When a person wants to start trading the stock market he or she has to figure out whether they want to do Day Trading, swing trading or long term trading. There are many different styles the trader can use to trade these different time frames and despite technical indicators and chart patterns that work on all time frames, there are certain things to keep in mind. Day Trading is the style that is most unique so in this article I will be talking about what makes this short term trading so different from the other styles and what the trader should keep in mind when trading intraday.
Things To Keep In Mind When Day Trading
Here the trader can use the normal technical indicators such as Bollinger Bands or MACD to look for favorable setups. One has to keep in mind that if there has been a overnight price movement, commonly known as a gap, the indicator can be out of place or give extreme readings. In this case the trader is advised to wait 2X bars where X being the length of the indicator used. For example if the trader is using a 20MA Bollinger Band he/she should wait for at least 40 Bars to be printed. This will return the indicator back normalcy and minimize the amount of fake signals the indicator might give.
Another tool used for intraday trading that requires some modifications are chart patterns. The most important thing to keep in mind is that chart patterns work best intraday if they are part of a move that occurs only during that day. A chart pattern that uses price bars from previous day is likely to be invalid. This is because chart patterns use trading psychology and captures traders on the wrong side of a trade but as most traders are flat "end of day" then there are no losing traders to "feed" on. So there is almost no reason to use price bars from prior day in the chart patterns. This is especially true looking at a time frame setting of 10 min or below.
Signals provided by technical indicators and chart patterns are more valid at certain times of the day than others. It is well known that the first 15-30 min of the trading day is made up primarily of retail investors. These retail investors are often buying because they read some news about a certain stock and are highly emotional. Because the morning price action is highly influenced by retail investors or traders, any signals in this time slot is not likely to follow through. It is therefore recommended to wait for signals after the 30 min opening price.
Another time of day to keep in mind is lunchtime. The big institutions slow down their trading as managers are leaving for lunch. This means volume is drying up and low volume often results in bad signals from indicators and fake break outs from chart patterns. A tip could be to close down for the day if you are already profitable. No reason to give back profit during the doldrums!
Finally the last 15-30 min of the trading day is something the trader is advised to stay away from. This is because the institutions are rebalancing their positions which often results in noise on the chart which then means the indicators are giving the trader fake signals. A shame to lose profit for the day on a bad signal so stay away from these last 15-30 min.
re you looking for free day trading education then feel free to visit our website. Here you will find many videos explaining in details the indicators and chart patterns. You will also find articles covering trading psychology.