Identify Market Direction to Improve Your Daytrading
Copyright (c) 2009 Scott Cole
An easy way the daytrader can improve results is by using a directional bias. In other words, the daytrader only takes long positions in individual stocks if the overall market is trading up, and short positions if the market is trading down.
Obviously, the main difficulty is to be on the right side of the market! However, an analysis is very small table operator needs to stay on the right side of the market mostly.
First, identify the current trend in the medium term. I define this intermediate trend through the use of day 13 and 34 days exponential moving averages. When the average of 13 days exceeds the average of 34 days, the market is in an uptrend and the market is in a downtrend if the day is less than 13 days to 34. However, any series of moving averages can be used, eg 10 and 20 days on average, 20 and 50, etc.
Then I look at the trading pattern on 3 to 5 days. If these days are up, I will have an upward bias, unless I see no reversal of a model, such as volume reduction and a trading range as a shrinking market trades higher. Pattenrs best are those where the market trades against the trend for a few days and showing signs of recovery in this trend. Inside trading days are also among the preferred models to search for.
It is also useful for identifying seasonal patterns that may offer a directional bias in the stock market. For example, when the market is in an uptrend, and approaching the end of a month or quarter, it will usually be some upward bias, the portfolio managers responsible for portfolios of winners. Trading days before the holidays tend to be biased in reverse too.
When I see one of these models in place, I will enter a long position when the market shows the intraday resistance. Usually, I seek a kind of escape in the intraday average age, and seek to trade stocks and highly volatile liquids in the same way.
The key to this is that if the market is firmly in place, the majority of stocks are also trading higher. Therefore, it makes no sense to try and trade against the underlying trends.
If you trade in the direction of the underlying market, you should become a more profitable daytrader!
