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A simple Day-Trading Strategy : How to trade narrow range breakouts
Posted: Aug 9, 2021 01:15
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Here is a simple but sound way to day-trade using narrow-range breakouts. These are the steps to follow :
- Know and define your trading capital. This should be actual cash you hold dedicated to trading.
- Identify how much of your current trading capital you are willing to risk on a day. If you are just starting, don't risk more than 0.25% of your capital. Once you get the hang of trading this way, you can slowly scale up your risk. There is no reason to risk more than 1% a day, as consecutive losing days can cause undesirable drawdown.
- An analysis of past trades may suggest that you could increase your capital at risk substantially. But do not do this. Future trades are not a mirror of past trades, and the only aspect of trading under your control is your capital.
- Next, identify the maximum number of day-trades you can handle in a day. If you are multi-tasking with a day job, you will almost certainly not be able to handle more than 2-3 day trades.
- Divide the capital you are putting at risk (i.e. the money you are willing to lose) by the maximum number of trades you can handle. This becomes your maximum permissible loss on any one trade.
- Find a stock which is trading in a narrow range. Lets assume you want to buy the stock because it is going through an uptrend. You would then place a buy order if it crosses (breaks out) above the upper end of this narrow range, and a stop loss below the lower end of the range after the trade get executed.
- Thus your loss per share on the trade would be the range that it is currently trading within. Since we know how much capital we are putting at risk, we can compute the number of shares to buy by dividing the risked capital by the loss per share if the stop loss is hit.
- The clip at the end of this article (an interview with BloombergQuint at the Trader's Carnival in May 2018) shows such a trade set-up.
- Lets use the trade set-up shown in the clip below as an example to illustrate this computation, which is essentially what Risk and Money Management are all about.
- Assume the trading capital available is ₹200,000, and we can trade at most two trades a day. Lets also assume we do not want to lose more than 0.5% of our capital (Rs. 1,000 at the end of the day). Since we have two trades, our maximum loss per trade is ₹500.
- In the trade set-up in the clip below, the narrow range was identified as being between ₹2,670 and ₹2,685. So, we would buy the stock if it breaks out above ₹2,685 and place a stop loss below ₹2,670. Our loss per share would then be ₹15. Since we do not want to lose over ₹500, we would place a buy order for ₹500 divided by ₹15 - i.e. 33 shares (rounded down).
This is a very rough explanation about how to set up a day trade using narrow range breakouts. You can learn much more about this kind of setup and try it yourself in our Trading and Investing Strategies online course. Additional details include stock selection, identification of narrow ranges, placing of orders, use of trailing stops and more.
This day-trading method is one of several trading and investing strategies that are covered - all the way from long term investing to day trading, as well as short-term trading and options.
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Interview with BloombergQuint at Traders Carnival which partly explains this strategy
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