Momentum trading is one of the most popular online day trading strategies. Although technical analysis doesn’t help that much here like in the first day trading rule of support and resistance, momentum building is a common characteristic of actively trading stocks that develop strong trends right from the beginning of the day. Market opens and stocks begin trading at much higher or lower prices than the previous day’s close. It’s not that rare to find gaps in 5-min charts that offer excellent setups to make money in online stock trading! The difficult part of day trading these stocks is to discover them, since the momentum usually lasts an hour or so. Read why I recommend StockTwits as a stock screener for day trading.
Day trading rule: Take advantage of the momentum
A stock opens considerably lower than previous day’s close, printing a gap down. The evolving bear market continues pushing the stock price to daily lower lows, printing continuously declining candlesticks. Buyers are nowhere to be found and the decline picks up momentum, as several day traders join in! Short selling orders are overwhelming and obviously no one is betting against the trend. Where would the decline find support and what kind of indicators will help us in our exit strategy? Let’s see the PBI 5-min chart and provide some answers.
On Friday PBI stock opened almost a dollar below the closing price of Thursday as the gap down indicates. During the first 15 minutes of trading, the stock dropped 7% more before the first glimmer of hope appeared as a green candlestick. Yet the downtrend resumed quickly until the support level at $12.60 proved to be strong enough to end the decline. But why $12.60? Is that in fact a random support level? Hm, here is the daily chart.
Well, well, 3 months ago PBI stock had found support at $12.60 and since then it is trading up and down between $12.60 and $15.30! Now back at the 5-min chart, sellers tried to push the price lower than $12.60 but failed 3 times during that very day! No surprise there, since the support and resistance levels found in charts of longer time frames are considered much more crucial than the levels found in shorter time frame charts. The long shadows of the first candlesticks that touched the support level were also additional indicators of technical analysis pointing that out.
Apparently trading out at the support level should be a rewarding exit strategy should we have day traded PBI stock on Friday. However, momentum can easily be exhausted and a trend reversal can quickly eat up all the profits before the price confirms a support level! That is why trading out when a new high is printed is also recommended. Due to the nature of momentum trading, day traders are advised to be prepared to trade out as soon as they notice any reversal signal. Take a look at the ENZ 5-min chart.
ENZ stock printed a gap up shooting for new multi-month highs, a tempting trading setup for day traders! Say we bought ENZ shares at the market’s open. If we didn’t trade out when a new low was printed, we would have lost all the money we would have made till then! Day trading online for a living certainly does not include giving profits back! A very tight trailing stop or trading out at the bearish candlestick pattern should have saved a lot of money.
In future posts we will discuss about gap fills as an extension of this trading strategy. For the time being though, the very next post will actually be about how to use trend lines when day trading stocks.