Identify Market Direction to Improve FOREX Day Trading

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The daytrader can significantly improve his results by utilizing directional bias in his trading. By trading individual stock positions that are running in the same direction of the overall stock market, the trader has greater odds for success.

Obviously, the main difficulty is being on the right side of the market! However, a little chart analysis is all the trader needs to stay on the right side of the market most of the time.

First of all, identify the current intermediate term trend. I define this intermediate trend through the use of the 13 day and 34 day exponential moving averages. When the 13 day average is above the 34 day average, the market is in an uptrend, and the market is in a downtrend if the 13 day is below the 34 day. However, any set of moving averages can be used, such as a 10 and 20 day average, 20 and 50, etc.

Next, I look at the trading pattern over the last 3 to 5 days. If these days are up, I will have a bullish bias, unless I see any kind of a reversal pattern, such as declining volume and a narrowing trading range as the market trades higher. The best patterns are those where the market trades against the trend for a few days, and exhibits signs of resuming that trend. Inside trading days are also among the favorite patterns to look for.

It is also helpful to identify seasonal patterns that may offer directional bias in the stock market. For instance, when the market is in an uptrend, and approaching the end of any month or quarter, there will usually be some bias to the upside, as portfolio managers load up their portfolios with winning stocks. Trading days before holidays tend to have an upside bias as well.

When I see one of these patterns in place, I will enter a long position when the market shows intraday strength. Usually, I look for some sort of intraday breakout in the major averages, and look to trade very liquid and volatile stocks in the same manner.

The key to all this is that if the market is up solidly, the majority of stocks will also trade 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!

Copyright (c) 2009 Scott Cole
Identify Market Direction to Improve FOREX Day Trading




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