Five Best Intraday Trading Strategies

In these times of fast food, few have the patience to study different types of trading strategies in stock market, back-testing them, and then deploy them. There is some logic behind not going through the grind or what some may prefer calling not rediscovering the wheel.

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When a strategy is tried and tested by thousands of traders and still works, there is little point in putting it to the test again and coming to the same conclusion. Most professional traders start with something available off the shelf and then work towards personalizing the strategy. We present five intraday trading strategies that have stood the test of time and are still traded by professionals and rookies.

Opening Range Breakout (ORB) Strategy

The opening range breakout strategy is one of the simplest and most popular trading strategies. Its simplicity comes from the fact that it does not require any indicators and can be traded by a novice.

As the name suggests, the strategy comes into play when the index or stock moves out of a range that is defined by its movement in the first few minutes. Defining the range is the one subjective element in the strategy. Some traders use the first 15 minutes to define the range, while others wait for 30 minutes and the more aggressive ones wait for the first 5 minutes.

The range is determined by creating a band using the highest point of the first 15 minutes bar and the lowest point.

The strategy is based on the premise that either the high or the low of the day is made in the first 15 minutes of the day.

We shall look at Bank Nifty futures using the 15-minute movement to define the range over 5 days to get an idea of the premise.

The trade is to buy above or below the 15-minute range, with a stop loss of the other end of the range or the mid-point of the range.

The chart shows that one extreme was indeed made on 3 of the 5 days. With proper risk management and position sizing, the strategy can be traded successfully. The trader can experiment with futures or options to benefit from this strategy.

Bollinger Band strategy

Bollinger Bands, as we had discussed earlier, define the high probability range in which the market can move. Depending on the standard deviation, we can define the boundaries for the market, which can offer low-risk trading opportunities.

Our strategy has kept the conventional parameter of 20 periods and 2 standard deviations. One can play around with the standard deviation number to match your risk profile. A higher value of standard deviation would mean fewer signals but ones where the probability of the trade working is high. For example, we shall study the Bank Nifty chart but change the time frame to 3 minutes.

The premise for the trade is that if the price touches the Bollinger bands, the probability of it continuing in the same direction is low. Thus, if the price has crossed the upper band, chances are high that it will come down. Similarly, if the price has broken the lower band, chances are high that it will move higher. As can be seen from the chart above, six trades were triggered during the day, and five of them worked well. The one that did not have only a small loss. Trades can be taken using futures or options in this strategy.

Relative Strength Index (RSI)

The RSI is one of the most common indicators in the market and has been used to determine the strength of the market. A value of 70 and above is considered to be overbought, and traders tend to exit from the market. On the other hand, a value of 30 and lower is considered oversold, which attracts traders to buy. We will look at a Bank Nifty chart in the 5-minute timeframe to see if this theory holds true.

A long trade will be taken when RSI moves above 30, and a short trade can be taken when it falls below 70. Exits, as well as trading time frames, can vary depending on the risk profile of the trader. Some traders also play around with the RSI parameter, moving it from the default 14 to low in case of aggressive trades and higher for conservative trades.

Moving Averages

One of the most common and entry-level strategies in the market is trading moving average crossovers. Moving averages smoothen the price movement and also determines the trend. Using more than one moving average adds more weight to the trade.

Trades have been experimenting by adding various values of moving averages and the number of averages to identify a trade. Entry is taken when the price moves out of all moving averages and is in a clear path and exits from the trade are taken when the price enters the moving averages again.

We shall look at an 8-period exponential moving average (EMA) and a 21-period EMA. Long entries are taken when the 8-period average crosses the 21 EMA from below. Similarly, a short trade is triggered when the 8 EMA cuts the 21 EMA from the top. The problem with using the moving average strategy is that the number of winning trades is lower; however, the few win trades that are captured result in a higher gain in rupee terms.

The chart below shows a Bank Nifty trade in 5-minute time frame.

Candlestick Patterns

Candlesticks-based trading has been in use for over 400 years and migrated from its country of origin – Japan, to other parts of the world, picking up strength as it travelled.

Its simplicity has added to its popularity which keeps on increasing. While many candlesticks patterns have worked well, few patterns are very popular with traders. We shall look at two such patterns – Hammer and the Shooting Star. These are very powerful patterns and can be traded on all timeframes. One need not master all candlestick patterns. To start with, a trader can select two or three patterns and develop a feel for them and only after they have mastered them should they consider adding new patterns to their armoury.

Shooting Stars are generally formed at the top of a move, and if accompanied by high volume, it offers a very good risk-reward trade, as seen in the chart below.

The following chart shows two Hammers formed at the bottom of an up move. These trades offer high probability, low risk and high reward trades.

Conclusion

There are numerous strategies that traders use to make money from the market. The reason many retail traders do not succeed is that they jump from one strategy to another in case of a small drawdown. Sticking to one strategy and mastering it is more important than knowing many strategies and only occasionally trading them.