The following five day-trading setups, or entry strategies, have a tendency to emerge in the market at some point on many, but not all, days. By learning to recognize these trading setups, a day trader may take actions that could improve their chances of seeing a profitable return. Based on the direction of the initial impulse, wait for a breakout from the consolidation in that same direction. A breakout in the opposite direction of the impulse isn’t traded. For example, if the price rallied off the open, then pulled back and consolidated above the open price, wait for the price to break out above the consolidation. That should trigger a buying opportunity. Bid one cent above the consolidation high point for a long trade (buying in the hope of selling later for a higher price). Or bid one cent below the consolidation low point for a short trade (selling borrowed shares in the hope of buying them at a lower price before returning them to the lender). The consolidation should be relatively small compared to the impulse wave that preceded it. If the consolidation is large compared to the impulse wave, the pattern is less effective. There should be a distinct impulse wave, a distinct pullback, and a distinct consolidation during the pullback. If each of these parts is not discrete, the pattern is less effective and should be avoided. This pattern could occur throughout the day, but keep in mind that the most significant moves in a market typically occur near the open. Catching the first trade of the day with this strategy can have a substantial impact on overall profitability. If this pattern occurs later in the day, it will often produce smaller price moves. For example, assume the price drops 20 cents off the open. It then rallies 30 cents. Don’t be distracted by that first drop; it doesn’t matter anymore because you now have an impulse to the upside. Your focus should be on watching for the price to decline a bit (pull back) and then consolidate. If the price breaks one cent above the consolidation, go long. The same rules apply as in the previous setup. Wait for a pullback in the opposite direction of the impulse. The pullback must be smaller than the impulse. Then wait for a consolidation and a breakout of that consolidation in the impulse direction. Watch for consolidation at a support or resistance level. If the price breaks above a consolidation near support or breaks below a consolidation near resistance, you have a trade signal. If a reversal signal occurs, make the trade when the price moves one cent above the consolidation near support or one cent below the consolidation near resistance. Expect the price to bounce off support or fall off resistance if this pattern occurs. If the price instead breaks above the major resistance area (and consolidation) or breaks below the major support area (and consolidation), get out of the trade immediately and consider taking a breakout trade if applicable. The basic idea is to watch for levels that pushed the price back in the other direction multiple times. For example, a price might repeatedly rally and reach $25.25 but then fall. After the price has tested that area more than three times, you can be assured lots of day traders have noticed. All of a sudden, if the price is able to reach $25.26, an important shift could be under way. A breakout does not guarantee a big move. That is why this strategy should be used sparingly. Often the price will break an important boundary but fail to produce a significant move. The power of the pattern comes from traders pushing the price back to and then, hopefully significantly, beyond the resistance or support level. The pattern shows those traders have more resolve than the traders going in the opposite direction. This type of confirming false breakout occurred in the reversal-consolidation breakout example. In that case, the expectation was for a move higher after the pullback because the last impulse wave was up. The price consolidated and then had a false break below the consolidation. The price then rose. You would have been waiting to go long anyway, but the false breakout in the opposite direction further confirmed the trade. If the price tries to go in one direction and cannot, it is probably ultimately going to go in the other direction.
