Trading Systems and Methods, 6th Edition

CHAPTER 16Day Trading

A day trade is a position entered and liquidated during the same trading day. Day trading reached a peak in popularity along with the top in the stock market at the beginning of 2000 but has again gained popularity in the bull market following the 2008 financial crisis. Trading on the long side of a rising market with good volatility makes day trading look easy.

The opening range breakout, buying a new high after the open and exiting on the close, was the strategy of choice in the '90s. While trading for a living is always difficult, day trading puts more restrictions on the rules, requiring you to extract a profit during a very short time period. Intraday prices respond more to noise than to fundamental factors. They can have unpredictable reactions to economic reports, and volatility can occur at any time due to large orders from funds, earnings statements, upgrades and downgrades, takeovers, geopolitical news, and the constant barrage of commentary on the financial news networks. The fact that the economy is strong or weak, that creeping inflation requires raising interest rates, or that the budget deficit is steadily growing has little impact on a trade that targets a 1-hour period during the day. Day trading is highly focused on price patterns, noise, and volatility.

Gaps, time of day volume, the distribution of intraday highs and lows, and other daily patterns that were discussed in Chapter 15 can be applied to day trading. Day traders often look ...