Day Trading Basics For Beginners  – Lesson 7: Most Important Day Trading Strategies

Day Trading Basics For Beginners  – Lesson 7: Most Important Day Trading Strategies

In this Lesson, I will introduce some of my strategies, based on three elements: (1) price action, (2) technical indicators, and (3) chart patterns. It is important to learn and practice all three elements at the same time. Although some strategies require only technical indicators (such as Moving Average and VWAP), it’s helpful to also have an understanding of price action and chart patterns in order to become a successful day trader. This understanding, especially regarding price action, comes only with practice.

As a day trader, you shouldn’t care about companies and their earnings. Day traders are not concerned about what companies do or what they make. Your attention should only be on price action, technical indicators and chart patterns. I know more stock symbols than the names of actual companies. I don’t mingle fundamental analysis with technical analysis; I focus exclusively on the technical analysis.

Now, having said that, as I mentioned in Lesson 4, I do hunt for a fundamental catalyst, a reason why a stock is running up. If I have a stock that’s running up 80%, I want to know what the catalyst is, and I don’t stop until I find out. “So, it’s a biopharmaceutical stock and they just got FDA approval.” or “They just passed through clinical trials. Okay, there’s a catalyst, now I can understand what’s going on.” Beyond that, you won’t find me listening in on conference calls or sifting through the earnings papers. I don’t care about those aspects because I’m not a long term investor – I’m a day trader. We trade very quickly – guerrilla trading! – at times we trade in time periods as short as ten to thirty seconds.

In case you’re doubting me on this point, I can tell you from experience that in ten seconds you can make thousands of dollars. I’ve done that. In ten seconds you can also lose thousands of dollars. I’ve done that too. When the market moves quickly, you need to ensure you’re positioned in the right place to take advantage of the profits and reduce your risk exposure.

There are millions of traders out there and even millions more of strategies. Every trader needs their own strategy and edge. You need to find your spot in the market where you feel comfortable. I focus on these strategies because these are what work for me.

I’ve come to recognize in my trading career that the best setups are the seven strategies that I will be explaining in this Lesson. These are simple strategies in theory, but they are difficult to master and require plenty of practice. These trading strategies give signals relatively infrequently and allow you to enter the markets during the quiet times, just like the professionals do.

Another point to remember is that in the market right now, over 60% of the volume is algorithmic high frequency trading. That means you are trading against computers. If you’ve ever played chess against a computer, you know that you’re eventually going to lose. You might get lucky once or twice, but play sufficient times and you are guaranteed to be the loser. The same rule applies to algorithmic trading. You’re trading stocks against computer systems. On the one hand, that represents a problem. It means that the majority of changes in stocks that you are seeing are simply the result of computers moving shares around. On the other hand, it also means that there’s a small handful of stocks each day that are going to be trading on such heavy retail volume (as opposed to institutional algorithmic trading) that you will overpower the algorithmic trading and you and I, the retail traders, will control that stock. Each day, you need to focus on trading those particular stocks. These are what I call in Lesson 4 the Alpha Predators, stocks that are typically gapping up or down on earnings. You must look for the stocks that have significant retail traders’ interest and significant retail volume. These will be the stocks you will buy, and together, we the people, the retail traders, will overpower the computers, just like in a storyline for the next Terminator sequel.

I personally use the candlestick charts explained in Lesson 6. Each candlestick represents a period of time. As I mentioned before, you can choose daily charts, hourly charts, 5-minute charts, even 1-minute charts. My preference is 5-minute charts because I believe a 1-minute chart is too noisy and at times you can be misled by normal price movement in a 1-minute interval.

And please, remember, my philosophy of trading is that you must master only a few solid setups to be consistently profitable. In fact, having a simple trading method consisting of a few minimal setups will work to reduce confusion and stress and allow you to concentrate more on the psychological aspect of trading, which is what separates the winners from the losers.

Before explaining my strategies, it is important to know about my order entry, exit and trade management.

It always intrigues me in the www.Kingtrader.net chatroom when two elite traders select the same stock—one long and the other short. Often, by the end of the day, both are profitable, proving that experience and trade management are more important than the stock and the direction that traders pick.

My trade size depends on the price of the stock and on my account and risk management rule (Lesson 3), but 800 shares is my usual size.

1. I buy 800 shares all at once.
2. I sell 400 shares in the first target, bringing my stop loss to break-even (entry point).
3. I sell another 200 shares in the next target point.
4. I usually keep the last 200 shares until I am stopped out. I always retain some shares in case the prices keep moving in my favor.

Some professional traders never enter the trade all at once. They scale into the trade, meaning they buy at various points. They might start with 100 shares and then add to their position in various steps. For example, for a 1000-share trade, they enter either 500/500 or 100/200/700 shares. If done correctly, this is an excellent method of risk and trade management. However, managing the position in this system is extremely difficult. Many new traders who are trying to do this will end up over-trading and will lose their money in commissions, slippage and averaging down the losing trades.

I rarely scale into a trade but at times I will, especially in very highly volume traded stocks. But remember, scaling into a trade is a double-edged sword and beginners may use it incorrectly as a way to average down their losing positions, sending good money after bad. I don’t recommend this method for beginners. Although they can appear similar, there is a huge difference between scaling into a trade and averaging down a losing position. For beginners, averaging down a losing trade is a recipe for wiping out your account, especially with small accounts that cannot stand several rounds of averaging down.

ABCD Pattern

The ABCD Pattern is the most basic and the easiest pattern to trade, and it is an excellent choice for beginner and intermediate traders. Although it is simple and has been known for a long time, it still works very effectively because many traders are still trading it. As mentioned earlier, it has a self-fulfilling prophecy effect. You should do whatever all of the other traders are doing because a trend is your friend. A trend may very well be your only friend.

Let’s take a look at this pattern:

ABCD Patterns start with a strong upward move. Buyers are aggressively buying a stock from point A and making constantly new highs of the day (point B). You want to enter the trade, but you should not chase the trade, because at point B it is very extended and already at a high price. In addition, you cannot say where your stop should be. You must never enter a trade without knowing your stop.

At point B, traders who bought the stock earlier start slowly selling it for profit and the prices come down. Still you should not enter the trade because you don’t know where the bottom of this pull back will be. However, if you see that the price does not come down from a certain level, such as point C, it means that the stock has found a potential support. Therefore, you can plan your trade and set up stops and a profit taking point.

Let’s take a look at Ocean Power Technologies Inc. (ticker: OPTT) at July 22, 2016, when they announced that they had a new $50 million contract to build a new ship (There’s a fundamental catalyst! Remember Lesson 2?).

The stock surged up from $7.70 (A) to $9.40 (B) at around 9:40 a.m. I, along with many other traders who had not heard the news, waited for point B and then a confirmation that the stock wasn’t going to go lower than a certain price (point C). When I saw that point C was holding as a support and buyers wouldn’t let the stock price go any lower than $8.10 (C), I bought 1,000 shares of OPTT near C, and my stop was below point C. I knew that when the price went higher, closer to B, buyers would jump on massively. As I mentioned before, the ABCD Pattern is a very classic strategy and many retail traders look for it. I purchased stock between points B and C. Close to point D, the volume suddenly spiked, which meant that traders had jumped into the trade.

My exit would be when the stock made a new low, which was a sign of weakness. As you see, OPTT had a nice run up to around $12.

Let’s look at another example, this time for SPU on August 29, 2016. There are actually two ABCD Patterns. I marked the second one as abcd pattern. Usually as the trading day progresses volumes become lower and therefore the second pattern is smaller in size. Please note that you will always have high volumes in points B and D (and of course points b and d in this example).

To summarize my trading strategy for the ABCD Pattern:

1. When I observe with my scanner or I’m advised by someone in our chatroom that a stock is surging up from point A and reaching a big new high for the day (point B), I wait to see if the price makes a support higher than point A. I call this point C. I do not jump into the
2. I watch the stock during its consolidation period. I choose my share size and stop and exit strategy.
3. When I see that the price is holding support at level C, I enter the trade close to the price of point C in anticipation of moving forward to point D or higher.
4. My stop is the loss of point C. If the price goes lower than point C, I sell and accept the loss. Therefore, it is important to buy the stock close to point C to minimize the loss. Some traders wait and buy only at point D to make sure that the ABCD Pattern is really working. In my opinion that is reducing your reward and increasing your risk.
5. If the price moves higher, I sell half of my position at point D, and bring my stop higher to my entry point (break-even).
6. I sell the remaining position as soon as my target hits or I feel that the price is losing steam or that the sellers are acquiring control of the price action.

Bull Flag Momentum

In day trading, Bull Flag is a momentum fast execution strategy that usually works great on low float stocks (Lesson 4). I believe Bull Flag is a scalping strategy because these flags won’t last long and you must scalp the trade – get in quickly, take your profit, and then get out.

This pattern is named Bull Flag because it resembles a flag on a pole. In Bull Flag, you have several large candles going up (like a pole), and you also have a series of small candles moving sideways (like a flag), or, as we day traders say, “consolidating”. Consolidation means that the traders who bought stocks at a lower price are now selling and taking their profits. Although that is happening, the price does not decrease sharply because buyers are still entering into trades and the sellers are not yet in control of the price. Many traders will miss purchasing the stock before the Bull Flag starts. It is risky to buy stock when the price is increasing. That’s called “chasing the stock”. Professional traders aim to enter the trade during quiet times and take their profits during wild times. That, of course, is the total opposite of how amateurs trade. They jump in or out when stocks begin to run, but grow bored and lose interest when the prices are, shall I say, sleepy.

Chasing the stocks is an account killer for beginners. You must wait until the stock finds its high point, and then wait for the consolidation. As soon as the price breaks up in the consolidation area, you can begin purchasing stocks.

Usually a Bull Flag will show several consolidation periods. I enter in only the first and second consolidation periods. Third and higher consolidation periods are risky because the price has probably been very extended in a way that indicates that the buyers will soon be losing their control. Let’s study an example of a Bull Flag of RIGL on August 30, 2016.

This is an example of two Bull Flag Patterns. It is normally hard to catch the first Bull Flag, and you will probably miss it, but your scanner should alert you to it. Let’s look at an example from my scanner in this time period:

As you can see, my scanner showed RIGL at 12:36:15 pm. As soon as I saw that, I realized that there was also a very high relative volume of trading, which made this a perfect setup for day trading. I waited for the first consolidation period to finish and, as soon as the stock started to move towards its high for the day, I jumped into the trade. My stop loss would be the breakdown of the consolidation period. I marked my exit and entry in the picture below. As you can see, if you had wanted to wait for a second consolidation period in hope of the third Bull Flag, you would probably have been stopped out. That is why I usually enter the first and second Bull Flags, but not the third one.

Entry, stop and exit of a Bull Flag Strategy on RIGL.

To summarize my trading strategy:

1. When I see a stock surging up (either on my scanner or when advised by someone in our chatroom), I patiently wait until the consolidation period. I do not jump into the trade right away (you will recall that is the dangerous act of “chasing”).
2. I watch the stock during the consolidation period. I choose my share size and stop and exit strategy.
3. As soon as prices are moving over the high of the consolidation candlesticks, I enter the trade. My stop loss is the break below the consolidation periods.
4. I sell half of my position and take a profit on the way up. I bring my stop loss from the low of the consolidation to my entry price (break-even).
5. I sell my remaining positions as soon as my target hits or I feel that the price is losing steam and the sellers are gaining control of the price action.

As I mentioned, many people, including myself, buy only at or near the breakout (similar to the ABCD Pattern). The Bull Flag is essentially an ABCD Pattern that will happen more on low float stocks. It’s fast and it will fade away more quickly. Therefore, it is more or less a Momentum Scalping Strategy. Scalpers buy when a stock is running. They rarely like to buy during consolidation (during that waiting and holding phase). These types of stocks usually drop quickly and brutally so it is important for you to jump only when there is a confirmation of breakout. Waiting for the stocks to break the top of a consolidation area is a way of reducing your risk and exposure time. Instead of buying and holding and waiting, which increases exposure time, scalpers just wait for the breakout and then send their order. Get in, scalp, and get out quickly. That’s the philosophy of momentum scalpers:

• Get in at the breakout
• Take your profit
• Get out of the way

The Bull Flag Pattern is found within an uptrend in a stock. The Bull Flag is a long-based strategy. You should not short a Bull Flag. I personally don’t trade much momentum. It is a risky strategy and beginners should be very careful trading these. If you choose to, trade only small size and only after sufficient practice in simulators. You will also need a super-fast execution system for scalping.

Top and Bottom Reversal Trading

Top and Bottom Reversals are among the easiest trading strategies. Day traders love using them because they have a very defined entry and exit point and a very high profit-to-loss ratio. In this section, I’m going to explain how to find reversal setups using scanners, how to read the Bollinger Bands to find extremes, how to use indecision or Doji candlesticks to take an entry, how to understand where to set your stops and your profit targets, and how to trail your winners.

If you are part of our private chatroom, you will hear me say time and time again that what goes up, must come down. Don’t chase the trade if it is too extended. The inverse is also true. What goes down will definitely come back up to some extent. When a stock starts to sell off significantly, there are two reasons behind it:

1. Institutional traders and hedge funds have started selling their large position to the public market and the stock price is tanking.
2. Retail traders have started short selling the stock but they will have to cover their shorts sooner or later. That is where you wait for an entry. When short sellers are trying to cover their shorts, the stock will reverse.

I’m going to illustrate this strategy with a few examples so that you can see exactly what to look for. Below is an example of what it looks like to find a stock that’s sold off really hard right after the market opens. Moves like this are extremely hard to catch for the short side, because when you find the stock, it is already too late to enter the short selling trade. But please, remember the mantra: What goes up, must come down. Therefore, you have the option of waiting for a reversal opportunity.

Each Reversal Strategy has four important elements:

1. At least 5 candlesticks (5 min) moving upward or downward.
2. The stock is trading close to or outside of the Bollinger Bands. Bollinger Bands are an indicator of volatility, and stocks usually stay inside of these bands.
3. The stock will have an extreme RSI indicator (Relative Strength Index). An RSI above 90 or below 10 will pique my interest. If you are not familiar with what an RSI indicator is, you can do a Google search or ask me in our chatroom. Your trading platform will probably have an RSI indicator built into it.

These three elements demonstrate that a stock is really stretched out, and you must pay close attention to the scan for all of these data points. You must simultaneously look for a certain RSI level, a certain number of consecutive candles, and a certain position within the Bollinger Bands.

1. When the trend is going to end, usually indecision candles, such as a spinning top or Doji, form. That is when we need to be ready.

In reversal trading, you are looking for one of these indecision candlesticks – spinning tops or Dojis. They are an indication that the trend may soon change. A Doji is a candle that has a wick longer than its body. You can see a picture of a bearish Doji below. It has that long upper wick that some would call a top and tail and that others would call a shooting star. This candle tells us four things: the open price, the close price, the high of that period and the low of that period. So, when you have a candle with a top tail, you know that at some point during that candle period the price moved up, was unable to hold at that level, and was then sold off. It depicts a bit of a battle taking place between the buyers and the sellers in which the buyers lost their push up. It is a good indication that the sellers may soon control the price and will push that price down.

The same is true about a bullish Doji. You can also see a picture of a bullish Doji below. It has that long lower wick that some would call a bottom tail and others would call a hammer. When you have a hammer candle with a bottom tail, you know that at some point during that candle period the price moved down, was unable to hold at those low levels, and was bought up. This indicates a battle between the buyers and the sellers in which the sellers lost their push down. It is a good indication that the buyers may now gain control of the price and push that price up.

Top Reversal Strategy with an indecision Shooting Star candlestick formed as sign of entry.

In reversal trading, you look for either Doji or indecision candlesticks. They are an indication that the trend may soon change. In Reversal Strategies, you are looking for a clear confirmation that the pattern is beginning to reverse. What you definitely don’t want is to be on the wrong side of a reversal trade, or, as we call it, “catching a falling knife”. It doesn’t sound like a good idea in real life and it’s not a good idea in trading. It means that when a stock is selling off badly (the falling knife), you don’t want to buy on the assumption that it should bounce. If the stocks are dropping, you want to wait for the confirmation of the reversal. This will usually be (1) the formation of a Doji or indecision candle and (2) the first 1-minute or the first 5-minute candle to reach a new high. That is my entry point. I set my stop at the lows.

In reversal trading, the RSI should be at the extremes (above 90, below 10), and that final candle should be outside the Bollinger Bands. Once you have your entry requirements listed, you must then look for an actual entry. An entry for me is going to be either the first 1-minute or the first 5-minute candle to reach a new high.

When you’ve had a long run of consecutive candles making new lows, the first candle that makes the new high is very significant. That’s my entry point. There are times when I’ll use the 1-minute chart, but typically I’ll wait for the 5-minute chart because it is a much better confirmation. The 5-minute chart is cleaner. The first 5-minute candle to make a new high is the point at which I get in the reversal, with a stop either at the low of the day or simply down around 20 to 30 cents. Usually, if a stock goes 30 cents against me, I will admit defeat, recognize that I mistimed my entry, and try again rather than continue to hold. At times, especially on stocks that are more expensive or more volatile, I’ll simply use a 20- or 30-cent arbitrary stop if the low of the day is too far away.

Once you’re in one of these trades, your exit indicators are quite simple. If the stock pops up and then suddenly moves back down on a bottom bounce, you stop out for a loss. If you jump in the stock and it ends up just going sideways, it’s a sign that you are probably going to see a flag (a reverse flag), and that is an indication that the price is probably going to continue to drop. If I get in and I hold for a few minutes and the price stays flat, I get out, no matter what happens

after that. I may be wrong, but so be it, I don’t like to expose my account to the unknown. I need to be in the right setup, and if it is not ready yet, I’m out. If I get into the profit zone, I can start adjusting my stop, first to break-even, and then to the low of the last 5-minute candle. I will then keep adjusting my stop as I move up.

You must realize that almost all of the big moves will eventually be corrected. What goes up, must come down. In Reversal Strategies, one of the main advantages is the opportunity to watch stocks that are running up, while simultaneously calculating possible resistance points and areas that could provide a good reversal opportunity. This allows you to resist being impulsive and rushing into the trade. You can instead take your time to watch the trade develop and wait for the momentum to begin to shift.

An important metaphor many traders use when talking about Reversal Strategies is that of a rubber band. When stocks become really stretched out to the downside, then inevitably they’re due for a correction. So, when a stock is really squeezing down, you will know that at some point it’s going to make a bounce, and you want to be in there for the bounce. What you definitely don’t want to be is to be the one still selling. As I said before, that’s like “catching a falling knife”. If stocks are dropping, you want to wait for the confirmation of the reversal. This will probably be the first 1-minute or the first 5-minute candle to make a new high. That’s my cue to jump in. I set my stop at the lows.

Bottom Reversal

Bottom Reversal Strategy with an indecision hammer candlestick formed as sign of entry.

This beautiful illustration on Emergent BioSolutions Inc. (EBS) shows a perfect reversal that I found using my stock scanners. An indecision candlestick at the bottom of the downtrend signifies a potential reversal, and as you see right after that you see a big swing back up. I took this trade right after seeing indecision Doji, and kept my stop at the low of that indecision candlestick.

The biggest advantage of Reversal Strategies is that they overcome the difficulty of anticipating when stocks will make major moves. You will probably miss the moment when the stock starts to sell off, and you won’t have the time to short the stock for profit, but you can always prepare for the reversal trade.

Another example:

Example of a Bottom Reversal Strategy on ALR.

I found ALR (Alere Inc.) on June 27, 2016 at 10:57 a.m., using a software program that scans the stock market and lets me know exactly what I want to know. See the image below:

Example of my Bottom Reversal real time scanner for ALR.

My scanner, at 10:57 a.m., showed me that ALR had seven consecutive candles to the downside, a relatively low float (80 million shares) and a relative volume of 1.21, which meant it was trading higher than usual. I actually did not take this trade because I missed my entry, but I wanted to show you what overall trading strategies look like for bottom reversals.

When you’re looking at reversals, you want to make sure that you only trade extremes. The example we just saw was a stock that made an extreme move to the downside before that move reversed. A stock that’s been selling off slowly all day long usually isn’t suitable for a reversal. Instead, it’s helpful to think of stocks the way you think of rubber bands – you want to see them really stretched out to the downside or, for short selling, really stretched out to the upside. You want to see the big extension, which means that you want to see considerable volume. Once you do, you then look for a couple of key indicators that will suggest that the tide may be about to turn, and that’s when you take the position. I’ve said it many times: what goes up, must come down. Oftentimes these stocks will give up days’ and weeks’ or years’ worth of price gain in just a matter of minutes. It is very critical to be able to time the reversal.

I’ll say it again: the key to the success with top and bottom reversals is trading the extremes. How do I quantify these extremes? There are a few things I look for:

1. An extreme RSI above 90 or below 10 will pique my interest.
2. A candle outside of the Bollinger bands is also going to interest me.
3. Finally, seeing five to ten consecutive candles ending with an indecision candle or a Doji is definitely going to catch my interest. These candles usually show that sellers are losing their control while buyers are becoming more powerful, and that indicates the end of a trend.

I will add a caveat to that final point: there will be times when you will have five to ten consecutive candles without much price action. They may be drifting down slowly, but not quickly enough for you to sense that it’s a good reversal. You must look for a combination of these indicators all occurring at the same time. Never sell short just because the prices are too high. You should never argue with the crowd’s decision, even if it doesn’t make sense to you. You do not have to run with the crowd – but you should not run against it.

Utilizing all of these different factors will create the strategy that has been extremely successful for me due to its incredible profit-to-loss ratio. Your profit-to-loss ratio is your average winners versus your average losers. Many new traders end up trading with a very poor profit-to-loss ratio because they sell their winners too soon and they hold their losers too long. This is an extremely common habit among new traders. The Reversal Strategy, however, lends itself to having a larger profit-to-loss ratio. To return to the rubber band analogy, by following such a strategy you will always buy stocks when the rubber band is stretched as far as it can go. When you time this right, you’re in as the rubber band snaps back and you can then ride the momentum right back up.

To summarize my trading strategy for the Bottom Reversal Strategy:

1. I set up a scanner that show me stocks with four or more consecutive candlesticks going downward. When I see a stock hit my scanner, I quickly review the volume and level of resistance or support near the stock to see if it is a good trade or not.
2. I wait for confirmation of a Reversal Strategy: (1) formation of a bearish Doji or indecision candle, (2) candlesticks being very close or outside of the Bollinger Bands, and (3) the RSI must be lower than 10.
3. When I see the stock make a new 5-minute high, I buy the stock.
4. My stop loss is the low of the previous red candlestick or the low of the day.
5. My profit target is (1) the next level of support or (2) VWAP (Volume Weighted Average Price, described later in this Lesson) or moving averages or (3) the stock makes a new 5- minute high, which means that the buyers are once again gaining control.

Top Reversal

A Top Reversal is similar to a Bottom Reversal, but on a short selling side. Let’s take a look at

Bed Bath & Beyond Inc. as it traded on June 23, 2016. My scanner showed BBBY going up at 10:18 a.m. with six consecutive candles. It had a relative volume of 21.50, which meant it was trading significantly higher than usual. That was because, as discussed, retail traders look for unusual trading volume.

I took this trade and made a good profit on it. The candlesticks were not outside of the Bollinger Bands, but because it was trading with very unusual volume, and forming a nice Doji on top, I decided to take the trade. I shorted stock when a new 5-minute candlestick was made, with my stop being the break of the high of the last 5-minute candles. I covered my shorts at $43.40 for a 60-cent profit when the stock made a new 5-minute high.

Example of my Top Reversal real time scanner for BBBY.

Example of a Top Reversal Strategy on BBBY.

To summarize my trading strategy for the Top Reversal Strategy:

1. I set up a scanner that shows me stocks with four or more consecutive candlesticks moving upward. When I see the stock hit my scanner, I quickly review the volume and level of resistance or support near the stock to see if it is a good trade or not.
2. I wait for confirmation of a Reversal Strategy: (1) formation of a bearish Doji or indecision candle, (2) candlesticks being very close or outside of Bollinger Bands, and (3) the RSI must be higher than 90.
3. When I see the stock make a new 5-minute low, I start short selling the stock.
4. My stop will be the high of the previous candlestick or simply the high of the day.
5. My profit target is (1) the next level of support or (2) VWAP or moving averages or (3) when the stock makes a new 5-minute high, which means the buyers are once again gaining control.

Some day traders focus exclusively on reversal trades and actually base their entire careers on them. Reversal trades are certainly the most classic of the various strategies with a very high risk-reward ratio and, interestingly, you will always find stocks that are good candidates for reversal trades. I myself am trading more and more reversal trades these days, especially during late morning and afternoon trading. However, reversal trading is not yet the cornerstone of my trading strategies. I am more of a VWAP trader and Support or Resistance trader, which I will explain later. 

Moving Average Trend Trading

Some traders use moving averages as potential entry and exit points for day trading. Many stocks will start an upside or downside trend respecting their moving averages in 1-minute and 5-minute charts as type of a moving support or resistance line. Traders can benefit from this behavior and ride the trend along moving average (on top of moving average for going long or below moving average for short selling).

I have been asked why moving averages are becoming support or resistance, and the answer is because many traders are looking at these lines and making decisions based on them. Therefore, they have a self-fulfilling prophecy effect. There is no fundamental reason behind moving averages being a support or resistance line.

I use 9 and 20 exponential moving averages (EMA) and 50 and 200 simple moving averages (SMA). I won’t go into the details of what moving averages are and the differences between simple and exponential in order to keep this post short. You can, however, do a Google search and find information about these moving averages or you can of course contact me directly through www.Kingtrader.net with any questions you may have. Your charting software will haves most of the moving averages built in. They are ready to be used and there is no need to change the default setting in them.

Let’s take a look at the chart below for NUGT to see how you could trade based on 9 EMA in a 1-minute chart.

Example of a Moving Average Trend Strategy on NUGT.

As you can see, at 15:06 pm I noticed NUGT has formed a Bull Flag. I saw that a consolidation

period was happening on top of 9 EMA. As soon as I saw that 9 EMA was holding as the support, I jumped on the trade and rode the trend until the price broke the moving average at 15:21 pm. I’ve marked my entry and exit points on the chart.

Let’s take a look at another example, Celgene Corporation (CELG), on June 16, 2016. In the chart below, you will see how you can trade based on 20 EMA in a 1-minute chart. I marked my entry and exit points on the chart.

Example of a Moving Average Trend Strategy on CELG.

Another example is EXAS on July 28, 2016 with 9 EMA.

To summarize my trading strategy for Moving Average Trend Trading:

1. When I am monitoring a stock and notice a trend is respecting moving average, I consider trend trading. I quickly look at the previous days’ trading data to see if the stock is responding to these moving averages in a 1-minute or 5-minute chart. I have 9 and 20 EMA and 50 and 200 SMA.
2. Once I learn which moving average is more suitable to the behavior of the trade, I buy the stock after confirmation of moving averages as a support, and I buy as close as possible to the moving average line (in order to have a small stop). My stop will usually be 5 cents below the break of moving average line.
3. I ride the trend until the break of moving average.
4. I never use trailing stops and I constantly monitor the trend with my eyes.
5. If the stock is moving really high away from the moving average, I take some profit, usually at half-position. I do not always wait until the break of moving average for my exit.

I personally don’t trade very often based on moving averages. I look at them to see potential levels of support or resistance, but I rarely make any trend trade based upon their trend because, in a trend trade strategy, you are usually exposed in the market for a considerable time. Some trend trades can last as long as several hours and that is too long for my personality.

Another major problem I have with Moving Average Trending is that you don’t know in the stock you want to trade which moving average is accurately acting at a support or resistance level. In the examples above, if I changed my moving average from 9 to 12, or to 15, or to any other number, then it won’t act as a nice clean support.

I use 9 and 20 EMA on my default charts, but I know not everyone does. Some traders are using

II and 21 EMA. That in the end is a significant problem with Moving Average Trading. You don’t know which moving average is best for a stock and you obviously do not have enough time to test them all out during the trading day.

I recommend using either:

9, 20 EMA and 50 and 200 SMA or:

11, 21 EMA and 50 and 200 SMA

Having said that, Moving Average Trend Strategy is an excellent strategy for beginners, because it usually does not require a very fast decision making process and trade execution. In addition, stop loss and entry points can be clearly recognized from the moving average on the charts.

As I discussed, strategies depend on your account size, personality, psychology of trading and risk tolerance, as well as on your software and the tools and brokers that you have. The combination of all of these factors have led me to be a VWAP trader and support or resistance trader, something I will explain in the next section. However, I want to emphasize that trade strategies are not something that you can imitate just from reading a book, speaking with a mentor, or attending a class. You have to slowly and methodically develop your preferred method and then stick with it. There is nothing wrong with any strategy if it works for you. There is no good and bad in any of these strategies; it truly is a matter of personal choice.

Now let me explain what my favorite trading strategies are.

VWAP Trading

Volume Weighted Average Price, or VWAP, is the most important technical indicator in day trading. Definitions of VWAP can be found in both Wikipedia and many other online resources. I will skip explaining it in detail for the sake of keeping this guide short, but essentially, VWAP is a moving average that takes into account the volumes of the stock being traded. Other moving averages are calculated based only on the price of the stock in the chart, but VWAP also considers the number of the shares that the stock is traded on every price. Your trading platform probably has VWAP built into it and you can use it without changing its default setting.

VWAP is a good indicator of who is in control of the price action – buyers or sellers. When stock is traded above VWAP, it means that the buyers are in overall control of the price. When a stock price breaks below the VWAP, it is safe to assume that the sellers are gaining control over the price action.

Trading based on VWAP can be very easy for beginner traders because so many traders are studying the VWAP and making decisions based on it. Therefore, a beginner trader can easily be on the right side of the trade. When a stock tries to break the VWAP but cannot, you can short stock because you can safely assume that other traders that are watching will also begin to short. A trading strategy based on VWAP is a simple and easy strategy to follow. I usually short stocks when traders try but fail to break the VWAP in 5-minute charts.

Let’s take a look at a recent trade that I took on SolarCity Corporation (SCTY) on June 24, 2016.

At around 10:30 a.m. on June 24, 2016, I noticed that SCTY had found a support over VWAP. I purchased 1,000 shares of the stock with the anticipation of moving toward $22 with VWAP as a support. My stop was a close below VWAP. I first sold a half-size position at $22.50, and then moved my stop to break-even. I sold another position at $22 because I know half-dollars (such as $1.50, $2.50, $3.50) and whole dollars ($1, $2, $3) usually act at a support or resistance level.

VWAP also works well when you want to short stocks. Let’s take a look at another recent trade that I took on SolarCity Corporation, this time on June 22, 2016, and this time on the short side.

Confirmation of VWAP as a resistartce le^E good entry to short SCTY

$22 level profit taking

Example of a short VWAP Strategy on SCTY.

At around 11 a.m., I noticed that SCTY had faced a resistance over VWAP. I shorted the stock with the anticipation of losing the VWAP at around $23. Around 12 pm buyers gave up and the sellers took control of the price action. I had a nice run down to $22 and covered my shorts at $22 for a good $1,000 profit.

To summarize my trading strategy for VWAP trading:

1. When I make my watch list for the day, I monitor the price action around VWAP. If a stock shows respect toward VWAP, then I wait until a confirmation of the VWAP break or support.
2. I usually buy as close as possible to minimize my risk. My stop will be a break and close 5-minute chart below VWAP.
3. I keep the trade until I hit my profit target or until I reach a new support or resistance level.
4. I usually sell half-positions near the profit target or support or resistance level and move my stop up to my entry point or break-even.

A similar approach will work equally as well when you short a stock.

Support or Resistance Trading

Horizontal support or resistance trading is my favorite style of trading. The market doesn’t know diagonals. It remembers price levels, which is why horizontal support or resistance lines make sense, but diagonal trend lines are subjective and open to self-deception. I therefore avoid trend lines because, in my opinion, they are wildly subjective and result in wishful thinking and self-deception. In fact, trend lines are among the most deceptive of all tools. You can draw a trend line across the prices or zones in a way that can change its slope and its message. If you’re in a mood to buy, for example, you can draw your trend line somehow steeper.

After making thousands of trades and looking at thousands of charts, I’ve come to the conclusion that the market doesn’t know diagonals. It remembers price levels, which is why horizontal support or resistance lines make sense, but diagonal trend lines are subjective and open to self-deception.

Support is a price level where buying is strong enough to interrupt or reverse a downtrend. When a downtrend hits support, it bounces like a diver who hits the bottom of the ocean and then automatically pushes away from it. Support is represented on a chart by a horizontal line connecting two or more bottoms (see the figure below).

Resistance is a price level where selling is strong enough to interrupt or reverse an uptrend. When an uptrend hits resistance, it acts like a person who hits their head on a branch while climbing a tree – they stop and might even tumble down. Resistance is represented on a chart by a horizontal line connecting two or more tops.

Minor support or resistance causes trends to pause, while major support or resistance causes them to reverse. Traders buy at support and sell at resistance, making their effectiveness a selffulfilling prophecy.

Using this method, every morning I shortlist the stocks that I would like to trade based on the criteria I set forth in Lesson 4: a stock that has fundamental catalysts such as news, an extreme earnings report or a new drug approval. These stocks are the ones that retail traders are watching and planning to trade.

Before the market opens, I go back to the daily charts and find price levels that have been shown in the past to be critical. Finding price support or resistance levels is tricky and requires trading experience. If you watch me trading every morning, you will see how I place my support or resistance lines on my Alpha Predators.

For example, let’s take a look at a SCTY daily chart without support or resistance lines and another including the lines.

Example of a Support or Resistance Strategy on SCTY daily chart.

Support or resistance lines in daily charts are not always easy to find, and at times you will not be able to draw anything clear. If I cannot see anything clear, I don’t have to draw anything. There is a good chance that other traders will also not see these lines clearly and therefore there is no point in forcing myself to draw support or resistance lines. In that case, I will plan my trades based on the VWAP or Moving Averages or chart patterns that I earlier discussed.

Here are some hints for drawing support or resistance lines:

1. You will usually see indecision candles (Lesson 6) in the area of support or resistance because that is where buyers and sellers are closely fighting each other.
2. Half-dollars and whole dollars usually act at a support or resistance level. If you don’t find a support or resistance line around these numbers on daily charts, remember that in intraday these numbers can act as an invisible support or resistance line.
3. You should always look at the recent data to draw lines.
4. The more of a line that is touching price lines, the more that the line is a better support or resistance and has more value. Give that line more emphasis.
5. Only the support or resistance lines in the current price range are important. If the price of the stock is currently $20, there is no point in finding support or resistance lines in the region when it was $40. It is unlikely that the stock will move and reach that area. Find only the support or resistance area that is close to your day trading range.
6. Support or resistance lines are actually an “area” and not exact numbers. For example, when you find an area around $19.69 as a support line, you must expect price action movement around that number but not at exactly $19.69. Depending on the price of the stock, an area of 5 to 10 cents is safe to assume. In the example with a support line of $19.69, the real support area might be anything from $19.62 to $19.72.
7. The price must have a clear bounce from that level. If you are not certain if the price has bounced in that level, then it is probably not a support or resistance level.
8. For day trading, it is better to draw support or resistance lines across the extreme prices rather than across areas where the bulk of the bars stopped. This is the complete opposite of swing trading. For swing trading, you need to draw support or resistance lines across the edges of congestion areas where the bulk of the bars stopped rather than across the extreme prices.

Placing support or resistance lines, although tricky, is actually quite simple once you get the hang of it.

Let’s review a recent trade that I took based on these lines. CarMax (ticker: KMX), the United States’ largest used-car retailer, on June 21, 2016 had extreme earnings and its stock gapped down over 3%. That was a perfect opportunity for retail traders like me to find a good trade plan. I quickly found the support or resistance area level on a daily chart and watched the price action around those levels.

KMX support or resistance lines and my trade for that day.

After reviewing the daily charts, I found two levels of $48.09 and $48.48. When the market opened, I watched the stock and realized that the area of around 48.09 acted as a support. When I saw an indecision candle around the support line, I purchased 1,000 shares of KMX with a stop of below $48. The stock surged up toward the next level at $48.48 and, interestingly enough, $48.48 was also close to my invisible half-round number ($48.50). I sold half of my position for a profit and kept the balance for going higher. Since I did not have any other support or resistance area higher up, I decided to sell my remaining position at the invisible

resistance line of $49. As you can see, $49 acted as a strong resistance line, and the stock sold off from that level.

To summarize my trading strategy for support or resistance trading:

1. Each morning, when I make my watch list for the day, I quickly look at the daily charts for my watch list and find the area of support or resistance.
2. I monitor the price action around those areas on a 5-minute chart. If an indecision candle forms around that area, that is the confirmation of the level and I enter the trade. I usually buy as close as possible to minimize my risk. Stop would be a break and a close 5-minute chart under support or resistance level.
3. I will take profit near the next support or resistance level.
4. I keep the trade open until I hit my profit target or I reach a new support or resistance level.
5. I usually sell half-positions near the profit target or support or resistance level and move my stop up to my entry point for break-even.
6. If there are no next obvious support or resistance levels, I will consider closing my trade at or near half-dollar or round-dollar levels.

A similar approach will also work when you short a stock.

Other Trading Strategies

You have now read briefly about my trading strategy. You may be wondering what other traders do. As I mentioned before, there are unlimited numbers of trading strategies that individuals have developed for themselves. Traders often choose their strategies based on such factors as account size, amount of time that can be dedicated to trading, trading experience, personality and risk tolerance.

You should develop your own strategy. A trading strategy is very personalized to each individual. My risk tolerance and psychology are most likely different from yours and from those of other traders. I might not be comfortable with a $500 loss, but someone who has a large account can easily hold onto the loss and eventually make profit out of a losing trade. You cannot mirror-trade anyone else; you must develop your own risk management method and strategy.

Some traders focus heavily on technical indicators like the RSI, the moving average convergence divergence (also known as the MACD), or the moving average crossover. There are hundreds, if not thousands, of sophisticated technical indicators out there. Some traders believe they have found the Holy Grail of technical indicators, and it might be a combination of RSI or the moving average crossover. I don’t believe in any of them. I don’t think that they work for day trading, especially over the long term.

Some of my day trader colleagues may disagree with me, but my personal experience is that you cannot enter a trade with a systemic approach and then let indicators dictate your entry and exit. That is my next rule:

Rule 10: Indicators only indicate; they should not be allowed to dictate.

Computers are trading all of the time. When you set up a system for trading that has no input or requires no decisions by the trader, then you are entering the world of algorithmic trading, and you will lose trades to investment banks that have million-dollar algorithms and billions of dollars in cash for trading.

Of course, I use the RSI in my scanner for some of my trading strategies, and in particular for reversal trading. Obviously, I have scanners that rely on a high or low RSI, but those are more conditioned to find stocks at extremes. This is not by any means a buy or sell indicator.

Develop Your Own Strategy

You must still find your own place in the market. I may be a 1-minute or a 5-minute trader; you may be a 60-minute trader. Some may be daily or weekly traders (swing traders). There’s a place in the market for everyone. Consider what you are learning in this post as pieces of a puzzle that together make up the bigger picture of trading. You’re going to acquire some pieces here, you’re going to pick up pieces on your own from your own reading and research, and, overall, you will create a puzzle that will develop into your own unique trading strategy. I don’t expect everything I do to work exactly the same for you. I’m happy to help you develop a strategy that is going to work for you, your personality, your account size and your risk tolerance.

The key for now is that you master one strategy. Once you can tread water in the market with your one strategy, you can be a trader without blowing up your account. This is simply a matter of spending time in the chair. The more time you spend watching your charts, the more you will learn. This is a job where you survive until you can make it. You can start casting out later, but first you need to master just one strategy. It can be the VWAP trade, it can be a Bull Flag Momentum Strategy, it can be a Reversal Strategy, or you can create a strategy of your own. Narrow the choices down, develop that area of strength into a workable strategy, and then use that strategy to survive until you are able to develop others.

It is absolutely critical for every trader to be trading a strategy. Plan a trade, and trade the plan. I wish someone had said to me when I first started training, “Andrew, you need to trade a strategy. If you’re trading with real money, you must be trading a written strategy, and it must have historical data to verify that it’s worth trading with real money.” You cannot change your plan when you have already entered the trade and have an open position.

The truth about traders is that they fail. They lose money, and a large percentage of those traders are not getting the education that you are receiving from this post. They’re going to be using live trading strategies that are not even hammered out, they will just be haphazardly trading a little of this and a little of that until their account is gone, and then they will wonder what happened. You don’t want to live trade a new strategy until you’ve proven that it’s worth investing in. You may practice three months on a simulator, and then trade small size with real money for one month, and then go back to the simulator to work on your mistakes or practice new strategies for another three months. There is no shame in going back to a simulator at any stage of your day trading career. Even experienced and professional traders, when they want to develop a new strategy, test it out on a live simulator first.

Your focus while reading this post and practicing in simulated accounts should be to develop a strategy worth trading, and it’s my pleasure to assist you with that process. Remember, the market is always going to be there. You don’t need to rush this. A day trading career is a marathon and not a sprint. It’s not about making $50,000 by the end of next week. It’s about developing a set of skills that will last a lifetime.