What Is The Best Day Trading Strategy?

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"What's the best day trading strategy?" - I often receive this question, so let me answer it in this blog post.

Yesterday morning I participated in a Live Day Trading Challenge. It wasn't my first rodeo. I have done it in the past and usually do quite well. If you are interested, you can watch the recording of this Trading Challenge here.

You could say that EVERY day in the markets is a Live Trading Challenge, but often there are certain rules and restrictions that make these day trading challenges even trickier than "normal" trading.

One of the restrictions of this morning's challenge was that I was only allowed to trade TWO markets. If you have attended any of my webinars, then you know that I like to follow 4-5 different markets every day. But, yesterday morning I was limited to only two markets, and I chose the e-mini S&P (ES) and Crude Oil (CL).

Another restriction was the trading times. I was only allowed to trade from 7:30am CST until 9:30am CST, i.e. one hour BEFORE the US stock markets open until an hour AFTER the open. These are unusual trading times for me, since I usually trade the first two hours AFTER the opening of the US stock markets, i.e. from 8:30am until 10:30am.

To make things more interesting, we were forced to take at least one trade.

So what's the best day trading strategy for such a challenge?

Fortunately, in my own trading I use four different day trading strategies:

  • The Simple Strategy, which is a trend-following strategy,
  • The Boomerang Strategy, which is another trend-following strategy that allows me to enter late into a trend in case I missed or skipped the original entry,
  • The Ping Pong Strategy, which is a trend-fading strategy and works great in a sideways market and
  • The Seahawk Strategy, which is a scalping strategy that's perfect for a slow market, e.g. before the opening.

So which of these strategies would be the best day trading strategy for this trading challenge?

The best day trading strategy is always the strategy that fits the current market conditions!

Let me explain.

In a trending market, you want to use a trend-following strategy. These types of trading strategies are very rewarding, since you often see a winning percentage of 50% or more and the average profit per trade is larger than the average loss per trade. Since you make more money on your winning trades than you lose on your losing trades, you only need to be right 1 out of 2 trades and would still make money. If you could get your winning percentage above 50%, you are in good shape!

The problem with these trading strategies is that they don't perform well in sideways markets. If you trade a trend-following strategy in a sideways market, you will get whipsawed - and frustrated. Therefore you must make sure that the market is really trending before using a trend-following strategy.

Some people say that the markets are only trending 20% of the time. I don't know if that's true, but it sounds about right. And sometimes there are days when the markets are not trending at all.

Yesterday morning's trading was the perfect example: in the 2 hours we had to trade for the trading challenge, there were no trends! Therefore using a trend-following strategy would not have been the best day trading strategy - at least not this morning!

What Is The Best Day Trading Strategy For This Market?

e-mini S&P during the Live Day Trading Challenge

The best day trading strategy to use in a sideways market like this is a trend-fading or a scalping strategy. I decided to use my scalping strategy "The Seahawk Strategy".

I openly admit it: The Seahawk Strategy is not sexy. As a scalping strategy, it uses a larger profit target than stop loss. At first this seems to be couter-intuitive, but you need to know that there's a strong relationship between the reward-to-risk ratio and the winning percentage. The higher the reward-to-risk ratio, the lower the winning percentage and vice versa.

Using the Seahawk Strategy I knew that I could only extract small profits from the market, but since there was no trend, that's all I could do. You have to take what the market is willing to give you. Don't be greedy. Watch the recording of the Live Trading Challenge to see if it worked out for me.

Long story short: The best day trading strategy is always the strategy that fits the current market conditions!

Therefore you MUST have multiple trading strategies. At a minimum you should have two (2) day trading strategies: One for a sideways market and one for a trending market.

And of course you MUST be able to determine the direction of the market. In the same way a doctor first diagnoses a patient before prescribing a treatment, YOU have to determine whether the market is trending or going sideways. And based on your assessment you then apply the appropriate trading strategy.

Hope this helps.

And as always: Leave a comment!

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