Day Trading lesson: perspective on price action

Stock trading to many new traders can seem like there is no rhyme or reason to price fluctuations during the day. Online stock traders do not have the same information of order flow that a NYSE specialist or a NASDAQ market maker has. “Screen” traders need to interpret action in a different way.

To do this properly with some consistency you need to give price action structure. No matter what style of trading you employ, scalping, charting, momentum, you need to be able to identify an opportunity that fits your method.  That opportunity will be based on how you view the market. 

Here is my point, no matter your style, your stock can only do one of three things. Test a previous high or low, consolidate or trend. All price action is a function of one of these scenarios. Make your trading have a structure and price fluctuations will never feel random!

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What does your “trade scenario” look like?

One of the most common trading problems for new traders is very easy to overcome once its recognized. Looking at too much on your charts. There are so many indicators available with charting packages today its ridiculous. Most of the indicators are derivatives of price. We feel very strongly that if you can read price itself, why the heck do you need something that “indicates” what price is doing?!

Keep your trading simple and master the basics. Make a decision. Do I trade pullbacks well or breakouts well? Look over your trades, they will tell you the truth. The more specific the scenarios need to be when you are looking for opportunities, the easier it will be to be patient waiting for them. You won’t be chasing noise.

Momentum trade from 4/20/07

We teach in our classes when you are setting up a trade, you need to make it clear whether you are trading with the trend or the momentum. If you have both on your side, thats great, but perfect set ups all the time is not reality.The expectation and the share size for each will be very different. Here you can clearly see the trend on the 15 min chart is down but the momentum is up. We made a quick .20 scalp long against the trend, but with the momentum. We knew it would be a scalp before we entered the trade, so we got out into momentum of the exhaustion bar.