*A review of technical day trading techniques and a GBP short trade I entered this week*
In this blog I am continuing on with the theme of short duration, high impact day trading techniques. The main reason for reducing duration is to remove prolonged exposure to the levels of volatility and market “chop” that is currently visible across a lot of FX currency pairs, Indices and Commodities.
Let’s start by looking at some of the techniques I use to analyse the FX currency markets for potential day trade positions. Grab a pen and paper and take notes.
Day trading techniques.
The first thing I look for is a tradable market structure. I am not interested in trading a choppy and indecisive market with no directional bias or trend. I want to see price making strong moves in a direction with an easily visible trend forming or already formed.
The 2 charts below show an example of a choppy market and a trending market.
As you can see, the choppy structure shows a lot more volatility and wild swings in price with no clear direction made. From the start of the chart (left hand side) to the end of the chart, price almost ends up flat whilst in between it has made erratic swings of more than 220pips.
The trending structure chart is much more precise, it has a directional bias (bullish) and the waves of the trend are visible and easy to spot. These are my optimal trading conditions.
The key parts to a good day trade position entry.
I look for the following key points of analysis when finding a suitable day trade position entry. It is best to find as many of these as possible when analysing the charts but I always advocate that traders should keep things simple. So don’t get carried away and stick to the basics of price action and technical trading.
- Find a trending market and plan to trade with the trade.
- Buy low and sell high. Buy in to bullish trends and sell bearish trends.
- Look for zones of support and resistance to assist your position entry.
- Don’t be greedy. Taking 2x or 3x ROI on a quick trade is perfectly acceptable.
Trending markets can be found using a few methods. The first and most obvious is to use your eyes and your brain and look at the waves forming in the markets. Higher highs and higher lows with price climbing over time is a bullish trend and the opposite is a bearish trend. You can also use trendlines and EMA alignment for this.
Once you have found a potential trending market you need to make the conscious decision to not be an idiot and buy a bearish trend or sell a bullish trend. This may sound obvious but a lot of people still make this mistake when trading the markets.
The charts below show 2 trends and the best trade entries depending on each scenario.
As you can see, lower highs and lower lows continue to make the basic bearish trend. The EMA’s are also aligned in a bearish fashion to suggest that the sellers have the overall strength. Shorting this trend is the sensible thing to do and these potential trade entries are shown with black arrows on the chart.
The chart above shows a bullish trend on the same timeframe and same FX currency pair. The principles of trading this are the same but you want to be buying the dips (higher lows) rather than selling the pullbacks in to lower highs. In this example you can also see how a simple trendline works in identifying a trend.
Support & resistance zones.
Okay, so you have found a potential financial instrument to trade because it is forming a bearish trending market structure and today is the day. You can see price is pulling back and climbing and potentially forming a lower high, what can you look for next in order to improve your chances of entering a successful short trade position?
A price resistance zone.
I use a number of technical indicators to find potential price support and resistance zones when looking to day trade the financial markets.
The main one is the daily pivot level. This is a commonly used technical indicator and uses open and close prices of the previous trading day to determine where price is likely to react and “pivot” at in the current trading day. If price is approaching the daily pivot level from below in a bearish trending market then I like to look for rejections before shorting the market.
The same theory applies to trading the daily pivot level in a bullish trending market. If price is retracing back down to the daily pivot level from above then it can be used for entering long positions. The chart below shows an example of this occurring.
Another method of identifying daily support/resistance price zones is to use the fibonacci retracement tool to find the retracement levels on the current bullish or bearish wave. This can work well but I sometimes find that on day trades, the gaps between the retracement levels can be very narrow so they tend to lose their accuracy/effectiveness.
I also often like to just use my own eyes to identify support and resistance zones on the charts. This takes practice as it is more discretionary compared to using technical indicators but it can work very well. I know of many day traders that identify their own daily/intraday support and resistance zones with great success. The chart below shows an example of this.
GBPUSD day trade example.
I will now show you my most recent day trade position on the GBPUSD FX currency pair that was entered and closed this week.
- Trade Entered: 6th April 2020 @ 10:00am
- Stop Loss: 50 pips
- Target Profit: 123 pips
- Final Return: 2.46R
- Total Duration: 13 hours
My entry for this trade was a combination of using a previous price support zone that was broken and now being retested as resistance. Price was rejecting the zone nicely with multiple candles failing to close above it. The trend was also definitely bearish with a lower low and now possible lower high being made along with the 50EMA being below the 200EMA to show a bearish alignment.
Price was near the daily pivot level and trying to close below it. I entered my short position on the close of a fairly strong bearish candle with a stop loss placed conservatively above the price resistance zone. This is important! I do not advocate high risk/aggressive trade entries because there is no need. Even with a stop loss of 50 pips, this trade had a potential reward:risk ratio of 2.46R. This is perfect acceptable for a short duration “day trade”.
I was targeting a new lower low to be made. I placed my final profit target at the daily support 1 level which is another benefit of using the daily pivot levels technical indicator. There was potential for price to go lower than this but that is not a given fact and the probability was low.
Price did not initially sell-off from my entry and instead continued to retest the resistance zone and stayed relatively flat through the afternoon trading session. Eventually enough momentum came in to the market to take price right down to my profit target and even slightly beyond.
It actually turned out that I was in a GBP short position on the right side of the shock fundamentals of the evening when it was announced that British prime minister Boris Johnson was taken to intensive care with Covid-19. I do not tend to flash trade market fundamentals like that but I was already in the correct position to benefit from such terrible news.
Get well soon Boris!
So there we have it, I hope some or all of you have learnt something from this blog post. Trading can be difficult when the financial markets are acting like they are at the moment and that is why it is even more important to pick your trades, take your profit and don’t be too greedy.
As always, keep it simple and build up a good reasoning for entering a trade using multiple points of analysis. If you aren’t sure then don’t trade! There will be plenty more opportunities to come.
If you have any questions about trading the financial markets, technical analysis or life itself then feel free to message me on here or through Instagram.
All my technical analysis is done using the TradingView platform. You can get access via the link below.
My preferred broker of choice is IC Markets. Low spreads and trading costs really help long term profitability. A link to their site is below.
FTMO Trader Funding Programme.
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DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.