Day Trading Strategies For Beginners

Introduction: What is day trading?

Day trading is a unique style of trading that capitalizes on intraday price action. Ideally, you will use chart patterns, technical analysis, and price action to take advantage of short-term moves in the market. Several options trading strategies can be deployed in a day trading setting. The strategies that traders commonly use are scalping, credit spreads, and iron condors. Using a shorter time frame allows traders to utilize shorter-dated expiration contracts to benefit their strategy. 

Key Takeaways

• Day trading is defined as a trade where the entry and exit are executed on the same day.
• There are several strategies that you can use to day trade. Finding one that best fits your trading profile is essential.
• Day trading is a style of trading where risk is inherently heightened, but the reward can also be lucrative if done correctly. There are both pros and cons to day trading.

Pros and cons of day trading

Trading will always have pros and cons, no matter what timeframe or strategy you choose to use as a trader. Some of the biggest benefits of day trading are no overnight risk, flexibility in the personal approach, and can have high rewards. Some downsides come with inheritance in the time frame you are using. In day trading, the risk is heightened, there is less room for error, and can be higher stress in a short time. For these reasons, risk management is as important as ever when day trading.

Strategy #1 – scalping

One of the most popular day trading strategies is scalping. Scalping is based on the premise that you can “scalp” a piece of the move. This strategy is typically used when trying to take advantage of a move, and you are targeting to get a piece. One way to look at this system is that you’re not looking for the whole pizza; you want a slice. Scalping is typically done with a long put or a long call. The advantage of this strategy is that the risk can be low with a high reward if structured correctly. This is not to be confused with the volatility of a short-term contract.

Example of scalping

An example of a scalping strategy would be to purchase a single 0DTE SPX contract at $2.00. This contract will cost you $200 to place the trade. Your max loss on this position will be the cost of entering the trade, in this case, $200. Using technical analysis and resistance levels, you can then define your stop-loss orders and a target for the trade. Remember, this will not have the intention of catching a macro move but rather catching a piece of momentum. That contract that was $2.00 may move beyond 100% even in a slight movement, but remember, the most you can lose is the initial investment it took to place the trade.

Strategy #2 – credit spreads

Another day trading strategy that can be used is known as credit spreads. Credit spreads are a directional trade, but with more leeway, if you will. A credit spread can be used similarly to a long call or long put, but there will be less risk and reward possible. Credit spreads differ because they have a defined max profit before getting into the trade. The most significant benefit to using a credit spread is that the greeks are in your favor. 

Example of credit spreads

An example of a credit spread would be if you have defined a critical level on the intraday chart at 3,800, and in this example, this is the support that you anticipate the market holding. One way you can approach this is by getting into a Put Credit Spread, using strikes below the level of support. You can sell the 3,790 and buy the 3,780 strikes. These extra 10 points from your support level provide some cushion. Strategically, this strategy can allow you to be slightly wrong and still be profitable. Using a short-dated contract, such as SPX 0DTE, can help the theta destroy the premium.

Strategy #3 – iron condors

An iron condor is a pinning strategy that can be flexible in its risk-to-reward ratio. You can tighten the condor range when you are a trader who wants to be more risk-averse. If you want to be consistent with less reward, you can make the width wider on the contracts you select. The general premise of an iron condor options strategy is that you want the price to expire within the range you have chosen. Using SPX 0DTE, you can benefit from Theta decay much quicker than a long-term trading strategy. Iron condors can be used in a day trade similarly to how you would use them over a more extended period of time. 

Example of iron condors

One of the best environments to place an iron condor is when you have identified a clear range in which an underlying asset is trading. When day trading, it can be essential to be patient to verify that the trading day is not a trending day but rather a choppy volatile day. Once you have identified the range for the day, you can place an iron condor wider than the day, giving a high probability trade. In this example, the greeks will instantly be working in your favor as theta decay on a short-date contract is heightened. 

Pattern Day Trading Rule:

Pattern Day Trading (PDT) is a rule that states that an investor may not execute four or more day trades within a five business day period. A day trade is defined as a trade where the entry and exit are performed on the same day. This rule applies to anyone on a margin account with less than the threshold of $25,000. One way around this rule is to have a cash account. 

Conclusion

Day trading is not for every trader and should be fully considered before jumping into it. Still, if this trading style fits your personality and risk tolerance, it can be an excellent addition to your arsenal. There are pros and cons, but at the end of the day, every strategy and system has them compared to other methods. The flexibility of strategies within day trading can allow day trading to be your primary style or just another weapon that you utilize. 

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