Everyone who participates in day trading has their own perspective, setups, indicators, and rules they use that work for them. However, there are some common points that are watched by a majority of intraday traders, and it is imperative to know what they are observing and how price reacts to those key levels.

I like to trade off momentum and support/resistance zones and play for (relatively) small targets with a high probability of success, and take stops close to entry when wrong, and Friday’s action in the morning was perfect for traders who enjoy pure price plays off support and resistance levels.

Focus initially on the Floor Trader Pivot Points (easily researched and easily calculated by hand) and observe how perfectly price behaved between the levels of S1 and S2 in the morning session.

Here is a chart of the DIA, the Dow Jones ETF:

Price gaps down early, attempts a retest but fails at Pivot S1 (marked). Now notice the extremely high probability trade that this action setup.

At 8:30, price tested Pivot Support #2, and also showed a large positive momentum divergence, forecasting on its own the likelihood that selling pressure was waning and buyers were beginning to step up. I’m sure there were other indicators that confirmed “oversold” levels as well. Regardless, price tested $130.70 and served as entry with a tight stop below. The initial target was the Pivot Support #2 which was $1.00 higher at $131.79 for the day. This was your “pure price trade.”

Price moved exactly as planned and the moment price tagged that band, traders in this setup should have exited… and they did. It setup a new trade in the opposite direction, allowing a quick short “scalp” trade.

At this point, we see a developing positive momentum situation combined with a clear “New Momentum High” on the oscillator which forecasts a higher probability for higher prices (often following a retest). With this, you should have been looking for a long entry which occurred as price broke out convincingly above the Pivot Support 2 (which should have been expected due to the momentum building), and price rallied an additional $1.00 up to $133 (which served as “round number” resistance).

At this point, with the overextension of price occurring, traders could have shorted when price showed the near “bearish engulfing” candle signaling a potential price climax and ‘vacuum trade’ or ‘mean reversion’ trade in the opposite direction, with the target being again Pivot Support 1. This trade would have brought in an additional $1.00.

Price swings dramatically dry up as does volume during the “lunch” period, and so most traders either trade lightly or walk away for a bit during this period – myself included. Price swings are just not as defined as the morning or the afternoon period.

Price then began a consolidation period for the rest of the afternoon until the breakout above key resistance by Pivot S1 as well as the 20 and 50 period (flat) moving averages. A breakout trade could have been entered to play for a bit of a ‘larger’ target than normal (because the market alternates between expansion and contraction). The price target wasn’t as clear as earlier, but eventually price was thwarted by the declining 50 period moving average on the 15 minute chart (not shown above).

The focus of this article is to highlight the interplay between support and resistance, as well as breakouts above these zones, as key zones not only to watch, but to trade around.

Day traders don’t need to trade 20 or 30 times per day – you can make a very comfortable living trading only three to five high probability trades per day, usually in a major market ETF or a future, such as the mini-Dow (@YM). You get used to this environment and the subtle nuances of price and the behavior of your trading instrument after you build experience.

You probably see your own patterns you like to trade in the above chart and that’s fine. We need structure to guide us regarding when to enter, where to place stops, and what profit target to play for. The ultimate arbiter is price, and whatever works for you (that is, whatever makes you money) is effective no matter what it might be or how odd it might seem to other traders.

Trade well and expand your horizons whenever possible.