Best Intraday Trading Strategy. Your First Step to become a Trader.

Best Intraday Trading Strategy

In the previous article, you learned What is Intraday Trading and determined that it is suitable for you.

Now It’s time to hunt for Intraday Trading Strategies and start making money. Let’s get started!

What is a Trading Strategy?

Trading Strategy / Intraday Trading Strategy is a set of predefined rules used by traders to buy and sell stocks. These rules define the entry, target, stop loss, risk to reward ratio, and position sizing of every single trade.

Before we get into the crux of the topic, you need to know some basic charting techniques.

Basic Charting Techniques

Pivot Points

Pivot points

When the stock changes its direction, it forms a pivot point. The highest point of the candle is called pivot high and the lowest point of the candle is called the pivot low as indicated in the image above.

A pivot high is formed when the stock peaks while moving upwards. Three candles create a pivot high, that is, there must be a candle to the lower left and lower right of the pivot high candle.

Similarly, pivot low is formed when the stock tanks while moving downwards. Again three candles create a pivot low, but in this case, there must be a candle to the upper left and upper right of the pivot low candle.

Support and Resistance

Support and Resistance are the most important and most used concepts of technical analysis all over the world. Pivots create support and resistance levels. Check out the images below.

support

First, let’s talk about the Support, it is the price level at which the stock will have difficulty falling below. As you can see in the image above, the stock has been coming down to a certain level, forming a pivot low and bouncing back as it is touching that level.

How to find Support Levels in the chart?

It’s simple, open up a chart of any stock, select Day Chart from the timeframe, look for the price level where the stock is making pivot lows multiple times (at least two/three), and draw a trend line. (Refer to the above image)

What is Resistance?

Resistance

Resistance is the opposite of support.  It is a price level where the stock will have difficulty breaking above. As you can see in the image above, the stock has been climbing up to a particular price level, forming a pivot high and falling down as it touches that level.

How to find Resistance Levels in the chart?

It’s simple, open up a daily chart of any stock, look for the price level where the stock is making pivot highs multiple times (at least two/three) and draw a trend line. (Refer to the above image)

Now that you have learned the basics of charting, let’s learn some Intraday Trading Strategies.

Successful Intraday Trading Strategies

There are hundreds of trading strategies out there, but today we will learn some easy to use day trading strategies.

Momentum Trading Strategy

It is a simple intraday strategy where traders identify stocks that are supposed to make a short term upward or downward move. The traders invest in these stocks right before they make a move and hold the positions until the stock stops moving in the desired direction.

The movement of stocks can be due to one of any reasons below:

  • Strong news about the stocks
  • Earning announcements
  • Long term trend breakouts
  • Key support or resistance level breakout etc.

To use this strategy, you need to constantly monitor and have a thorough understanding of the stock you are trading.

Let’s take a look at the example:

On August 3rd, 2020, after the markets closed there was news that Reliance would acquire NetMeds (Online Pharma E-Commerce Company). As the news is positive, the very next day, Reliance Shares rose more than 7% which is a huge move.

Gap up and Gap Down Strategy

When a company comes in the news or announces its earnings during the night or after the market closes, the stock prices will react to such announcements or news on the next day. In the case of positive news, the stocks open much higher than the previous days close which is known as gap up, and in case of negative news, the stocks open much lower known as a gap down.
There are different types of gaps:

Common Gap up or Gap down

These gaps occur due to some small news or announcements. The price gap here is very small when compared to the previous days close and the gap usually fills up in a couple of hours or by the end of the day.

Common Gap up

As you can see in the above image, the stock made a gap up, and eventually during the day the prices came back to the previous days close filling the gap.

Running Gap

If a gap occurs in an already trending stock, it is known as a Running gap.  As you can see in the below image, the stock is in an uptrend trend and a gap up occurs indicating that the uptrend will eventually continue.

Running Gap

Catastrophic Gap

A catastrophic Gap occurs when there is extremely bad news, such gaps will have a huge percentage drop in the stock price. When such gaps occur, the stock is very unlikely to go back to the previous prices.

Catastrophic Gap

Reversal Trading Strategy

In this strategy, a trader will track trending stocks, and wait for them to reverse their direction. Refer to the below image, the stock is in an uptrend and due to some reason, the stock prices fall severely. This severe fall indicates the reversal of the uptrend and the beginning of the downward trend.

Trend Reversal

Support and Resistance Breakout Strategy

In this strategy, traders look for stocks that are trading in the support and resistance zone. Whenever the stock breaks key support and resistance zones, it is likely to move in the same direction.

Support and Resistance Breakout

As you can see in the image, the stock has been hovering in the zone for a while, and as it breaks that zone, it starts moving on the upside.

Well, these were some of the trading strategies that can be used by beginners easily and also are the most commonly used intraday trading strategies in India. Although these strategies help you find the entry and exit points in a trade, it’s always great to be extra cautious.

To be double sure you can use technical indicators. We will have a thorough discussion of how to use the technical indicators to find the right entry and exit points in the next article.

Conclusion

  • Trading Strategy is a set of predefined rules used by traders to buy and sell stocks.
  • When the stock changes its direction, it forms a pivot point.
  • A pivot high is formed when the stock peaks while moving upwards and turns its direction.
  • Pivot low is formed when the stock tanks while moving downwards and turns its direction.
  • Support is the price level at which the stock will have difficulty falling below.
  • Resistance is a price level where the stock will have difficulty breaking above.
  • A momentum strategy is used to buy or sell the stock that is supposed to make a short term upward or downward move and exit. Usually, such movements are determined by News or Announcements.
  • Common gaps will usually be filled in a couple of hours or by the end of the day.
  • Running gaps will strengthen the trend of the stock and help the stock keep moving in a particular trend.
  • Catastrophic gaps usually occur due to extreme news and make it hard for stocks to go back to previous price levels.
  • In the Reversal Trading Strategy, traders will look for stocks that are in an upward or downward trend for a long time and wait for the reversal to take the trade.
  • In the Support and Resistance Breakout Strategy, traders look for stocks that are trading in the support and resistance zone and wait for the price levels to break the zone to take a trade.
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