Day Trading Signals 101

The Daily Price signals are based on the concepts outlined in – Tony Crabel’s work Day Trading with Short Term Price Patterns, &  Street Smarts by Linda Branford Raschke and Laurence Connors. Short term trading signals are grouped into three areas: Range Breakout, Trend Continuation & Directional Bias. These signals need to have price patterns trigger one into a trade, but in combination with Daily Support & Resistance Levels, and Fibonacci Levels low risk/high reward setups abound.

Range Breakout Signals

These signals characterize a market that is backing & filling. Price action is coiling ready to spring into a new trend. When these signals are fired, taking out the previous day’s high or low usually represents a trend day in the making, where counter trend trading is hazardous to your wealth. Our Range Breakout signals are Inside Day, Narrow Range Days & Low Historical Volatility Break.

 

Inside Day

An Inside Day occurs when entire daily price range falls within the price range of the previous day.  Inside Days are trading sessions that mark signal indecision because neither the bulls nor the bears are able to send the price beyond the range of the previous day. If an Inside Day is found at the end of a prolonged downtrend and is located near a level of support, it can be used to signal a bullish shift in trend. Conversely, an inside day found near the end of a prolonged uptrend may suggest that the rally is getting exhausted and is likely to reverse. Breaking above the High or Low of the signal day establishes a range breakout for the day’s trading. Very useful indicator in combination with Narrow Range Trading Day signals.

 

Narrow Range Days

Narrow Range Day Signals represent days when price is contracting and preparing for a range breakout. Markets that fire Narrow Range Day signals can expect an increase in volatility and offer a greater probability for price expansion or movement. Exceeding the previous trading day’s high or low typically has prices trade in the direction of the break for the balance of the day.

 

NR4

The daily price range has the narrowest trading range of the prior 4 days (inclusive).

NR7

The daily price range has the narrowest trading range of the prior 7 days (inclusive).

 

Low Historical Volatility Break

The Low Historical Volatility Break signal indicates that exceeding the previous day’s high or low points to a strong directional move in the direction of the breakout. Historical volatility is a mathematical measurement of how much prices fluctuate over a given time period. Once volatility starts to contract, it will continue to decrease until it reaches a critical level. At this point, volatility will expand and price will propel in a strong directional move. These large sharp moves often lead to multi-day trends.

 

Trend Continuation Signals

The following are signals indicate a high probability signals the previous day’s trend will continue into the current session.

 

High Continuation

High Continuation Signals are fired when the preceding trading day exhibits a bullish trend move and closes fairly strong within near the top of the day’s trading range. The signal implies some bullish continuation of the trend move following the generally strong close.

 

High Continuation & Reversal

High Continuation & Reversal Signals are fired when the preceding trading day exhibits a strong compressed bullish trend move throughout the entire day and closes fairly strong near the top of the day’s trading range. The signal implies that the strong bullish move has moved too far, too fast and that a reversal is likely sometime during the trading day.

 

Low Continuation

Low Continuation Signals are triggered when the preceding trading day exhibits a bearish trend move and closes fairly weak within the bottom of the day’s trading range. The signal implies additional downside following a generally weak close.

 

Low Continuation & Reversal

Low Continuation & Reversal Signals are fired when the preceding trading day exhibits a strong compressed bearish trend move throughout the entire day and closes fairly weak within near the bottom of the day’s trading range. The signal implies that the strong bearish move has moved too far, too fast and that a reversal is likely sometime during the trading day.

 

Low Range Close

The Low Range Close signal is triggered when the preceding trading day closes in the bottom of its trading range. The signal implies a strong probability that the next day’s trading will trade beneath the previous day’s low.

 

Please note, there is no “High Range Close” signal. The old adage that the market takes the escalator up but the elevator down, applies here. Markets typically correct quicker in time and price than rally, even on the daily signal level, which adds to the stronger probability of a down move when a Low Range Signal is generated.

 

Directional Bias Signals

These signals establish a directional bias for the day’s trading.

 

Outside Day

An Outside Day occurs when one day’s high is higher than the previous day’s high, and its low is lower than the previous day’s low. This is often taken as a signal that the market is about to make a move in the direction of the close, but more accurately a break of the previous day’s high or low sets the directional bias for the day’s trading.

 

Wide Range Day Bullish & Bearish Reversals

These signals occur at important inflection points in the daily timeframe, and indicate a good probability of a multi-day trend change. Tom DeMark characterized these patterns as Bullish and Bearish Flips.

 

Wide Range Day Bullish Reversal

Today’s price action needs to break above the previous trading day’s high to confirm the Wide Range Bullish Reversal and change in trend to the upside. The signal occur at important inflection points in the daily timeframe, and indicate a good probability of a multi-day trend change.

 

Wide Range Day Bearish Reversal

Today’s price action needs to break below yesterday’s low to confirm the Wide Range Bearish Reversal and change in trend to the downside.

 

High Breakout Continuation Setup

The High Breakout Continuation Setup Signal requires that the preceding trading day’s high needs to be exceeded to confirm a change in trend direction. The signal seeks to take advantage of a pullback in the immediate daily trend.

 

Low Breakout Continuation Setup

The Low Breakout Continuation Setup requires that the preceding trading day’s low needs to be exceeded to confirm a change in trend direction. The signal seeks to take advantage of a pullback in the immediate daily trend.

 

Momentum Rebound Signals

These reversal indications are stronger than the High and Low Continuation & Reversal signals. These momentum reversal signals typically fire following a trend move the previous day that has traveled too far, too fast and is accompanied by an extreme short term Relative Strength Index that indicate a very high probability for a reversal. While the High and Low Continuation Reversal signals point to a good likelihood for a reversal move sometime during the trading day, the Momentum Rebound Signals use the 1st hour high and low as a specific price level that needs to be exceeded to trigger the Momentum Rebound Signal.

 

Momentum Rebound Buy

The Momentum Reversal Buy Signal is a stronger reversal indication than the Low Continuation & Reversal signal. This momentum reversal signals typically fire following a trend move the previous day that has traveled too far, too fast and is accompanied by an extreme short term Relative Strength Index that indicate a very high probability for a reversal. While the Low Continuation Reversal Signal points to a good likelihood for a reversal move sometime during the trading day, the Momentum Rebound Buy Signal use the 1st hour high as a specific price level that needs to be exceeded to trigger the Momentum Rebound Buy Signal.

Exceeding the high reached in 1st hour of trading triggers the Buy signal.

 

Momentum Rebound Sell

The Momentum Reversal Sell Signal is a stronger reversal indication than the High Continuation & Reversal signal. This momentum reversal signals typically fire following a trend move the previous day that has traveled too far, too fast and is accompanied by an extreme short term Relative Strength Index that indicate a very high probability for a reversal. While the High Continuation Reversal Signal points to a good likelihood for a reversal move sometime during the trading day, the Momentum Rebound Sell Signal uses the 1st hour Low as a specific price level that needs to be exceeded to trigger the Momentum Rebound Sell Signal.

Exceeding the low reached in 1st hour of trading triggers the Sell signal.

 

Day Trading Metrics & Floor Pivot Points

Floor trader pivot points, or floor numbers, are specific support and resistance price points that have been calculated using the previous day’s trading. I’ve added some additional relationships to calculate normal and extended ranges based on the previous day’s trading as well as weekly pivot numbers.  Pivot levels, and their derivative support and resistance levels are extremely useful, if for no other reason than so many other traders are watching them.  The market will often find significant intraday turning points on these levels.

 

The floor pivot points (the most basic and popular type of pivots) are widely used in technical analysis. The main aim of a pivot point is to represent a primary level of support/resistance – the point at which the trend can become bearish or bullish. Levels of resistance and support (from first to third) serve as the additional points of possible trend breakouts or the trend range limits. These are various rules to calculate classic floor pivot points, as long as one is consistent, find a method that works best for you.

 

2 thoughts on “Day Trading Signals 101

  1. Waheed Jaffer

    Hi can somebody please tell me what 2 Day ROC Sell means and where I can find more information about all these setups.

    Thank You

    Reply
    1. tradingpoints Post author

      Think you will find the answer in this book: Day Trading with Short Term Price Patterns, & Street Smarts by Linda Branford Raschke and Laurence Connors.

      Reply

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