6 Essential Ingredients for Winning at Stock Index Trading
By Mohan Wolfe, DayTradersAction.com
After trading the futures markets for 25 years, there are a few things that are certain. Trading futures is a high risk business, and like all trading it will require your full application of skill in the areas of research, practice and live “in the trenches” trading to gain experience and realize success. The rewards can be tremendous if you apply yourself fully to learning the key ingredients described in this article.
The Trading Strategy I will be describing today for the US stock index primarily uses the mini Nasdaq (NQ) contract. I find this to be the best day trading contract for the US stock indexes. This strategy can also be used on the mini S&P500, Mini Dow or Mini Russell 2000 as well with great results.
The 6 essential ingredients to successful futures day trading are:
- A tested and proven method for day trading on a short term time frame basis.
- The “High 5” or what is sometimes referred to as “the tape” or “the big board”. These indices are used for reading the surface bias of the market.
- The Higher Time Frames of the market. To get a "helicopter” view of the market bias above the “High 5” readings.
- Simple Candlestick reading. I use very simple candlestick reading methods to get instant additional information as to the direction of the prices.
- Basic Elliot Wave chart patterns. These patterns occur regularly in day trading and you should learn them following the simple approach I use.
- Fibonacci Retrace map. The Fibonacci readings are very accurate if used correctly and they should be part of your day trading arsenal.
These are the 6 key ingredients for successful day trading. This is really all you need to know to be successful but you will need to gain skill in learning how to work with these elements and incorporate them into your trading. This mastery comes from time in front of your screen and practice, just like a surgeon masters all the surgical tools in front of him during an operation or airline traffic controllers are completely adept at reading all the gauges in front of them. You too should master the simple methods for the 6 key ingredients for successful day trading. They are not that hard to learn and I will summarize them in this article.
First, here is a 450 tick Boomerang Day Trader chart of the mini Nasdaq (NQ) which shows both a winning Sell short trade and a winning Buy trade using Boomerangs bias indicators and chart readings.
Note the Sell Trade Channel moving down (marked by down arrow) and a pullback to the Signal Line Entry marked by the yellow dot and subsequent lower move in prices. Also the Buy Trade Channel moving up and the pullback to the Signal line marked by the Blue dot.
Because of this lower move and then upside reaction the High 5 readings were most likely more Neutral.
The Higher time frames were also leaning more on the Neutral side which you can also learn more about on the webinar provided below. You can see how on the way down during the sell off the Red Boomerang candles which were all solid bodied. The bearish candlesticks are solid bodied. Note how after the reversal and the Buy signal from Boomerang the majority of the Green candles were hollow bodied. Hollow bodied candles are the bullish candles.
For simple candlestick reading I only focus on 2 things. I focus on the hollow bodied candles on an up move and if some of the candles are starting to show solid bodies as a possible sign of a reversal. The opposite is true for a down move. I watch for solid bodied candles moving lower with some intermittent hollow bodied candles showing possible signs of the move to the downside completing. The only other element I watch for in looking for a completion of the move is for a candle to become “engulfed” by the body of the next candle.
The Higher time frames bias reading is a matter of watching the shift first in the 5 minutes chart from Bullish to Neutral to Bearish and the follow up with the 13 minute chart following the same pattern. You can use an MACD indicator to watch for these shifts and other indicators such as our BDT bias indicators.
Then when we see the 30 minute chart bias join the one sided bias reading to neutral and then bearish it is important to trade on that side of the market until the downside gets more exhausted. If the 60 minute then rolls over to bearish during this time expect a larger scale move. When the 135 minute charts rolls to bearish intraday joining the other already bearish time frames then we will most likely see a very strong move to the downside.
When the market makes a stronger, one sided move in line with the shift in the higher time frames that is when we can begin to start measuring the Elliot Waves 1-5 pattern. On the chart below you can see the Elliot Wave patterns which are based on a Wave 1 directional thrust, a Wave 2 pullback, a Wave 3 continuation thrust and a 4rth wave pullback. The general rule is that if Wave 2 is simple then Wave 4 will be complex. If Wave 2 is complex then Wave 4 will be simple. Then following Wave 4 we have the Wave 5 move which is often a very strong extended move which finishes off the directional pattern.
Below is a chart of a common Elliot Wave 1-5 move intraday and subsequent upside reversal after the 5th wave lowest move. Note how the patterns all correlate with the description I gave above. Note also how the Boomerang bias indicators #1 and #2 measure the Elliot Wave patterns.
Elliot Wave theory can be kept simple by using it intraday like I show you here. The E Wave 1-5 pattern is easier to spot intraday. It is when you get into multi day or even multi week E Wave patterns that a deeper study of the theory is required. Here is a good place to learn more about the Elliot Wave 1-5 pattern I follow as one of the key ingredients for successful day trading.
The last Key Ingredient you will want to learn for professional day trading is how to use what I call a Fibonacci Retracement map. Fibonacci, was a brilliant mathematician from long ago who discovered specific numerical sequences present in nature itself and with many valuable uses. It was Fibonacci who introduced the Hindu/Arabic numeral system to the west. When we count 1-2-3-4 etc. we can thank Fibonacci for that.
Please watch my short 5 minute video on the history of trading mathematics here.
I use the Fib retracement map after the market has made a strong intraday move and I want to map out the potential retrace levels using the highly accurate Fibonacci readings. However, please note that the Fibonacci map is only for purposes of measuring where to exit a clear Boomerang trade or for support/resistance using the map as a guide. The Key numbers used with Fibonacci are: Zero…23.6%…38.2%….50%…61.8%…100%. You can see on the chart below how after a strong, early rally as measured from the top of the rally prices pulled back and bounced off of the Key Fibonacci numbers as shown by the 50% center dot/dashed white line and the key 38.2% light blue line and 61.8% dark blue line. This can be a very valuable road map when you are live trading intraday.
“How to trade with the Elliot Wave patterns”
In this section of the chapter I will show you two excellent examples of how to trade using the Elliot Wave patterns using a plain chart.
I have added to this plain 450 tick chart on the mini Nasdaq (NQ) a 14 period Bollinger Band and a 10 period simple moving average which is the blue dashed line.
On the charts I have identified the specific Waves 1-2-3-4-5 along with the completion A-B-C pattern after the 5th wave move.
The rule to watch for on the wave 2 and wave 4 patterns is as follows:
If wave 2 is relatively simple then wave 4 will be complex (and therefore require a bit more patience in shifting to wave 5)
If wave 2 is more of a complex wave then wave 4 will be simple with wave 5 coming into play much quicker.
The above rule when learning to intraday trade with Elliot Wave is incredibly valuable so be sure to make a note on your trading desk about this.
The Elliot Wave patterns occur over and over in intraday trading of active markets.
The patterns will not always complete the full extension of the move but if you have carefully read the higher time frame charts and they are all one sided then odds are very strong the pattern will come to full fruition.
I highly recommend that you go over 20-50 charts with the same time frame and indicators I show above and get really skilled at indentifying these patterns.
You will be surprised to see how frequently they occur intraday giving you the advantage of trading off of them.
Once you recognize the E Wave pattern in relation to the Higher Time Frame charts described earlier you will have an incredible advantage in seeing where the market is most likely to go.
Sometimes the pattern will not complete itself and a Wave 4 (or even sometimes an early Wave 3) will fail and prices will shift gears.
This can be identified with the Bollinger Band level on the Wave 2 or Wave 4 cannot hold the retrace pullback. So always be sure to work a tight stop on the BB pullback retracement moves.
Here is a classic Elliot Wave intraday pattern on the downside with details describing the move:
Note how on the Wave 2 and Wave 4 reflex reversal moves prices ran right to the Bollinger Band while the Blue dashed MA line stayed relatively flat on the move.
Below is another classic E Wave up pattern:
This particular chart is interesting in that it shows the full E Wave pattern completing along with the A-B-C pattern right into the close of the session.
Still, because the pattern is so powerful in this case citing a reversal that prices drifted lower into the final futures close and then lower into the Globex session.
Notice throughout these charts also the Candlestick Engulfing patterns signaling the end and start of a new reversal move.
After 25 years of trading I have seen these 6 Essential Ingredients of prove to be the most valuable elements of day trading. If you just focus on getting a really tested proven short term time frame system of day trading and then combine that with the other 5 key ingredients it will be all you need to learn. It is not that difficult to learn these ingredients and it will save you many years of going to endless webinars trying to figure out what are the most important things to follow.
If I can be of any assistance in your trading just email me anytime and I will gladly answer any questions you may have. Email me at Mohan@daytradersaction.com.
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