DAY TRADING STRATEGY
I focus on two Day Trading strategies: Pullback to a prior day intra-day Buy/Sell Zone or a Trigger Point Continuation strategy. The strategies start with forming a daily watch list followed by applying the proper intra-day trading strategy and risk management. I don't chase trades, if price doesn't pullback to my price target or fit into my plan, then no trade. The number one priority is always to manage risk. Never risk anymore then 1% of your trading account on one trade. In the daily email we offer a precise entry for the Buy/Sell zone day trade setups with a focus on a 3-1 risk reward ratio and close the position if neither is reached by the end of the current trading day.
Both trading strategies start with trading in the direction of the major indexes and following these four steps:
DAILY CHARTS: I scan the daily charts each night that are trending in search of one of the three following Patterns on the daily chart: (inverse for shorting)
Buy & Sell Zone Setup: This is my bread and butter setup for both day and short term swing trading. Buy and Sell Zones are where a higher concentration of supply (sellers) and demand (buyers) for the stock exist. I determine the buy/sell zones one of two ways: 1. The most simplistic is to identify daily candle's that have a strong lower wick representing a buy zone (inverse for shorting/Sell zone) 2. Based off the prior day 15 or 30 minutes charts using the 5 and 1 minute charts to help fine tune the entry within the larger zone. With this method I tend to focus on stocks with large empty wicks on the larger 30/15 minute time frames. Wicks tend to show quick price rejection. With the smaller 5/1 minute time frame I look for the origin/beginning of the move inside these wicks to identify an entry price. Both versions are described below.
VersionOne: is a simple way to form Buy and Sell Zone day trading opportunities. Focus on trending Daily Charts and find Daily candles with wicks that support the trend to move higher. These wicks represent zones of price rejection where demand exceed's supply and can be targeted for day trade setup's. The zone is formed from the top of the daily wick (open or closing price of the daily bar) to the low of the day. This is the most simplest method for developing an intra-day Buy/Sell zone's for day trade setup's. Entry is anywhere between the top of the wick and middle of the daily wick with the stop below the low of the day.
Example of Wicks which are also called Hammers, Pin Bars and Shooting Candlesticks:
Below is an example of JPM in a down trend with several wicks off 9 and 20ema support. As you see below 5 trade opportunities were present over a two week time frame where price traded back into the Sell Zone/Wick (grey area) and sold off for a positive result. Little to no trade management is needed outside of entry, exit, stop and close the trade before the end of day.
Version Two: A more fine tuned version to forming Strong Buy and Sell zones that can produce larger gains is to look for these two intra-day patterns formed inside WRB Daily Candles.
A: Daily Chart Price Break: On the the daily chart a wide range candlestick is formed when price breaks through a prior resistance point on the daily chart and closes strongly beyond the break point. I will mark this resistance point break line and use the 30 and 15 minute charts to determine the buy zone around this break point.
B. Intra-day Buy Zone: The zone is formed from a strong intra-day move that was a catalyst to forming a Daily Candle Wide Range Bar. This is a stock that gapped up and broke out to new highs. These zones will be formed around one of these three intra-day patterns on the 30/15 minute charts and fine tuned with the 5/1 minute chart for entry:
1: Inside Bar: Price traded up, based to form an inside bar, and broke out to continue its strong move up. The zone is formed around the inside bar.
2: Hammer or V pattern for a Buy Zone: price trades up, has a quick pullback of 1 to 3 candles to form a hammer or small base (middle of the V), and resumes its breakout up to a new high. This zone is formed around a small base of candles or hammer candle in the middle of the V after the pullback. The top of the zone is the high of the hammer or high of the base. (Sell Zone is an upside down V pattern or hammer).
3: Breakout from a flat top base, triangle base, or clear breakout from the 5, 15, or 60 minute high of the day. The pattern shows a CLEAR breakup from the price range.
Below is an example of the first intra-day pattern the Inside Bar. The Buy Zone is formed after a strong intra-day move that forms a 30 minute inside bar, and breaks out over the inside bar to trade to higher highs. The buy zone is formed around the inside bar and four days later the stock trades back into the buy zone for a nice setup.
Below is an example of the second intraday pattern the V pattern or upside down V pattern for forming a sell zone. Here a Sell Zone with the upside down V pattern is formed on a 30 minute chart. After a sharp sell off the stock rebounds, forms an inside candle (white arrow) which is in the middle of the upside down V pattern, and proceeds to sell off forming the upside down V pattern. Two days later the stocks trades back into the sell zone for a nice setup.
Once I determine the zone, entry price, stop placement and exit goal, I will then place orders before the market opens with these entry, stop and exit points. The concept is very simple and very boring, no other trade management. I always determine my stop point first, and prefer beyond a Whole # .00 or half number .50. I prefer tight stops (generally 25 to 33% of the stocks price with a 3 times reward (generally a 1% move on the stock). For Example stock XYZ is trading at 60.25. My entry target is 60.15 - the stop is 59.95 - and my exit goal is 60.75.
Trigger Point Continuation Setup: The goal of the setup is a continuation move from the prior day with entry near or above the previous day's high price. This setup is for traders who like to make intra day trades based on the current price action - for traders seeking action. With the Continuation Setup I identify a trigger point, but will not automatically take a trade at the identified trigger point. The trigger point can be a previous day high or R1 or R2 pivot point with entry in the vicinity of the trigger price. Most trading charting programs will have the pivot points that can be added to the charts. When looking for an entry I prefer to see narrow candles forming in the vicinity of the trigger point. I use the 5 minute charts to look for one of these two setups at the trigger point. Before entering a trade I always peak at the higher time frame 15 minute chart to obtain a more clear picture and to confirm a solid entry and stop placement.
With the Trigger point Setups the watch list stocks are placed on 5 minute charts with the 9, 20, 60 and 240ema's and the R1, R2, S1, and S2 pivots points. Will consider placing a trade when price trades at or near the stocks trigger point or pulls back into the prior day Buy or Sell zone.The Trigger Point entry is based off a candlestick entry in the vicinity of the Trigger price . The buy/sell zone strategy entry is placing orders in the stocks buy/sell zone.
Base, Break and Go: The stock opens under the trigger point, proceeds to trade up to the trigger point, and begins to base/consolidate in a narrow range under the trigger point. Will enter my order on a break above the base provided there is rising 5 minute 9/20ema support with the stop placed below the 20ema. How to take this trade at the open: If the trigger line is in proximity to the prior day closing price, with the 5 minute 9/20ema as support and the overall premarket (SPY and QQQ) favorable towards the trades direction. (For example: if looking to go long on a stock at the open the indexes should not be tanking pre market – the market should be opening flat to up) then can place an order for a break of the trigger point when the market opens. 5 minute candle option: The conservative option for trading at the open is wait for the first 5 minute candle to close above the trigger point. Enter at the high of the candle, stop low of the candle/under the 20ema.
Pullback to trigger point: The stock gaps above or trades through the trigger point with wide range candles and then proceeds to pull back to the trigger point. Will look to enter a trade off the trigger point if price consolidates at the trigger point, with narrow range candles, and will use the Base, Break and Go entry setup described above. The second option is one of these two candlestick entries off the trigger price. A: On the pullback to the trigger point small green or indecisive candles form at the trigger price with support from the rising 5 minute 9, 20 or 60ema. Enter if the high of the prior 2 candles is taken out. (I don't enter the high of a small green candle/indecisive candle to help avoid fake outs - a larger green hammer candle I will enter off the high) B: Red to green candle: On the pullback to the trigger point a red candle forms off the trigger price with support from rising 9, 20, or 60ema. Will enter if the high of the red candle is taken out. Stop placed below the 20 or 60ema for both entries.
Manage Risk: With the Trigger Strategy I sell half my shares at the R2/S2 pivot (or next level/pivot) with a risk reward of 1.5 to 3x risk/reward which varies on how strong the market is and how tight my stop was set. I will trail my stop if price closes under the 5 minute rising 20 or 60ema. With the Buy/Sell Zone strategies I exit all at 3x risk/reward. With day trades I do not adjust my stop. With swing trades I evaluate each night for tightening my stop.
I close out all day trade's at the end of day. An example of a trade using Risk/Reward of 3-1 with a .50 stop: Enter stock XYZ at 60 with the stop placed at 59.50. Will exit with a 1.50 gain - 61.50.Reverse all strategies for shorting weak stocks in neutral to bearish markets.
RISK CALCULATOR (in excel) will help you determine the amount of shares to purchase per trade. The wider the stop, the less shares that will be purchased. The formula takes the amount you are willing to risk divided by the range between your entry and stop: CLICK HERE
Knowledge & Discipline is Power