So, generally speaking I don’t love any short term trading strategy.. mostly due to the fact I lose more money than I make but given the simplicity and potential power of this new strategy it seems reasonable to share.
This short term trading strategy is capable of producing fast profits using a combination of price movement and news catalysts. Please be aware this is not a long term investment strategy or even a swing trade. This is an intraday, or more likely, an intra-hour play. If the move doesn’t happen just move on, don’t sit on the position waiting. Most of the stocks that will be uncovered here won’t be worth the paper their shares are printed on. They will move fast so be ready to act accordingly.
Lets break this down step by step and I’ll include some pictures from the ThinkorSwim platform to highlight the process.
Step 1 – Find a suitable candidate
Well start by scanning for a setup or setups. From the scan tab create a new scan that contains the following 3 criteria;
- Last price (.30 -$10)
- Volume (5,000 – max)
- Price_change (Close) is a least (20%) (Greater or less) than (10) bars ago (daily chart.
*Feel free to adapt the scan settings to something appropriate for your style. Obviously if 20% is too high you’ll have to minimize or if price is too low you’ll need to increase. Additionally, If your looking to play to the upside select greater than or less than for plays to the downside.
Step 2 – Study the charts
With the scan completed, I typically sort the % change or price change columns to bring the highest movers to the top of my list for further analysis. Specifically, I’m looking for stocks that have gapped up or down and have maintained the higher or lower price throughout the pre market session. Following which I’ll use basic technical analysis to identify the ideal candidates for a watchlist.
Step 3 – Follow the news
Once I’ve created a watchlist or saved the scan for easier viewing in TOS I’m now looking for related news that can support the premarket move. For example, suppose a pharmaceutical company XYZ is trading 20% higher during the pre market session with positive news about a new cancer treatment that is generating a buzz. The combination of the large price increase and positive news can be the 1-2 punch for driving the stock higher quickly at the opening bell.
Lets take a look at an example chart to highlight exactly what I’m looking for.
Notice the gap down and then the continuation of the gap for what could have been a monster play to the downside. The idea in the above image is to wait for price to break below the low of the pre market session and jump in to catch a continuation of that move.
Please don’t become greedy though, stocks like this have a tendency to snap back as quickly as they moved to begin with.
Step 4 – Money management and Trade plan
No trading strategy is perfect and this short term trading strategy is no different. First determine how much capital you’ll want to use, then determine amount to risk. Once risk is determined then decide how much profit is worth that risk. Determining these at the outset of every trade is sound practice and something entire books are written on. The trading plan and good money management are truly the holy grail of trading.
That’s all there is too it. Really not very difficult but can be very powerful if predetermined rules are strictly followed. If you have any questions please ask me below.
Also, here is an article from Investopedia I found useful regarding how to be successful with a short term trading strategy.
May God bless you and keep your trading profitable,