Simple Day Trading Strategies That Work In The Real World

During the last few months the staff at Market Geeks has been busy writing several articles about short term trading strategies. Since that time we received several requests for articles and videos about day trading strategies that work in the real world. Specifically, I was asked which of the strategies I discussed worked well for day trading stocks as well as futures contracts.

The Tail Gap Strategy

One of my favorite all around strategies and that includes day trading is the Tail Gap Strategy and today I will show you how to apply it to day trading stocks. If you dont remember the strategy or need a refresher you can download a copy of the strategy on our home page. In a nutshell the Tail Gap Strategy is a simple pullback strategy that involves a short deviation from the main trend. When applying the Tail Gap Strategy to day trading I want to see a gap against the direction of the main trend.

The pullback must make a 10 day price low and must have a gap between the high of the 10 day price low and the previous days low price. Since we are day trading and not holding positions overnight Im ok with the stock being in a trading range instead of trending strongly.

I will not trade against the trend no matter what time frame I choose to trade. Lets go through a few different examples so you can see how the pattern sets up as well as the rules necessary to trade it correctly. 

Make Sure There Is A Gap Between The High Of The Current Day And The Low Of The Previous Day

Once you identify the set up correctly you can place a buy stop order $0.02 cents above the high that was made on set up day. Make sure you place your buy stop before the next trading day. This set up often triggers immediately at the opening bell or a few minutes thereafter; to avoid having to watch the market second by second and risk being late to the game I recommend a simple buy stop order 10 to 15 minutes before the opening bell.

Once you place your order you should monitor the market or make sure your brokerage firm has a way to quickly notify you of your fill. There is a chance that the stock can drop quickly after you are filled; therefore its important for you to place your stop loss as quickly as possible to prevent the stock from dropping below your stop loss level before you have a chance to place your stop loss. After you place your protective stop loss order you should place your exit order. The exit is very simple and from testing several methods used in day trading stocks I find that market on close or MOC orders work especially well with this method.

Always Place Your Protective Stop Loss After Your Fill Is Confirmed

Day Trading Short Side

I want to demonstrate that the method works equally well to the short side as it does going long. As a matter of fact I prefer to trade this method to the short side because markets drop faster than when they move up. Keep in mind since we are day trading I dont mind trading range bound markets instead of strong trending markets when I use this methods. I wont trade against the trend but if there is no trend and I see a good set up I will take it.

You can see the stock makes a 10 day high and gaps up. Notice in this particular example how the market is range bound and trend-less. As long as the trend is not moving upwards the trade is valid and is worth taking. This strategy tends to move quicker and produce more volatility to the downside over the long term.

This Strategy Feels Very Natural Trading To The Downside

Once you identify the pattern you need to place your sell stop order. This will be your entry order and I want to make sure you dont confuse sell stops with buy stops. When you are trading this strategy short you want to place a sell stop to enter and a buy stop as your protection order. This is the opposite of how it works when you go long.

Assuming you are filled the next day you want to place a buy stop order immediately after you get filled. Never wait till the last minute because the stock can rally past your exit level while you wait. It doesnt happen often but it does happen once in a while. After you are filled you want to place a MOC or Market On Close order so that you dont have to watch the market all day. Getting out at the close gives you the most time for your position to work in your favor.

Final Example

Here is one last example so you can see the entire progression from beginning to end. Im using another short example because I prefer to trade this method to the short side but it works equally well trading to the long side as it does trading to the short side. You can see in this example a perfect Tail Gap formation.

This Is What A Good Set Up Looks Like

Be patient and wait for set ups like this one to come along. Dont forget to place your protective stop loss order after you get a confirmation of your entry fill price.

This Is What A Good Set Up Looks Like

After you receive confirmation of your fill and you place your stop loss and your profit target orders theres very little to do. Dont let intra-day emotions get the better of you. Stay with the trade and ride it out till the close no matter what happens.

The Stock Continues Dropping Till The End Of The Trading Day

Next time I will demonstrate more day trading strategies that work in the real world. For more on this topic, please go to: Day Trading Tips And Tools For Beginners  and Best Stocks For Day Trading