This is one of the simplest trending strategies I use for day trading, and also one of the most effective. For this it has been given the very catchy name of the Day Trade Trending Strategy.
While I have called it a day trading strategy, it can actually be utilized on any time frame, as the set-ups are the same across a 1 minute chart, 1 hour chart or daily chart. Once this trending strategy is understood, it’s quite simple as it utilizes the trend to make a profit and also keeps me out of the market when the market isn’t trending. I use a very similar method for swing trading forex using daily or 4-hour charts.
Even if I am not trading this method on a particular day, I watch for the set up as it generally keeps me on the right side of the market (or out of the market when conditions aren’t ideal).
Before I begin, I cannot stress enough the importance of patience when employing the strategy. After you’ve exhibited patience, I am cannot stress enough the importance of restraint in not continuing to use the strategy once the window has closed. Like a fighter honing his striking skills, it is all for not if the blows are delivered at the wrong time. Wait for opportunities, then pounce…that’s how to trade stocks (or other markets as well).
Day Trade Trending Strategy – When and How
The following day trading strategy will provide roughly 4-8 (sometimes a bit more, sometimes a bit less) trades per day. That said, using this method will provide an overall context for the movements throughout the day, giving feedback and confirmation for many other strategies or signals which may arise.
When day trading stocks I use a 1 minute chart and a “Level II.” The main waves (trends) of the day are traded, usually with two trades per major price wave.
Some days will turn out to be ranging days. If this is case, no trades will be triggered, or very few, since intra-day swing highs/lows will not be broken, thus no trend is present. Use patience and restraint. Only trade what the market actually provides (don’t take a trade early, trying to get a better a price, assuming the trade will trigger).
Don’t start using this strategy till about half an hour into the trading day. I have other strategies I use during the first half hour (see: Truncated Price Swing Strategy for one of those strategies).
Day Trade Trending Strategy – Examples and Guidelines
Here is how the first couple trades of the day may look:
We start out the day in a choppy fashion but then about an hour in we break the lows of the day.
We can now draw our downward trendline because we have broken lows and eventually we want to go short.
We then wait for a pullback towards the trendline
Please note, the trendline is only a visual, but really has no significance to me. What matters, in this case, is that all the future swing highs in this move stay below the most recent swing high and new lows are created. As long as that happens, it is a downtrend. Opposite applies to an uptrend. For more, see How to Use Trendlines–Dispelling the Myths.
Enter short when a pullback ends – signaled by the low of a green bar or cluster of bars getting taken out (price drops below the cluster or below the low of a green bar, after the price has come close to the descending trendline).
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Stop is just above recent swing high (in a downtrend) and is usually fairly small. In the first trade (first red arrow), the high is 117.05. I would exit if the prices gets back there. Entry is 116.91-116.90 as we move below the low of an up-bar that took us near the trendline. I do not wait for bars to complete, bars are arbitrary. I only care what is happening in real-time. Therefore, stop is about 15 cents.
The target is the recent low-minus the stop (for a downtrend, or recent high+stop in uptrend). In this case the former low was 116.66. Since we are in a downtrend I assume that low will be broken by some amount. The amount I assume it will be broken by (at least) is my stop. [Please note that this applies to how I enter the market and has been tuned to my methods. If someone uses a slightly a different entry method, then this method may not work for them.] Therefore, my target is 116.66-0.15=116.51. I place my profit target order and it is hit. Profit is about 2.5 times the risk.
Another swing low occurs and then the market pulls up again toward the trendline. I do the same thing again for the second trade. High is 116.42, my stop loss is just above this. Entry is 116.27. Target is 116.11-0.15 (stop will not always be 0.15, it is just coincidence) = 115.96. This time the reward is about 2:1 relative to risk.
Two trades to three trades is normally all we get in an intra-day trend, unless there is a very strong trend occurring that day. If the market continues to make lower lows and lower highs, great, we may get a couple more in. But this is pretty rare before we see a larger correction against the trend.
If it looks choppy I stay out – this often occurs between 11 and 1 ET. It does not mean there are not moves, it just means I don’t see high probability moves like mentioned above.
Let’s skip to after lunch. The horizontal line marks the low of day so far. After lunch that low is broken (near 115.50, see chart above and then below). I repeat my process.
I can now draw a trendline, as a major low has been broken (prior to this the market was moving between horizontal lines – “rangey”)
I wait for a pullback near the trendline which has already been drawn (patience-better to miss than get in too early and have too big a stop loss).
Enter short using same criteria as before.
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You will notice an “optional” long trade. The market recently had made a higher low and then a higher high (an upward trendline could have been drawn here). On the following correction it makes a higher low, thus giving us a potential entry, but the bars are big at the turning point (this may be hard to see, but the stop is about 20-35 cents as the entry was harder to pinpoint). This made the stop too big and the entry “murky”, so I avoided this trade, especially since at this point it was against the overall sentiment of the day. If the risk to big based on the projected target (discussed above) don’t take the trade.
The market does not really recover then makes a lower low followed by a lower high. Another potential short entry is marked by the second red arrow. My target is hit. BUT, this is actually not a trade based on this strategy. The reason: I would have had to draw that trendline in after I took that short trade–in other words, the market was in transition and not trending at that point. Can you see the difference between this and the others? If you can, then it is likely you understand the strategy. It is actually the next price wave which should be our entry – and it would have resulted in a loss. That entry is between the second red arrow and first green arrow and I would have been stopped out.
The ETF then makes a series of higher lows and higher highs providing about 4 entries into the up move with stops of about 15 cents and similar targets to what was discussed above. Having 4 trades in a move like this is rare. Don’t expect it. After 2 trades, the odds begin to decline; a losing trade becomes more likely as the trend is reaching extremes….but trade what the markets give.
My turning points are somewhat subjective. I don’t always use the high or low of bar, since sometimes there may be a cluster of bars. Each situation is slightly different. Basically I am just looking for a shift from buying to selling or vice-versa near what I believe should a turning point (a correction in a larger trend, ie. trendline).
Like I mentioned the trendline is not too important, it is just a visual. Rather, understand that pullbacks in a downtrend can go almost all the way to the recent swing high in that downtrend, but should not exceed it (opposite for uptrend). As a pull back is occurring I am looking for any sort of shift which indicates a move back in the direction of the current primary trend.
Usually only make 1 or 2 trades in each move. I only want to be involved in the “meat” of the trend. Not picking tops or bottoms. The market has already shown it is reversing/has reversed. Then basically I am waiting to get in at a low risk entry point in that emerging trend. Those with a basic understanding of Elliott Wave Theory will see that this simple trending method is basically designed to capture waves 3 and 5 of a trend–and there may potentially be a couple trades in each of these waves.
If there is any question as to the current trend I do not trade this strategy. For example, a lower low is created then a higher swing high is created. In this case back off, and let a trend develop.
SPY may not be best place for this strategy, rather I will trade another stock or ETF. In an uptrend I trade stocks or ETFs that are relatively strong and the market leaders. This usually provides smaller stop trades and more reward. In a futures downtrend I trade stocks or ETFs that are relatively weak to the market (laggards) for the same reasons mentioned above.
If the market is pretty close to my profit target and starts to pull away, I exit. I am not going to risk giving up a bunch of profit for a couple cents.