day trading: calling a top

A consistent  day trader more often than not will spend very little time trying to pick tops and bottoms. There are some events that occur however that make it very clear the end of a move has arrived.

Monitoring  price action and volume together, there are instances where a pending turn is obvious. We call this event “exhaustion.” This occurs when a stock has moved very quickly from its average price AND a very large body candle forms AND this is accompanied by a significant increase in volume.

You can see here on this chart a clean exhaustion bar forms with the other criteria. You can use this action in one of two ways, exit a position into momentum before it reverses violently or put on a very agressive trade in the opposite direction, once the shorter term time frame displays a lower high or higher low so that you can manage risk.

In an upcoming article we will explain the mechanics of why “exhaustion” works.

Day trading: Trade replay

Last night we did a free workshop for online stock trading on our NYC office. There was a student in the room who refused to believe that intra day trading is as simple as defining the supply demand equation.

She proceeded to ask a litany of questions about fundamental analysis and how it would relate to a day trading decision. Of course we went through all the necessary fundamental factors to be aware of, but ultimately a traders decision will be based on what is going on right now.

This trade displayed in AMD is a perfect example of what I mean. The short term momentum from the 15 minute chart was rising and made it’s way above the 20sma. As we teach in our Equity Trader 101 course, this tells us we should be zooming into the lower time frame to time an entry to the long side (we will be trading with the most immediate momentum)

The entry is the bull flag on the five minute chart. The trade played out beautifully for a profit of just about a quarter. As you can see here, there were TWO reasons to exit the trade where we did, there was resistance from the previous days trading and we had perfect “exhaustion bars” that indicated the end of the move.

TXN continuation

TXN Texas Instruments had a huge gap up about 10 days ago and never came close to filling the gap. This is a stock (and sector) we trade on a daily basis. The trade we were stalking was an eventual continuation of the the strong gap. The stock consolidated for the previous four days, we were now anticipating a break out from the consolidation. It was expected the move would be to the upside because the gap was never filled, indicating remaining strength. 

The stock opened very strong, unless you were very quick on the open you may have missed the initital break out above the 4 day resistance level. That was ok because the trade of the day was the first intra day consoliation. From 9:40-10:10 there was a nice little trading range that was forming at the figure, $36. There it was for the taking, the stock slowed down just waiting for you to grab some shares. The rest of the trade was easy, it made a nice smooth $1 ride. Ring the register and go to lunch.

Are they all this easy? That depends, I can promise you, the harder you work, the luckier you will get.

momentum trade MCD

In the chart on the left, we see MCD is basically flat as far as the trend is concerned. We measure the trend by using the 20sma. In this case, the trend is flat, so there would be no longer term view of the stock. We use the 5sma to determine the stocks momentum. In this case on the 15 minute chart, the 5sma has a nice down0 slope. We know we can stalk a quicker scalp type trade in the direction of the momentum, which in this case is short. We get off a short trade when price begins to trade back in the direction of the momentum. In this case the short was good for just over .20. Since we knew it was only a scalp before we got into the trade, we exit into momentum.

WFC trade replay

  Picture perfect set up. Wells Fargo WFC moving up nicely on both the momentum and the trend. Two great entries on the five minute chart. Entries don’t get much cleaner than these.