Day Trading Basics

A Day Trading Basics article could cover quite a number of topics including day trading markets, types of orders, technical analysis, etc. However, for our discussion, we will concentrate on beginners technical analysis. We will use our Custom Built Indicators to explain and illustrate the concepts of Resistance and Support Envelopes, Overbought and Oversold Oscillators, and Trend Identification.

Day Trading Basics - Resistance and Support Envelopes

Resistance (ceiling) refers to the price or area where the market will stop, hesitate, reverse, or breakthrough as it is moving UP.

Conversely, Supply (floor) refers to the price or area where the market will also stop, hesitate, reverse, or breakthrough as it is moving DOWN.

We have found that our HL Resistance/Support Envelope, HLResSupST, does an excellent job of defining areas of resistance (red and magenta lines) and areas of support (cyan and yellow).

As with all our indicators, the time frames are set to the optimum level for day trading, but they do have inputs which can be changed for optimization in other markets.

Resistance and Support Envelopes can also be used to locate areas where intra day breakouts occur. If the market breaks out of the top of the HLResSupST, and is followed by heavy volume and increased price movement to the upside, the market can be expected to continue to move upward. A small pullback in prices can lead to an excellent day trading area to take a Long position. Day Trading Basics, tradestation

On the short side, if the market breaks out of the bottom of HLResSupST, and is followed by heavy volume and increased price movement to the downside, the market can be expected to continue to move downward. A small pullback in prices can lead to an excellent day trading area to take a Short position.

Day Trading Basics - Overbought and Oversold Conditions

During any day trading session, price swings will occur many times throughout the course of the trading day. An overbought condition occurs when buyers have pushed price to a extent where the market is overvalued, and most of the buying is completed for that particular swing move. At this point, the market would be expected to experience a pullback, as sellers move in to push the market back down. An oversold condition is exactly opposite, with sellers pushing the market down until buyers move in to reverse the market.

Many different oscillators can be used to measure overbought and oversold conditions, (but are beyond the scope of this day trading basics article). However, the best oscillator we have developed for measuring extreme price conditions is our aptly named HLOverbought/OverSold Oscillator (HLOBOS). We have plotted it below with our Moving Average Trend Indicator (which we will discuss shortly) to illustrate how effectively HLOBOS identifies profitable pullbacks against an intra day trend.

Overbought/oversold conditions occur when the oscillator rises above 75 (indicator turns red) and falls below 25 (indicator turns cyan) respectively. As price moves back down from an overbought condition (see round red arrows), HLOBOS will alert one to a direction shift with a color change from red to white. Directional change to the upside after an oversold condition occurs is highlighted by a color change of HLOBOS from cyan to blue (see first round cyan arrow).

Low risk trades can easily be taken as long as the day trader follows the direction of the trend, buying only when the oscillator has turned up from the oversold area and selling only when HLOBOS has turned down from the overbought area.

HLOBOS has become the cornerstone of many of our advanced trading systems and is our most popular day trading indicator for triggering trades.

Day Trading Basics - Trend Identification

No discussion of indicators for a day trading basics article would be complete without explanations and illustrations of Trend Indicators. Intra day trends do occur throughout the trading day, especially during volatile economic periods. Many of the most profitable trades can be taken during these runaway market conditions. Identifying these moves early enough to take advantage of the profit potential of these trends are the goals of all day trading trend indicators.

HLMAvgTrend is an excellent intra day trend indicator which can be used in a number of different ways. As we saw earlier, HLMAvgTrend, when used in conjuction with an oscillator such as HLOBOS, offers excellent trading opportunities while following an intra day trend.

HLMAvgTrend can also function as an early warning indicator that the market has run out of steam, and is likely to consolidate (go sideways) or reverse. The faster line (yellow changing to magenta) will help alert the day trader that the current trend is concluding and a change is imminent.

It can also be used to help trail an open position, placing a stop just below the lower moving average line.

HLMAvgTrend is quite a versatile performer and is must for all day traders.

Another Trend Indicator that is valuable for the day trader is HLMoTrend. HLMoTrend is an especially valuable day trading indicator in that it not only functions as a Trend Indicator, but also as an excellent Divergence Indicator. It is quite easy to view the intra day divergence between price and HLMoTrend in the chart below.

Divergence signals can give the day trader confidence in taking an early trend move to the opposite side, especially if the divergence spans a number of swings up or down, or occurs over a long period of time. These early warning signals are some of the most profitable trades for the day trading specialist.

Using two different time frames of HLMoTrend, we can spot great pullback areas to enter low risk trades.

HLMoTrend is a terrific Trend Indicator, giving both divergence signals and pullback trades. It can be used as a stand alone indicator, or used as the foundation of a day trading system. HLMoTrend, is a valuable weapon that should be a part of all day traders' arsenal.

One of our most popular momentum/trend indicators is our HLScalperD. This unique study combines two momentum indicators which are used to measure market strength and weakness, and an oscillator, which is used to spot divergence and pullbacks for entry.

Here are just a couple of comments from traders who have used HLScalperD:

..."What a great program. I watched for 2 days while I was at work and trading today,learning the scalps. I'm really impressed how well the software ID's the trades. It solved a huge problem for me:entering a trade or scalping with or against the trend......I was trading with ONLY a modified stochastic. The program gives a lot of time to see the setups. Thanks for your hard work..."

..."I LOVE the Scalper .You must be proud. Especially like the volatility adjusted stochastic oscillator"...

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