Day Trading Fundamentals

If you want profits in a single day, and do not want to wait it out for your investments to grow in the market, day trading is a viable option, given that you have significant hours to spend doing research and practicing your trading strategy in advance.

To Day Trade you would need the following :
1. your internet connection has good speed
2. if there is a connection failure at any point you have a backup broker over the phone to assist you
3. a reliable online trading platform
4. a trading platform that has the best plans in terms of trade execution charges(transaction fees). Opt for a firm that will give you the best transaction fee and the most user friendly online software, and charts as well.
5. You have access to real time market data, i.e. no delay in the relay of market data
6. Access to real time charts and stochastic tools
7. A spread sheet application to keep track of the losses and profits you made over a day

Once you have access to the above, you may first need to build your strategy for day trading and test it with filters and regressive cases to make sure that your strategy works in most scenarios.

To build your day trading strategy you will need access to pivot points, MACD, slow and fast stochastic charts, and volume indicators. In addition you may also need to be aware of news triggers and the overall direction of the market, and the time of the day, as most stocks have greater movement in the first half of the day, although this is a trend that is sometimes overpowered by market news and sudden unexpected triggers.

Pivot Points and their significance in everyday trading

Pivot point is a price level that is calculated for a stock based on its previous days open, close, high and low price. It is basically an average of these prices and helps to predict where the price will more likely be for the day, given no other factors of involvement. If the market, or if the stock itself is bearish, the prices are more likely to be below the pivot point and if the prices are bullish, they are more likely to be above the pivot point.

Pivot points have associated price levels as well, that are referred to as support and resistance levels. On a bullish day, a stock price is highly capable of reaching these support levels or even cross them, depending on the volume and the bulls. On a bearish day, to the contrary, the prices are likely to reach these resistance levels, and once a resistance level is broken, it signals bearish movement.
Support levels are S1, S2, S3 and resistance levels are at R1, R2, R3. Online pivot calculators are available that help calculate the pivot point for a particular stock based on the previous days prices.

I am providing a link below of the 5-day intra-day chart of the SPDR Gold Trust in Wikipedia, that illustrates how pivot points might be helpful in determining entry and exit points for inter-day as well as intra-day trades. http://en.wikipedia.org/wiki/Pivot_point (see the Trading Tool section)

If you analyse the chart more carefully, you will observe the following:
On the first day, the market is directionless, and hence the prices fluctuate more or less around the pivot point. Even though the price tries to reach the first resistance level, it is immediately pulled back, and keeps hovering near the pivot point for the rest of the day. This indicates that the support is not strong enough.
On the second day, it starts near the second support level, indicating, that it is going to remain bearish for the rest of the day.
Note on the fourth day, that even though the stock price falls very close to the pivot point, it is not able to break it and go below it or reach it, indicating a bullish trend ahead. When it crosses the first resistance level, this is further confirmed. If the point at which this happens is used in conjunction with candlestick patterns, it will be even easier to identify the entry and exit points during the five day chart referred to here.

In my next post I will try to illustrate how pivot points when used in conjunction with Fibonacci numbers can act as a helpful tool to determine entry and exit point for trades.

Fibonacci Numbers and their Significance in Trading

A lot of the times, when the market is moving at its terrific speed, we are unsure whether the price we are buying or selling at is correct, and if the price of the stock will go further up from here and vice-versa. Since we are not sure of the point of the change in trend, we often either BUY and SELL too late, or BUY and SELL too early. Fibonacci numbers help us at these points to determine what could be the highest range the stock may reach for the day and vice versa.

Fibonacci tools unlike a lot of the other tools in the market are not trailing indicators but leading indicators.

Fibonacci tools allow you to track retracements and extensions. So what exactly is a Fibonacci retracement? A Fibonacci retracement is based on the fact that Stocks will often pull back or retrace a percentage of the previous move before reversing their direction.

Fibonacci retracement is created by taking two extreme points on a chart and dividing the vertical distance between the two by the key Fibonacci ratios. 0.0% is considered to be the start of the retracement, while 100.0% is a complete reversal to the original move. Once these levels are identified, horizontal lines are drawn and used to identify possible resistance and support levels.Fibonacci retracements often occur at the following levels: 23.6%, 38.2%, 50%, 61.8%, 100%.

Even though Fibonacci retracements work best over a longer time-period they can be pretty useful for getting into short term trades as well, when used along with MACD and stochastic oscillators.

Here is a snapshot for LNKD chart which mainly had a downtrend yesterday. For the second wave in the day, the high is at 231.29 and the low is at 227.59 which gives an approximate retracement of 50% at 229.42 and retracement of 61.8% at 229.85%. Since this was a downtrend, the retracements were pulled down before they could reach the 61.8%, indicating a further downtrend in the day. If you notice the next high is at 229.64.

So here even though it is a single day chart, the Fibonacci retracement still helps to more or less predict at which point one should sell, to reduce their losses during a downtrend.

Now lets us look at FB which was on an uptrend yesterday.

It's first high for the day was 54.46, and the subsequent low was 53.77 which gives an approximate retracement of 54.29 at 76.4% and 54.19 at 61.8%. The next  subsequent highs were 54.16 and 54.24 which were just below the 76.4% and 61.8% mark indicating that even though it was in an uptrend, it was not strong enough to cross these marks, and hence starting on a downtrend with the next high not able to cross 54.16 again.


So here even though it is a single day chart, the Fibonacci retracement still helps to more or less predict at which point one should sell in a single day trade, to reduce their losses during a downtrend.

Stocks to watch Today

ADT: has been upgraded to outperform, given a target of $44-49. It is most likely to open high today, however, if you can buy the stock at a range of anywhere between $40 to $42 it is great BUY.

LNKD: has been recently upgraded, and considering that Chinese market has performed so well today, this stock is likely to go up today

CASY: will most likely cross the 75.44 median target today and cross the previous high of 76.21. However this should be short term buy as the upside is not that high for the time being. They are announcing their Q3 earnings today

FCE-A: was recently upgraded, and has an earnings report today. Most likely to go up.

Others : ALOG, STZ, CSCO

Notes:
CSCO(Cicsco): has shown significant volume in the pre-market today
AEO: has been upgraded today to BUY
GIL: has been upgraded today to BUY
KRFT: has been upgraded to a BUY
VLO: has been upgraded to BUY
MPC: has been upgraded to a BUY
PL: upgraded to a BUY
MHK: upgraded to a BUY

Stocks to Buy Today

I had listed three stocks to follow out yesterday : ZOOM, ADAT and ICLDW

ZOOM reported third quarter losses yesterday morning, and therefore it was better to stay away from this stock. However, if you have invested in this stock, I would suggest a Sell.

Since the overall US market was weak yesterday, both ADAT and ICLDW fell as well.

So here is my Rule No. #1 : always follow News, and if the overall market is falling wait before you invest in any stock. It is sometimes good to wait and watch the market before you make your move, and yesterday was just one of those days.

Festive seasons like Christmas means more investing by consumers on Groceries and travel, and Retail in general. It is therefore the Retail sector that steals the show during this period. Dec and Jan are therefore a good time to watch Retail stocks. Also, noteworthy is the point that since Retailers sell more in this period, they will post better earnings report in the first quarter of the year.

Since all other sectors have little momentum during the holiday season, it is my favourite Oil & Gas sector that investors turn their attention to during this season. Hence the other sector that needs to be followed closely now is the Energy and Oil and Gas sector.

Some of the stocks worth watching in the Retail sector are :

Cabella(CAB) : has been recently upgraded to a BUY, and will probably see some upward movement today, a good one to invest if you are planning to make a quick buck. Make sure to get out of it within the week.

American Eagle Outfitters (AEO) : the earnings report is due 6th Dec, however the projected growth estimates for this stock are stagnant for the next few months, and hence I would not be interested. It is probably a good BUY in the long run if you are interested to invest now and wait for a year, to see if the stock goes up. However you will most probably get a better BUY somewhere near its next earnings report, so I would suggest to wait for the time being.

Now moving to the Oil & Gas sector :

MPC: everything is in favour including the recent upgrade to a BUY. Looks like a good BUY at this point.

OK, so we do consider earnings report and recent Upgrades and Downgrades in determining which stocks to invest in. How earnings and upgrades/downgrades can affect the movement of a stocks price, and how technical analysis can help us to determine at what point this movement will happen, I will try to cover in my next post.

Till then, Happy Learning and Happy Market Watching!

Stocks to buy Today : roadway to developing your own trading strategies

We have discussed Candlesticks and certain simple strategies in my previous posts. I am now going to discuss some of my trading strategies using examples, that help identify the stocks that I watch for the day. Once I have established the rules for identifying the stocks that I watch, I will explain further on the simple strategies that I use for the same. Below are a list of stocks that I will be looking at today and I will later follow up with another brief later to explain the strategies used. So here is the list :

ZOOM : has risen quite a bit in the premarket hours, and has positive news over the last few days. The stock will be a good buy at the previous close price, however it should be considered a short term investment of a day or two, and my advice would be to lock in the profits within the week. The mean and median target prices are 8, so I would ideally sell it before it reaches 8, at around 7.8. So for an investment of let's say $3000 I could make around $600 if I am lucky! Lets see.

ICLDW : need to keep a watch, as it has already reached it's high in last two weeks of November. A second peak could be possible.

ADAT: is a buy as well, it has recently reported profits and is a very cheap stock. However, the target currently is $2, which means that it has a significant upper curve in the next few days.


Now that we have listed a few stocks that we have sorted out to watch for the day. we will revisit them, after the market opens, and follow up with strategies used to oversee these stocks.

Tools for Trading successfully : Candlesticks

The term Technical analysis in Finance is primarily used in context to tools which are helpful in forecasting the future prices of a stock. These tools have been used by traders for hundreds of years and date back to the 17th and 18th century. So how can technical analysis be helpful to a current day novice trader? The answer lies in the power of these tools to predict patterns, and help avoid common mistakes and pitfalls, that starter traders so always commit.

Candlesticks are one of the easiest to follow and helpful tools that one can use in day to day trading. However they are more useful in context to day trading, and often do not provide enough support to forecast long term movements. However on days when news is against a stock, and you have discovered other trends that indicate that the stock might be going downhill in the near future, it is best to exit from your trade while making substantial profits. It is at these crucial moments that candlesticks can provide helpful exit points to make your sell. Candlesticks have coloured patterns to depict when the stock is bullish, and when the stock is bearish. However, in addition to these indications, candlesticks also have patterns like a an upper shadow or a lower shadow and of course the length of the candlestick itself which can suggest which direction the stock will most likely be taking in the next few minutes. For ex if you see the diagram below

A strong lower shadow in the shape of a hammer suggests that the stock is most likely to go down from this point. An exit at this point can be contemplated, based on a few other indications from some other very handy tools. Smart Trading often involves going to and forth between these indicators in a few seconds and make a decision to exit or stay in your trade. Don’t be jolted by the timeframe, once you get used to it, it is rather ok to use!

I will be providing further details on candlesticks and other frequently used Technical analysis tools in my future posts. Happy reading!