5 Minute Chart Magic

 

The Day Trading Setup

 

A simple day trading strategy that has a plan can make all the difference in the world to a new trader. I use this strategy in my own trading almost every day.  Trailing stop management and quick profit taking is an important skill to learn for any day trader.  This strategy can get faked out on volatility expansion, but losses are limited to the range and usually end up much smaller than the range after you get comfortable with the market you are trading.

The 5 Minute Chart Magic strategy is a momentum strategy that you can use starting 5 minutes after market open.  Giving the market a few minutes to stabilize after the open is important.

All you have to do is bracket the high and low in the first 5 minutes; then use that range plus previous high, low, open, and close to plan trades throughout the day.

The simplest form of this strategy is to buy breakouts of the range to the upside and to sell breakouts of the range to the downside.  Target is the width of the range or better with a stop at the opposite edge of the range.

 

TF 5 min breakout bar strategy – 5-10 points possible

 

YM was a little better for me , 5 min break out trade

 

As you can see the 5 Minute Chart Magic is a simple trading strategy with no fancy indicators.

 

Adding a very simple strategy to your toolbox can yield amazing results. Just having a plan to start with will help most people that start trading.  At stockguy22.com we want to help you grow as a trader to the point where you eventually don’t need us to point out trades to you.  These pages are here for that purpose.

We aren’t trying to sell you an indicator package or promise you a Lamborghini. What I can promise you is that you will have the chance to be a better trader because you joined our community.

 

Update: 8/20/2013

Trend days are their own sort of magic. I was skeptical at the open with the other indices selling. The /TF once again pulls through.

You notice that /ES and /YM both dropped below the 5 min range briefly. To avoid a loss on the reversal I usually trail stops to the opposite side of the previous candle.  If there is disagreement with one of more markets or volume is showing a reversal is building then I will take small profits on the trade or close it for breakeven.

What you don’t want to do is continually add to a losing trade. It will work a few times on occasion for day trading.  All it takes is a single trend day to wipe a small account when you add to losing trades.

 

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Update: 8/21/2013

Even on a  slow morning leading up to FOMC minutes; there was still plenty of opportunity for this very simple strategy. I took the first long, stopped out at BE, then waited.  The market felt weak, sold the range and took a nice profit.  Coming into the 2PM EST FOMC Minutes release I was flat, as I always am before scheduled market moving events.  I missed a little of of long off the low, but the afternoon fade more than made up for it.  Simply by using the range I was able to knock out 41 points on the day per contract.

It wasn’t only the range that helped me trade this day.  It was also my experience with previous FOMC days and the general behavior of the market after the announcement.  Remember that no strategy dictates the market, what you are doing with a strategy is fitting it to the market using probability.  The market will trade however it is trading that day and no lines, indicators, or chart magic will guide it.

Left to right, the powers of the market in the long term.

Fundamentals > Emotion > Technical Indicators

Short term price movements can be influenced by an indicator reading or emotional reaction to news or a certain price level.  However, fundamentals due to changes in the underlying economics of the market will always win in the long run.

 

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Stops

Let’s lay down some ground work for stops and define what stops are.

Stops try to prevent catastrophic losses.

Having stops is part of having a trading plan.  Stops prevent bad trades from running away with your account.

Stops help remove emotions.

Stops help you remove the ‘hope and pray’ trade.  If you are stopped, you are stopped.  End of trade.

Stops add complexity.  

If they are too optimized when the market changes, you will be stopped out for losses.  If they they are too wide, you will take larger losses that you have to.

Stops are an art more than a science.

Stops when used correctly help you get a feel for how the market is trading.  For example, is it a day that price is taking out stops and reversing?  If you are getting stopped out a lot, look at why you are getting stopped out.  Are you wrong?  Are you fighting the trend?  Are your stops too tight for volatility.

 

Using ATR to estimate potential volatility

Every platform should have ATR (Average True Range) as an indicator.

Developed by J. Welles Wilder, the Average True Range (ATR) is an indicator that measures volatility. As with most of his indicators, Wilder designed ATR with commodities and daily prices in mind. Commodities are frequently more volatile than stocks. They were are often subject to gaps and limit moves, which occur when a commodity opens up or down its maximum allowed move for the session. A volatility formula based only on the high-low range would fail to capture volatility from gap or limit moves. Wilder created Average True Range to capture this “missing” volatility. It is important to remember that ATR does not provide an indication of price direction, just volatility.

Wilder features ATR in his 1978 book, New Concepts in Technical Trading Systems . This book also includes the Parabolic SAR, RSI and the Directional Movement Concept (ADX). Despite being developed before the computer age, Wilder’s indicators have stood the test of time and remain extremely popular.

By determining what the ATR has been over the previous 2-3 weeks on a daily basis, you can determine if your stop is appropriate for not only your trade but for your account.  You should look at the ATR on a daily, and the timeframe you are trading, these will give you a clue as to what to expect from the price action.

If the volatility is larger than the amount you are going to risk per trade, then it is likely you will be stopped out much more than you should be.

 

Technical Analysis 

The assumptions that we make when using technical analysis are clear.

Technical analysis assumes the following:

  1. Market action discounts everything: Any outer influence on the market is reflected in price as soon as the market is aware of it.
  2. Prices move in trends: Price might move up, down, or sideways. Once a trend is established from random price movement, price is likely to continue in the direction of the trend until an external force opposes it.
  3. History tends to repeat itself: We will assume that traders will make similar decisions to what they made in the past, this is the basis for chart patterns.

Sounds pretty straight forward, right? It really is that easy; all these wondrous indicators and charts are all made from these 3 simple assumptions.

The truth is the market is much more complex, but by making a few basic assumptions we are able to reduce the amount of variables needed to analyze a trade.

 

This is a summary from articles from the Stockguy22.com Blog.

http://stockguy22.com/2012/09/27/thoughts/

http://stockguy22.com/2012/09/27/monkey-trades-woods/

http://stockguy22.com/2012/10/01/monkey-trades-stops-thoughts/

http://stockguy22.com/2012/10/06/review-primate-trades/