Learn how to day trade stocks, including how and when to enter and exit trades, manage risk, find stocks to trade, what times to trade, and what indicators to use (if any).
This strategy takes multiple trades each day and uses a 1-minute chart. It is an intraday price trend strategy that requires less than two hours of trading (although you could trade more if desired).
Day Trading is tough, no doubt about it. But making some money—even if it’s a bit of extra money—is possible with the proper plan and a crazy amount of discipline and patience.
There are several steps to becoming a successful day trader.
- Build a trading plan. This will include entries, exits, risk management, what times you will trade, what stocks you will trade, and guidelines for when you shouldn’t trade.
- Practice like crazy, but only practice what is in your plan. NOTHING ELSE!
- Learn to control (not ignore) emotions, and stick to the plan when real money is on the line.
Steps two and three are the really hard ones. Most people can come up with a plan. In this article, I am going to give you one. I will layout how to enter, exit, manage risk, what to trade, and when.
Steps two and three are up to you. So with that in mind, here’s how to day trade stocks, laid out step-by-step. These sections all compose your trading plan. A trading plan is a written document that lays out exactly how you will trade (or not trade) in all circumstances. Keep the trading plan by your desk while trading and refer to it regularly to make sure you are following it.
What Stocks to Day Trade
There are lots of stocks to day trade, so we need to narrow it down to only a few, or one, to trade. Here’s how you determine which stocks to trade:
- Pick one or two stocks and trade them all the time, or at least for several months (maybe even years).
- Run a daily scan to find stocks that are moving well that day.
- Run a weekly scan for stocks that are likely tradable all week (and potentially longer)
Picking One or Two Stock to Day Trade
The most efficient way to day trade is to pick one stock or Exchange Traded Fund (ETF) and trade it every day. For example, you could just pick the SPDR S&P 500 (SPY) or Apple Inc. (AAPL). These are not recommendations, just examples. For some ideas on stocks to trade, check out the Best Day Trading Stocks page. You may find a stock you like there, or you may find one on your own.
Pick a stock that does lots of volume (so you can scale up your position size as you get better) and that also has a decent amount of movement. It should move enough that you see several large price swings in the morning (the ideal time for day trading), and potentially after the lunch hour if you want to keep trading that long.
The goal is to find a stock that suits your trading style and strategy, and then become a master in it, in all trading conditions. There is no magic formula for picking a stock. If it moves a decent amount and does lots of volume every day, it can be day traded.
Screening Daily For Day Trading Stocks
Some people prefer to scan daily for stocks making big moves. This means the stocks you trade will likely change daily.
You will need to pay for scanning software with this approach. I use Finviz Elite, as it provides real-time scanning, pre-market scanning, and loads of other features.
Screening means more work, more jumping around between stocks (which may require more chart windows and computer monitors) which is another skill set to learn.
In How to Scan for Day Trading Stocks Making Big Moves After the Open, I provide a rundown on how to screen for stocks that are trending big during the day.
Time of Day to Day Trade Stocks
The first hour the market is open is the best hour. If you are going to trade only one hour per day, make it the first hour. That is where the biggest moves happen.
When I day trade stocks, I usually only trade the first 90 minutes to two hours of the day.
Therefore, 9:30 AM EST till about 11 AM EST is the ideal time to day trade stocks.
Don’t open new trades between 11:45 AM and 12:45 PM EST. Things quieten down during the “lunch hour.” If you still have trades open heading into the lunch hour, exit them via your exit rules (discussed below).
Take a break during lunch. Clear your head. Eat something. Stretch, go for a walk. Do something other than look at your screens.
If you want to keep trading after taking a break for lunch, you can start looking for setups around 12:45 PM EST, as things usually start moving a bit more around 1 PM EST (approximately).
The last hour of trading, from 3 PM to 4 PM EST, also typically has some big moves.
Over the years I have found that most days I make between 3 trades (quiet day) and 8 trades (lots of action day) in the first 90 minutes of trading. Yet between 1 PM and 4 PM I typically only make about 3 trades on an active day, and only 1 or 2 trades on a quiet day.
In my experience, most of my profits comes in the first 90 minutes of the session. If I keep trading after lunch, my profits go up only marginally for putting in a lot more hours.
Therefore, I have opted to only trade the first 90 minutes to two hours of the day. You may find the afternoon is great for you, and in that case, you should trade it. But if you are putting in a bunch of extra hours and it is not increasing your profits, there is no point.
Day Trading Entries for Trending Stocks
This, of course, is not the only way to day trade. It is just one way…of an infinite number. The Breakout and Run Day Trading Strategy uses daily, hourly, and 5-minutes charts to capture bigger day trades which could be turned into overnight swing trades if desired.
Back to the one-minute chart, and this intraday trending strategy…
The first 90 minutes of the day is when the most action happens. That is when I want to trade, because big price moves/trends are happening. That doesn’t mean the price will trend in the same direction that entire time. It may, but quite often we will see big trends both up and down during that period. For example, the price may rally initially providing a trade or two, and then it may drop. We may get another trade or two or three in on that price move. It could then rally, providing another trade or two.
Each day is different, but almost always the most action occurs early in the day.
The following methods are meant to be used early in the day or only when there is very strong price movement.
There are essentially only two entries I look for. Consolidation breakouts and engulfing patterns. These are called trade triggers.
A consolidation is several bars that move sideways. There is no defined amount. Sometimes it is two bars, three bars, four, five, or six one-minute bars. Maybe up to about 10 bars. A consolidation is small compared to the surrounding price waves.
I enter when the price breaks out of the consolidation in the expected direction (trending direction).
An engulfing pattern occurs when there is a big one-minute bar in one direction followed by a bigger one-minute bar in the other direction. For example, the price is dropping. A few bars move to the upside, followed by a big green bar (not enough to reverse the trend though). This is followed by a red bar that drops below the low of the big green bar. The red bar has engulfed the green bar.
I enter when a second big candle engulfs the first big candle, in the direction of the second candle. As with the consolidation, the trade signal must occur in the expected/trending direction.
The consolidation or engulfing pattern must occur during a pullback against the trend, or be the pullback.
Here are a few examples on a one-minute Facebook (FB) chart.
Charts from TradingView.
Determining the trend, and in which direction you will trade breakouts is the hard part. To do this, you need to look at the length of the price waves. For more on this, read and watch How to Read Price Action – Spotting Trend Reversals in Real-Time.
The first down wave (bullish engulfing) doesn’t retrace a lot of prior wave up. The price drops and slows down, and then has a big move to the upside. We buy. The trade didn’t work out, as the price quickly fell, but it was still a good trade.
Once the price fails to move higher, and then drops enough to erase almost the entire up wave, we know that if the price consolidates and then drops out the bottom of the consolidation we want to go short. All the evidence is saying the price is under selling pressure. The short trade works out.
The next short trade is basically the same setup, except this time we fully know we are in a downtrend. If the price drops out the bottom of the consolidation, we want to be short.
The price continues to drop but then has a big rally over several price bars. The rally almost completely erases the prior down move (where we went short the second time). That is a warning sign. We want to see which way the price breaks out of the consolidation. If it breaks higher, we go long. In this case, it did. But if the price had broken to the downside, we could have also gone short, because the trend was still down. It only likely turned up once the price broke out of the consolidation to the upside!
Consolidations and engulfing patterns are quite common. To trade them effectively we need to narrow down which ones to trade. For example, during a pullback, we may get two or three consolidations in a row. There are often clues as to which ONE to trade, as trading the others will likely result in a loss or poor entry price. This comes down to context and looking at the whole picture of what is going on.
Context is also important when it comes to trade signals and seeing the price turns as opposed to blindly getting focused on details.
For example, I am fine with the two bars of an engulfing pattern occurring a few bars apart! A big down candle, a few more candles that don’t do much, and then a big up candle tells me the same thing as a big down candle followed by a big up candle right away. Without adaptability and context money can be lost quickly, and opportunities may be missed.
Day Trading Exits
Losing trades are capped with a stop loss. A stop loss is placed just above a consolidation or engulfing pattern if going short, or just below the consolidation if going long.
There are several ways to exit a profitable trade. Which you pick will depend on how the stock you opt to trade moves. You will likely find, simply by looking through the charts from prior days, that one exit method tends to work better in that stock. If you are unsure, look for entries and the various exits on prior days, and tabulate which exit method was most profitable.
Reward:Risk Exit Method
This is a simple and classic exit method that works well, assuming you calibrate the R:R to the stock you are trading.
Reward to risk is how much bigger your profit is relative to your risk. For example, if you utilize a R:R of 2, that means you want your profits to be twice at large as your losses. If you have a stop loss order 10 cents below your entry, you place a profit target (limit order) 20 cents above your entry.
You may need to alter your R:R from time to time, or even throughout the day as conditions change. In the big morning moves you may be able to get R:Rs of two or three to one. As things calm down you may only get 1.5 (risk 20 cents to make 30 cents).
The following chart shows the R:R in a visual way, with the red box marking the risk and the green box marking the profit potential. On all these trades larger R:Rs could have been used to capture more profit, but that won’t always be the case.
The bigger the R:R the longer you will be in trades for and the less trades you have each day, but the bigger your profits could be on each trade. With a lower R:R you will typically have more trades, be in them for shorter periods of time, and have smaller profits on each trade.
On stronger trending days, capitalize by using a bigger R:R. On choppy days, a lower R:R works better.
1-Minute Reversal Exit Method
Another exit method is what I called the 1-minute reversal. Recall, I only use 1-minute charts when day trading stocks with this trending strategy.
After entry, exit on a one-minute reversal in real-time. For example, assume you enter long and the price starts moving up. The low of each closed price bar becomes your stop loss. You exit if the price drops one cent below the low of the most recently closed bar. If you entered short, you exit if the price moves above the high of the most recently closed bar.
You can trail a stop order below price bar lows if long, or above price bar highs if short, or you can simply hit your market sell or buy, respectively, when the exit signal occurs. Don’t delay on getting out. Don’t try to get a bit better price on your exit. Just get out as soon as you are supposed to.
The chart shows two short entries and one long, along with three exits using the aggressive trailing stop loss method.
This exit method works very well in high momentum stocks. It will annihilate you in stocks that are choppy or don’t move a lot. This is also a very “active” exit method, meaning you will catch quick moves and typically get in and out multiple times during a big price move. If you have high commission costs, this exit method may not be efficient for you (test to see on prior day’s charts of the stock you trade).
See The One-Bar Aggressive Trailing Stop Loss for more details on this exit method.
I like to incorporate this type of trailing stop loss when the price approaches my target. That way, if the price reverses near the target you still lock in a profit, and if the price keeps running, you can move your target up (or delete it) and use the 1-minute trailing stop loss instead.
Day Trading Risk Management and Position Sizing
Nothing else matters if you don’t control risk. With poor risk management or the wrong position sizing, great entries or exits won’t matter. Risk management and position sizing are the cornerstones of profitable trading.
There are three elements to risk management in this style of trading: the stop loss, position sizing, and the daily stop loss.
One element of risk management has already been discussed: the stop loss. Use it on every trade.
The next element is position sizing. You want to trade the ideal position for the stop loss you are using and for the balance in your account.
Position size isn’t randomly chosen based on how confident you are in a trade. It is a formula.
Account Risk ($) / Trade Risk ($) = Share Position Size
Account Risk is the percentage of your account you are willing to lose per trade, converted into dollars. 1% or less is recommended. If your day trading account is $45,000, then you can lose $450 (1%) per trade, or $225 (if using 0.5%), for example. You can also just pick a dollar amount you are comfortable with, such as $100 or $150…but it should be less than 1% of the account.
Trade Risk is the difference between the entry price and stop loss price. For example, if you buy at $50.51 and your stop loss is $50.41, the Trade Risk is $0.10.
Assume your Account Risk is $150, and your Trade Risk is $0.10. Plugging into the formula, your position size to take on this trade is 1,500 shares.
Account Risk won’t fluctuate much each day, but your Trade Risk will vary by trade which will affect your position size on each trade. Practice learning to calculate your position size quickly.
Since we can see a trade setup happening before it actually triggers a trade, we should know our entry price and stop loss level before we get into the trade. If we know these (and our Account Risk) we can calculate our position size before the trade is taken. We don’t need to guess.
Daily Stop Loss
Further control risk by managing how much you lose in a day. This prevents one bad day (or a few) from wiping out an account, or an entire month’s worth of profit, for example.
Daily stop losses can be implemented in several ways.
- Limit the percentage loss on the account balance each day. For example, don’t lose more than 3% of the account balance. If you are losing, or have lost 3% of the account balance, stop trading for the day. If you are a new trader, make it 1% and keep the risk on each trade (position size) well below 1%.
- Limit the number of losing trades in a row. If I lose three trades in a row I quit for the day. I am not seeing the market correctly or the price isn’t moving well for my strategy.
- Have a maximum dollar figure you are willing to lose in a day (preferably less than 3% of the account balance). If you lose that much, stop trading for the day. This dollar amount should be roughly equal to your average winning day. For example, if on a typical winning day you make $500, you should cap daily losses at about $500. That way it only takes one winning day to make back what is lost on a losing day. If you allow yourself to lose much more than that, it will take more winning days to make back the loss.
One, or a combination, of these rules may work for you.
When Not to Trade
Your rules tell you when to trade. Yet most of us have an action bias. That means we want to always be doing something. If there is no trade setup, we feel we are missing out or that we aren’t doing it right, so we make a trade that isn’t part of our plan. We bend our rules, we start gambling, or we start relaxing our scan or strategy parameters to find a trade.
Our plan and our rules are there for a reason. It is the trades we shouldn’t be in—that don’t match our rules—that hurt us the most. They cost us emotional capital and money, decrease our confidence, punch holes in our discipline and patience, and undermine our ability or goal to be/become a successful trader.
- If there are no trade setups that match your rules/strategies, don’t trade. Just keep scanning and/or watching for new setups.
- If there is not enough movement to likely make at least 1.5x what you are risking, then don’t trade.
- If you can’t isolate the trend, or you are having trouble analyzing the price action, don’t trade.
- If you don’t know where to put an entry, stop loss, or which position size to take, don’t trade. Everything needs to be in order before a trade.
- Don’t open new positions during lunch hour, unless you have shown consistent profitable performance during this period (in demo or live trading).
- If you are feeling sick, tired, angry, sad, or have a lot on your mind and can’t focus on trading, don’t trade. Being overly optimistic or confident is also an issue. You need every ounce of mental energy you have to stay focused, disciplined, and patient while trading. If you aren’t feeling well, you likely won’t have the energy or mental fortitude to trade well. Rest, save your money. The market will still be there tomorrow.
Reinforce all these things with a 5-minute morning routine that you do before you start trading. This will help reinforce what you are supposed to do, and avoid what you aren’t supposed to do. It will help you get in the right mental space for trading.
Tying it Together
Your job now is to go back and decide how you are going to trade. Write down your rules for each one these sections on a sheet of paper. Then follow those rules as you start to practice and begin day trading, first in a demo account (to test things out) and eventually with real capital.
Staple that piece of paper to your forehead if you have to! Follow the rules and guidelines you have laid out.
For additional reading, see How to Scan For Stocks That Are Moving Big AFTER the Open.
By Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.