Recent Sweet Day Trading Setups
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.
Corey-
I’ve been meaning to say thanks for your great blog for a while. I like what you are posting and have learned a lot reading it every day.
Can you explain the red and green dots on your chart?
Alan
Hi Alan. Thank you so much for the comment and kind words of support.
The chart comes courtesy of custom settings in TradeStation. The dotted lines are “Floor Trader Pivots” which actually are 5 lines cropped off when price action doesn’t touch them.
The green and red dots are from an indicator called “Pivot Highs” and “Pivot Lows”. I actually should have deleted them before posting to the blog – I cut off some other indicators for simplicity.
As a swing trader, I am looking to analyze price highs and lows and try to put them into context. The red and green dots look beautiful when posted after the market closes, because you have the temptation to look back and say “Gee, I would have bought there and sold there and made so much money” but the sad fact is that the calculations (program) post the dots after the price swing high or low is completed, and at times, it changes where the dots are placed if necessary, meaning they’re really only good to indicate price highs and lows, and have – to me – little predictive value whatsoever.
If you use TradeStation, these indicators are either with the system, or downloaded from the EasyLanguage workshop page online.
Corey
Hey Corey –
I was wondering if you could point me in the direction of some entry level books/sites talking in more detail about Day Trading setups like you’ve described above… \\thanks for your time.
– Dan
Hello Corey –
Can you explain how you see a “large positive momentum divergence” on the chart above. Not sure which indicator you’re referring too.
Thanks again for the great resource.
– Dan
Dan,
Thank you for your comments and questions.
There really are a plethora of entry-level and intermediate level books for traders looking to discover patterns such as the above but they’re really about the simplest patterns I can think of – essentially it’s just a play off the day’s support and resistance as provided by Pivot Points. The software draws the pivots for you but they can be calculated by hand and drawn manually on any intraday chart.
I really don’t have any major books off the top of my head to recommend – just avoid books that try to convince you that day traders are a stressed out bunch of individuals who make 30 or more trades and chase news reports or earnings reports or the like. That’s absolutely contrary to the way I trade and the way most professionals do it.
Take basic technical analysis concepts often taught regarding daily charts and apply it to the intraday time frames.
I made an example of Friday’s intraday action because it conformed so perfectly – in the morning – to the pivot levels. Either way, it provides structure for you to base trade ideas off of, and allows tight risk/reward parameters for some small-target trades.
I’ll update here if I get a chance to review some books I’ve read that would be of help to you but I haven’t read a particular book on day trading in a while so none pop into my head at the moment.
Dan,
I’m glad you asked about the momentum divergence. I was lax in annotating the chart, but it’s difficult to do so (to me) with TradeStation charts – StockCharts.com charts – what I normally use for clarification on the blog – didn’t provide the pivot levels and that’s why I chose to use TradeStation.
Imagine with me that there is a trend line touching the bottom of the swings (oscillations) in the blue wave-based oscillator on the bottom.
The first morning’s trade (where I put the hand graphic) is a classic divergence play. Price made a lower low while the wave oscillator made a higher low. This signifies that selling pressure is stagnating.
The third valley in the wave oscillator – along with price – is building the case for a potential upside momentum and price break because we can extend our trendline to touch three lower ‘swings’ in the oscillator. This tells me that buyers are likely taking over and they will ‘have their way’ with the market when given the chance soon. If not, then a tight stop will take you out with no problem.
There is a building positive divergence with price also in the afternoon, at 11:00, 12:00, and 1:00 respectively, which forecast the eventual second price upside breakthrough.
I live by five basic market principles, #2 being “Momentum Proceeds Price”. This is true in the case of divergences and also new (fresh) momentum highs or lows.
Momentum attempts to measure the force of balance (or imbalance) between buyers and sellers in relation to price swings.
Thank you for the question,
Corey