Intraday Trading Techniques
These are some of the daytrading techniques that we found to be effective in making consistent profits. You can practice these with the RapidSP daytrading simulator. Don’t be afraid to modify these and come up with your own. The more techniques you have up your sleeve the more successful you can expect to be. The techniques discussed here assume familiarity with technical analysis and patterns. Please read our papers on technical analysis for more information on technical patterns.
Electronic trading means many markets are open 24-hrs a day. But we recommend that you trade only during times of high liquidity/volume. This way you get much better executions, prices are better and spreads are smaller. For futures (and even currencies) it is preferable to trade only when major day-time markets (such as U.S. stock market) are open.
Trading the Gap Up Opening:
Short the market at Gap up Open. Exit when the gap fills. In gap up openings frequently the gap is filled partially, market goes up and again comes down to fill the gap completely and more. Not recommended for gap down openings. Also to the thing to keep in mind is that if the gap is not filled immediately, it may not get filled.
Trading a Strong Trend:
As obvious as it sounds, if you notice a significant trend in early hours of trading, take a position (long/short) by recognizing trend. Trends have habit of continuing. Watch out for different technical patterns forming along the way. Trend lines with 45 degree angles are ideal. Trend lines with higher angles (‘steeper’ trend lines) denote excess exuberance/pessimism have tendency to change directions quickly and violently. Also it is very important that either you tread with the trend or not trade at all. Never try to trade against the trend no matter how sure you are.
Trading a Trendline Break
As an extension to above method watch out for trendline breaks. Take a position after the trend break assuming the trend will reverse. Exit if continues side ways. Sideway trading is an indication that the trend may not be broken yet. Use various moving averages and trendlines (explained in the section in technical analysis) to detect reversal of a trend.
Trading a single Position throughout the day
When the market opens, watch the market for few hours. If you do not see anything interesting, or if the volatility is low do not trade. Take a position if volatility is reasonable by observing the chart formation from a technical point of view. Set a stop loss. Let the profit run through the day. Raise stop losses to lock in gains as the market moves in your favor. Exit at close.
Trading with major technical patterns (W and M)
Watch out for significant technical patterns forming such as W or M. The wider (formed over a longer time period) the pattern the more reliable it is. One strategy is to wait and watch till you see one of these patterns formed and then trade. Keep tight stop losses and let the profit run till the end of the day in this case.
Using the 200 Day moving average
Calculate the 200 day moving average for the day, by using the 200-day moving average calculator in RapidSP. If the market is below the 200 day moving average, short the market as it approaches the 200 day moving average. If the market is above the moving average, go long as the market approaches the average. Reason is that as the market approaches 200 day moving average from above or below it will encounter either a strong resistance (if below) or strong support (if above).
Support and Resistance
Watch for support and resistance levels being formed during the day. Watch and trade only when you see a good support or resistance level being formed. Support and resistance levels are explained in our paper on technical analysis. Keep a short stop loss. If the instrument breaks through your stop loss, close the position.
Watch for No. of Trades
It is very important that you do not exceed a set no. of losing trades (we recommend 2 losing trades per day) for any given strategy. This avoids big set backs when the market is not acting as you are expecting. Just take a break and relax. Do not be bent on trading when the market is acting unpredictable for you. You must also set max. no of losing trades in a row per day or trading session. Do not trade if you exceed this set limit. Also set a $ limit on how much you are willing to lose per day. Stop trading if you do. If it happens again next day stop trading for a week.
Trading with 3/2 rule
Enter the market with reasonable volatility and place a best-guess trade by observing the technical pattern formations. Place an OCO order to sell the instrument when it hits a certain stop loss or certain profit goal. Keep the stop loss and profit goal so that the profit goal is slightly higher (for example 3 points in case of e-mini S&P) than the stop loss (2 points for example).
Increase in slope of trend
Sudden increase in slope of the trend after a long run, means the trend is about to break in most cases. Close the trade if any and go opposite when this happens. If it is the up trend that is being broken, expect much more violent down side. Close this trade by placing limit order as opposed to market order. You will typically get better execution.
Trading on a sluggish day
If the market is trend less for a while (2-3 hours), look for an upside or down side break. Take two positions when you do see a break happening, one for short term and one for long term. Trade one with the 2/3 rule described above and let the profits run on the other one. The profit potential in this situation is typically high and you would want to stay in to benefit. The 2/3 trade (if profitable) will give you something to smile about if the big move doesn’t materialize. Do not trade on a sluggish day if you do not see anything moving.
This is one of our highly preferred strategy. Look at the pattern formation after the market has been trading for 3-4 hours. Use the pattern formed to take you best guess about the future direction. Trade if there is reasonable amount of information in the price action. Though you will miss many of the major moves the market typically make in the early hours of trading, the mood of the market is somewhat clearer so the markets are easier to trade in the second half of the day.
Trading sharp rise or falls
Sharp rises or falls ‘without reason’ mean things are happening that are beyond your understanding. We recommend that you stay out in these situations. Do not trade highly chaotic and volatile markets. Besides getting bad fills on your orders, these are tough to predict one way or another. Wait till things settle down. If you are already in, close the position as quickly as you can.
Don’t place stop-losses at obvious places:
If you are daytrading already, how many times have you noticed that the market hits your stop loss, you get out of the market and then the market continues it’s original direction to your dismay? Why does this happen so often? The stop loss price most traders set is typically based on some trading system or rule the trader comes up with that calculates the stop levels based on a support area or a trend line or a Gann angle or old bottom or old top formation or Fibonacci numbers or a chart price gap, or just simply an obvious natural stop-loss area such as a whole number. If the concentration or stop orders at a particular level is high, the market gets drawn to that level.
Markets echo similar patterns over and over again. The science of technical analysis allows you to play these formations. Keep in mind that if you see a price pattern that you do not understand you do not have to trade. Wait till you are on familiar turf, there will always be another day of trading and the pattern you are looking for is just around the corner.