Filling the gap is a popular strategy where you buy a stock when it gaps down in the morning and then wait for it to fill the gap.
Many bloggers have written about how good this strategy is. However, there usually isn’t much evidence to support those claims.
I test the strategy on 20 Nasdaq stocks between 2008-2018 and find mixed results after transaction costs. Read more »
Some intraday stock traders say that if they could choose only one technical indicator it would be the VWAP.
I find that VWAP is not necessarily a holy grail and traders disagree with the best way to use it. In the rest of this article, I test two very simple VWAP trading systems and present the results. Read more »
In this article I take a look at the Udemy course ‘Learn to Trade the News‘. Udemy are currently having a 25% off sale on thousands of courses which you can access here. Coupon code = 25JBMARWOOD.
In this article I look at some of my favourite intraday trading patterns including naked price action patterns and Japanese Candlestick patterns. Read more »
It was November 2008 and I was a graduate futures trader for a trading house in the UK. I’d been trading full time for only a couple of months.
The credit crunch was in full force and every day presented new challenges and headaches.
Until Lehman Brothers collapsed I had been doing well. Trading a small account, I was happily bringing in a reasonable £300 a day.
Then, everything changed. People thought the financial system might collapse and the markets went into chaos. The FTSE 100 would drop massively in the space of a couple of minutes.
Then, it would reverse almost as fast, for no other reason than traders being too scared to hold on to their shorts. Read more »
Building an intra day trading system for trading futures, stocks, or forex is no easy task and many would say that in today’s markets it’s simply not possible.
For one thing, the markets are not at all like they used to be.
As I mentioned in a previous post, I do not classify day trading as an easy route to riches. However, if you were to ask me what my favourite approach would be, I would say pivot points. In this post I will illustrate how to use pivot points in trading stocks and forex.
How to use pivot points in trading
Pivot points can be calculated on most charting packages now but it’s still handy to know the exact formula so you can calculate them yourself, so here it is:
Pivot (P) = (High + Low + Close) / 3
R1 = P + (P − Low)
S1 = P − (High − P)
R2 = P + (High − Low)
S2 = P − (High − Low)
R3 = High + 2 × (P − Low)
S3 = Low − 2 × (High − P)
In essence, I think pivot points work quite well because they are always adapting to recent price action. They are also watched by lots of professional traders and because of that I think it gives them more significance.
Traders can use pivot points in different ways. Personally, I find them most useful as profit targets because when a market hits a pivot level it nearly always holds up there for at least a short period of time.
I tend to be bearish on a market so long as the price is below the pivot and bullish so long as the price is above the pivot. I also like to combine pivots with other indicators and to watch the news.
For example, if the market drops through the pivot on some significant piece of news I will often short the market and look to buy it back on one of the support levels. Depending on the momentum of the market, I might take all the position off at the second resistance/support or I might take half the position off. Indeed, I might hold out for the third level if price action is really moving.
Rarely, if volatility is dead, I will take a position off at S1 or R1.
Watching momentum is therefore very important when using pivot points and it’s also a good idea to watch the ATR. That way you can see what is happening to volatility. If volatility and momentum are tapering off it’s a sign to exit your trade more quickly.
In order to illustrate how to use pivot points in trading I thought it would be a good idea to show some examples from last week. These charts are all taken from the same period. You’ll notice from these charts that pivot points do get hit a lot of the time.
As can be seen in the next chart, pivot points often produce uncanny levels in which to enter or exit a market.
On the 29th July, the pivot, or just below it, would have been an excellent place to sell and the third support (S3) would have been a great place to close the trade, making around 30 pips.
On the 30th, the market declined and bounced off the second support and on the 31st the market stayed around the pivot for most of the day.
On the 1st August, the currency pair pushed through the pivot in the morning and moved right up to the third resistance, giving a trader 40-50 pips if long.
During the same period, the pivot also acted as a strong level for GBP USD.
On July 29th, the market dropped 60 pips from the pivot to the third support and on the 30th the currency moved up to the pivot before falling back to the second support.
On the 31st, GBP USD hit the pivot in the morning then moved down to the first support where it consolidated.
And on the 1st August, the currency touched the pivot in the morning then moved lower throughout the session, closing right on the second support. The second support (S2) was a great place to take profits.
As you can see from the next chart, a similar story unfolded for the Kiwi US dollar pair.
On most days, the key pivot levels provided great places to enter buy and sell orders and take profits.
On the 29th, the currency fell through the pivot all the way to the second then third support.
On the 31st, the currency turned back off the first resistance to the pivot and on the 1st August the currency moved between the first support and first resistance.
As can be seen, pivot points can work in volatile as well as trending conditions.
A new day trading strategy idea
In previous articles I have blogged about the high risks involved with day trading. I have also spoken of my preference for trading strategies that combine both technical analysis AND fundamental analysis. Much like Bruce Kovner in the original Market Wizards, I find that fundamentals can add real strength to technical trading systems by first eliminating overpriced companies. In this article I will talk about a simple trading idea based on both value and trend.
Day trading obstacles
The biggest problem that day traders have to overcome is the cost of trading.
Commissions and wide spreads mean that day traders need to stick to shares with high volumes and tight spreads. This narrows the playing field and means traders should stick to the most well known companies such as Apple, Exxon or Google.
The second biggest problem day traders face is psychology. Day trading is inherently stressful and can chew up and spit out even the best traders if they don’t have a strong plan. It’s for this reason that most traders benefit from implementing some sort of system.
Most important components
There are many important components to a successful trading strategy but I suggest that none are as important as this:
The direction of the long term trend.
Fundamental and value traders can complain all they like but the fact is, markets move in irrational ways, particularly in the short term. Trading the trend is therefore the most reliable method for day traders. In fact, if you can correctly ascertain the long term trend you should be able to make money at least 70% of the time.
Take the S&P 500 for example. How much money would you have made by going long the index every day during the last bull market? A lot, I’m guessing.
Nevertheless, it is true that a buy and hold strategy can outperform strategies that move in and out of the market, especially when costs are taken into account.
I therefore suggest that fundamentals should be used in conjunction with looking at the long term trend.
Specifically, the idea of this strategy is to identify high volume stocks that are good value and moving in a clear direction, up or down.
New day trading strategy rules
The first step is to focus only on the stocks that trade the tightest spreads (0.1% or less). We can then do a stock screen on these companies to find those that are cheap on a valuation basis.
For this I will use the stock screener at finviz.com and I will only consider stocks with a PEG ratio of less than 1. This will bring up a list of stocks that we can at least say are not expensive.
Now, get rid of any stocks that have an RSI above 70. We don’t want to be buying anything that is overbought already.
Just these three steps are likely to reduce the list down to only a handful of companies. Look at each one and decide which one is showing the most consistent long term trend.
If all these steps are in place and the 20 day EMA is above the 50 day EMA, then you buy on the open and sell on the close. If the stock happens to go down two days in a row, you wait until it has at least two more up days.
And that’s it. A simple day trading strategy that relies on value and the long term trend (in my view the most important consideration for a trading strategy).
Now I don’t know if this strategy would work or not as I haven’t tried it. But the chart of Apple indicates that the idea might be worth exploring. Setting the strategy up in code and putting into a back tester to test on past data will be the next logical step.