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 catchy name: Day Trade Trending Strategy. Using a one-minute chart the price will often make a larger move, have a very simple pullback, and then begin to move in the trending direction again. The strategy attempts to capitalize on that. Pullbacks aren’t always this simple, therefore, this strategy is best used in conjunction with the consolidation breakout method and the engulfing candle method (which this method is similar to).
The strategy utilizes the trend to make a profit and also keeps me out of the market when the market isn’t trending.
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, a strike is only effective if delivered at the exactly the right time. Too early, or too late, and the strike is not as effective. Wait for opportunities, then pounce…that’s how to trade the financial markets.
There are many other articles that are linked to in this article. To get the full benefit from this strategy, it is recommended those articles are read as well.
Day Trade Trending Strategy – When and How
The following day trading strategy provides roughly 4 to 8 trades per day, sometimes a bit more and sometimes a bit less. The main waves (trends) of the day are traded, usually with two trades per major price wave. Even if not taking trades using this method, it provides 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 or forex I use a 1-minute chart and a Level II (not required for forex). The Level II is only used if the volume in a stock is bit low and I need to watch for when liquidity is available. If the stock has lots of volume (plenty of shares at every price level) then there is no need for a Level II, just use the chart.
Some days will turn out to be ranging days. If this case, no trades will be triggered, or very few, since intraday swing highs/lows will not be broken, thus no trend is present. Use patience and restraint. Only trade what the market actually provides. One of the most common problems new traders have is taking a trade too early and trying to get a better a price, assuming a trade will trigger in the near future. This is a big mistake. Only take a trade once the actual trade trigger (discussed a bit later) actually occurs. As alluded to prior, another mistake is waiting too long after a trade trigger has occurred. This too is detrimental to profits. Trades are taken at the exact moment of the trade trigger or not at all.
Don’t start using this strategy until about 30 minutes into the trading day. I have other strategies I use during the first half hour, such as the Truncated Price Swing Strategy.
Day Trade Trending Strategy – Examples and Guidelines
First, let’s look at a downtrend example, then we look at an uptrend example after.
Looking at Figure 1, 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 and 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. The opposite applies to an uptrend.
- Enter short when the pullback is potentially ending, signaled by the price dropping back below the low of a green bar or cluster of bars near the trendline (doesn’t need to be exactly at trendline).
- Place a stop loss just above recent swing high (in a downtrend. In the first trade (first red arrow), the high is 117.05. I would exit if the prices gets back there (stop loss).
Entry is 116.90 as we move below the low of the latest up/green bar near the trendline. I do not wait for bars to complete (but you can if you wish), bars are arbitrary. I only care what is happening in real-time. In this case, the risk on the trade ended up being $0.15.
- The target is the recent low minus the stop loss (for a downtrend). 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 loss amount. [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.
- A simpler target method is to simply use a fixed reward:risk ratio of 1.6:1 or 2:1. For example, if risking $0.15 on trade (per share), then set a target at $0.24 profit (1.6x risk) or $0.30 profit (2x 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, which means the stop loss is again $0.15 (this is just coincidence, the stop loss amount is often different for each trade) The swing low prior to entry was 116.11. Minus the stop loss of 0.15 and the target is 115.96. This time the reward is about 2:1, relative to risk.
Two to four trades is usually all we get during a single intraday trend. After two to four trades the price often reverses. We don’t assume it will reverse, I am just noting an observation. If the market continues to make lower lows and lower highs, great, we may get a couple more trades in. For spotting reversals and trading those, see Strong Trend Reversal Trading Strategy.
If it looks choppy I stay out. Choppy trading often occurs between 11 and 1 ET. The price will still move during this time, but I don’t typically see high probability moves like mentioned above. Best to stay away during this time.
Let’s skip to after lunch. The horizontal line marks the low of the day so far. After lunch, the price keeps dropping so the downtrend is intact and I can continue to look for short trades.
- 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.
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 on the chart, but the stop is about 20-35 cents). This made the stop too big. And while the price has started a small upward trend, the overall sentiment of the day is still down. I avoid taking this trade for both these reasons. If an uptrend is going to develop, there will be more opportunities to get in, so there is no reason to jump the gun and assume one is occurring simply because we have had some very small higher swings and higher lows (magnitude of price waves matters!). If the risk is too big based on the projected target, or trade is going against the dominant trend direction, don’t take the trade.
The market doesn’t end up rallying, and instead 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. I opted to take the trade I did because just prior that entry the price made a lower swing low. It then bounced, consolidated, and then starting dropping again. This trade is more in alignment with the reversal strategy and consolidation breakout methods linked to earlier in the article.
The price then makes a series of higher lows and higher highs. This provides about 4 entries into the uptrend. Notice how the moves down were getting much smaller before the price started rallying. The price was just barely making lower lows before we are able to draw this upward trendline. Since the downward momentum had slowed so much, once the price starts making short-term higher highs and higher lows we can feel much more confident about taking the long trades.
- Stops losses are about 15 cents again, placed just below the most recent swing low formed prior to entry. The same target approach is used as discussed above. Since we are going long, we add our stop loss distance to the recent swing high. We can also simply used a fixed reward:risk ratio.
Here are a few more examples from the forex market. I have not included the trendlines here, because we don’t even need them…even though they may be helpful at times. When we have a strong trend, and a clean pullback, often just waiting for the price to start moving back in the trending direction is all we need to trigger our trade.
When the price is trending up, long trades are only taken after the price makes it upward move…the green candles that either engulf prior down candles or break out of a consolidation to the upside. Similarly, during the downtrend, short trades are taken after the price starts it downward progress…the red candles that engulf the prior green/up candle(s). Red lines mark stop loss levels for the most recently entered trade.
Day Trading Trending Strategy NOTES:
- I am only taking trades in the trending direction. I am waiting for a pullback and then only entering once the price starts moving in the trending direction again. This takes skills, as it is a somewhat subjective form of analysis and trading.
- The exact level of the trendline, if used, is not important. It is just a visual aid. 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 pullback is occurring I am looking for any sort of shift which indicates a move back in the direction of the current primary trend.
- If there is any question as to the current trend, I do not trade this strategy.
- SPY is used for these trade examples, but the method can be applied to any stock or forex pair. Other stocks to consider for day trading each week are discussed on the Day Trading Stock Picks page.
- If the market is pretty close to my profit target and starts to pull away from the target, I exit. I am not going to risk giving up a bunch of profit for a couple cents.
- The target, which can be estimated before the trade occurs, needs to be realistically achievable based on the size of the recent price waves. If it the target will require the price have a much bigger move than it has been producing that day, the trade is skipped.
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By Cory Mitchell, CMT