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Daytrading signalsWhen it comes to daytrading signals there are hundreds of them but only a few which can be trusted... In the following pages I will give you some trading approaches you will hear about out there and most of them apply mostly to day trading but if you adapt the numbers you can also use it in swing trading. Remember that MY trading plan will give you the combination of approaches I came out with following a lot of trials and errors so read through this but know that these can’t be used alone if you hope to succeed… (That’s another reason most traders fail to succeed at this cat and mouse game… Guess which one you are!) The first daytrading signal I will look at is the use moving averages: A break below the 200MA would signal a sell or short entry. The 200MA is often used by fund managers. A stock that is trading above its 200 day moving average is generally a good long position, as long as it holds that moving average. A crossover of 2 moving averages itself is often used for entry / exit signals, i.e. a fast moving average (10MA) crossing over (from below) a slower moving average (50MA) is used as a buy signal. Furthermore they smooth the often very volatile price movements and therefore make it easier to see the direction of the trend in the chosen period of time. ARemember that a moving average tells you the average price over the chosen time period and length. For example the 200 day moving average shows you the average price of the last 200 day and a 5 min 200MA will show you the average price of the last 200 5 min periods. It is usually calculated on the value of the closing prices. The following picture shows a chart with various moving averages The bottom one being the 200MA, followed by the 100MA, the 50MA, the 20 MA and finally the 10MA. As expected, you can see that 200 MA is the one that takes the longest to catch up once the stock`s price moves.
Another daytrading signal which deals with MA is moving average crossovers I use moving average crossovers in pretty much the same situations as the stochastic reversals which we will see later on with the exception that MA crossovers work better in slower trends. For example you can use the 10MA and the 20MA on a daily chart. If the 10MA crosses over the 20MA from below, that is a long entry signal; vice versa for shorts. Again, for longs, the stock should be in an overall up trend and the pullback has to be significant. About the choice of MA’s: I suggest you try a few combinations and use the ones that worked best in the past. Like I said earlier, every stock has its own personality... The following example shows a stock that had a strong day the day before. After the open it pulled back about 40 cents. The market was pretty strong so a recovery in the stock was to be expected. I was looking for stabilization and a crossover of the 5MA above the 10MA. The crossover happened just below $18 and my stop was below the intraday low at $17.81. After breaking the previous days high the stock gained initial momentum.
The next day trading signal is the Breakout Note: all the examples are written for long setups; just apply the opposite for shorts. The breakout setup is one of the core setups used in trading. Breakouts occur all the time on every timeframe, i.e. breakouts to new 52 week highs, daily highs or above trend lines, It is a trend following setup that is confirming the prior direction. The type of breakout I will be talking about is the breakout out of a consolidation, also referred to as a core breakout. Always look to trade a breakout in the direction of the prior trend. Meaning, I want to trade a stock long that is consolidating after an uptrend. I will enter the trade once the high of the consolidation is broken.
The stock should consolidate for a significant amount of time A good guidance are moving averages. The most important thing to consider before en¬tering a breakout trade is where the initial stop is. I will set my stop just below important moving averages or the low of the consolidation. Therefore it is true that the tighter the consolidation is, the smaller the initial stop will be. Note: A very long consoli¬dation in an up trend is often a negative sign, especially when moving averages are not able to “push” and leads to a trend reversal. What you will often notice is that a stock is moving sideways and gets pushed higher as rising moving averages near. This often creates a very powerful move. The ideal breakout also occurs on multiple time frames i.e. a stock is consolidating at the intraday high, which also happens to be the prior day’s high. If a breakout occurs here that will bring in momentum from both the intraday breakout and the breakout on the daily chart. For what it is worth, I breakouts to new daily highs work better than pure intraday breakouts. Make sure the stock you are about to enter has no immediate resistance to the upside. I would look at least at the daily chart and look for resistance in form of old highs or moving averages.
Here is an example of a “nice” breakout that occurred on a 15 minute chart:
Now let's look at the next daytrading signal: Continuation patterns Continuation patterns are trend-confirming setups. They can occur in virtually every timeframe. Continuation patterns allow you to find an entry in stocks that are already in a trend and moving. I find the pattern equally interesting for both longs and shorts. My example here describes a long setup. Again, vice versa is true for shorts. The pattern consists of three candlestick bars: 1. A wide range bar (a candlestick with a relative large range in which the lows are near or at the open and the highs near or at the close of that particular time period). 2. A narrow range bar (a candlestick with a small range). The candlestick has to be in the upper half of the first candlestick and the high can only be slightly higher than the high of the first candlestick. Ideally, the range is in the upper half (or higher) of the first bar and builds a doji candle, which serves as an additional continuation indictor in this example. 3. A breakout bar that breaks above the highs of bar 1 and 2 and signals the entry.
Enter the trade once the price of the third bar breaks the high of bars 1 and 2. The stop is placed below the low of the second bar. Once the third bar is completed, quickly move the stop below the low of that bar.
Finally I will explain another classic daytrading signal: Stochastic reversals The stochastic oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. For the stochastics the standard settings is 14,1 and 5. You can imagine the stochastics like a rubber band that when stretched has to bounce back. The more stretched (oversold/overbought) it is, the stronger the reversal will be and the more precise. I use the stochastic a lot and believe this is a great indicator. Simple and efficient. In MY trading plan I explain in details how I use it but for this course I will discuss its use in general which is fine. The idea here is to look for stochastic indicator which has been below the 20 band (trigger line) for an extended period of time. Readings at zero or just above are the best, because they indi¬cate a very oversold condition. If the stochastics then reverse and cross over the 20 band (sometimes even the 10 band) that signals that the stock seems to have found a bottom and is likely to reverse. The bigger the sell off was before the reversal, the more potential to the upside there is. Please experiment for yourself with the trigger lines and settings. For shorts, I look for situations where the stock has been close to or at the 100 band for an extended period of time. A cross below the 80 band will be my sell trigger. Don`t worry, the only difference with my approach is that I adapted it to work in combination with two other indicators and also I use a slightly different setting but like I said, the information above works fine as is. The following example is for longs: CIEN dropped from about $13.80 to about $13.05 in less than 15 minutes. What is of most importance is that this drop happened in one move and not in a stairstepping pattern. The stochastics were holding near the zero band for an extended period of time. The reversal above the 20 band gave an entry signal. I would have taken at least partial profits near the prior highs that serve as resistance. The stop for those setups al¬ways has to be very small since they are more scalp oriented. I would use a stop just below the low of the pullback or a stop based on my entry price, i.e. 15 cents below my entry:
Now is time to move on to the next section entitled Candlesticks patterns. 
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