Chapter 7:
Most Important Day Trading Strategies
In this chapter, 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 Chapter 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 chapter. 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 Chapter 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 Chapter 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.