How to Day Trade for a Living: Tools, Tactics, Money Management, Discipline and Trading Psychology

In day trading, Bull Flag is a Momentum Strategy that usually works very effectively on low float stocks under $10 (described in Chapter 4). This trading strategy is difficult to manage the risk in and requires a fast execution platform.

This pattern, shown above in Figure 7.5, is named Bull Flag because it resembles a flag on a pole. In Bull Flag, you have several large candles going up (like a pole), and you also have a series of small candles moving sideways (like a flag), or, as we day traders say, “consolidating”. Consolidation means that the traders who bought stocks at a lower price are now selling and taking their profits. Although that is happening, the price does not decrease sharply because the buyers are still entering into trades and the sellers are not yet in control of the price. Many traders who missed buying the stock before the Bull Flag started, will now be looking for an opportunity to take a trade. Wise traders know that it is risky to buy a stock when the price is increasing significantly. That’s called “chasing the stock ”. Professional traders aim to enter the trade during quiet times and take their profits during the volatile times. That is the total opposite of how amateurs trade. They jump in or out when stocks begin to run, but grow bored and lose interest when the prices are, shall I say, sleepy.

Chasing the stocks is an account killer for beginners. You must wait until the stock finds its high point, and then you must wait for the consolidation. As soon as the price starts breaking up in the consolidation area, you can begin purchasing stocks. Patience truly is a virtue.

Usually a Bull Flag will show several consolidation periods. I enter in only during the first and second consolidation periods. Third and higher consolidation periods are risky because the price has probably been very extended in a way that indicates that the buyers will soon be losing their control. Let’s study an example in Figure 7.6 below of a Bull Flag on RIGL on August 30, 2016.

This is an example of two Bull Flag Patterns. It is normally hard to catch the first Bull Flag, and you will probably miss it, but your scanner should alert you to it so that you can be ready for the next Bull Flag. Figure 7.7 that follows is an example from my scanner in this time period:

As you can see, my scanner showed RIGL at both 12:31:52 p.m. and 12:36:15 p.m. As soon as I saw that, I realized that there was also a very high relative volume of trading (120 times the normal trading volume), which made this a perfect setup for day trading. I waited for the first consolidation period to finish and, as soon as the stock started to move toward its high for the day, I jumped into the trade. My stop loss was the breakdown of the consolidation period. I marked my exit and entry in Figure 7.8 below.

You can see the Bull Flag Pattern on any short time frame: 1-minute, 2-minute and 5-minute charts. Now let’s take a look at Figure 7.9, a 2-minute chart for OPTT on June 1, 2016. As you can see, the stock had a powerful Bull Flag right at the Open, followed by a consolidation period. As soon as the first consolidation period was completed, another small Bull Flag formed. The volume of shares traded is significantly higher after consolidation, which is a confirmation for a long entry .

You can also see another Bull Flag on the OPTT 2-minute chart followed by another consolidation period. As shown below in Figure 7.9, after the second consolidation period, the volume of shares traded was significantly higher, a confirmation for another long entry. I don’t trade more than two Bull Flags in a stock and, as you can see on this chart, the stock started to sell off after the third Bull Flag (at around $7). Aside from the strategy, did you notice that OPTT moved from $1.50 to almost $7 in just 35 minutes? This kind of move can be expected from low float under $10 stocks.

To summarize my trading strategy:

The Bull Flag is essentially an ABCD Pattern that will happen more often on low float stocks. However, in a Bull Flag Strategy for stocks under $10, many traders buy only at or near the breakout (opposite to the ABCD Pattern for medium float stocks). The reason for this is because moves in low float stocks are fast and they will fade away very quickly. Therefore, Bull Flag is more or less a Momentum and Scalping Strategy . Scalpers buy when a stock is running. They rarely like to buy during consolidation (during that waiting and holding phase). These types of stocks usually drop quickly and brutally so it is important to jump in only when there is a confirmation of breakout. Waiting for the stock to break the top of a consolidation area is a way of reducing your risk and exposure time in low float stocks. Instead of buying and holding and waiting, which increases exposure time, scalpers just wait for the breakout and then send their order. Get in, scalp, and get out quickly. That’s the philosophy of momentum scalpers:

The Bull Flag Pattern is found within an uptrend in a stock. The Bull Flag is a long-based strategy. You should not short a Bull Flag. I personally don’t trade much momentum. It is a risky strategy and beginners should be very careful trading these. If you choose to, trade only in a small size and only after sufficient practice in simulators. You will also need a super-fast execution system for scalping.