Day trading is one of the most popular approaches you can use to make money online. It involves buying and selling financial assets like stocks, commodities, and cryptocurrencies with the goal of making short-term profits.
While day trading is a great way to make money, it is also a high-risk process, which explains why most people don’t succeed. As such, you need to have a good day trading strategy that ensures consistent profits over time.
If you are a beginner, you can rely on classic techniques (such as trend following or reversal), but these strategies will not always suit your style or goals.
That’s why you should immediately start rolling up your sleeves and develop a strategy tailored specifically to you.
This article will explain how to develop a good day trading strategy from scratch and some of the top pitfalls to consider.
Table of Contents
What is a day trading strategy?
A day trading strategy is simply the approach you need to follow when opening and closing positions. It involves pre-set rules that need to happen before you execute either a bullish or bearish trade position.
There are many types of trading strategies that you can use. Some traders focus on scalping, where they open and close many trades within a few minutes. Their goal is to make small profits tens or hundreds of times per day.
Other day traders focus on swing trading, where they open a few trades and hold them for several days. Further, traders use strategies like trend-following, breakouts, reversals, and algorithmic trading.
The type of trading strategy you decide to use will depend on several things. For example, swing trading and trend-following will be suitable for you if you have a full-time job. Scalping works well if you are a full-time day trader.
Define your trading goal
The first step in creating a day trading strategy from scratch is where you define your overall career goals. There are several things that you will look at in this stage.
For example, you should determine the main purpose of your day trading. Do you want to supplement your income?
Alternatively, do you want to make trading your full-time job? This stage is important because it will help you determine the type of day trading strategy that you will decide to use.
In this stage also, you should gauge your interest in the market and the key markets to trade. The most popular markets you can trade are stocks, forex, commodities, bonds, and cryptocurrencies.
In addition to the direct approach of buying and selling assets, you can asset the concept of trading futures and options. These are financial derivatives that have become popular among day traders. They both involve buying or selling puts and calls. A put gives you a right to buy an asset while a call gives you the right to short.
Select your trading style
The next stage is where you decide the trading style you want to follow. As mentioned, there are different approaches that can make you rich in the financial market.
First, you can decide to be an investor, where you buy assets and hold them for a long time. Like Warren Buffett, this approach can help you make a lot of money through share appreciation and dividends.
Second, you can be a scalper, where you execute many trades per day and make small profits in each. Further, you can be a position trader, a swing trader, or a hybrid one. A hybrid trader is one who uses several trading and investing strategies in the market.
How to determine your style
There are several things that will determine your trading style. First, it will depend on your appetite for risk when day trading. If you are highly risk-averse, then trend-following makes sense for you. If you are not afraid of taking risks, then scalping can work for you.
Another relevant point is the time you have or want to devote in front of your trading software. If you prefer immersive sessions and continuous monitoring of your positions, scalping is perfect!
If, on the other hand, you want to open a trade and leave it open for a few days, swing trading should be your style.
This is a very important stage for you to take time on since it will play a crucial part in determining your eventual success rate in the market.
Use a demo account to create a strategy
In all this, you should use the demo or practice account to develop your strategy. A demo is an account that has all the information and details that is available to real traders and investors. It has live data across all financial assets.
The only difference is that a demo account does not have real cash. As a result, the account will help you to create the strategy while having real access to the live market. It makes it possible for you to test different approaches, make mistakes, and learn from them.
Most brokers give you free access to a demo account. However, we recommend that you use the demo account provided by TradingView, the best charting platform in the financial market. Until you have access to our TMS.
Best approaches
There are several rules to consider when using a demo account. First, you should take it extremely seriously. In this, you should feel pain when your demo account loses money.
Second, you should start with funds that you intend to have in a live account. It makes no sense to have a $1 million account when your goal is to start trading with less than $10,000.
Third, always test different approaches and assets in the demo account before you move to a live account.
Key parts of the trading strategy
There are several important things you need to have in a trading strategy. We have already looked at the aspect of assets, timeline, and the trading style.
First, you should establish the type of analysis you want to use. Some traders have succeeded by focusing only on technical analysis while others have become successful when using fundamental analysis.
Technical analysis is the approach where you use indicators like moving averages and the Relative Strength Index (RSI) to determine your entry and exit points. Fundamental analysis involves using news and data to enter and exit trades.
Second, there is the element of risk management, which is defined as the process of ensuring that you maximize your profits while minimizing your risks. There are several parts of this strategy, including having a stop-loss, a take-profit, position sizing, and using adequate leverage.
Third, there is the aspect of identifying entry and exit locations. For example, some traders only place buy trades when a stock moves above the VWAP while others do so when two moving averages crossover.
Backtest the strategy
The next step is where you backtest the strategy you have developed. Backtesting is a process where you use historical data to test the performance of a trading strategy.
Fortunately, many trading platforms, including TradingView and MetaTrader have an inbuilt tool for backtesting strategies.
Backtesting should always be combined with forward-testing. Forward-testing is an approach that involves using the demo account to find the performance of a strategy.
In all, you should spend a few weeks doing the back and forward testing approaches in the market. As part of this approach, you should identify the pitfalls and then refine it well.
For example, if your strategy involved using the 25-period and 15-period moving average, you could tweak it into 30-period and 20-period and evaluate the outcome.
Refine and optimize the strategy
The final stage of creating a strategy is where you refine it and optimize it. Refining is where you polish it with the goal of improving it.
As mentioned above, this is where you change a few things to see whether it will improve. For example, you can tweak the period parameters to see whether it will improve.
As part of this process, we recommend that you document and review the new parameters to see their effectiveness.
Final thoughts
Creating a trading strategy is often a long process that many traders should always go through. In most cases, people who trade without a strategy fail. Therefore, we recommend that you dedicate a few months to creating and testing the strategy.
A few things will help you create a good day trading strategy. First, we recommend that you read books on trading and investments. Second, watch YouTube videos to learn more about trading. We recommend Trader TV, a YouTube channel where real traders trade with real cash.
Third, always learn from other people, especially those who have been in the industry for a long time.
