PRICE ACTION PATTERN #1: DBLHC

PRICE ACTION PATTERN #1: DBLHC

• The DBLHC stands for Double Bar Low Higher Close and it is a bullish chart pattern which means you should be looking for this pattern in an uptrend market.
• How do you spot this pattern? Well, look for 2 bars that have lows that are on the same price level or  within 2 pips of each other, but the 2nd bar must have a close that is higher than that of first bar.
• How do you trade the DBLHC pattern?  You can buy at market order as soon as 2nd bar closes or place a pending buy stop order just 2-3 pips above the high of the 2nd candlestick.
• For your stop loss, place it 2-5 pips below the low of the 2nd candlestick in the pattern.

#1 Day Trading Breakout

No matter if the market is trending or aimlessly floating sideways, there will always be breakouts in the morning.  A breakout is defined when a stock gaps up or down on high volume first thing on the open.  These types of moves are almost always related to a news event.

Tata Motors

Day Trading Breakout Rules

1. Stock gaps up or down on high volume.
2. Wait for a trading range to develop between 9:30 and 9:50.
3. Buy or sell short the breakout of the morning range high/low sometime between 9:50 am and 10:10 am.
4. Have a predetermined profit target for your position.  Your profit target should be in alignment with the volatility of the stock.
5. You must have a stop loss order.  My personal stop is a maximum of 2% and I look to exit trades if they are not profitable once the 11 am time strikes.

You may be thinking what's up with the time references?  Day trading is fast, so you only have a set amount of time to capitalize on each trade.  At 11 am the number of participants in the market drops off dramatically and you will find it very difficult to trade breakouts.  So, get in and out in a hurry; time is not on your side.

Trader Profile - Day Trading Breakout

1. Expects quick returns
2. Perceives volatility as their friend
3. Able to make trading decisions in a matter of seconds
4. Less concerned with riding the trend and more attracted to making quick profits before the trend reverses course

Day Trading Setups – 6 Classic Formations

Day Trading Setups – 6 Classic Formations

Day trading is all about getting in a rhythm.  Over time you will begin to identify day trading setups that consistently work for your trading style.

Whether you have a high win ratio or the average winning profit runs much greater than your losers, you just need to come out ahead.

Your trading style is what makes your market experience unique from everyone else's.  This is where your background, fears, and beliefs all converge in how you view the market.  No matter how good the system or the day trading setups placed right before your eyes, if the system is counter to how you view the world, you will not make money.

One of the most popular trading systems of all-times is the Turtle Trading system.  The Turtles, as they have been affectionately called, were able to make 100s of millions of dollars trading commodities.  That's right folks, 100s of millions of dollars, but did you know that some of the trainees in the program were let go.  Even though these folks received the same training as the other Turtles, some could not grasp the concept of allowing their profits to run.  It's never about the system; it's about you the trader.

In this article we will cover 6 classic day trading setups you can use to trade the markets.  When I say classic, it means these setups would have worked in the 1980s and will continue to work well into the 2030s.

As you study each day trading setup, it's important to remember you must find the one that matches your trading style the most, in order to have success.

#1 Day Trading Breakout

No matter if the market is trending or aimlessly floating sideways, there will always be breakouts in the morning.  A breakout is defined when a stock gaps up or down on high volume first thing on the open.  These types of moves are almost always related to a news event.

Day Trading Breakout Rules

1. Stock gaps up or down on high volume.
2. Wait for a trading range to develop between 9:30 and 9:50.
3. Buy or sell short the breakout of the morning range high/low sometime between 9:50 am and 10:10 am.
4. Have a predetermined profit target for your position.  Your profit target should be in alignment with the volatility of the stock.
5. You must have a stop loss order.  My personal stop is a maximum of 2% and I look to exit trades if they are not profitable once the 11 am time strikes.

You may be thinking what's up with the time references?  Day trading is fast, so you only have a set amount of time to capitalize on each trade.  At 11 am the number of participants in the market drops off dramatically and you will find it very difficult to trade breakouts.  So, get in and out in a hurry; time is not on your side.

Trader Profile - Day Trading Breakout

1. Expects quick returns
2. Perceives volatility as their friend
3. Able to make trading decisions in a matter of seconds
4. Less concerned with riding the trend and more attracted to making quick profits before the trend reverses course

#2 Fade the Breakout

Your ability to accurately pre-screen a breakout will determine how often the stock will continue in the direction of the primary trend.  I have been able to successfully introduce the concept of volatility into my trading system which has greatly increased my overall win rate.

If you are just buying and selling any and every breakout, then your success rate will likely land around 50%.  So, the takeaway from this statistic is there are just as many failing breakouts as ones that will continue trending.

I'm a firm believer you should profit off of the failed breakout attempts as well.

Fade the breakout rules

1. Stock gaps up or down on high volume.
2. Wait for a trading range to develop between 9:30 and 9:45.
3. If the stock gaps up, the first 15-minute range high cannot be breached.  Conversely, if the stock gaps down, the first 15-minute range low cannot be breached.
4. Buy or sell the break of the trading range between 9:45 and 10:10 in the opposite direction of the gap.
5. The profit target is the closure of the gap.
6. Stop loss is below the high or low of the morning range, depending on the direction of the gap.

Trader Profile - Fade the breakout

1. Expects quick returns
2. Perceives Volatility as their friend
3. Able to make trading decisions in a matter of seconds
4. Enjoys the idea of going counter to the trend
5. Loves to punish other traders that jump in a trade too soon

#3 Trading Ranges

Believe it or not, there are trading ranges that can develop intraday.  It's hard for people to think of day trading in terms of ranges, because most people assume day trading is some wild man's game with flashing lights bouncing off the screen.

I personally could not make money trading ranges.  It's not that ranges don't work; they just didn't work for me.  The slowness of the moves and the fact I had to trade with larger sums of money to achieve the same profits made me uneasy.  I would close trades well before they had time to develop. You may not have these issues, so review the trading range rules and see if you have found a match for your trading style.

Trading Ranges Rules

1. Stocks volume should be light compared to the morning's trading volume.
2. Identify a discernible high low range between 9:30 am and 11:00 am.  This may not always correlate to the high low of the day; just make sure you have identified the primary range.
3. Range should be a minimum of 1% from high to low.  This will give you enough profit to cover commissions and the inherit risk that comes with any trade.
4. Open new positions between 11:00 am and 2:00 pm.
5. Buy the low of the range and sell the high of the range.
6. Profit target is again the high and low of the range.
7. Stop Loss is relative to the size of the range.  A rule of thumb is you do not want to see the range exceeded by .20% of its value.  So, if a range is 2%, you do not want to see the stock move out of the range by more than .4%.

Trader Profile - Ranges

1. Slow to react
2. Likes to perform thorough analysis over the course of a few minutes to a few hours
3. Views volatility as unwanted risk
4. Seeks to limit risk by placing tight stops
5. Gravitates towards a clear trading channel versus sloping lines and other geometric shapes
6. Is okay with placing multiple trades for the same stock

#4 Late Day Breakout

At the end of the day around 2 pm the volatility picks up again in the market.  This is where traders return from lunch and are looking to enter or close positions in preparation for the next trading day.  This is a great trading opportunity for active traders as the high low ranges set earlier in the day are breached.

Again, I only trade the mornings, largely because I will over trade if given the opportunity, but if you are a volatility trader after 2 pm is when you can get back into the game.

Late Day Breakout Rules

1. The stock exceeds the morning range with an increase in volume after 2 pm.
2. The stock is able to clear the range by .2%.
3. Profit target is the size of the move that preceded the trading range.
4. Stop loss is the middle of the range.  This would imply the stock failed on the breakout attempt and is now falling back inside of the range from the morning.

Trader Profile - Late Day Breakout

1. Slow to react
2. Likes to perform thorough analysis over the course of a few minutes to a few hours
3. Likes volatility
4. Enjoys riding the trend into the close

#5 Trading the Flag

A flag is a classic technical analysis pattern that predates anyone reading this article.  If you are unfamiliar with the pattern it's a sloping rectangular formation that occurs after a strong move.  The primary characteristics of the formation are an increase in volume with a sharp price move.  The stock then begins to consolidate in a range pattern that goes counter to the trend and volume completely dries up.

While I do not trade flags, I do like the fact the formation is soundly based on price and volume principles.

Flag Rules

1. Stock needs to breakout with high volume
2. A sloping rectangular range will develop with a minimum of 4 candlesticks
3. Open new positions on a breakout above or below the range
4. The profit target is the same length of the move that preceded the flag formation
5. Stops should be placed below the low of the range if going long and above the high of the range if going short

Trader Profile - Flags

1. Less concerned with a particular time of day and more focused on trading the setup
2. Likes to see a number of inside bars and consolidation patterns before a continuation move
3. Enjoys riding the primary trend to profits, regardless if this takes a few minutes or a few hours
4. Only looking to trade a stock once, in order to reap the rewards of the next major move

# 6 Triangles

I trade the Wyckoff method which calls for parallel trend channels and stays away from the head and shoulders patterns, diamond formations, and other complicated chart formations.  However, I would be re-missed if I did not touch on the concept of ascending and descending triangles. Like the flag formation an ascending or descending triangle will develop after a strong move in a stock.  The part of the triangle formation I like the most is that the reactions are smaller and smaller each failed attempt at the breakout level.

Funny enough when a trade goes against me, the ascending or descending triangle is the one formation that you can literally feel pulling away at your life.  If you are short, the stock fails at the high of the day, so you immediately feel relieved as the stock backs away.  This flash of hope is replaced by fear as the stock quickly turns back up again and does not break the previous low of the day.  This process goes on and on, for what feels like ages, and by the time the stock finally breaks out, you already knew you were toast two hours into the formation.

Triangle Rules

1. Stock needs to have a strong move with price and volume
2. Once a high or low is set, each reaction from that swing point should become more shallow
3. Buy or sell short the break of the daily range
4. Place your stop below the last swing reaction if long and above the last swing if short
5. Profit target is the length of the move that preceded the triangle formation

Trading Profile - Triangles

1. Less concerned with a particular time of day and more focused on trading the setup
2. Likes to see a number of inside bars and consolidation patterns on a chart
3. Enjoys riding the primary trend to profits, regardless if this takes a few minutes or a few hours
4. Only looking to trade a stock once, in order to reap the rewards of the next major move

Summary of Day Trading Setups

In this article we covered 6 classic day trading setups.  I could have easily highlighted another dozen or so; but that would only expose one of the main problems confronting active traders.

There are just too many opportunities present in the market on any given day.

Your job is not to trade everything, but only trade a limited few. Remember, it only takes mastery of one day trading setup to make consistent profits in the market.

Do you have an idea of what type of day trading setup you should be trading?  If not, or if you are looking to refine your current trading methodology, try out our trading simulator built by and for active traders.  Learn to trade in a risk free environment before placing your hard earned money in the market.

Good luck trading,

READING PRICE ACTION WITH BOLLINGER BANDS

Price action trading is more than just price patterns like Engulfing candlesticks and Head & Shoulders. Price action traders often overlook a crucial aspect: the volatility of price. How much the market moves is as important as how the market moves.

In this concise guide, you will learn how to include volatility in your price action analysis. The tool we will use is the Bollinger Bands.

As you can see below, Bollinger Bands are elegant lines driven by price fluctuations.

• Middle Band Line = N-period simple moving average (SMA)
• Upper Band Line = N-period SMA + (N-period standard deviation of price x 2)
• Lower Band Line= N-period SMA – (N-period standard deviation of price x 2)

The standard value for N is 20.

Bollinger Bands create an envelope around a moving average of price. And the width of the envelope depends on the price volatility. Bollinger Bands expand and contract according to the standard deviation of past price action.

Hence, the Bollinger Bands help you to read price action in the context of its recent volatility. In a nutshell, its interaction with price reveals valuable trading information.

Have you been watching the dance between the market and the Bollinger Bands? If you have, you would’ve noticed the following scenarios:

1. Price bars tagging the Bollinger Bands and reversing
2. Consecutive price bars pushing against the Bollinger Bands
3. A price bar forming entirely beyond the Bollinger Bands

Let’s take a closer look at each scenario. Here, you’ll learn how each situation ties in with different trading strategies.

SCENARIO 1: PRICE BARS TAGGING THE BOLLINGER BANDS AND REVERSING

The market is moving sideways. It confirms a lack of volatility. And the market is trapped within a trading range.

This market is ideal for scalpers who are aiming for small profits.

A basic strategy is to buy with a limit order as price hits the Lower Band Line. Aim for the Upper Band Line for a high probability trade. (The reverse works for a bearish trade.)

The Gimmee Bar setup is an excellent example of using the Bollinger Bands to profit in a sideways market.

You can enhance its performance by looking for reasons to support a sideways market. E.g., Just before the release of significant economic data, the market tends to move sideways. During that pre-release period, consider taking quick trades by fading moves within the Bollinger Bands.

SCENARIO 2: CONSECUTIVE PRICE BARS PUSHING AGAINST THE BOLLINGER BANDS

Continuous price bars pushing against the Bollinger Bands show a powerful breakout. It confirms market strength. It tells you not to fight the trend unless you want to trade contrarian.

This occurrence comes along with an expansion of the Bands. It is normal to see this after a price breakout. If you are riding on the surging price swing, you’re in for a rewarding ride.

You can attempt to join the breakout by entering the market when it breaks out of the Bollinger Bands. The most straightforward way is to buy when price breaks out of the Upper Bollinger Band Line. Or, like the chart above, you can sell when price breaks out of the Lower Bollinger Band Line.

In a sideways market, this trading method might lead to many whipsaws. Hence, for a safer entry, consider waiting for a price bar to close beyond the Bands before entering.

For more examples of using Bollinger Bands for breakouts, look at this trading strategy. It uses the MACD and the Bollinger Bands with a shorter period to find breakout trades.

SCENARIO 3: A PRICE BAR FORMING ENTIRELY BEYOND THE BOLLINGER BANDS

John Bollinger designed the Bands to contain most price action under normal market circumstances. Hence, an outlier bar completely beyond the Bands is rare.

This formation is also unsustainable. Price cannot stay beyond the Bollinger Bands for long. It will soon snap back within the Bollinger Bands. This snapback reaction will take the form of a reversal or retracement.

Thus, if you are a reversal trader, you should pay attention to this scenario. When you see an outlier bar above the Bollinger Bands, consider a bearish reversal trade. In the same vein, an outlier bar below the Bollinger Bands suggests a bullish reversal setup.

As with any other trend reversal signal, you should not give it too much weight in isolation.Take a reversal setup only if you find supporting signals.

For instance, look for a volume surge that implies a weak market ready to reverse. In fact, many cases of price leaping beyond the Bollinger Bands are also exhaustion gaps. Hence, you can apply the same rules of analysis you use for trading exhaustion gaps.

This unusual formation is not just helpful for trading reversals. It is also an excellent tool for profit-taking.

Let’s say you’ve managed to catch a bullish breakout and are in a long position. An outlier bar above the Bollinger Bands gives you a strong reason to take your profits.

Even if the market does not reverse, it is likely to move sideways. Hence, even if you think that the market will not reverse, it’s wise to exit the market with an outlier bar. After that, you can usually re-enter at a better price.

CONCLUSION: READING PRICE ACTION WITH BOLLINGER BANDS

The traditional price action framework uses support & resistance and price swings for context. As a result, price volatility is often ignored.

But with Bollinger Bands, you can recover this neglected aspect in your price analysis. You can read price action within the context of its past volatility. In the hands of a skilled trader, this simple envelope adds depth to price action analysis.

(For another volatility-based price envelope, check out the Keltner Bands. It is like the Bollinger Bands. However, it uses average true range instead of standard deviation as the volatility measure.)

TRADING PULLBACKS USING TREND LINES AND PRICE CHANNELS

If you ask a group of price action traders about their favourite tool, one of the top answers will be trend lines. Trend lines and price channels are the best tools for amplifying the power of price action.

In this article, you will learn a powerful pullback trading strategy. It is a simple approach using nothing but trend lines and channels.

INTRODUCING THE TRADING TOOLS

But before that, let us recap on the trading tools: trend lines and price channels.

IMPORTANT: The explanations below are for bullish price action. Invert the rules for their bearish equivalents.

TOOL #1: THE TREND LINE

HOW TO DRAW A TREND LINE

1. Choose two pivots lows. (Make sure that the second pivot low is higher than the first.)
2. Connect the two points with a straight line.
3. Project the line to the right.

HOW TO USE A TREND LINE

When unbroken, it acts as a price support.

When broken decisively, it flips and serves as a price resistance.

Remember, these rules apply to a bullish trend line that is sloping upwards.

TOOL #2: THE CHANNEL

A channel is a natural extension of a trend line. You must know how to draw a trend line well before you can master the channel.

HOW TO DRAW A CHANNEL

1. Draw a line that is parallel to the trend line. This line is the channel trend line.
2. Recall that a trend line is drawn with two swing lows. Find the highest swing high between the two swing lows. This swing high is the anchor point.
3. Now, affix the start of the channel trend line to the anchor point.

Together with the trend line, you’ve got yourself a price channel.

HOW TO USE A CHANNEL

In theory, the channel is supposed to contain price action.

When the market exceeds the channel, it is likely to be repelled back into the channel.

THE PULLBACK STRATEGY

Now, let’s apply these tools using a standard pullback strategy template.

1. Define the market bias with a trend line.
2. Identify an overextended pullback with an opposing price channel.
3. Time the trade entry with the confluence of the trend line and the opposing channel trend line.

Refer to the chart examples below to see this strategy in action.

EXAMPLE #1 – BAC DAILY CHART

1. These are the two pivot lows used to draw the bullish trend line. This trend line tracked the bullish market bias.

2. These two pivot highs formed the basis of the orange bear channel.

3. When price hit the bear channel trend line, it was a signal that the pullback was about to end.

4. The bounce off both the bull trend line and the bear price channel was a result of solid market support. It was the ideal long entry.

You might find it hard to see the price action details in this example. But the scale of this chart is needed to show the market context. It’s important to know that the pullback took place in the setting of a steady bull trend.

EXAMPLE #2 – 6E FUTURES (EUR/USD) 30-MIN CHART

Let’s take a look at how this simple strategy works for intraday time frames too.

1. With these two pivot highs, we drew a bear trend line.

2. An opposing bull channel was drawn with these two pivot lows.

3. Both the bear trend line and the bullish channel trend line resisted the pullback. It was an excellent short trading setup.

Look closely at both examples. You will notice that both charts showed double bounces off the channel trend line. Such mini double top/bottom formations are common in setups featuring complex pullbacks.

TRADING STRATEGY NOTES

This pullback strategy is a minimalist trading method with great potential.

First, the trend line forces you to pay attention to the trend and price action.

Then, the price channel helps you to find steep pullbacks against the trend. These high angle pullbacks tend to fail spectacularly and lead us into the best trades.

But there is a common pitfall. Traders often get confused because they are not sure how to select the swing pivots. They also lack a clear set of rules for drawing the trend lines and channels. So you must figure that out first.

Learn a fixed method to identify pivots, trend line, and channels. Then, make an effort to stay consistent. Don’t look back in time and try to adjust your trend lines after the trade.

Take care of this aspect, and you can safely make the most out of this trading strategy.

In the examples here, I’m using the trend line and channel techniques taught in the Day Trading With Price Action Course. You need not use the same methods. Instead of chasing after the best trend line drawing method, remember that consistency is more important.

STRATEGY NOTES FOR THE DAY TRADING WITH PRICE ACTION COURSE

In these examples, we drew the trend lines using valid pivots as taught in the course. For consistency, it’s a rule you should stick to.

As for the opposing channels, it’s perfectly okay to draw them with basic pivots. It’s a tweak to find more setups. (That’s what we did in Example #2. It explains why the pullback in Example #2 is less complex than the one in Example #1.)

After all, we are fading the opposing channels. So, it makes sense to use the less significant basic pivots to draw them.