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

Many traders love to draw diagonal trend lines. I’m not one of them. As far as I am concerned, they’re the exact opposite of objective. There’s a very good chance that two traders looking at the same chart will draw trend lines with very different slopes. A person in a mood to buy will be apt to draw a trend line in a way that shows a steep upward movement. On the other hand, if a person feels like shorting, they’ll be apt to draw a downward trend line.

The market only remembers price levels, which is why horizontal support or resistance lines on previous price levels make sense, but diagonal trend lines don’t. Accordingly, horizontal support or resistance trading is my favorite style of trading.

Support is a price level where buying is strong enough to interrupt or reverse a downtrend. When a downtrend hits a support level, it bounces. Support is represented on a chart by a horizontal line connecting two or more bottoms (see Figure 7.26 below).

Resistance is a price level where selling is strong enough to interrupt or reverse an uptrend. Resistance is represented on a chart by a horizontal line connecting two or more tops (as also set out in Figure 7.26 below).

Minor support or resistance causes trends to pause, while major support or resistance causes them to reverse. Traders buy at support and sell at resistance, making their effectiveness a self-fulfilling prophecy.

Using this method, every morning I shortlist the stocks that I would like to trade based on the criteria I set forth in Chapter 4. As potential stocks hit my scanner, I look for significant news events that may explain their price swings, such as an extreme earnings report or a new drug approval. You’ll recall that these are called fundamental catalysts and the shortlisted stocks are what we call Stocks in Play. They’re the ones that I’ll be monitoring carefully and planning to trade.

With these Stocks in Play identified, and before the market opens, I go back to their daily charts and find price levels that have been shown in the past to be critical. Finding price support or resistance levels is tricky and requires trading experience.

For example, let’s take a look at Figure 7.26, an SCTY daily chart without support or resistance lines and another including the lines.

Support or resistance lines on daily charts are not always easy to find, and at times you will not be able to draw anything clear. If I cannot see anything clear, I don’t have to draw anything. There is a good chance that other traders who have shortlisted the same stock will also not see those lines clearly and therefore there is no point in forcing myself to draw support or resistance lines. In that case, I will plan my trades based on VWAP or Moving Averages or other chart patterns that I earlier discussed.

Here are some hints for drawing support or resistance lines on daily charts:

Placing support or resistance lines, although difficult when you are first learning how to trade, is actually quite simple once you get the hang of it. For the sake of keeping this book more understandable for the novice trader, I deliberately limited my commentary on how to locate important support and resistance levels. You will find considerably more detailed information and criteria in my other book, Advanced Techniques in Day Trading .

Let’s review a trade that I took based on these lines. Please see Figures 7.27 to 7.29 below. On June 21, 2016, CarMax Inc. (ticker: KMX), the United States’ largest used-car retailer, had extreme earnings and its stock gapped down over 3%. That was a perfect opportunity for retail traders like us to find a good trade plan. I quickly found the support or resistance area levels on a daily chart and watched the price action around those levels.

After reviewing the daily charts up to June 20, 2016, I found four levels of $47.93, $48.42, $48.67, and $49.15. As you can see in Figure 7.28 above, all of these levels are extreme price levels for the previous days and, as I explained, I give more attention to wicks and extreme prices than I do to the open or close prices.

Now, let’s take a look at Figure 7.29, which is the next day intraday chart for June 21, 2016, and see what happened to the price action at those levels. I marked the areas where they acted as support or resistance. Do ensure that you give special attention to the volume of shares traded at or near those levels. Do you see that the volume is considerably higher? A high volume confirms that these levels are significant and day traders should therefore pay attention to them.

When the market opened, I watched the stock and realized that the area of around $48.67 was acting as a resistance level. Later, the stock sold off to $47.93 with high volume. I bought 1,000 shares at that support, with a stop loss below $47.93. If the price closed below that, I would be out with a loss, but it didn’t. The price instead quickly bounced back. I sold 500 shares at $48.42. I sold the other 500 shares at the next resistance level of $48.67. I kept monitoring the price action and, in the afternoon, when the price rejected the $49.15 level with high volume, I went short with a stop loss of a new high of the day or a close above $49.15. I covered half of my shares at the level of $48.67 and the other half at $48.42, both for another nice profit.

To summarize my trading strategy for support or resistance trading:

A similar approach will also work when you sell short a stock below a resistance level.