Great Day Trades Start By Understanding Sentiment…

07/12/2007 12:00 am EST

Focus: STRATEGIES

John Netto

Author, The Global Macro Edge

A number of factors go into ultimately deciding whether or not someone can be a a successful day trader. At the core of being a successful day trader is the goal of compounding your returns by participating in exponentially more positive expected value transactions. The byproduct of increased transaction charges that arise will be offset by the lower risk profile (assuming no overnights), and ability to compound profits.

A key component to realizing this goal is to repeatedly put yourself in a position of being on the side of market sentiment by precisely timing your entries. A couple of factors go into determining sentiment, and whether you should be buying the dips because the bulls are in control, or selling the rallies because the bears are in control.

The first component I look at is price action from a longer term basis. If over the last few weeks, the market is breaking out to higher highs and higher lows, then on a longer term basis, sentiment is on the side of the bulls. As a result, I come into the day looking for low risk long entries that would allow me to match up my day trades so that I am on the side of the intraday trend, as well as the long term trend.

The first thing I discuss in my book, One Shot - One Kill Trading, is finding who's in control by identifying if the market is making a new 11-period high, or 11-period low. If the market is making a new 11 period high on a 15 minute chart, and it looks strong on the daily chart, sentiment is favoring a trade to the long side on both the shorter term and longer term charts. The charts below of oil on both a daily chart and 15 minute chart show how you can use pullbacks on the 15 minute to enter when the daily trend is strong to the upside.

Figure 1

Figure 2

Matching up your day trades to be on the side of the longer term trend should help keep you in more winners, and give you several opportunities to profit as a day trader.

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