The Components of Successful Intraday Trading

Traders are often lured to into the futures markets with a fascination for day trading. The thought of trading leveraged contracts without overnight risk is appealing to many, but underestimated by most. As a retail broker I have had the pleasure, and the pain, of watching day traders attempt to profit through strategies ranging from scalping to “position” intraday trading which spans several hours.

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My observations have led me to the conclusion that day trading is perhaps one of the most difficult strategies to successfully employ. However, for those that have the perseverance to dedicate themselves to the practice, contain the natural ability to eliminate emotions and have enough experience under their belt day trading may also be one of the most potentially lucrative forms of market speculation.

The term day trading can be used to describe an unlimited number of strategies and approaches that involve buying and selling a contract in the same trading session. Many are system based, meaning that trading signals are executed according to specific technical set ups; others incorporate a trader’s instinct along with the technical guidance. The approach that you take in the markets should be dependent on your personality and risk tolerances and not necessarily what has worked for somebody else.

Let’s face it; there are only about twenty to thirty commonly used oscillators if there were absolute magic to any of them more people would have discovered the holy grail.  Rather than expecting an indicator or an oscillator to do the work for you, I believe it to be more productive that you properly educate yourself to the risks and the rewards of the markets as well as some of the less technical, and thus less talked about, aspects of day trading.

Day Trading is Mental

I believe that becoming a successful day trader comes down to instinct and the ability to control emotion. If you have ever been involved in athletics, you have probably heard the adage that performance is 95% mental and only 5% physical. I have found this to be true in trading as well, although instead of being physical trading is technical. Quite simply, it isn’t which oscillators or indicators that you use, it is how you use them and perhaps more importantly how you deal with fear and greed as you are charting your trades. Here are a few day trading tips that may aid in the mental preparation of day trading.

Know the “Vol” and Accept the Consequences

You often hear traders talk about their need for volatility. It is a common perception among the trading community that higher volatility is equivalent to higher opportunity and therefore profit potential. Call me a “girl”, but I happen to be a contrarian when it comes to this point of view. Sure, if the markets are moving there is an increased chance for you to catch a large move and make history in your trading account.

However, there is another side to the story; let’s not forget that if the market goes against your position you could be put in an agonizing position. Also, if you are a trader that insists on using stop orders, increased levels of volatility translates into amplified odds of being stopped out prematurely.

I am not suggesting that you avoid markets during times of explosive trade; however, you must fully understand the consequences and be willing to accept the risk accordingly.

In my opinion, the most convenient way of measuring volatility is through the use of Bollinger Bands. The bands allow a trader to visualize the explosion and contraction of volatility with similar movements in the bands. Simply put, as the bands get wider the volatility and market risk is also on the rise. Conversely, tighter bands suggest relatively lower levels of volatility. Please note that I didn’t say lower levels of risk; this was intentional.

Figure 1: Traders can visualize market volatility through the use of Bollinger Bands. It is a good idea to do so on a daily chart to get the big picture of market volatility.

Narrow bands indicate that market volatility is relatively low, but if the contraction is excessive enough it may signal an extraordinary spike in price is imminent. Markets go through times of quiet trade but are often followed by large and sudden increases in instability. As you can imagine, being in the market at such times could be similar to winning the lottery or they could mean financial peril. Before executing a trade in a fast moving market, or one that is trading quietly, you must be aware and willing to accept the risk accordingly. Being conscious of all of the potential outcomes of your trade may prevent panic liquidation or the infamous deer in the headlights failure to act.

Trader’s Tool Box

Technology has provided traders with an abundance of readily available information at their fingertips. Accordingly, I strongly believe that traders should properly understand and utilize the resources available to them. It doesn’t make sense to pick a single indicator or oscillator and expect it to tell you the whole story; instead it should be viewed as a piece to the puzzle. With that said, it can often be counterproductive to bog yourself down with too much information or guidance; this is often referred to as analysis paralysis.

In my opinion, it is a good idea to pick three or four tools that fit your needs and personality. For example, if you are an aggressive trader with a high tolerance for risk you may opt for a quick oscillator such as the Fast Stochastics. If you are a slower paced individual, the MACD may better suit your needs as it is a much slower moving indication of trend reversals.

It is important to note that after you have entered a trade you shouldn’t change the oscillator that you are watching simply because the original isn’t telling you what you want to hear, or in this case see. This can be a tempting practice for traders that are caught in an adversely moving market and are in search of a reason to stay in the trade for fear of taking a loss.

Mental “Stop Loss”

As you are probably aware, a stop order (AKA stop loss) is an order requesting to be filled at the market should the named price be hit. A trader long a futures contract may place and stop order below the futures price to mitigate the risk of an adverse price move. Likewise a trader holding a short futures position may place a buy stop above the current market price as a risk management tool against a possible rally. Once executed, the trader would be flat the market at or near the named price.

Most traders or trading mentors will tell you that you should always use stops; I am not most. I argue that experienced and disciplined traders may be better off without the use of live stop orders and believe that mental stops may be a better alternative. Supporting my assumption is the theory that the dollar amount of the risk on any given trade is conceivably higher through the use of mental stops as opposed to actual working stop orders but the risk in the long rung may be less through the reduction of untimely exits.

The concept of a mental stop is simply picking out a price level at which it is fair to say that your position may have been an incorrect speculation and manually exiting the market once your pre determined price is hit. Using mental stops as opposed to placing an actual stop loss order may prevent the natural ebb and flow of the market from stopping you out at what ultimately becomes premature.

I am sure that you have all fallen victim to the stop order that was triggered to exit your trade only moments before the market reversed course and left you behind. Not only is this a frustrating place to be, but it often has an adverse impact on trading psychology going forward. Unfortunately, it doesn’t seem to be uncommon for inexperienced traders to behave somewhat recklessly in an attempt to get their money back from the very market that took it from them. It is easy to give in to this mentality, but doing so will almost always end negatively.

The use of mental stops requires a considerable amount of discipline and may not be appropriate for all traders and strategies. If you have a consistent problem controlling your emotions (we all fall victim to fear and greed at some point), stop orders are a must. Without them you may be put into a position in which a single losing trade can wipe out weeks or months of hard work, or worse put you out of the trading business forever.

Even those that have an adequate ability to stay calm during unfavorable market moves may find losses pile up in violent market conditions. For example, there are times in which it is very difficult to exit a position once the named price is hit without considerable financial suffering. If you are not mentally capable of accepting this possibility, placing outright stop orders may be a better alternative for you despite its limitations.

Remember, if successful trading is largely determined by the mental capabilities of a trader it is imperative that you know yourself well enough to steer clear of situations that may lead you to behave emotionally as opposed to rationally.

Figure 2: Stop orders are a great way to minimize exposure, but I believe them to be a great source of frustration as well. If you are disciplined it may be better to work without stop loss orders.

Be Creative

It is no secret that more retail traders lose money than not in the realm of futures and option trading. I have observed that day traders could face even more dismal odds of success. However, don’t let this deter you from participating in the markets, instead use it as your incentive to be different. If a majority of people are trading unproductively, perhaps you should be interested in strategies that are a bit out of the norm.

Options as Stops

During the last few days of an options life the time value, and thus the premium, of the instrument has often eroded to affordable levels. If this is the case, it is sometimes possible to simply purchase a call or put option as an alternative to placing a stop loss order. Keep in mind that excessive volatility will prevent even those options with little time left before expiration from becoming “cheap” enough to make them a viable substitute for stop loss orders.

In essence, the purchased option creates a synthetic trade in which the risk is limited to the amount paid for the option plus any difference in the entry price of the futures contract and the strike price of the option. This is because the option will act as an insurance policy against the futures price moving above the strike price of the long call or below the strike price of a long put. Beyond the strike price of the option, losses in the futures contract are offset with gains in the option at expiration.

The premise of such a strategy is to reduce the possibility of being prematurely stopped out of what would eventually become a profitable trade. However, it is important to realize that using options as a replacement for stop orders should only be done if the risk is affordable. If the options are relatively expensive, the risk of loss will be too high and depending on the situation it may be too likely to make this approach practical.

Keep in mind, the foundation of buying options instead of placing stop orders is to limit not to increase it. Paying more for a protective option than you originally intended to risk on the trade should be a red flag and lead you to explore other alternatives.

Counter Trend Trading

Based on my observations, it seems as though most day trading strategies are very simple; identify an intraday trend and “ride” it until it ends. It sounds easy enough; but is it? I will be the first to admit that day trading is not my forte. Nevertheless, through the scrutiny of the trading practices of others I strongly believe that intraday trend trading is much more difficult than one would imagine.

The problem with a trend is that it is only your friend until it ends. By the time that many trend trading methods provide confirmation to execute a trade the market move has already been missed. Psychologically, I have a difficult time buying a contract that has already risen considerably. Likewise, selling a contract after it has already established a down-trend may simply be too late.

After all, the overall objective is to buy low and sell high. Buying high and selling higher may work at times but the common theory that markets spend a majority of their time range-bound seems to work against intraday-trend trading in the long run. Only during times of exceptional market moves will it be possible for a trader to ride a trend long enough to recoup what may have been lost on false signals and failed break-outs of the range.

Patient traders might find that they fare better by looking to take advantage of extreme intraday price moves in hopes of a temporary recovery to a more sustainable level. Doing so may provide less profit potential and if done correctly less trading opportunities but may pose better odds of success.

Identify Extreme Prices

Market prices have a tendency to overshoot realistic valuations only to eventually come back to an equilibrium price. Emotion plays a big factor in this phenomenon but the running of stop orders is also a primary driving force. Traders often place sell stop orders under known areas of support and buy stop orders above known areas of resistance. As you can imagine, there are often several stop orders with identical or similar prices.

Once these orders are triggered, a swift move in prices in the direction of the stop orders takes place but often has a difficult time sustaining itself. Understanding that stop running can artificially move a market quicker and in a larger magnitude than what would have transpired without the stop orders, a trader could attempt to take advantage of the subsequent rebalancing in price.

For example, an e-mini S&P trader may notice the market drop five handles in a very quick fashion with little fundamental news to drive the move. This type of trade may be the result of a market that has simply triggered a batch of sell stops. As the stop orders were filled, the buying didn’t keep up with the selling and the futures price dropped accordingly.

However, if our assumption was correct and the move was based on sell stop execution instead of fresh short selling, it is practical to believe that the market will rebound some if not all of the losses artificially sustained. A day trader may look at this as an opportunity to buy the futures contract in an attempt to capitalize on a partial or full retracement of the drop.

Figure 3 : 60 minute e-mini S&P chart displaying extreme market moves followed by a retracement to an equilibrium level.

Naturally, before entering a trade some technical confirmation must be made. After all, the theory that the market drop was the result of sell stop running was an assumption not a fact. Overbought and oversold indicators may be helpful in determining whether or not prices were pushed to a level extreme enough to encourage buying.

Most of the available oscillators were developed with the intention of identifying overbought and oversold conditions. In their simplest forms, both overbought and oversold markets are the result of prices overshooting their equilibrium price. Thus, depending on your trading style and personality you may look to stochastics for confirmation, others may look to the ADX. I like using either the RSI or the Williams percent R in my analysis (see Figure 3).

Each of these indicators seems to represent extreme prices relatively well. Thus, traders looking to buy on dips may find them helpful, but shouldn’t expect them to be fool proof by any means. Indicators are a tool but they aren’t a guarantee. They can tell you what the market has done, but only you will be able to translate that into what the market may do next.


Although day trading is a challenge, there is likely a reason why so many traders of all skill levels and sizes are attracted to the practice. There are obvious market opportunities in intraday trading and with enough patience, practice and fortitude you may become one of those that have achieved profitable long-term trading results.

However, there is also rationale as to why we don’t all quit our jobs and day trade for a living. Despite what may be relatively conservative risk on a per trade basis and a lack of overnight event risk, day traders face substantial risk in the long-run through the possibility of several small losses. If you aren’t willing to commit yourself to the practice of day-trading, I suggest that you consider less labor intensive strategies.

Carley Garner is Senior Market Analyst and Broker with DeCarley Trading, and a columnist for Stocks and Commodities. The co-author of Commodity Options and author of the upcoming book, A Trader’s First Book on Commodities, Garner writes two widely-distributed e-newsletters, The Stock Index Report and The Bond Bulletin. She provides free trading education to investors at Garner is a Magna Cum Laude graduate of the University of Nevada Las Vegas.