Introduction to daytrading methods: knowing when to buy and when to sell

• In daytrading, you should get as many things stacked in your favor as possible prior to entering a trade. We will go through a "checklist" of things to look for that you should memorize and practice paying attention to prior to buying stock. It's a balance: you can't wait til "all the planets line up" or you'll be buying the obvious top, where faster traders are selling to you. If you enter without having any of these things in your favor you are increasing your risk, however.
• It's helpful to evaluate trade risk management and entry/exits like a funnel, with broader market dynamics considered first (naz/spoos up or down?), the sector you're playing considered second (eg $SOX, $GIN), your stock's 5-day trend support/resistance levels considered third, and finally level 2 & time and sales momentum, volume, RSI, MACD and other technical chart patterns & indicators for your specific stock considered lastly. Don't buy stock if the overall market's tanking, it may take level 2 a brief time to 'catch up'. Anticipate larger market direction first, then use level 2 to time your entries, exits and trade sizes.

• Get your trading rig set up at least an hour before the market opens. Turn on CNBC & get some coffee.
• Read the online headlines on CBS Marketwatch.com and ZD news, others if you want. Put a few of the "Stocks to Watch Today" in your software watchlist if they meet our general trading criteria.
• Also look at these two 'big picture' considerations to help you "prepare for battle":

This is CRITICAL to look at if you're going to be trading during the first ten minutes of the market open. How far has a stock gapped in either direction premarket, and on what kind of volume? If CSCO has gapped down 2 1/4 points premarket due to a bad news story, how do you play it? Probably buy the gap down on open if buyers start to come in.

If EGRP gaps up +3 1/8 to 37 on positive earnings news premarket, how will you play it? Probably short it on the market's open, if you think it will sell off due to profit taking.

A final note: Make Sure to keep an eye on your stock premarket using the island java book and Level 2 (if you have it). If I have a rare overnight hold, I will frequently sell it off at 8:30-9:15 on ISLD before the market opens if I'm up with a decent profit.

In general, I usually sell into the opening momentum and wait til 10-10:30 to buy stocks.

Ding ding. Ok, the market's open. There's several distinct "trading waves" in the first half hour of the market open, from 9:30 thru 10:00. In time, you'll be able to 'feel' the momentum of these waves based on buying and selling momentum, pace and volume.

You should almost never buy an opening gap up; there is a favorite market maker trick called the "gap and trap"; designed to lure in traders who think a stock is hot and headed up. Eg NOVL closed at 28 5/8 the day before, now it opens at 30 1/4 and ticks up to 30 1/2 by 9:35am. Do you buy? Heck NO. Not unless you see higher highs and higher lows sustained for a few minutes on higher-than-average volume.

Wait for an initial pullback to buy any stock on the open, to see how deep the pullback is. If it continues all buyers, then you might want to jump on board. It will usually, however, sell off as market makers who have shorted it on open will continue selling until daytraders start panicking out of their positions.

9:30 - 9:40ish: The first market action occurs: a rush of buying or selling. You should be following the overall Nasdaq composite index at this time very carefully. See my 4-monitor trading screen setup; on the far right the two large black indexes are the $COMPQ and the $TRINQ. I always look at these first before, during and after I trade stocks. I also watch sector index charts, like the $SOX and $GIN.

9:40-9:50: The first reaction wave occurs; either the trend continues or starts to reverse from its initial direction. Pay close attention here.

9:50-10:15 2nd 'wave' (note these aren't exact times; the main thing to remember is that the market will frequently change direction several times in the first hour of the trading day, from 9:30-10:30). Be sure your trades are on the right side of the composite trend.

10:15 - 11:30 This is a time where I trade most of my positions (60%). My daytrades are rarely longer than a half-hour each, unless the stock is on a steady climb up.

11:30 - 1:30 "Deadzone Hours": Play with caution. Usually I will short a top that's starting to weaken during the low-volume, dangerous lunch hours. This is the time where stock usually stays flat or declines. I usually sit out the lunch zone.

1:30 - 3:00 Another trade window, somewhat less volatile than the morning, I make around 10% of my trades during this time.

3:00 Bond Markets Close: Look for sell/buy programs to kick in.

3:00-4:00 Final hour to trade for the day; the second-best time to trade stocks. I may do around 30% of my trading during this timeframe. Hint: stocks usually continue their opening pattern during this time (if it trended up in the first 2 hours, stayed flat/down over lunch, it will probably trend up during the last hour as well). The only exception is if a stock has been downtrending all day, in which case short covers may cause a small "cover rally" in the last half hour. These can be profitable and explosive plays; I've frequently seen stocks gain back 2-5% in 30 minutes here.

Intraday Trading Tips Area #1:

How would you daytrade in the next 15 minutes, based on these two charts?

Above you see a screensnap of the Nasdaq composite index and $trinq for a recent day:

Note the $TRINQ went all the way to 1.45 before having a sharp reversal, when the Nasdaq composite started up. The $TRINQ is now consolidating and headed upwards, which corresponds to a downtrend in the Nasdaq index for now. Use the two in combination.

We'll get into daytrading chart patterns and TA in a later lesson. For now, here's a profitable chart combination I use all the time:

• Nasdaq Composite Index 1-minute close line chart
• Nasdaq TRIN 1-minute close line chart: the $TRINQ is a great contrary indicator for the Nasdaq; I use it in conjunction w/$PREM, $TYX, SP9 and the leading indicators to confirm market direction, pivots and trend reversals.
• Pro Daytrading Tip: In general, I am hesitant to buy stock long if the $TRINQ is >1.0 and am looking to go short when the $TRINQ is >1.20 (or, I'm looking for 'when will it bounce?').. If the $TRINQ is under 1.0 I am much more comfortable in taking a long position, and am aggressively looking to buy stocks if the $TRINQ is <.60.
• Many traders also use the spoos/naz futures/$PREM/$TYX as leading indicators.
• We will look at how to use realtime NASDAQ and S&P Futures in your daytrading in a later module.

This is a bullish level 2 screen; eg many buyers at 17 7/16 and not many sellers. You should Buy Limit Bid 17 7/16 to join the ISLD buyers, or buy Limit at 17 15/32 to front run the current inside bid.

Note the green sell (2nd inside ask) band is paper-thin with only 2 mm's at 100 each, where there's a lot of heavyweight mm's bidding 10 deep. Again, level 2 must be the last thing you look at, also consider chart trends and market direction.

This is a bearish level 2 screen, notice how many sellers (a wall of sellers) to go thru at 24 1/8 on SBUX. Also notice how thin the support levels are on the bid side, only 1-2 market makers at each of the next 4 spreads.

Buying here is a no-no; it's unlikely all the sellers will step off the 24 1/8 ask and let the price go up. This is the advantage Level 2 provides, you can see how deep the buyers vs sellers really are.