Wednesday, November 14, 2007

Day Trading Tip #1

What does the gap being filled within the first hour of trading tell us about what kind of day the market will give us?
The first hour of trading is the most important in determining what type of action the market will bring for the day. Understand that none of these are 100% accurate, but their accuracy is high enough to give us a great guide for how to trade the day.

For example, today saw a strong opening for the first 10 minutes and then the fade began back to the open and even gave some back.
This give us a very valuable clue as to what we should expect from the rest of the day.
It tells us that there are very high odds that this will not be a trending day in either direction and the market should stay range bound from the range established in the first hour.
So the plan then is to sell rallies and buy dips within the range. It also tells us that should the market break out of the 1st hours range on either side then there should be an extended move in the direction of the breakout.
We also do not need to wait for the market to move through the entire range before we buy or sell. We know that it will be a choppy day and to sell rallies and buy dips. More aggressive traders can look to the 1 minute chart with a simple 44 period stochstics to signal buys and sells. Look to scalp 3-5 points on each turn. Of course this type of trading contains more risk, but you can limit your risk with very tight stops, as you will know almost right away whether the trade is going to go your way or not. Typically no more than a 1 point stop for scalping this way is prudent.
The most recent trade is proof in the pudding of this type of strategy.
Notice also that when the 5 min chart also gives a sell you should look for the move to be more than the 3-5 point scalp and perhaps in the 6-9 point range.
Remember also to always use your stop and to move the stop up as the trade goes your way.
Here is my set up for moving your stop on scalp trades.

1- Initial position...... 1 point stop loss

2- 2 points profit ....... Breakeven stop

3- 3 points profit ...... Lock in 2 points

4- 4 points profit ...... Lock in 3 points profit

5 - 5 points profit ..... Lock in 4 1/2 points profit

You get the idea. The more profit the trade begins to generate the tighter you make your stop.
The most important concept in this module is the importance of using a stop and also moving the stop as the trade goes in your favor.
You can have the greatest timing module in the world, yet without the proper use of stops you will eventually be doomed into a large depletion of trading capital.

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