There are six common basic strategies by which day traders attempt to make a profit:
1. Trend following
Trend following, a strategy used in all trading time frames, assumes that stocks which have been rising steadily will continue to rise, and vice versa. The trend follower buys a stock which has been rising, or short-sells a falling stock, in the expectation that the trend will continue.
2. Playing News
Playing news is primarily the realm of the day trader. The basic strategy is to buy a stock which has just announced good news, or short-sell on bad news. Such events provide enormous volatility in a stock and therefore the greatest chance for quick profits (or losses).
3. Range Trading
A range trader watches a stock that has been rising off a support price and falling off a resistance price. That is, every time the stock hits a high, it falls back to the low, and vice versa. Such a stock is said to be “trading in a range”. The range trader therefore buys the stock at or near the low price, and sells (and possibly short sells) at the high.
4. Scalping
Scalping originally referred to spread trading. Today it has come to mean any extremely quick trade for a small profit.
5. Technical analysis
A method of evaluating securities, stocks, bonds, forex, futures, options, indexes, currencies and commodities. or any item that has a price and a market by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts to identify patterns that can suggest future activity.
6. Covering Spreads
Playing the spread involves buying at the Bid price and selling at the Ask price. The numerical difference between these two prices is known as the spread. The bigger the spread, the more inefficient the market for that particular stock, and the more potential for profit. This spread is the mechanism that some large firms use to make most of their money (as opposed to trade commissions) since the advent of online discount brokerages.