. In this case, the price reacted minimally at first and then broke the level with large candles. Such a price behavior may confirm the lack of selling interest (not a lot of profit-taking of bullish traders) and, therefore, point towards more buying to come in the longer-term uptrend.

The stop loss, in such scenarios, is usually placed below the daily high. 

Daily Highä (3)

 

Trading into the daily high is a trend-following day trading strategy. Therefore, traders may choose to stretch their targets to potentially capture larger winning trades because the price tends to move more during trending markets.

Daily Highä (2)

 

Daily Open & Session Momentum

Especially in Forex or stock trading, many day trading strategies incorporate the session open into their trading rules. The idea is that there might be a larger-than-usual momentum- or volatility level at, or around, the opening of a trading session.

In Tradingview, there are many freely available indicators that plot the different trading sessions directly onto your charts. In the example below, the UK trading session has just begun, visualized by the green background color. We are looking at the EUR/USD chart which has its most active price behavior during the UK session. Therefore, looking at trading opportunities during the UK session may provide better trading opportunities.

What we can see is that the price has been in an overall uptrend and the price has moved from the bottom left of the chart to the top right so far. The bullish trend occurred during the yellow Asian session. Therefore, looking for trading signals during the UK session might provide trend-following opportunities in the ongoing trend context.

For a bullish continuation to occur, traders typically wait for the price to break into a new higher high - marked with the black horizontal line below. Trading long below a higher high might provide less favorable trading opportunities. 

Open (1)

 

The bullish trend-following signal is given when the price breaks into a new higher high. The breakout occurred within the first hour of the US session, making use of the session's open momentum theory.

Aggressive day traders may place their stop loss below the breakout level. If you want to have a little more security, placing the stop loss below the last swing low might also be an option.

Open (3)

 

In this example, the bullish trend developed during the early hours of the UK session. Many traders prefer to take exits on their active trades before 12 pm lunchtime in the UK because they believe that the trading activity is significantly reduced during that time. This might be a great starting point for your backtest to learn more about the price behavior of your chosen markets during different daily session times.

Open (2)

 

Supply and Demand Zone Trading

Supply and Demand trading concepts are commonly used in many different trading strategies. They complement traditional support and resistance trading too. 

Supply zones often, but not always, lead to further bearish reactions in the future. And especially in the right context when accompanied by further confluence factors, they may provide robust trading opportunities.

SD zone (1)

 

It is important to wait for the price to actually reach a supply or demand zone before starting to go to a lower timeframe. Many amateur traders are fighting with impatience in their trading and they suffer from FOMO (the fear of missing out) which leads them to get into trades too early, without waiting for proper trading signals.

Only after the price has reached the supply zone is it OK to go to a lower timeframe as a day trader to look for potential trading plans. 

SD zone (6)

 

The next screenshot shows the 15min timeframe. What stands out is the high level of volatility that started to form just underneath the supply zone. A high level of volatility may further confirm important supply zones because it can indicate that there is a lot of trading interest around the zone. As we have seen in the previous screenshot, the higher timeframe price was in a long-term uptrend. A high level of volatility may indicate profit-taking and, therefore, might lead to a trend reversal when enough long traders exit their trades by placing short orders.

Waiting for the price to break into a new lower low is the usual trading plan for such scenarios. As long as the price is still stuck in the high-volatility sideways period below the supply zone, it is best to wait for the price to make a decisive breakout move.

SD zone (5)

 

The bearish breakout happened shortly after and the price broke and retested the low of the range. This break-and-retest pattern is utilized by many day trading strategies. A stop loss, in such cases, is typically placed within the range. 

SD zone (4)

 

The price trended lower after the break and retest. The level of volatility also decreased as soon as the price has broken out of the sideways period. During healthy trending phases, the level of volatility is usually lower. When the volatility then picks up again, it could be an early warning sign that the trend structure is undergoing some changes once again.

SD zone (2)

 

Engulfing Candlestick Pullback

The next example utilizes higher timeframe candlestick patterns together with a trend-following moving average analysis. 

In the screenshot below, the price has been in an ongoing downtrend as indicated by the price movement below the EMA - I am using a 13-period EMA in this example.

To find trend-following trading signals, many traders wait for so-called pullback opportunities. A pullback is a short-term price movement, in the opposite direction of the ongoing trend. A pullback is ideally short-term and should not break the moving average.

In this example, the price was rejected by the EMA and the very right candlestick formed an engulfing candlestick pattern. An engulfing candlestick can be a strong bearish signal in the right context. 

We can use the pullback candlestick as a bearish confluence signal and then go to a lower timeframe to look for day-trading opportunities in the higher-timeframe trend direction.

Candles (5)

 

On the 5min timeframe in the screenshot below, we can identify a sideways market phase - this corresponds to the pullback candles on the higher timeframe. 

Since the higher timeframe suggests an overall bearish trend scenario, it is usually recommended to wait for the market to break out of the sideways pattern and continue to make lower lows. Trading inside a short-term range on the lower timeframes should generally be avoided because the price is unpredictable during such ranges.

Candles (3)

 

The price is breaking out shortly after. Many traders will choose to place their target orders at previous high or low points. In this case, a trader may choose to place the target on their short order at the last swing low. Trading through such a significant swing low may lower the odds of realizing a profitable trading outcome.

Candles (2)

 

Also noteworthy is the pre-breakout sequence. The price started to show longer and stronger bearish candles, and fewer bullish candles, around the breakout. This may already foreshadow an upcoming breakout and can be used as an additional confluence factor in a day trading strategy using breakout concepts.

Candles (1)

 

Bollinger Band® Spike Reversal

Finally, let´s take a look at a reversal day trading strategy using a multi-time frame approach. 

The screenshot below shows the 4H timeframe with the Bollinger Bands. What we want to see is a double top and a spike through the outer Bollinger Bands. When a trend fails to advance higher and forms a spike through the outer band, many traders take this as a sign of weakness on the bullish side.

BB Spike (1)

 

We take this bearish bias from the higher timeframe and then look at the price scenario on the 5min timeframe. The 5min timeframe shows a topping structure with lower highs. So far, the price wasn´t able to make a lower low yet. Waiting for the price to break into a new lower low is important as repeatedly mentioned in this article. 

BB Spike (6)

 

When the price breaks through the last lows, making lower lows, many traders take that as an entry signal. In such a trading scenario, the stop loss is typically placed above the last highs. The target is placed just a bit above the last swing low. 

BB Spike (4)

 

The screenshot shows the final outcome. The price moved quickly into the target hitting the potential take profit level. Trends often unfold with a lot of momentum when the final breakout level has been broken. It is, therefore, important to wait for the breakout and avoid trading within topping structures. 

BB Spike (3)

 

Final Words

The domain of day trading is filled with countless strategies, each carrying its own set of benefits and risks. The ability to adapt and apply different trading techniques based on market dynamics is critical for day traders.

The six trading strategies shared in this blog article are each unique in their approach, with no single strategy reigning superior to others. The choice of a strategy largely depends on the trader's individual preferences and specific needs.

We recommend backtesting your chosen day trading strategy first to evaluate its effectiveness before committing real money.

However, it's important to remember that successful day trading is not just about applying these strategies mechanically, but also about understanding the underlying market dynamics, managing risk, and cultivating discipline and patience in execution.

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