Knowledge & Discipline is Power
The SPY and QQQ indexes drive the market and a trader should always be fully aware of their short term trend on the 15 minute charts, and their longer term trend on the Daily Chart. The moving averages I place on the 15 minute charts are the 20, 40, and 80ema and used as visuals to give me reminders of the short and intermediate term trend. With the Daily charts I place the 9, 20, 50, and 200ema's moving averages. Its best to trade with the current trend of the market when trading individual stocks and the indexes. Before entering a trade I first identify the stop point followed by identifying an exit point. I always need a minimum of 1.5 risk reward ratio.
The night before I identify short term Buy and Sell Zone opportunities in the indexes based off the prior day(s) trading.
Buy and Sell Zone Setup: Similar to the Buy and Sell Zone setup described in the Stock Strategy section, each night I identify short term buy and sell zones in the SPY and QQQ. These zones are based off price points on 30 and 15 minute charts. I use the 5 minute charts to fine tune the zones when looking for a smaller entry zone. In a nutshell, to form a zone I identify price areas of rejection and identify the candle that starts a strong move away from the price area. Next step is to identify the red candle (if looking long) prior to the move and mark the OPEN on the candle. The open of that candle is marked the top of the Zone. The bottom of the zone is the base of candles that have rejected a price point and the origin of the move before the move up. When the indexes have a medium to larger gap, I will mark the gap fill area as a Buy or Sell zone for when the gap has filled.
Zones can be used for three setups: With these three setups I want both QQQ and SPY trading in unison and not against each other.
1. Pullback to the Zone: After a strong move away from the zone, price proceeds to pull back into the zone. Entry can be placed in the zone, with the stop outside the zone - or - wait for a 15 minute candlestick to form anywhere inside the zone and enter at the top of the 15 minute candle with stop placed at the low of the candle. I tend to scale in on the first test of a zone, placing 1/3 to 1/2 my order in the zone, with the stop outside the zone, and enter the remaining half of the order with a 15 minute candle confirmation. When there have been multiple test's of a zone, I will only use the 15 minute candle confirmation to enter a trade.
2. Break through the Zone and Go: Once a zone has been tested a few times the odds of a break through increase. I will consider entering a trade when price breaks through the top of the zone with the 20ema trend supporting the break through. The stop will placed on the opposite end of the zone or the low of the current 15 minute candle for a tighter stop.
3. Reverse Side Entry: Price gap's over a zone and trades back into the zone. This zone was once resistance and now is support. The reverse side entry is similar to setup two. I will consider a reverse side entry with a 15 minute candlestick confirmation. Enter the top of the 15 minute candle with the stop placed at the low.
The stop ranges from .25 to .50 (range of the 15 minute candlestick) with a risk/reward between 1.5 to 3x risk. Reward will depend on how far away the next support area/zone is located and always want to exit before the next level. Once I achieve 1R, will then bring the stop to the entry price. I don't chase trades, if price doesn't enter the zone/fit into my plan, then no trade.
Using 20/80ema with Candle Entries as Additional Confirmation: Buy and sell zones can be used with added confirmation /support from the 15 minute 20 & 80ema moving averages when price pulls back to the moving average and a buy/sell zone or gap fill price point. Here I want the 20 or 80ema in the general price location of the Buy/Sell zone or gap fill price point supporting the entry candle. Examples of the 20/80ema support trade can be found here:
Daily Chart SPY & QQQ Setups with Strong Trend's:These two setups are taken off the Daily chart
1. Red to Green Daily Candle: This setup starts with the Indexes trending up multiple days over their Daily Chart 9/20ema's. A red down day appears on the daily chart, while price is still trading over the Daily Chart 9ema. Will enter into a trade when the high of the red candle is taken out on the next trading day. Stop low of day. Inverse for shorting.
2. Two day Pullback: This setup starts with the indexes trending over their Daily Chart 9/20ema. Price then pulls back (2 or 3 down days on the Daily Chart) and remains trading over the Daily Chart 20ema with both the 9 and 20ema trending up. Will enter into into a trade when the high of the prior 2 day high is taken out. Stop low of day. Inverse for shorting.
Examples can be found on the blog here:
OF NOTE: The SPY and QQQ indexes can be traded with a futures contracts or a High Delta in the money option (prefer over .70 delta) that will move closely with the trading price. Practice on a simulator with both.