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When people use the term "day trading", they mean the act of buying and selling a stock within the same day. Day traders seek to make profits by leveraging large amounts of capital to take advantage of small price movements in highly liquid stocks or indexes. Here we look at some common day trading strategies that can be used by retail traders.
Entry Strategies
Certain stocks are ideal candidates for day trading. A typical day trader looks for two things in a stock: liquidity and volatility. Liquidity allows you to enter and exit a stock at a good price (i.e. tight spreads and low slippage). Volatility is simply a measure of the expected daily price range - the range in which a day trader operates. More volatility means greater profit or loss. (To learn more, see Day Trading: An Introduction.)
One day trader favorite is Sun Microsystems (Nasdaq: SUNW). The stock is cheap ($4.38 at the time of writing), liquid (almost 50 million shares traded daily) and very volatile (as can be seen by looking at its chart). This type of stock is ideal for the retail day trader.
Once you know what kind of stocks you are looking for, you need to learn how to identify possible entry points. There are three tools you can use to do this:- Intraday Candlestick Charts - Candles provide a raw analysis of price action.
- Level II Quotes/ECN - Level II and ECN provide a look at orders as they happen.
- Real-Time News Service - News moves stocks. This tells you when news comes out.
We will look at the intraday candlestick charts and focus on the following three factors:- Candlestick Patterns - Engulfings and dojis
- Technical Analysis - Trendlines and triangles
- Volume - Increasing or decreasing volume
There are many candlestick setups that we can look for to find an entry point. If properly used, the doji reversal pattern (highlighted in yellow in Figure 1) is one of the most reliable ones.
Figure 1 - Looking at candlesticks - the highlighted doji signals a reversal. |
Typically, we will look for a pattern like this with several confirmations:
1. First, we look for a volume spike, which will show us whether traders are supporting the price at this level.Note that this can be either on the doji candle, or on the candles immediately following it.
2. First, we look for a volume , which will show us whether traders are supporting the price at this level. Second, we look for prior support at this price level. For example, the prior low of day (LOD) or high of day (HOD).
3. We look at the Level II situation, which will show us all the open orders and order sizes.
If we follow these three steps, we can determine whether the doji is likely to produce an actual turnaround, and we can take a position if the conditions are favorable. Typically, entry points are found using a combination of these three tools.
Finding a Target
Identifying a price target will depend largely on your trading style. Here is a brief overview of some common day trading strategies:
Strategy
| Description |
Scalping
| Scalping is one of the most popular strategies, and it involves selling almost immediately after a trade becomes profitable. Here the price target is obviously just after profitability is attained. |
Fading
| Fading involves shorting stocks after rapid moves upwards. This is based on the assumption that (1) they are overbought, (2) early buyers are ready to begin taking profits and (3) existing buyers may be scared out. Although risky, this strategy can be extremely rewarding. Here the price target is when buyers begin stepping in again. |
Daily Pivots
| This strategy involves profiting from a stock's daily volatility. This is done by attempting to buy at the low of the day (LOD) and sell at the high of the day (HOD). Here the price target is simply at the next sign of a reversal, using the same patterns as above. |
Momentum
| This strategy usually involves trading on news releases or finding strong trending moves supported by high volume. One type of momentum trader will buy on news releases and ride a trend until it exhibits signs of reversal. The other type will fade the price surge. Here the price target is when volume begins to decrease and bearish candles start appearing. |
You can see that, although the entries in day trading strategies typically rely on the same tools used in normal trading, the exits are where the differences occur. In most cases, however, you will be looking to exit when there is decreased interest in the stock (indicated by the Level II/ECN and volume). (For further reading, see Introduction To Types Of Trading: Momentum Traders and Introduction To Types Of Trading: Scalpers.)
Determining a Stop-Loss
When you trade on margin, you are far more vulnerable to sharp price movements than regular traders. Therefore, using stop-losses is crucial when day trading. One strategy is to set two stop losses:
1. A physical stop-loss order placed at a certain price level that suits your risk tolerance. Essentially, this is the most you want to lose.
2. A mental stop-loss set at the point where your entry criteria are violated. This means that if the trade makes an unexpected turn, you'll immediately exit your position.
Retail day traders usually also have another rule: set a maximum loss per day that you can afford (both financially and mentally) to withstand. Whenever you hit this point, take the rest of the day off. Inexperienced traders often feel the need to make up losses before the day is over and end up taking unnecessary risks as a result. (To learn more, see The Stop-Loss Order - Make Sure You Use It.)
Evaluating and Tweaking Performance
Many people get into day trading expecting to make triple digit returns every year with minimal effort. In reality, around 80% of day traders lose money. A recent (January 2005) behavioral finance study of the Taiwanese stock market conducted by professors at the University of Taipei and the University of California suggests that "less than 20% of day traders earn profits net of transaction costs". Most of these people would be better off putting their money on the roulette table than using it for day trading! However, by using a well-defined strategy that you are comfortable trading, you can improve your chances of beating the odds.
How do you evaluate performance? Most day traders evaluate performance not so much by a percentage of gain or loss, but rather by how closely they adhere to their individual strategies. In fact, it is far more important to follow your strategy closely than to try to chase profits. By keeping this mindset, you make it easier to identify where problems exist and how to solve them.
Conclusion
Day trading is a difficult skill to master - well over 50% of those who try it fail. But the techniques described above can help you create a profitable strategy and, with enough practice and consistent performance evaluation, you can greatly improve your chances of beating the statistics.
Calculating Pivot Points
By definition, a pivot point is a point of rotation. The prices used to calculate the pivot point are the previous period's high, low and closing prices for a security. These prices are usually taken from a stock's daily charts, but the pivot point can also be calculated using information from hourly charts. Most traders prefer to take the pivots, as well as the support and resistance levels, off of the daily charts and then apply those to the intraday charts (for example, hourly, every 30 minutes or every 15 minutes). If a pivot point is calculated using price information from a shorter time frame, this tends to reduce its accuracy and significance.
The textbook calculation for a pivot point is as follows:
Central Pivot Point (P) = (High + Low + Close) / 3Support and resistance levels are then calculated off of this pivot point using the following formulas:
First level support and resistance: First Resistance (R1) = (2*P) - Low First Support (S1) = (2*P) - High
Likewise, the second level of support and resistance is calculated as follows: Second Resistance (R2) = P + (R1-S1) Second Support (S2) = P - (R1- S1)Calculating two support and resistance levels is common practice, but it's not unusual to derive a third support and resistance level as well. (However, third-level support and resistances are a bit too esoteric to be useful for the purposes of trading strategies.) It's also possible to delve deeper into pivot point analysis - for example, some traders go beyond the traditional support and resistance levels and also track the mid-point between each of those levels.
Applying Pivot Points to the FX Market
Generally speaking, the pivot point is seen as the primary support or resistance level. The following chart is a 30-minute chart of the currency pair GBP/USD with pivot levels calculated using the daily high, low and close prices.
The green line is the pivot point (P).The red lines are resistance levels (R).The blue lines are support levels (S).The yellow lines are mid-points (M).Figure 1 shows how the pivot line served as support for the GBP/USD for most of the European trading hours. Once U.S. traders joined the market, however, prices began to break higher, with each of the breaks first testing and resisting either the mid-point or the R1 and R2 levels; then the break occurred off of those levels (see areas circled). This chart also shows something that occurs frequently in the FX market, which is that the initial break occurs at a market open. There are three market opens in the FX market: the U.S. open, which occurs at approximately 8am EDT, the European open, which occurs at 2am EDT, and the Asian open which occurs at 7pm EDT.
Figure 1 - This chart shows a common day in the FX market. The price of a major currency pair (GBP/USD) tends to fluctuate between the support and resistance levels identified by the pivot point calculation. The areas circled in the chart are good illustrations of the importance of a break above these levels. |
What we also see when trading pivots in the FX market is that the
trading range for the session usually occurs between the pivot point and the first support and resistance levels because a multitude of traders play this range. Take a look at Figure 2, a chart of the currency pair USD/JPY. As you can see in the areas circled, prices initially stayed within the pivot point and the first resistance level with the pivot acting as support. Once the pivot was broken, prices moved lower and stayed predominately within the pivot and the first support zone.
Figure 2 - This chart shows an example of the strength of the support and resistance calculated using the pivot calculations. |
The Significance of Market Opens
One of the key points to understand when trading pivot points in the FX market is that breaks tend to occur around one of the market opens. The reason for this is the immediate influx of traders entering the market at the same time. These traders go into the office, take a look at how prices traded overnight and what data was released and then adjust their portfolios accordingly. During the quieter time periods, such as between the U.S. close (4pm EDT) and the Asian open (7pm EDT) (and sometimes even throughout the Asian session, which is the quietest trading session), prices may remain confined for hours between the pivot level and either the support or resistance level. This provides the perfect environment for range-bound traders.
Two Strategies Using Pivot Points
Many strategies can be developed using the pivot level as a base, but the accuracy of using pivot lines increases when Japanese candlestick formations can also be identified. For example, if prices traded below the central pivot (P) for most of the session and then made a foray above the pivot while simultaneously creating a reversal formation (such as a shooting star, doji or hanging man), you could sell short in anticipation of the price resuming trading back below the pivot point.
A perfect example of this is shown in Figure 3, a 30-minute USD/CHF chart. USD/CHF had remained range-bound between the first support zone and the pivot level for most of the Asian trading session. When Europe joined the market, traders began taking USD/CHF higher to break above the central pivot. Bulls lost control as the second candle became a doji formation. Prices then began to reverse back below the central pivot to spend the next six hours between the central pivot and the first support zone. Traders watching for this formation could have sold USD/CHF in the candle right after the doji formation to take advantage of at least 80 pips worth of profit between the pivot point and the first level of support. 
Figure 3 - This chart shows a pivot point being used in cooperation with a candlestick pattern to predict a trend reversal. Notice how the descent was stopped by the second support level. |
Another strategy traders can use is to look for prices to obey the pivot level, therefore validating the level as a solid support or resistance zone. In this type of strategy, you're looking to see the price break the pivot level, reverse and then trend back towards the pivot level. If the price proceeds to drive through the pivot point, this is an indication that the pivot level is not very strong and is therefore less useful as a trading signal. However, if prices hesitate around that level or "validate" it, then the pivot level is much more significant and suggests that the move lower is an actual break, which indicates that there may be a continuation move.
The 15-minute GBP/CHF chart in Figure 4 shows an example of prices "obeying" the pivot line. For the most part, prices were first confined within the mid-point and pivot level. At the European open (2am EDT), GBP/CHF rallied and broke above the pivot level. Prices then retraced back to pivot level, held it and proceeded to rally once again. The level was tested once more right before the U.S. market open (7am EDT), at which point traders should have placed a buy order for GBP/CHF since the pivot level had already proved to be a significant support level. For those traders who did do that, GBP/CHF bounced off the level and rallied once again.
Figure 4 - This is an example of a currency pair "obeying" the support and resistance identified by the pivot point calculation. These levels become more significant the more times the pair tries to break through. |
Conclusion
Traders and market makers have been using pivot points for years to determine critical support and/or resistance levels. As the charts above have shown, pivots can be especially popular in the FX market since many currency pairs do tend to fluctuate between these levels. Range-bound traders will enter a buy order near identified levels of support and a sell order when the asset nears the upper resistance. Pivot points also enable trend and breakout traders to spot key levels that need to be broken for a move to qualify as a breakout. Furthermore, these technical indicators can be very useful at market opens.
Having an awareness of where these potential turning points are located is an excellent way for individual investors to become more attuned to market movements and make more educated transaction decisions. Given their ease of calculation, pivot points can also be incorporated into many trading strategies. The flexibility and relative simplicity of pivot points definitely make them a useful addition to your trading toolbox.
EURO IS EXPECTED TO RISE THIS MONTH DUE TO THE EURO 2008 SOCCER EVENT IN AUSTRIA/SWITZERLAND.
THE FOLLOWING SIGNALS ARE IN GMT TIME .
N.B ALL SIGNALS ARE JUST GUIDES NOT ENTRY SIGNALS.ONLY PLACE TRADE IF YOU ARE SURE AND AT YOUR OWN RISK.
MONDAY 8TH
8:30 AM GBP...........PPI INPUT
PREV 2.4 FORECAST 2.6
BUY GBPUSD IF ACTUAL IS 2.8 OR GREATER FOR 30 PIPS
SELL GBPUSD IF ACTUAL IS 2.4 OR LESS FOR 30 PIPS
12:15 PM CAD.................HOUSING STARTS
prev 214 FORECAST 220
BUY USDCAD IF ACTUAL IS 210 OR MORE FOR 20 PIPS
SELL USDCAD IF ACRTUAL IS 230 OR MORE FOR 20 PIPS
