Adapting to Volatile Trading Days – November 7 Day Trades

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Adapting to Volatile Trading Days – November 7 Day Trades

Whether you trade forex, stocks or stock index binary options, there was a lot of movement on November 7 to capitalize on. Just prior to the start of the US session the ECB Interest Rate announcement sent the EUR/USD flying lower, dropping about 150 pips in 2 minutes, it then consolidated for a few minutes before dropping about another 75 pips.

The consolidation presented a trade following the news announcement. The sideways movement and lack of any aggressive buying pressure indicated that this was indeed a consolidation, and that there was likely still another wave lower. Given the size the first drop, the drop after the consolidation was likely to be much smaller though. Figure 1 shows the trade set-up.

Figure 1. EUR/USD 1-Minute Chart News Trade

Anytime there is a large price spike this approach can be used. There is a slight variation of this strategy specifically for the non-farm payroll report, but for most news releases or price spikes this strategy works well.

The strategy is only used when there is a sideways move following a strong price surge, as in Figure 1. In this case the consolidation took the form of a triangle. Since the initial drop was to the downside, watch for a break below the consolidation pattern, and when it occurs enter short.

The area to go short is marked with a checkmark just below the triangle. A stop is placed just above the recent high, producing 20 pips of risk in this example.

Use a 2:1 reward:risk ratio. Since the risk if 20 pips, the target is 40 pips from the entry price. Adjust slightly based on momentum as the price approaches your target, but your profit should be roughly two times or risk, or slightly more.

If the price surge was up, wait for the price to break above the consolidation and go long. Place a stop below a recent low and set your target at approximately two times your risk.

This was a profitable trade, the target marked with another checkmark.

The market then drifts sideways again, but this time breaks to the upside. There is no trade here since momentum has been overwhelmingly down and more confirmation is needed to go long against such a strong downtrend.

The price continues to rally setting up several long trades along the way throughout the European and US sessions. But with volatility having subsided a bit, the same strategy isn’t as effective; a new strategy needs to be implemented which takes advantage of the new conditions.

Based on strategy originally provided in Forex Day Trades -October 7 (and covered more in-depth in subsequent posts), the next trade occurs when the price pulls back to the lower band following a strong run to the upside.

Figure 2. EUR/USD Trend Trade

The long trade is taken at the outer band with an initial 3.5 pip stop and a Fibonacci expansion tool is used to establish profit target. Given the now strong movement to the upside, the first target is the 61.8 Fibonacci level, resulting in a more than 25 pip profit. This is a larger than normal profit for this strategy when using a one minute chart.

As the price is approaching the target area though, the price is much choppier compared to the prior run higher. Near the target, the price is gyrating, barely pushing past the former highs. This is a sign the upward momentum may be out of gas so no long trade and we allow the price to make a deeper pullback.

The price does indeed experience a deeper pullback and toward the right of the chart the price continues to consolidate inside the recent low and below the recent high.

The next compelling trade is another long. The price rallies to the same high as before–short-term momentum has re-aligned with the major uptrend which is now in play–then experiences a shallow pullback to the lower band. Buy at the lower band with a 3.5 pip stop.

Figure 3. EUR/USD Trend Trade into Resistance

Since the moves are smaller than they were before the Fibonacci tool projects the first target just above the former high. If this exit is taken the profit is 8 pips–more than twice the risk. This is actually a reasonable target since it is possible there is some strong resistance given that that area rejected (sent it lower) the price only an hour before.

But the price does break through, and if you were patient, you could have taken profit at the next Fibonacci level, taking home a 15 pip profit.

More volatility ensued and more trends. A highly lucrative day for a trader who stayed focused. Yet trading in volatility can take a mental toll. Despite the opportunities, if you feel tired or mentally fatigued after trading days like these, don’t push yourself. Take a break, because without focus the losses can rack up just as quickly as the profits.

How to Find Consistently Volatile Stocks for Day Trading (Video Tutorial)

Do this once to find a handful of volatile stocks you can day trade throughout the week. The whole process takes about 20 minutes, and your homework is done for the week. No more researching for volatile day trading stocks every day, such as flipping through new highs and lows or a biggest movers list. By watching a handful of these stocks you always have big moves to day trade…especially in the mornings, which is when day traders should be most active anyway.

In the video below, I show you how to find volatile day trading stocks which are likely to see big percentage movements each day over the course of the next week, based on average historic volatility.

This is the method I use to update the Day Trading Stocks Picks each week (the picks include some stocks found using a different method as well).

Watch, learn, enjoy. Resources mentioned in the video are discussed below.

Resources For Finding Volatile Stocks

Volatile day trading stock picks are based on the method(s) described in the video, screened for on

Reasons I like this screening method is covered in Consistent High Volatility Stock Screen For Day Traders. Here is a sample screen/filter you can copy and paste into

show stocks where the average day range (100) is above 4.5%
and Price is between $5 and $150
and Average volume (30) is greater than 4000000
and exchange is not amex
add column Average Volume (30)
add column Average Day Range (30)

What this filter is asking the research engine to do is find stocks that typically move at least 4.5% per day. That’s quite a bit of movement. We are also asking the research to only produce stocks that have a 100 day over 4.5%. So the stocks that show up on this list likely didn’t just move a bunch one day…they tend to move a lot every day. If they have moved, on average, over 4.5% for 100 days, they will probably move a fair bit this week as well. Then next week will run the filter again.

The price filter gets rid of penny stocks, which I don’t like, but you can adjust this filter to find stocks in a price range you like.

The volume criteria make sure that the stock has ample volume for us to trade. On lower-priced stocks often 2 million is enough volume. As the price increases, typically we will want more volume to keep the spreads tight and be able to get in and out with ease. I typically like to trade stocks with 4 million or more in average volume.

The criterion “exchange is not amex” excludes ETFs from the results. If you want to include ETFs, delete this line of code.

The add column functions show us how much the average volume and volatility is over the last 30 days.

If you’re a do-it-yourself type person, and like to look for stocks that are moving a lot each day, look into a Finviz Elite subscription. Use it to see what’s moving in the pre-market and during the day, see what stocks are gapping, and run technical filters for stocks breaking out of chart patterns. This is for people who don’t like waiting around for trades, and instead like actively seeking out trades all day long.

Volatile Stock Day Trading Strategies

The above screening method doesn’t tell us how to trade or which direction these stocks are moving. The screen/filter just tells us that these are the stocks that consistently move a lot. As for how to trade, for that we need a trading strategy. For strategies that work well with these types of stocks, see:

Day trading volatile stocks isn’t for everyone. Have a plan for how you will trade them, and test out your strategies before trading with real capital. Slippage is possible in these stocks. This isn’t an endorsement for the stocks that show up on the list. Pick a handful that move in a way you like, then trade them all week. Run a new scan each week. Typically I find the same stocks stay on the list week after week…which is a good thing because it shows the scan is producing consistently volatile stocks.

This method is just one option for finding volatile stocks for day trading if you don’t want to be constantly researching.

Cory Mitchell, CMT

Follow me on Twitter @corymitc and check out our Facebook page.

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Referenced Symbols

The long day-trading drought has ended as the U.S. stock market’s intraday volatility has soared in the past several weeks.

For example, on Monday the S&P 500 SPX, +0.00% moved in a 79-point intraday range between 2,554 and 2,633. Although no one can predict how long this volatile stretch will continue, as a strategy, day trading has been working. Day traders’ big advantage over buy-and-hold investors is that they don’t care if the market goes up (it’s possible there will be one final blow-off top), or down (almost every rally has recently failed and the S&P 500 is below its key 200-day moving average).

As long as there is volatility, day traders may generate profits. Nevertheless, just because day trading strategies are working right now doesn’t mean you should quit your job or even use this strategy. That’s what many traders did in the 1990s, and it didn’t end well.

For those interested in day trading, consider the following:

1. Start small: The No. 1 rule is to start small. Whether you are day trading stocks, options, or exchange-traded funds, if you are a beginner, start with no more than 100 shares of stock or one or two options contracts. This way you can make every potential mistake using as little money as possible. It can take years to learn how to be a consistent trader. Your tuition is the money you will likely lose as you learn how to manage risk. Remember, most day traders lose money at first, which is why you want to keep losses small.

2. Trade for real, not practice: I no longer believe in using practice accounts. Practice accounts are not realistic if you want to feel the pain of loss and the thrill of making real profits. By trading small, (say $1,000), you will experience real emotions without severe financial damage when you’re wrong.

3. Be selective: If you have less than $25,000 in your account, you are limited to making only three day trades during each five business day period in a margin account (contact your brokerage for specific rules). Once you make that fourth round-trip day trade, you will be designated as a “pattern day trader” and must put $25,000 in the account to continue trading.

This is a good rule. Beginners will learn to make more selective trades, rather than buying and selling dozens of times a day. If you’re that good of a trader, you will eventually be able to build your account past the $25,000 threshold even if you’re starting with $5,000.

“ Never trade more than what you can afford to lose. ”

4. Don’t be overconfident: The biggest danger to most day traders is overconfidence. Often, day traders make 5%, 10%, 20% on their money in one day. So instead of trading small, many traders bet big on the next trade, perhaps using margin (not recommended for most traders) — and instead of making the big score, they blow up their account. Never trade more than what you can afford to lose. Once you cross over from disciplined trading to gambling, you will likely lose money, perhaps all of it.

5. Be emotionless: The best traders are often the most unemotional. When you think you are a genius (as many long-term investors thought a month ago), you could give back your profits. Here’s a hint: After I make a huge profit, I stop trading for the rest of the day, and perhaps even the next few days. If you feel giddy or too eager to make a trade, that’s a clue to stop trading.

6. Keep a trading diary: If you want to be an educated trader, keep a trading diary. In this diary you will write all of your mistakes and what you learned. By writing it on paper, you will eventually find strategies that work for you, indicators that will keep you on the right side of the market, and rules that will help you cut losses when wrong and increase gains when right.

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7. Concentrate: Beginner day traders underestimate the concentration needed when day trading. Although you don’t have to sit in front of the computer and trade all day, when you do have an open position, you must watch it like a hawk or you may lose money. Speaking from experience, in the past I had large open positions, went to lunch, and when I returned I had lost thousands of dollars. If you cannot watch your open positions closely, don’t trade.

8. Trade only one or two stocks: You do not need to trade or even watch dozens of stocks every day. If you are starting out, focus on trading only one or two stocks or indexes. Popular index-tracking ETFs are good choices, such as SPDR S&P 500 ETF Trust SPY, 0.00 , SPDR Dow Jones Industrial Average ETF Trust DIA, -0.18% , iShares Russell 2000 ETF IWM, -0.32% , or PowerShares QQQ Trust QQQ, +0.04% . Or you can choose one or two stocks and learn their trading personalities. The more stocks you trade, the more confusing it gets when the market turns on you.

“ Aim for hitting singles, not home runs. ”

9. Be content with small profits: Another huge problem for day traders is greed. Instead of being satisfied with a $100 or $200 daily gain, they fret over the money they could have made. At first, your goal is to be a disciplined and consistent trader. Aim for hitting singles, not home runs. Learn to book profits quickly, almost always before the end of the day, if not before noon.

10. Don’t trade every day: You do not have to trade every day. On the days when intraday volatility is low, day trading strategies may not work. Eventually, after the next correction or bear market is over, volatility will get crushed once again. That’s when you may have to reduce day trading strategies and primarily use buy and hold. Meanwhile, strike while the iron is hot, because day-trading’s day in the sun won’t last forever.

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