Intraday Trading Strategies – Backtests Analysis

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.

Related reading: Day trading strategy

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.

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