The best metaphor to describe day trading is one of a sniper waiting in a blind for a stock to move between his or her crosshairs. The patterns are fairly easy to learn, but can be difficult to identify while they are happening in live markets. The trader must see the pattern as it is happening by knowing which part of the pattern they’re in and what happens next. This is best done not by obsessing over the pattern, but by focusing on trend direction. Patterns tend to be far more complex and more difficult to read than trend direction.
The Importance of the 15-Min, 3-Day Trend
For technical day trading, timing entries is key. The 3-day trend as viewed on the 15-minute chart will help a trader see trend direction more clearly. The 10 and the 20 moving average on this timeframe will indicate the direction of the overall trend. Identifying this direction is imperative; because after the initial first half hour to 45 minutes of the trading day, the 3-day trend direction will resume. If a stock gapped up away from the moving averages it would fade down until it gets to the major moving averages on the 15-min chart. It would then revert from its short term trend back to its 3-day 15-min chart trend direction.
Trade Preparation for Technical Day Trading
The beautiful thing about trading off of a 3-day 15-min trend direction is the simplicity of scanning your universe of stocks and eyeballing the direction of the major moving average. The trader should put the universe of stocks into two lists: an uptrend list and a downtrend list. Leave all sideways trending stocks in your main stock universe list. Traders can set alarms to alert them when a stock is hitting a specific price point that would be near the moving averages. Usually a trader would want to buy a stock after it’s gone down and touched the moving average and then reversed back off of it. Remember, bidding is passively buying at your price, rather than aggressively buying at the offer price.
Technical Day Trading in a Nutshell
Identify a pattern that is easily recognized as a gateway into trend direction. Patterns are a gateway into the trend, trends are easy to identify while patterns are a bit more complex. Most patterns need to be used in the context of trend direction. However some patterns indicate a possible reversal. Reversals are difficult to identify and have much lower odds than trading continuation patterns.
Next time, we will continue talking about technical day trading but with a focus on trend trading. Until then, trade well.
Written by Michael DiGioia, Director of Education
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