The vehicle you choose to trade for intra day trading depends on your execution platform, your commission structure, trading rules and your objectives.
Most Professional Traders will choose to trade a very volatile and liquid market, that’s why more and more of the Stock Jockeys move over to the Forex Market.
Let start and jump into the deep end.
Below I have two Charts of the recent EURUSD that opened with a gap a couple of weeks ago.
Fig 1 Show the trend we are in and give and indication which direction to trade in.
Note: I do not use the 1hr chart to plot my trading strategy – merely to find the direction of the trend.
Fig 2 We use the 15min chart to find the divergence of the gap. However the 1hr and 4hr charts can be used as well – but since we are trading a gap for a short period - and maximum profit, best to stick to the 15min charts for the analysis and the entry points.
On the other hand the 30 min or 1hr chart are used to find the exit points – in this case we will look for pattern reversals i.e. hammers, tweezers, spinning tops etc.
As a Professional Intraday Trader we trade Breakouts and Pull Backs after the breakout.
These are simple rules that will benefit the growth of your equity over time – and eliminates a lot of noise in the market when the technique is applied.
Example. When triangles form in the market especially on daily charts – normally after a breakout there is a gap – the news has been absorbed into the market via the price swings and that creates attractive trades without any difficulty.
Fig 1. When timing entries look out for swing highs and swing lows plus the length of the Swing Up & Swing Down. Here in Fig1 we notice clear Lower Highs and Lower Lows. We can see there was a clear drop, followed by a reaction – a move to the upside - No 1
The 2nd leg down ensued by another reaction up. This classic ABC type move - Rallies to Point A – falls to a higher low Point B – then rallies above Point A to Point C. This is a classic Momentum Divergence on the way up – These are the best shorting signals - gabs can form in an Up Trend and can be traded the same way.
Last leg down had a clear loss of momentum and the downward movement was not as great as the first leg lower. A convergence formed, making higher lows and breaking the trend line.
This is the 1st swing greater than the previous down swing. This indicates that the market has changed its nature and now we switch from shorting to long the market, and buying the pullbacks.
Daily charts display longer term moves as they filter out a lot of market noise, they tend to show smooth and consistent swings - easy to read, but analysis will not provide many trades.
More active traders perform the same style of analysis on 15min charts and 1hr charts.
Every good breakaway point will either have a gap or a large range increase with increasing volume. When looking at momentum indicator Point 1, where the oscillator far exceeds its previous high points. Here we can trade the pullbacks after this new momentum high.
It is paramount to choose ahead of time – are you long or short in the market. Don’t work both sides, work the side with the most potential gain.
Taking advantage of pullbacks against the overall trend is an important part of this strategy. The moving average used here to spot pullbacks is the EMA 20, which works best for this time frame.
Fig. 3 & Fig. 4 Shows the opposite for a gap in the Uptrend
In all the 15 min charts Momentum Indicator is plotted against the Price Swing to find the Divergence Lines.
Aggressive Traders vs Conservative Traders.
Initiate a small scale entry if he perceive a slowing in the reaction.
Waits till the market starts to turn back towards its trend. It also depends on the liquidity of the market. Less liquid market traders will get a more advantageous price entering a long position when there are a lot of sellers and visa versa.
Therefore we should try and enter before the market turns, as long as you are still confident that you are trading in the direction of the higher time frame.
- • Never limit yourself trading the first two or three pull backs before a trend reversal is due.
- • Never limit yourself in a strongly trending market.
Referring back to the EURUSD – there are lots of pullbacks and it is still following lower.
Be careful to enter late in the game as the market might be ready for a bigger shakeout or a sideways movement. Try to differentiate whether this is a normal trading environment or is there a more powerful force at work.
It takes a lot of time to reverse a strong trending market – There is usually an extended period of accumulation or distribution, so it would be extremely rare that a trend reverses on a dime without plenty of advance warning.
Trend reversals are a process that often show up in a classic chart formations such as :
- • Hammers
- • Tweezers
- • Morning Stars
- • Evening Stars
- • Crowns
- • Double Bottoms
- • Triple Bottoms
Remember daily charts offer cleaner, prettier and more symmetrical swings than charts with shorter time frames. By using the longer time frames, you get smoother data, less noise, and a clearer picture of the trend.
These strategies I reveal here are very simple and works for me – there are many strategies out there and a lot of books – but it doesn’t mean that simple classic analysis doesn’t work. They worked in the past, they work now and they will work in the future.
It doesn’t matter if you are a Short Term Aggressive Trader or a Long Term Conservative Trader, success depends on understanding the basic swing. It is most important whether the price is in an Up Trend making Higher Highs or a Down Trend making Lower Lows.
Managing a Trade
This simply means by placing an initial stop loss and following an exit strategy.
To achieve maximum profitability:
- Play for small wins as opposed to aim for large gains.
- Playing for larger gains use a trailing stop.
- Start to pull up your stop to break even when the trade starts to work
- Have a mechanism in place that forces you to take profits.
This can done by having an initial fixed stop and a time stop. To do this you employ an 10 bar time stop in conjunction with a fixed stop – on a 10 or 15 min chart use 10min & 15 time stops or in a daily chart use a 8 day time stop.
Finally it is important to minimize the risk of having a large loss. Traders end up with a big loss because they were hoping for a big profit. The best traders first learn to play good defense before going to the offense.
Secondly go where the action is – don’t pick dead markets that don’t do anything – hoping for a breakout. There are so many currency pairs available with good readable swings. Go where the volatility is and where supply and demand imbalances exist.
Leaders continue to remain leaders and the underdogs tend to continue to under perform.
Never get discouraged at the amount of noise in the market. Classic technical analysis eliminates noise – examine the trend and within the trend the individual swing. Then notice they become pretty predictable.