If you have already set up your trading account and have started reading up about intraday trading then you must have come across terms like crossover, reversal, pullback rally and correction etc. These terms are a part of stock market analysis and can either relate to fundamental or technical research methodology of the markets. All these are different types of strategies which you can use in the markets to earn in intraday trading.
What is an intraday trading strategy?
Before understanding different types of strategies in intraday trading, let us first understand was an intraday trading strategy is. An intraday strategy is a fixed set of rules and condition which can help you decide when to enter or exit a trade. A strategy creates a situation in the market or a perfect time for a trader to either buy or sell a stock based on past data in case of a similar situation. Strategies are historically tested scenarios which tell you how the price chart will move if a given set of conditions are achieved.
There are many strategies which you can use to become successful. Each strategy needs practice and proper understanding before implementation. A certified investment advisor who uses such strategies can guide you and explain you regarding them.
1. Moving Average crossover strategy
2. Breakout strategy
3. Reversal strategy
4. Pull back strategy
5. Momentum trading strategy
A moving average is a line on the price chart of a stock which shows the average price of the stock over a fixed number of days. There are 200 days moving averages, 100 day moving averages or 50 day moving averages. The longer moving average gives a longer term past trend of the stock whereas the shorter moving average gives the average price for a shorter duration in the past. A crossover occurs when the two lines intersect each other. For example, if a stock has been performing well for the past one year, the 200 DMA will be an upward moving line. However, if the stock has suddenly started performing poorly in the past couple of months, the 50DMA will move downwards and there will be a point when the 50DMA line will intersect the 200 DMA. Such crossover signals a ‘sell’ for the stock. Whereas if the 50DMA crosses the 200DMA from below, it would mean a time to ‘Buy’the stock as there is more potential upside to the stock.
In a normal situation, price of a stock moves within a fixed rage which is bordered by the resistance level on the upper side and the support level on the lower side. These two elements form the trading range for the particular stock price. When these levels are violated, there occurs a breakout. After a breakout, it is unlikely that the stock prices will return to the trading range immediately, hence giving traders a chance to earn profits. For example, if the trading range for a stock is between Rs. 80 and Rs. 100, it means that in the past, at least for three times, the price of the stock has not gone below Rs. 80 level and has not gone above Rs. 100.
Then as per breakout strategy, if the stock price moves above Rs. 100, then it will continue moving upward and a person can buy the stock at Rs. 102- a price just above the resistance level which would indicate a breakout.
In simple terms, reversal means change in direction to the opposite. Since mostly stock markets have only two fixed directions upwards and downwards (other than sideways which is the absence of any direction), a reversal strategy identifies when a stock is about to change its direction from upward to downwards or downwards to upwards. Technical analysis has a lot of tools and tricks for this strategy, the most common ones being candlestick patterns.
A candlestick is basically a chart formed using bar like shapes with lines on top and bottom called candles - containing information about the price movement of the stock.
A candlestick chart is used to demarcate the movements of the price of a security, derivative, currency or commodity. The candle formed in a candlestick chart contains the information of all four important levels on the duration of which the candle is formed- open, close, high, and low.
A fixed sequence of the candles can help in understanding when there will be a reversal in the price of the stock or security. There are many reversal patterns such as bullish morning star, Bullish hammer, shooting star, three- white soldiers, bullish harami etc. These patterns are indicators of reversal in the stock prices and can help you trade in the direction in which the reversal will happen.
A pull back can be defined as a small movement of the price in the opposite direction of the long term direction. This is a trading strategy which is used by many in intraday trading since some pull back rallies or corrections last for a very short time period.
For example when the price of a stock is moving up continuously, and there is no major cause for it to fall or deflect from its path. Then, there will come a time when the price will move in the downward direction or correct itself for a short period of time before again resuming its bullish trend.
Similarly, for a stock whose value is falling continuously for a long time will witness a pullback rally, in which the prices will go up for a short time and then continue moving downward. This strategy is useful when the overall fundamentals of the market do not change and there is no systematic risk to the markets.
Momentum trading strategy in simple words means that you trade in the direction of the trend in stocks which have a high volume. The holding in intraday for such stocks can be minutes, hours or the whole day based on the strength of the trend. You can choose stocks which have a high volume and trade in a fixed direction each day. These stocks can then be bought or sold at the beginning to the day or when a particular trend sets off in that stock’s price. This is called momentum trading and is one of the most basic strategies used by intraday trades in the sock markets as it does not require a lot of sophisticated charting tools either.
There are some stocks in the market which give a movement of 10-20% in one single day and this movement can be used by intraday traders to earn profit in intraday trading.
While all these strategies can help you in deciding when and how to trade it is important to also understand and have a strong control over your emotions while trading in the markets. Intraday trading is only 20 percent strategy and 80 percent discipline. If you do not trade in a disciplined manner, no trading strategy can bear fruit and you would be forced to incur losses. Hence, always remember to keep your behavioural biases in check.
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