An Introduction to Day Trading

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Conceptually they are the same but when you get into the exact details and the trading execution of these details, a few things stand out: The size of the gap in stocks is very important. In trading ETF Gaps, the size of the gap does not make much of a difference in the overall returns.

In stocks they do and we devote an entire section to it. The size of the limit order to buy or short a gap needs to be significantly larger in trading gaps in stocks than in trading gaps in ETFs. He found they had statistical edges. A few years later in after Larry published his research, day trading with short-term price patterns download unknown at that time commodities trader by the name of Toby Crabel wrote a book titled Day Trading with Short Term Price Patterns and Opening Range Breakout.

In his book, Crabel looked at many different price patterns, including gaps, and showed the historical returns from these patterns. When the book was published, I devoured it. I day trading with short-term price patterns download still working for Donaldson Lufkin and Jenrette DLJ at the time and was making my way towards my goal of trading for myself. At that time there were few credible trading books and even fewer which backed their strategies with quantified results. He statistically showed what many of us saw — pattern recognition worked and he had the statistics to prove it.

Crabel went on to build one of the largest Commodity Trading Advisor CTA firms in the world with consistent low volatility returns for the past two decades using this research as his base. Both like to focus on trading on the opposite side of the crowd, both view risk management as a key role towards success, and day trading with short-term price patterns download importantly both are incredibly disciplined in making sure that their research is backed by strong statistical test results.

What you will see, just as Larry Williams and Toby Crabel saw over two decades ago in the commodities markets, is that Gap Reversals hold true in the stock market. There is strong statistical evidence that Gap Reversals is an excellent strategy that traders should seriously consider. We looked at higher gaps and lower gaps.

We did this on hundreds of liquid stocks every stock which traded on average at least 1, shares for the past 21 trading days. If you would like to continue reading How to Trade High Probability Stock Gaps — 2nd Edition you can download the guidebook for free here to learn how to identify the best stock gap setups every single day, including how to day trading with short-term price patterns download optimal entry levels and where and when to exit your positions.

At Connors Research, we are using it as an overlay to many of our best strategies to make them even better -- now you can, too. Larry Connors has over 30 years in the financial markets industry. For over 15 years, Larry Connors and now Connors Research has provided the highest-quality, data-driven research on trading for individual investors, hedge funds, proprietary trading firms, and bank trading desks around the world.

The Connors Group, Inc.

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I'm always on a look out for simple strategies that my students can apply to day trading with short term price patterns and indicators. One of the easiest patterns to learn and one of the first ones I teach traders is the U turn strategy. The reason I call the strategy U turn is because it's a very fast reversal pattern that works wonders with volatile stocks, futures, currencies and commodities.

The U Turn pattern is a short 1 day reversal away from the main trend. When the pattern is setting up it looks like the market is suddenly breaking out in the opposite direction from the trend. However, as the day continues the market quickly changes direction and closes back in line with the main trend. You can see in this example how the stock gaps down against the trend and appears to be heading down. As the day continues buyers come into the market who notice that the stock is substantially lower than its fair value and momentum going in the direction of the trend soon follows.

This is a very short term trade that's designed to take advantage of stocks and other markets that are temporarily out of balance. You need to move quickly when you see this type of pattern because they don't last very long. Make sure the breakaway gap day closes near the upper 20 percent of the trading day. The next day is entry day and this is the most important time because this strategy moves fast and you want to make sure you don't miss the momentum coming into the market.

The entry point is above the high that was made on the signal bar which is the gap down bar. The best trades get filled at or near the opening bell so you probably want to place a buy stop order a few ticks above the gap day high price. This way your trade will be filled automatically when the market trades above the gap high day.

One Important word of caution, do not take signals that occur after the first 2 hours of the trading day. This is a day trade so you want to make sure you have plenty of time for the trade to develop and achieve some degree of profit.

Don't limit yourself and your opportunities by day trading too late in the day when there is less profit potential and less time for trades to develop. You can see in this example the entire sequence from beginning to end.

Don't forget to cancel your entry stop order if you are not filled during the first two hours of the trading session.

Often times traders forget to cancel their open orders and get filled accidentally, prevent costly mistakes and keep track of all your open orders.

Moreover, don't forget to place your stop loss order immediately after your fill is confirmed. The stop loss level is placed a few ticks below the signal day low price and the profit target is MOC or market on close. This way you get the most opportunity to profit from this position without having to hold it overnight. Keep in mind that you need a strong trending market for this set up to work. I always look for trend lines that slope above 20 percent either up or down.

There are several indicators that you can learn about on Marketgeeks. Always remember to trade with the trend, especially set ups that require momentum in the direction of the trend such as this one.

The stock pulls away from the trend and appears like it's breaking down for a short period of time. Quickly the stock reverses as buying comes in and closes near the upper range of the trading day. This is the type of set up you should be looking for on your daily charts after the close each day. Set ups like this one are ways to take advantage of temporary inefficiencies in the market. Some traders watch the market and enter orders manually when their entry conditions are met while others enter stop orders and get filled automatically.

For beginners I recommend entering stop orders and for experienced traders I recommend watching the market and doing it manually. If you do enter entry stop orders make sure you cancel them if they are not filled during the first two hours of the trading day. Here is the final view of the same chart we just saw but using daily charts instead of intra day charts.

I always use daily charts first and then once I isolate the pattern I move to intra day charts. For stocks I prefer to use 15 minute bar charts and for E-mini Futures and Forex I use 5 minute charts.

The U Turn Strategy is a short term deviation from the main trend. The set up occur quickly and disappear just as quick so you have to find them and take advantage of them as soon as they appear. Use either stop orders or market orders to enter the trade and never ever enter this type of trade if the entry has not been triggered during the first two hours of the trading day.

Hold the position till the end of the trading day and monitor the position using 15 minute charts if you are trading stocks. The U Turn Strategy is one of the best short term trading strategies for quick profits and easy management. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice.

Information for any trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information.

By downloading this book your information may be shared with our educational partners. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.

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