Day Trading Stocks Successfully Using Day Type Price Patterns
If you have ever day traded stocks then most likely there have been times when you
received a day trading signal from your system to go long a stock at the same time that the market indices (i.e., Dow, S&P, and Nasdaq) were solidly trending down. Or maybe, your system produced a short signal on a stock when the overall stock market was in a runaway uptrend. For most day traders, taking trades against the currents of the market indices leaves an uncomfortable feeling in the gut. The decision about whether you should take a particular entry signal can be improved by understanding day type price patterns.
It is true that the market indices behave differently from one day to another. However, there are recurring and predictable day types that appear over and over again. Being aware of the type of day that is setting up for the Dow, S&P, and Nasdaq before you enter a trade, will help you make better decisions that are in tune with the flow of the day's market dynamics. Understanding day types will make it easier for you to decide whether you should take a trade or avoid it altogether. This will, in turn, lead you to placing more effective and higher quality trades.
Markets are in a constant state of flux between trending activity and range-bound activity. On certain days the market indices may move in one particular direction for the entire session while on other days the indices are void of any particular market direction. Ignoring a trending day type may cause you to take low-probability counter-trend trades against a strongly trending day simply because your system told you to do so. Conversely, ignoring a range-bound type of day, may cause you to make the common mistake of only taking trend trades when it is safe to take both trend trades and counter-trend trades. The ability to switch modes from trend trading to counter-trend trading based on the type of day that is setting up will make you a more adaptable and effective day trader.
The following five general day type price patterns can help you decide whether you should play one side of the market or both sides, either long or short. The patterns provided below are for a bullish market, however, you can simply reverse the logic for a bearish market.
Trend Day. The market index opens strong to the upside and continues trading higher through-out the day without only minor pullbacks. Any declines in the market index are only pullbacks within the uptrend. Alternatively, the market moves haphazardly but steadfastly upwards over the course of the day. You will "typically" see NYSE Advancing issues trouncing NYSE Declining Issues and NYSE Up Volume trouncing NYSE Down Volume. Typically, both Advancing Issues and Up Volume will be greater than 75%. You should seek to take only long trades during a bullish Trend Day.
Range-Bound Day. The market index trades sideways within a range over the course of the day. There isn't a sustained trend in any particular direction. NYSE Advancing issues will be about the same as NYSE Declining Issues and NYSE Up Volume will be about the same as NYSE Down Volume. It is fine to take both long and short trades during a Range-Bound Day.
Thrusting Day. The market index opens strong to the upside, but then trades in a channel starting around noon (or 11:00 am est.), and continues trading sideways both up and down for the remainder of the day. NYSE Advancing Issues and NYSE Up Volume will trounce NYSE Declining Issues and NYSE Down Volume, respectively, in the beginning of the session, but may then peter-out. It is OK to take both long and short trades during a Thrusting Day.
Range-Explosion Day. The market index trades sideways in a range for most of the day, but then suddenly breaks-out to the upside in the latter half of the day. NYSE Advancing issues will usually be about the same as NYSE Declining Issues, and NYSE Up Volume will usually be about the same as NYSE Down Volume. It is fine to take both long and short trades during a Range-Explosion Day.
Reversing Day. The market index opens strong to the upside, but then suddenly reverses in the opposite direction either soon after the open, over the course of the day, or near the end of the day. NYSE Advancing Issues and NYSE Up Volume will typically trounce NYSE Declining Issues and NYSE Down Volume, respectively, in the beginning of the session but may then peter-out or potentially reverse. It is OK to take both long and short trades during a Reversing Day.
Apply these patterns to the market indices (i.e., Dow, S&P, and Nasdaq) throughout the day. When you receive a day trading signal from your system to enter a particular stock, consider the pattern that exists at the time of the signal to help you decide whether or not to take the trade.
by: Monti Simmons
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