Another successful strategy I use to day trade is very similar to the one used in Part One. However, this strategy uses different indicators to lead the decision making in the trade. Recently, I successfully utilized this strategy when trading Jones Soda (JSDA). Jones was having a breakout, over a few days, and the volume was significantly higher than average. Most of this was attributed to the shorts getting squeezed early and the bulls running hard for a few days. The two constants in this trading strategy, when compared to the other strategy, are high volume and the stock being positive on the day. Without those two, I am very likely to pass immediately on the chart.
This strategy uses the ADX and MACD indicators, first and foremost, to determine when to jump in and get out of the stock. If you notice the second day on the two-day chart (chart below), from 12pm to 1pm Eastern, the ADX indicator was bearish. This is determined by the red line above the green line. The yellow line is the ADX line that shows the strength of the trend. A line trending over 40 is considered to be relatively strong and higher is obviously stronger. When the ADX is under 25, this is a weak trend that will be volatile until a strong trend develops.
During this hour, the price rode the bottom Bollinger Band south until the ADX line started to show the trend was changing. The MACD went flat, than positive, which is a buy signal. Around the same time, the CMF (15) confirmed the buyers coming in. The A/D line never fell intraday, showing that the buyers are likely to continue for another trend north. When following the ADX and MACD indicators, you must confirm the buy signals with other indicators as there is a fair chance of a fake signal. A fake signal could get you in trouble if you don’t notice it right away.
So, after the MACD and CMF (15) went bullish, I waited on the ADX trend to show more weakness, indicating a new trend could take place. Some traders will wait until the green line crosses the red line to the north, before buying. However, I feel that puts us in a position of buying too late. If other indicators show strength, I will initiate a trade right before the ADX signals buy and watch closely to make sure the ADX does stay on that current path.
To further confirm this was a good entry point, the RSI was in oversold territory. This indicates much upside potential when combined with other indicators stating a bullish trend is about to take place. Last, on my list, was a quick peek at the Level 2 Quotes to confirm strength in bids and resistance levels. I noticed some rather significant bids coming in, which were three times the size of any resistance level, therefore I initiated the trade under $2.
Shortly thereafter, the ADX indicator signaled buy and the stock lifted over $2. The ADX indicator trended in a volatile range before the green bounced off the red line and trended higher. The ADX line started to trend north as well, which was a positive sign that the trend was strengthening. Soon after this, the MACD flattened out and showed signs a reversal was about to take place. The ADX indicator started to flatten out as well, which told me to sell some of my position around $2.20.
Later, I ended up trading JSDA some more and near the end of the day, it hit my stop loss for a small profit. I did not want to hold the stock overnight as I was fearful the shorts could take advantage of it or a general market selloff could negatively affect the stock. The next day, JSDA briefly rose before crashing and the shorts started to mount an offense. The lower volume has given the shorts a chance to win and this has prevented me from trading JSDA again. However, I’m keeping it on my watchlist for signs of another squeeze. With the new short ban in place, it gives long’s another advantage.
Now, you have two winning strategies to grow comfortable with and these can be molded to fit your personal style of trading. These strategies, when implemented correctly, will net you small yet quick gains, which add up over time. Again, only dedicate a portion of your portfolio to doing this in order to keep your risk low. Also, be sure to use stop losses to help prevent any significant pain if the stock tanks. You do not want to get stuck turning a trade into a long-term investment. Feel free to email me questions or join us in chat to discuss further. Good luck out there.
- None Found