Day Trade the Best Stocks and Adjust to the Market

Day trade the market or day trade your stock and ignore the market?

What is your game plan if the market finally runs out of buyers?

It’s bound to happen, the situation with crude oil is too much for the general market to overcome. In my opinion we are about to collapse in a big way.

Day Trade for Today, or Know Your History?

Did you learn from 2007-08? Are you prepared with strict stop-loss orders? Are you ready to be in cash if you can’t find awesome risk/reward scenarios for new long positions?

Most day traders like to be “long.” We like to be buyers.

It’s easier to understand than short-selling and technically has defined risk (you know where zero is). If this is you, it’s time to get prepared. Great day traders look for new ideas regardless of nyse runnerexisting positions. You should do the same.

Only plan day trades that match your strategy. It’s very tough to be profitable with spur of the moment ideas.

Always be assessing probabilities for your next move. Always be building if/then scenarios. Day trading is hard work. The stock market has been kind to investors the last 2 years. We aren’t investors. It’s time to make a trading plan for a bearish tape.

If you never need it, good for you.

The day trading community was littered with wealthy traders who went broke when the stock market turned down in April 2000. I personally witnessed dozens of day trader’s freeze while in long positions, waiting for a favor that came in March of 2003.

If you believe the market “always goes up” you are not a student of trading history.

Day Trade the Current Market with a Consistent Game Plan

What is your day trading plan with the $VIX at 13? Are you adjusting share size and stop-loss areas to compensate?

What about adjusting your list of stocks to trade? Are you losing money day trading a dead industry? What is your plan to adjust into a new list?

What about stocks in the news? Can you handle a day trade in a stock with a news catalyst? The rewards can be great but the risk is just as big if you are slow to react.

The Chinese stocks are in play right now. How would you trade them?

Your best, next move, could be adding to an existing position or it could be initiating your first entry in a tiered structure. This is how hedge funds allocate money. They never open an entire position at once and neither should you. Not only does this method put tremendous pressure on you (to find the perfect entry), it is simply bad math.

You never want your full position unless a trade has started to move in the intended direction. There are old-school day traders that will tell you to initiate a full position as close to a definitive stop loss position as possible, but those are ideas from a different generation.

The days of a specialist, floor broker or pit trader as the dominant force handling retail orders are gone. The odds of your stop-loss being triggered near a significant number are great. This means you need to plan to enter a day trade in multiple positions.

Relative Strength and Relative Weakness

So what do you do, if selling pressure starts to overtake the buying? Do you change your plan and start to short-sell? Do you day trade the short-side or continue to look for longs?

The professional who has a clear strategy would say no. You don’t change your edge. You continue to do what works for you. To give you an extreme example, I have a friend who is one of the top day traders in NYC. He trades long 95% of the time.

Here is his exact quote; “If a stock declines $7 but has a $1.50 bounce, I am trading the bounce not the short-sale.”

Should you be that extreme? Yes and no. Yes you should focus only on your edge, but no in the sense that if I was your mentor I would tell you to find another stock to be long.

Which brings me to the core of this lesson. How to find stocks to day trade if the general market is not offering opportunities that are aligned with your strategy.

Great trading happens before the trade.

This means you stack the odds in your favor, then make the day trade. The best traders do this in the direction of the general market. So plan “A” is monitor the market every day (even if you are swing trading) and have a strict set of guidelines that tell you when and if, to be aggressive and hold good trades longer.

This also means to monitor which sectors, industries and stocks are not following the market. By doing this, you are setting yourself up for future trades, and gauging the strength or weakness of institutional pressure.

In “trader talk” this is relative strength or relative weakness.

Here is how you apply the concept.

The main pillar in this day trading strategy is the general market. What is the current phase of price action on the longer-term charts? For a swing trader this means the previous quarter or 3 months. For a day trader it means the last month, week and yesterday.

We are looking for obvious buying order flow in the market and those stocks that are trading in sync with the general market. These are the best day trading scenarios and have high-probability. Any day trades that do not fit this criteria can still be a good trade, but not necessarily a great trade.

Remember you want to allocate money to great ideas. Even the best day trading ideas will not earn money sometimes, but you never want to accept risk on a weak premise.

The next scenario is the one that most day traders miss. On January 5, 2014, the Dow Jones Industrial Average declined 331 points. It appears the market is starting to change hands and distribution is taking place.

It’s time to make note of stocks that hold sideways or even rally as the market get weak. These stocks are showing relative strength. They are showing institutional buyers who have interest and are supporting the stock.

Next, have in place a strategy to identify when the market has found support, and appears ready to move higher again. If and when the market rallies, your first day trade to consider are the stocks in your relative strength list.

Remember, you don’t want to change your strategy if your plan is to be a buyer. Stick to your edge and use relative strength to filter out the best day trading ideas when everyone else is losing their shirt and hoping weak stocks find buyers.

**If you short sell the concept works the same on the opposite side of the market. They key is to identify bearish swing trading trends and then make note of stocks that do not rally.

This is by no means a complete day trading game plan but it should give you ideas to make an outline.

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About the Author

Pete is a full-time trader and mentor since 2000. Author of Equity Trader 101 and the Order Flow Method. He is dedicated to help self-directed traders to bust through the six-figure level.

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