How to Generate Day Trading Signals in a Swing Trading Context
There are a number of approaches we can take to generating day trading signals, and every trader hoping to excel as one of the trading world’s elite should evaluate each of them. Whether scalping, trading sudden news shocks, or using technical analysis, becoming a successful day trader will require you to find a method in keeping with your personality – using your strengths and protecting you from your own weaknesses.
One general method which many have found a profitable means of generating useable day trading signals involves looking for appropriate stocks which are setting up strongly for a longer term swing trade. Such an approach addresses the initial requirement of a day trading system: identifying the stocks you will be buying and selling through the trading day. Given the fact that there are well over 10,000 issues to potentially choose from, this is a critical first step.
For instance, at the time I am writing this, finding extremes in short period RSI readings is all the rage with swing traders. There are minor variations on the theme, but in general a swing trading signal is generated when a stock that is trending upward hits a sudden downdraft, resulting in an extreme reading in a two or three period RSI.
There are different schools of thought around entering this sort of a long swing trade – entering on the close of the first down day, entering upon even further decline in price, entering when the price goes above the prior day’s high, and so on. But day traders can focus on these kinds of stocks for intraday strategies, too. Let’s look at an example of how we could start putting together a trading strategy, using low RSI stocks as our starting point. The following entry/exit rules are for long trades, but can be flipped for short trading.
Stock trading above 100 SMA, and closes with RSI(2) at or below 5 on previous day.
Stock should open at, or below previous day’s close.
Trading chart set for 15 minute bars. No trades taken prior to 9:45 EST.
At 9:45 EST place a buy stop just above the the first 15-min bar’s high.
If stock’s price declines without triggering buy stop, move the buy stop to the next 15-min bar high. Continue trailing down until buy is triggered.
Once buy stop has been triggered, trail a protective stop just under the two bar low.
If protective stop is not triggered, close position at end of trading session.
[Note: this set of buy/sell rules is just a rough beginning and is presented as an educational tool. Do NOT use this as presented in live trading without first evaluating its applicability to your trading style.]
Because the swing trade set up has a well documented trading edge, the day trader can use this simple time-based breakout system with some reasonable expectation of a significant move in his/her favor. At the same time, the fairly tight stop will protect the day trader from out-of-control losses which can fluch him right out of the game.