Technical Analysis - Day Trading

▪ Sucsess for the New Day Trader

Find a mentor that is successful at day trading. Find out everything you can about the trader's methods and emulate them. Focus on what they do short, medium and longer term as they trade scalps, swings and positions. Paper trade their methods. Are you making a profit?
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▪ Become a More Disciplined and Successful Day Trader

Learn from my 27 years of successful day trading and involvement in stock and bond markets.

During my years of trading experience, I have tried every indicator imaginable. I know what works and what doesn't. I also know how to give myself the best odds of executing a winning trade.

How can you learn what steps you need to take to win at this profession we call "day trading?"
Read. Learn. Emulate.

Strategies for Day Traders

In the beginning, I found I was using tools that supported my market bias. And, instead of finding stocks that fit actionable trading criteria or a system I could trade, I found I was overwhelmed and confused.

1987 - Began reading publications on buying stocks (Day Trading) using point and figure methods.

Knowledge is Power
Francis Bacon

Epiphany - Developing a Day Trading Style

While reading a copy of Investors Business Daily in October 1987, just after the market crash, I found a system that worked for its author and readers. William O'Neil's system was simple.

Mr. O'Neil's paper quantified the relative strength of a company in an industry sector and then gave it a number or ranking from 0-100.

A relative strength of 99 represented the strongest companies relative to its competitors. A trader emulating Mr. O'Neil's methods focused their attention on companies and stocks in strong sectors with the highest relative strength.

He then focused on chart patterns that had the highest probability of success. Most of these patterns were represented as bullish setups. Cup and Handle, Double Bottom, W patterns and flagging patterns were displayed, with their relative strength and industry rank listed. This is a simplified version, but what I found was a method that used fundamental and technical analysis to give the trader a definable edge. He also used stops.

So, as I became proficient in trading, I consolidated my system of trading into the following.

  • Identify the market trend. I follow SPX, COMPQ, and RUT.
  • Identify which major SPDR sectors are being bought for longs. Relative Strength.
  • Identify which major SPDR sectors are being sold for shorts. Relative Weakness.
  • Chart the stock of interest
  • Overlay trend lines and note bullish and bearish patterns
  • Overlay Bollinger bands. I turn these off and on when needed.
  • Overlay an oscillator. I use slow stochastic and MACD. I usually keep these on.
  • Overlay volume
  • Overlay fibonacci levels using several pivots and look for confluence.
  • Look for signs of institutional interest.
  • Note unusual volume patterns at key inflection points.
  • Note important candlestick patterns for reversals.
  • Regarding inflection points - read about Point and Figure
  • Overlay Horizontal Lines of support and resistance using Point and Figure.
  • Overlay Volume by Price Histogram - the volume bars on the left of my charts


Below is a chart of KRE - The SPDR Regional Banking ETF. We noted the strength compared to other sectors in my weekly video. Note the sector view that we looked at here. Note the current chart at the bottom, one week later.

Note the green arrows. Stochastic reversed direction on June 17th. Traders began mentioning the relative strength in Regional Banks while SPY was selling hard for a couple of weeks.

Moving Averages - Note price action was above the 30SMA and the 50SMA (not shown). The averages are sloping upward, so we're only take long trades.
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Pattern - We saw the highs were descending and creating the upper trend line resistance.

Oscillators - With stochastic turning we anticipated that this pattern could break higher. Note MACD histogram started to turn as well.

We then scanned the components of KRE and came up with a short list of long setups, listed on the right of the chart. SIVB chart is below.

Stochastic - the oscillator on the chart gave a great entry signal.

Fibonacci - note we held the 38.2 retracement off the recent pivots. This signaled relative strength.

Pattern - we saw a triangle with oscillators pointing to a move higher.
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Moving Averages - note how prices pulled back off the May 28th high and bounced in the "box" zone between the short term and medium term moving averages. Prices did not fall through this area.

I find simple is better. The chart is clean and easy to discern.

Indicators are minimal but support a good risk/reward setup.

Targets are based on height of the pattern and fibonacci extensions. Note price is "flagging" right on the 127 extension. I would expect this pattern to move higher over the next couple of weeks. The next target would be the 161.8 extension if this scenario plays out.

So, in a nut shell, I have a game plan for this sector and the stocks referenced on the KRE chart above.

Stops are set using a risk/reward of 3:1 on a perfect trade setup. I typically limit losses to 3-5%. This is not a hard and fast rule. The more expensive the stock the smaller risk I usually take.

Remember a 10% loss only takes an 11% winner on your next trade to break even. Whereas, a 50% loss on a position requires the trader to make 100% on the next trade to break even. Simple math. The longer you can stay in the game, the higher your odds are of winning at day trading.

Check back often as this section will expand.

Most of my followers have shown an interest in actual trades, what indicators were setting up and what the market was doing at the time, rather than educational, which can be found in the books in the right column.

Current chart KRE, one week later +10%. Thats relative strength at work!
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