Practical Day Trading Strategies

Excerpts from The Electronic Day Trader

1. Relative Strength in Morning
- Find the most active stocks and the greatest points gainers and losers.
- Many of them that are up strong early, i.e. first 15 mins, pull back.
- Those that cannot pull back, or pull back a little, tend to move substantially higher in a short time.

2. Trend Reversal
- Look for stocks with small percentage declines relative to the market on sharp down days
- When the market rallies, look for these stocks to reverse.
- Eg. ABCD closes at 50, opens at 49, trades down to 48, and then rallies back above 49
- Make sure stock trade above closing price before buying

3. Strong into the Close/Gap in the Morning
- Stock that close near their highs are more likely to go higher than lower the next morning

4. Relative Strength and Volume
- Stock trading 2 to 4 times average volume and up 5% to 10% will continue to go up and follow through.
- However, stock up 25% on 20 times average volume is vulnerable to pull backs.

5. Anticipating Relative Strength
- Cyclical stocks, such as technology, automobiles and retailers, tend to do well in strong economy
- Interest-sensitive stocks, such as banks and home builders, tend to do poorly on days when bonds market perform poorly (interest rate increase).
- S&P strong + bonds weak -> cyclical stock GOOD
- S&P strong + bonds strong -> interest-sensitive stock GOOD

- Oil price increase -> Oil Stock GOOD, airlines stock BAD
- Strong dollar
-> Companies that produce overseas and sell in USA - GOOD (imports cheaper) eg. Toyota, Nike etc
-> Companies that export goods overseas - BAD (export more ex, harder to export)

6. Key Patterns
- Start of downtrend ->High cannot beat the previous high, confirm by low below previous low.

7. Interpret Openings
- 30 Year Bond Future Higher -> Higher stock price
- S&P 500 Futures Higher-> Higher stock price

8. Study Investor's Business Daily

9. After opening at 9:30
- 9:50 - 10:10 -> Opposite direction to opening (reaction)
- 10:10 - 12:00 -> Revert back to opening's trend 66% of the time

10. Take home winners
- Buy stocks in the last hour that are up on the day, that are trading on good volume, and that go out strong.
- Take note that overnight trades equal HIGHER RISK (but higher returns).

11. ALWAYS put a stop loss at yesterday's close (writer's own tip)
- Yesterday stop loss is an important short term Support.
- Once it is breached, it will go down for the next few hours or days.

~Excerpts from How to Get Started in Electronic Day Trading

1. Gap Trading

- "Amateurs control the open, professionals control the close"

- "Hook Close" and "Short Squeeze"

- During down days, professionals buy a stock going into the close ACTIVELY. This will look like a "hook" on a chart ("Hook Close") . Short sellers will often panic and are forced to cover their shorts.

- This will continue the next day and the stock will gap open, instilling even more panic of amateur short sellers who held on overnight ("Short Squeeze"). Professional will sell the stocks (even selling short) at inflated price to panic short sellers who are buying to cover.

- Once the volume of buying subsides indicating most of the amateur shorts are covered, the stocks falls quicky after the open, allowing the professionals to cover their short for a nice profit.

- *Strategy: Buy stocks that close strong, sell quickly the next day.

2. News Driven Price Patterns
http://www.geocities.com/koh_jiefeng/graph1.jpg

3. Earnings Announcements
http://www.geocities.com/koh_jiefeng/graph2.jpg

4. Stock Split Announcements
http://www.geocities.com/koh_jiefeng/graph3.jpg