HighProbability Daytrading

07/24/09 09:00:12 AM

by Donald W. Pendergast, Jr.

Daytrading can be fun and profitable, if you get to know the characteristics of the markets you desire to trade on an intraday basis.

Security: ESU9, .SPX, SPY
Position: N/A

I made an intraday trade on Tuesday, July 21, 2009. The market I traded was the September 2009 S&P 500 emini futures contract (ESU9) and the time frame chosen for the trade was three minutes, using a simple bar chart, a pair of moving averages, and an intraday pivot grid, one designed to locate probable areas of support and resistance. Although no trader can ever be sure how a trade setup will turn out, the manner in which this trade pattern developed made me realize that this was a high-probability scalp trade, one worth risking a modest amount of points on.

FIGURE 1: S&P 500 SEPT 2009 EMINI, THREE-MINUTE. Three simple technical tools (moving averages, pivot points, and money flow), combined with an eye to identify high-probability patterns, resulted in this quick profit in a scalp trade.

Graphic provided by: Interactive Brokers TWS 3-minute chart.

Check out the chart in Figure 1; nothing very fancy at all. A pair of key moving averages, the 20- and 50-period exponential moving averages (EMAs), are used to identify short- and intermediate-term trends, while the horizontal lines (pivot points) are utilized to identify likely support/resistance zones. Finally, to round out the technicals, I employed one of the most vital tools available to traders, the Chaikin money flow indicator (CMF) (21), which can be seen at the bottom of the chart.

These three technical tools, when combined with an eye trained to see repetitive chart patterns and/or trade setups, can allow a daytrader to home in on promising, low-risk trades with a reasonably high degree of accuracy. Of course, there are a few other considerations to take into account before actually placing a trade, so let's review the setup.

During Tuesday's session, the September 2009 S&P 500 emini opened at 947.00 before managing a two-thrust swing move toward 952.00, after which prices drifted steadily lower throughout the morning. The first support pivot (the horizontal red line labeled "S1") did provide support near 941.00, setting the stage for a weak bounce back up toward 944.00, still shy of the daily pivot point (gold horizontal line labeled "PP"). The contract fluctuated in a narrow range just above S1 for the next hour or so before finally staging a breakdown through the support level. No doubt many eyes were watching for S1 to break, causing some shorts to pile in, hoping that a prime short-selling opportunity had just been handed to them. Alas, they may have failed to note the bullish money flow divergence that was already under way (see gold markers on chart) and the fact that the tick, TRIN, and advance/decline numbers in the NYSE were all failing to confirm a valid short-selling setup. So the short setup failed, prices began to reverse and, as they did, we got a convergence indication of the 20- and 50-period EMAs, helping to confirm the newly formed platform or consolidation pattern that began about 10:20 PT.

Platforms occurring after a major reversal (on any time frame) like this, particularly when the higher time frames (30 minutes, 60 minutes, and daily) are already in a bullish trend can be the start of what is known as a continuation pattern. What that means is that once the consolidation plays out (duration, as always, unknown), in most cases the stock or commodity in question will continue to move higher as it breaks above the upper boundary of the pattern.

Knowing all these factors to be in place, I waited for a pullback toward the 20-period EMA, initiating a long trade at 942.50 with a target of 943.50 (the previous high within the consolidation pattern). To limit risk, a stop-loss was placed at 941.25. Eight minutes later, my profit target was reached and the trade was closed out for a one-point gain.

Those familiar with today's price swings might wonder why I didn't just stay long for the rest of the session; after all, the S&P 500 emini ran all the way back up to close near 953.50 just a few hours later. I had indeed identified a very profitable continuation pattern, but the fact is that my trading plan was to simply go for a scalp trade with a small, super-high probability of success. I honored my simple trading plan and was rewarded with success. It would have been nice to ride out the trade for an 11-point gain ($550), but the probabilities of that occurring were much smaller than that of securing profits on a quick "in-and-out" scalp. And again, that wasn't my trading plan anyway, so there was no need to mourn over the loss of potential profits or to play the "woulda shoulda coulda" game or other kinds of futile second-guessing or even outcome-based kinds of evaluations.

Learn to read your charts, the same way you scan the sports stats in the morning paper, training your eyes to identify and categorize different types of trade setups that appear time and time again, and then perhaps you can also start to cash in on the intraday swings, reversals, and trend moves in the stocks and futures that you follow. It's well worth the investment of time and patience that is required.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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HighProbability Daytrading

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