Technical analysis and day trading for beginners

10 tips for a successful start to your journey

I have been a long term/value investor for the first 12 years after finishing my Master’s Degree. I used to evaluate companies based on their earnings, cash flow, debt, growth and many other metrics before deciding to invest. I was looking for a positive return, but I did not focus on the current price, but rather on analysts’ price projections based on future income and so on. This strategy has worked very well in most cases, as I was adding more capital once my stock’s price was dropping and selling the extra shares when it was trending higher. It thought this was the proper, smart way of investing in the stock market, and I thought that this suits me just fine. 

In the past few years, I have discovered a completely new approach that is currently the predominant strategy that I employ for my investments, namely technical analysis. I always thought that technical analysis is only used by mathematicians or extremely sophisticated investors. I did a few courses online and started reading some books on the subject. I quickly become amazed at how efficient this strategy can be if employed correctly. I soon started to develop my own style, using the strategies that I understood best and that were working for my type of investments. The next step was to apply it to my actual long term investments. At first I was reluctant to abandon some of my long term holdings when they broke technical levels, thinking that I was smarter than this, and that I would be right eventually. In parallel, I opened a paper trading account where I made investments based solely on technical analysis. Once I realized that my paper trading account was doing much better than my actual one, I started to use technical analysis as my main strategy for investments. 

A lot of investors refuse to use technical analysis because they believe it is way too complicated for them, and too time consuming. In this article I would like to share some tips for those of you embarking on this new route that made my life a lot simpler once I understood them. These are just the techniques I employ on a daily basis, that make my investments first of all safer, and, secondly,  offer a better return in the long term. 

1.The most important thing is to continue to do your due diligence. By this I mean, being informed about current events, reading your business news daily and understanding  important macro economic developments. After I complete my morning routine of news gathering, I start looking at the Asian and European markets to get a feel about the overall market before the US one opens. Usually, if Asia and Europe are up more than 0.5-1% you can expect a strong start for US markets as well. Knowing how the market opens is vital in preparing your day trading strategies based on technical analysis.

2. At the beginning, I traded only stocks that I knew well from my previous investments. For example I started using technical analysis for most stocks in the tech sector that I was comfortable with such as $AAPL, $FB, $AMZN, $GOOGL, $TSLA. 

3. Before the market opens at 4:30ET, I look at the charts of 10-20 stocks and see how they have been trading in the past 6 months. I use Trandingview (which is free). For technical indicators  I start with these 4: 8EMA, 21 EMA, 50EMA, 200EMA. EMA refers to exponential moving average. I check which stocks are above the moving averages. A stock that is trading above the 8&21EMA has strong momentum and is looking for higher prices. A stock below the 8&21EMA has lost momentum can therefore be initially dismissed. 

4. After I map out my stocks, I check how the overall market has been trading in the past 6 months. For this you can look at the S&P for the entire market and the $QQQ ETF for the tech sector. 

5. I usually wait for the first 15 minutes after the market opens before making a trade. In this time,I look closely at the S&P and other indices to see if we are trending higher, meaning making higher highs and higher lows; or if we are going lower, making a new lower low. Once I get a feeling about the general direction in the first 15 minutes,I check my individual stocks. For example, if you chose $AAPL and it is currently +0.3% and the $QQQ ETF is 0.2% it means that is has some relative strength compared to the overall market. If all your stocks are from the same sector see which one is up more compared to the others and the overall market. 

6. I open a new position once I can confidently see that the respective stock is currently above the moving averages, is showing relative strength compared to the sector and its peers and that it is making higher lows on the daily chart. If I am looking just for a day trade (exiting the position by the end of the market) I put in a stop loss price at the recent low of the day. If I am looking to keep this position for longer, I put the stop around the 8EMA on the chart. 

7. One important lesson at the beginning is not to overtrade. Wait for the right set-up, and trade only when one presents itself.

8. One of the best set-ups that I enjoy trading is when the markets open lower, and I am looking to initiate positions in the stocks that have been the strongest in the previous days. This is a high probability trade, meaning that if the market recovers during the day, those stocks will be the first to go green, generating a nice profit.

9. There are 2 chart patterns that I recommend mastering: the Day1 (see figure 1) and bull flag pattern (See figure 2). The Day1 refers to a big green candle with huge volume which pushed the stock from below its moving averages above them. I usually add once the stock is above at least one of the EMAs and once again at the end of the market if the stock finishes close to its highs. A Day1 pattern usually means that sellers have been forced to cover and this in turn leads to continuation the following day if all variables remain the same. The bull flag is another great pattern that offers good returns. After a strong Day1, some stocks do not continue the second day but rather consolidate either up small or down small compared to yesterday’s close. After a few such days of consolidation, if the market continues to trend higher, you can expect a new leg up. I prefer to add during this days to my position as I am waiting for the breakout rally. The risk here is limited, using as a stop the halfway point between the high and the low of the Day 1 candle. 

10. Use a tier system. I generally buy in 3 stages. In the first stage, let’s say I buy 100 shares of a stock if it is looking to breakout from a zone, or if it has a strong Day 1. During the bull flag consolidation period I add another 100 shares, and start selling only once the breakout occurs. If the period of consolidation is longer, I might do a third tier, but will sell quicker on the way up to book the profits.

11. Use stop loss for all your trades. This can save you a lot of money. If you use stops you avoid a catastrophe as the market can reverse quickly and leave you without the capital to continue the next day. Having stops and accepting that the trade did not work lets you fight another day when the set-up will work. Having small losses than a big gusher is the safer way to trading. At the same time, book profits and sell most of your position on a day 4 up, or if the stock is very extended from the moving averages.  (See figure 1)

Spread the love

Leave a Reply

Your email address will not be published.

Suport Us

Personal Info

Donation Total: $10.00