Intraday Trading Strategies (Backtests And Examples)
Last Updated on February 7, 2023
In the trading world, people approach markets differently. While some use swing or position trading strategies, others trade intra-day and use intraday trading strategies. Wondering what intraday trading strategies are?
Intraday trading strategies refers to a style of trading where a trader buys and sells a financial instrument within the same trading day. The financial instrument can be stocks, futures, or forex. Intraday trading can be scalping — a trading method that tries to profit from small price fluctuations that happen all through the trading day. It can also be day trading — a trading method that aims to capture the major price movements of each trading day but ensures to close all positions before the market closes for the trading day.
In this post, we take a look at intraday trading and the strategies used for it and we end the article by backtesting a couple of intraday trading strategies.
What is intraday trading?
Intraday trading refers to a style of trading where a trader buys and sells a financial instrument within the same trading day. The financial instrument can be stocks, futures, or forex. Intraday trading can be scalping — a trading method that tries to profit from small price fluctuations that happen all through the trading day. It can also be day trading — a trading method that aims to capture the major price movements of each trading day but ensures to close all positions before the market closes for the trading day.
Whatever the target of the trader who uses intraday trading strategies, the aim remains to exploit the inevitable up-and-down price movements that occur during a trading day while avoiding unmanageable risks and negative price gaps that may occur between one day’s close and the next day’s open. This is in contrast to swing trading, position trading, or investing, where trades are held for several days, weeks, months, or years, as the case may be.
Often considered speculation or even gambling, intraday trading is not the easiest way to make money from the financial markets. This method of trading is most common in Forex and futures trading, where traders can use sizeable leverage to increase the size of their stakes and magnify their profit potential. Still, it is also quite common in some stock markets.
How intraday stock trading works
Intraday trading in stocks means buying and selling stocks on the same trading day. In the US stock market, traders who use that method are subject to the pattern day trading rules — a set of rules that govern day trading in the US stock market put in place by the Financial Industry Regulatory Authority (FINRA).
The FINRA, a self-regulatory organization that regulates member brokerage firms and exchange markets in the US, designates a pattern day trader as one who executes four or more “day trades” within five business days — as long as the number of day trades represents more than six percent of the total trades in the margin account for that same five business day period.
In other words, if you make four or more trades within five trading days and they amount to 6% of your trading account, you would be designated a pattern day trader. You must meet the requirements for such trading — maintain minimum equity of $25,000 in your margin account on any day that you day trade.
However, the $25,000 minimum equity can be a combination of cash and eligible securities but must be in the trading account before engaging in any day-trading activities. But any time your account falls below the $25,000 requirement, you will not be permitted to day trade until you restore your account to the $25,000 minimum equity level. Apart from the maintenance margin requirement, you cannot exceed your day-trading buying power — which is generally up to four times the maintenance margin excess as of the close of trading the day before. In other words, you are only allowed a maximum of 4x leverage.
If you want to trade with a smaller amount and use a higher leverage, you may have to trade stock CFDs, but in that case, you must not be in the US, as CFD trading is prohibited in the US. Outside of the US, you can trade CFDs on US stocks.
Intraday trading rules
There are different rules for intraday trading; each trader has his or her own trading plan. You have to develop your own intraday trading plan. To stand a chance of succeeding in intraday trading, you don’t just make a trading plan, but also, it must be backtested and proven to have a statistical edge in the market.
Apart from having a backtested trading plan, there are some intraday trading rules you need to know and follow if you want to have a successful intraday trading journey. These are some of them:
Learn about the market: To be an intraday stock trader, you have to educate yourself on the various aspects of the stock market. Learn how the market works and the factors that affect stock movements. Study those who have succeeded in the business to find out the things they did and didn’t do. Study financial journals and start to pick the patterns of news reports to know those to take seriously and the ones to ignore.
Have a realistic goal: Intraday stock trading is not a get-rich-quick scheme. You can be successful and make money from trading, but it takes time, patience, and skills. Focus on learning the process and not just the outcome. Your aim should be to master the art of creating profitable strategies and implementing them well. When you do that consistently, the results will take care of themselves over time.
Don’t follow the crowd: By all means, avoid herd mentality. The wisdom of the crowd does not work in stock trading. Create your quantified strategies, backtest them, and if they are good enough, stick to them and trade according to your plan. Don’t bother about what others are doing and don’t listen to trading tips from the so-called gurus.
Be careful with the broker you choose: Your success as an intraday stock trader depends a lot on the broker. This is even more important if you are to trade stock CFDs. Choose a reputable broker that is regulated by a tier-1 financial regulator and most especially in your country. This helps you to avoid brokerage scams and also covers you for a compensation plan (like the financial services compensation scheme in the UK for cases where a broker becomes insolvent). Another thing to consider when choosing a broker is the trading fees — you will be making lots of trades, so you want to save on trading fees.
Pick only very liquid stocks: As an intraday trader, you have to exit your positions before the close of the trading day, so you want to trade only liquid stocks that won’t give you any issues entering and exiting your positions. You may have to focus on large-cap stocks that are components of the broad market index.
Study the companies behind the stocks: Even though you trade based on technical analysis, you should be aware of the fundamentals of the stocks in your watchlist — a list of about 20 stocks from which you select the ones to trade each day. In addition to analyzing emerging trends and other technical factors that affect the market, you should be aware of forthcoming news, such as stock splits, dividends, mergers/acquisitions, and earnings reports.
Use a quantified trading system: Intraday trading is fast-paced for a discretionary system: you don’t have time to think through your trades. Moreover, you cannot afford to sit all day monitoring your trading screen. Having a quantified and automated system makes things easier and also takes away emotions (fear, greed, excitement, and hope) from your trading. This way, you have a greater chance of success, as the odds of your strategy will play out without hindrance.
- Mechanical Trading Strategies – Advantages with Mechanical Rules and Edges
- Mechanical Trading Strategies Vs. Discretionary Trading Strategies
Periodically assess your trading results: While it is not a good practice to keep checking the outcome of each trade, it is certainly a great practice to review your trading results after a series of trades. You should trade in sample sizes and review your results after each sample size. Your sample size may be 100 trades, 200 trades, or more. With the review, you know how your system is performing and whether it needs to be tweaked.
Intraday trading strategies
Intraday traders mostly make use of technical analysis strategies. While discretionary traders may use price action patterns, many base their trading strategies on technical indicators which are easier to use for quantified strategies.
Trading indicators for intraday trading strategies
Some of the technical indicators intraday traders use include:
- Momentum oscillators: These include indicators like the RSI, stochastic, Williams R, and CCI, which measure price momentum and show overbought and oversold conditions in the market. Intraday traders use such indicators to know when to enter or exit the markets.
- Bollinger bands: The indicator consists of a 20-period moving average with an upper and lower line two standard deviations away from the moving average line. Although it tracks volatility, it also shows when the market is overstretched. Traders use it to know when the market is overbought and oversold.
- Internal bar strength: This measures the position of the current trading session’s close relative to the session’s high-low range. For example, on the daily timeframe, IBS is based on the position of the day’s close in relation to the day’s range. Traders use it for mean-reversion trades.
- Moving average: This measures the average of the price data over the chosen period. Traders use it to identify trends and spot dynamic support and resistance levels.
Some strategies used by intraday traders
- Scalping: Scalpers aim to profit from the small price fluctuations on the lowest timeframes, such as the 1-minute, 5-minute, and 15-minute timeframes. They use different methods to ascertain when to enter or exit a trade, but they are often done by trading algos. We believe scalping is a waste of time.
- Mean reversion: This strategy is based on the behavior of most time series to revolve around their mean. the same happens to price. So, traders try to take the contrarian position when it is far stretched from its mean.
- Trend following: With this strategy, a trader tries to trade in the direction of the trend. Moving averages and trend lines are mainly used for this strategy.
- Momentum: This strategy is used by those who want to trade only when the price is moving strongly in one direction.
- Breakouts: Traders who use this method look to trade when the price breaks out of a chart pattern, such as a triangle.
- Range trading: This refers to seeking buying and selling opportunities around support and resistance levels, respectively, in a range-bound market.
- News-based trading: With this strategy, a trader tries to profit from the high volatility that occurs around news events, such as scheduled announcements, like the release of economic statistics, corporate earnings, or interest rate announcements, which receive market expectations and reactions. The market reacts when those expectations are not met or are exceeded, causing significant price movements that day traders try to benefit from.
Is intraday trading profitable?
Yes, intraday trading can be profitable if done with a quantified strategy that has been proven to have an edge in the market through backtesting.
However, it is not always easy to find an edge in the market. In fact, most intraday traders lose money, and here is why:
- Many of them start intraday trading without a trading edge. They have been sold the fallacy that mastering trading psychology and risk management is the key to success, but without an edge in the market, the trader would fail. All those risk management and psychology skills can only prolong the journey if a strategy can’t make money. A trading edge can be in the form of a win rate greater than 50% or more profits from the winners than the losses from losing trades.
- Another thing is having a trading plan and quantified strategies that can take away emotions from trading.
Intraday trading strategies backtest – does it work?
We have, in previous articles, mentioned that it’s both challenging and time-consuming to make an intraday trading strategy into specific trading rules and settings. The reason is that an intraday trading strategy usually is more complex to backtest than a strategy based on daily data.
That said, even though it’s simpler to backtest on daily data, it doesn’t mean that any strategy based on daily data is inferior to any strategy intraday data!
Below we show you an example of an intraday trading strategy using hourly data. What are the basics of the strategy?
The strategy and logic are straightforward: we want to enter a position after a series of lower lows and lower highs in a row.
How many lower lows? In this backtest, we use three lower lows and three lower highs on hourly bars.
Let’s summarize the trading rules:
- We use hourly bars.
- We enter long at the close when the bar is the third lower low and third lower high in a row.
- We enter a position only at 1030 local NY time.
- We sell at the close of 1600 NY time.
The strategy is backtested on the WTI crude oil futures contract traded on NYMEX. The equity curve looks like this (2000 – 2021):
As you can see, the historical performance is not good. We would be better off if we flipped the strategy and instead shorted: the average gain per trade is a negative 0.11%, and the win rate is 47%.
Our strategy ends in July 2021. Let’s check the out-of-sample backtest on unknown data:
The trading statistics indicate there are only 21 trades but the average is 0.57%. After all these years, it seems our strategy started performing well from July 2021!
The strategy only serves as an example, but our experience after decades of backtesting is that intraday trading strategies are not only challenging to backtest but also less likely to pass out of sample backtests (compared to backtests done on daily data). We believe the main reason for that is too much noise between the open and the close.
List of trading strategies
We have written over 1000 articles on this blog since we started in 2012. Many articles contain specific trading rules that can be backtested for profitability and performance metrics.
The trading rules are compiled into a package where you can purchase all of them (recommended) or just a few of your choice. We have hundreds of trading ideas in the compilation.
The strategies are taken from our source of what are the different types of trading strategies. The strategies are an excellent resource to help you get some trading ideas.
The strategies also come with logic in plain English (plain English is for Python traders).
For a list of the strategies we have made please click on the green banner:
These strategies must not be misunderstood for the premium strategies that we charge a fee for:
FAQ intraday trading strategies
Let’s end the article with a few frequently asked questions:
What is the best time of day to trade intraday?
The best time of day to trade intraday is probably during the first two hours after the market opens. This is when liquidity and volatility are highest, allowing for better execution of trades. Intraday trading requires volatility, and around the open (and the close), the volatility is highest.
How much capital do I need to start intraday trading?
The amount of capital required to start intraday trading will depend on the type of investments you plan to make.
Generally, you should have at least enough capital to cover the cost of any trades you plan to make, plus extra capital to cover any losses.
Our experience is that most traders have too little trading capital and thus shouldn’t do intraday trading. You are better off either making swing trades or investing for the long term.
Is intraday trading risky? Can you lose money in intraday trading?
We argue, yes, because most traders lose money. If you have a backtested trading plan, you stand a much better chance of succeeding.
What types of strategies can I use for intraday trading?
There are many different strategies available for intraday trading. Some of the most popular include scalping, momentum trading, news-based trading, and trend following.
No matter your strategy, you should always backtest it first to get statistics and performance data. Did it work in the past? If not, then skip it.
What markets should I focus on for intraday trading?
The best markets to focus on for intraday trading are those with high liquidity and volatility. Typical markets include forex, stocks, futures, and options.
We believe stocks offer the best opportunities and forex the least.
What indicators should I use for intraday trading?
The best indicators to use for intraday trading will depend on the type of strategy you are using. Some popular indicators include moving averages, MACD, Bollinger Bands, and RSI.
However, in today’s market, we believe it’s naive to expect these indicators to work on intraday strategies. They do work on stocks on daily data, but that’s mainly because of their mean-reverting nature.
Is intraday trading profitable?
Most traders lose money on this type of trading. The majority will never make much money due to how markets work: intraday trading is zero-sum game.
How much do intraday traders make?
Most traders lose money. It’s just a tiny majority that makes significant amounts of money. Prop traders can do well, and also institutional traders.
Why am I losing money in intraday trading?
If you have read the whole article, you probably understand why. Most traders have to lose, but the good thing is that most of those who lose have no trading plan and have never backtested anything. Do yourself a favor and start backtesting!
Can the strategy be improved?
We are not oracles, and we are pretty sure there are traders out there who can improve the strategy. Do you have any ideas on how to improve it?
If so, please comment below or drop us an e-mail.