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

Some traders use moving averages as potential entry and exit points for day trading. Many stocks will start an upside or downside trend around 11 a.m. New York time and you will see their moving averages on 1-minute and 5-minute charts as a type of moving support or resistance line. Traders can benefit from this behavior and ride the trend along the moving average (on top of the moving average for going long or below the moving average for short selling).

As I explained in Chapter 5 about my indicators, I use 9 and 20 Exponential Moving Averages (EMA) and 50 and 200 Simple Moving Averages (SMA). For the sake of keeping this book short, I won’t go into the details of what moving averages are and the differences between simple and exponential. You can, however, do an online search and find much more detailed information about these moving averages. I’ve also included very brief definitions in the glossary at the back of this book. Your charting software will have most of the moving averages built in. They are ready to be used and there is no need to change the default setting in them.

Let’s take a look at the chart below, marked as Figure 7.18, for Direxion Daily Gold Miners Bull 3x Shrs ETF (ticker: NUGT) to see how you could trade based on 9 EMA on a 1-minute chart.

As you can see, at 15:06 p.m. I noticed NUGT had formed a Bull Flag. I saw that a consolidation period was happening on top of 9 EMA. As soon as I saw that 9 EMA was holding as the support, I jumped on the trade and rode the trend until the price broke the moving average at 15:21 p.m. I’ve marked my entry and exit points on the chart.

Moving Average Trends can happen in any intraday time frame. I monitor prices on both 1-minute and 5-minute charts and make my trades based only on these two time frames.

Let’s take a look now at Figure 7.19, which is another Moving Average Trend on NUGT, this time on June 16, 2016 and on a 5-minute chart.

Let’s take a look at another example, Celgene Corporation (CELG), on June 23, 2016. On the chart below, Figure 7.20, I’ve marked my entry and exit points and you will see how you can trade based on 9 EMA on a 5-minute chart. I entered the long position when 9 EMA held as a powerful support at around $99.90, and I then rode the upward move until 9 EMA broke at $100.40, for a profit of about 50 cents per share.

Another example of a 9 EMA Moving Average Trend Strategy is Figure 7.21 below, a 5-minute chart for Exact Sciences Corp. (ticker: EXAS) on July 28, 2016.

Another fantastic example of a 9 EMA Moving Average Trend Strategy is set out below in Figure 7.22 for AMAG Pharmaceuticals, Inc. (ticker: AMAG). On January 9, 2017 its stock sold off from $31 to $23 in only a few hours. The 9 EMA held as a strong resistance. A great trade would have been a short sell on AMAG with a stop loss of the break of 9 EMA. In three areas marked on the chart, the price broke the 9 EMA and went slightly higher, but a 5-minute candlestick did not actually close above 9 EMA. These false breakouts usually happen with low volume. Experienced traders wait for a 5-minute candlestick to “close” above 9 EMA before they get out. A sudden break of 9 EMA with low volume may not be a good indicator of a trend coming to an end.

A more recent example is Uber Technologies Inc. (ticker: UBER) on April 6, 2020. As you can see in Figure 7.23 below, as soon as UBER came above VWAP and held 20 EMA on the 1-minute chart, you could go long and ride the trend from $24.70 toward $25.60, and then exit when the moving average trend line is broken at around 12:40 p.m.

To summarize my trading strategy for Moving Average Trend trading:

I personally don’t trade very often based on moving averages. I look at them to see potential levels of support or resistance, but I rarely make any trade based upon a trend because, in a trend trade strategy, you are usually left exposed in the market for a considerable length of time. Some trend trades can last as long as several hours and that is too long for my personality. I would like to take my profit in a matter of minutes. I rarely will wait even an hour. Another reason that I do not often trade these strategies is that they usually best work during Mid-day and the Close. At the Open (in the morning session), when volatility is high, it’s hard to identify a Moving Average Trend play. These slow trends are best identified during the Late-Morning and Mid-day, when there is lower volatility, and they usually end near the Close (around 3 p.m. New York time) when the professional traders on Wall Street start to dominate the trading.

Having said that, a Moving Average Trend Strategy is an excellent trading strategy, because it usually does not require a very fast decision-making process and trade execution. It also often does not require the use of Hotkeys. You can enter the trades manually and still be successful. In addition, entry points and your stop loss can be clearly recognized from the moving averages on the charts. This is especially important for traders who pay high retail commissions (sometimes as high as $4.95/trade) and cannot scale in and out of trades without a high fee. The Moving Average Trend Strategy has clear entry and exit points and usually a good profit can be made by only two orders, one for the entry and one for the exit.

As I have discussed, strategies depend on your account size, personality, psychology of trading and risk tolerance, as well as on your software and the tools and brokers that you have. However, I want to emphasize that trading strategies are not something that you can imitate just from reading a book, speaking with a mentor, or attending a class. You have to slowly and methodically develop your preferred method and then stick with it. There is nothing wrong with any strategy if it works for you. There is no good and bad in any of these strategies; it truly is a matter of personal choice.