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Two Day Trading Strategies You Haven't Tried


Yesterday's price action closely followed the template for two useful day trading concepts: opening range analysis and the "spike and climb" pattern.

While most of my futures trading could be classified as swing trading (holding positions from a few days to a few weeks), I still like to do some limited day trading in the e-mini (ES) S&P 500 (INDEXSP:.INX) futures contract and the SPDR S&P 500 ETF (NYSEARCA:SPY) when an opportunity looks strong.

The way I approach day trading is not the way I have seen most people approach it. I do not attempt to stare at a computer screen and decipher five-minute bar charts. I do not use an automated system and I am not even remotely equipped to do (or interested in doing) high-frequency trading.

So what is my basic approach? It is based upon a few different factors. First, it is an understanding (based upon my quantitative approaches and intuitive experience) of what the edge for the current trading day is. I then combine these signals with my studies (and judgment) on how price action tends to develop during the first two hours of the day given the existing larger picture setup.

To break it down further, it would look like this:
  1. An assessment of the overall market environment. I have labels for different market environments that alter my expectations of how different approaches will (or will not!) perform. I document part of how I think about these issues in my recent Active Trader Magazine article.
  2. The markets swing their positions based upon the prior day's close. This is a price pattern concept that usually uses no more than five days of trading data. Examples of this can be found here and here.
  3. Where the market opens relative to yesterday's close and the prior day's high and low. I have found this information to be very significant for intraday trading.
  4. How the first five to 30 minutes of the day play out. I call this opening range analysis, and I have found it to be very significant. An example of this can be found here.
Why focus on the morning session for day trades? As is documented in the chart below, the morning session is typically where the most volume and volatility exists on any given trading day. I don't want to be in there thinking I can slug it out against the market's toughest competitors all day long. I only want to make a day trade when I think the big institutions are going to dog pile in one direction. To me, the only point of a day trade is to either "catch a ride" during the most volatile time period of the trading day.

Let me give an example from today of how the pieces come together. Look at the following chart.

Click to enlarge

I decided to write this article because yesterday's price action closely followed the template for two different day trading concepts that I use: opening range analysis (which usually sets up after a significant gap like we had yesterday) and what I have labeled the "spike and climb" pattern. The "spike and climb" is basically a "fake-out" type move against a dominant trend that sets up a squeeze move higher later in the day. After the move down, volatility compresses and price begins to slowly grind higher. This is very uncomfortable for shorts, who often like to initiate short positions on the open when they think the market is overbought. As the day progresses, they see their morning session profit slowly start to erode away. As price works higher, it starts to "pop" above prior highs, and frequently ends up accelerating and blowing the rest of the shorts out of their positions. This is a good intraday pattern to look for when the macro environment is bullish. If you study the preceding chart, you can see how this basic pattern unfolds over the course of the trading day.

The "spike and climb" pattern is based upon my own experience of being short and "trapped" on the wrong side of the market. I took those experiences and was able to add my own analytical perspective, which now helps me to identify new opportunities and avoid bad trades.
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