In order to day trade, you need to have reliable intraday charts.  Without this crucial source of information, you’re dead in the water.

What is an intraday chart?  An intraday stock chart is simply a chart that displays information for time-frames shorter than a day.  For most traders this includes 1, 5, 15 and 60 minute charts.  Also, if you’re trading a market that trades 24 hours a day, like the Forex, a frequently used intraday chart is the 240 minute (or 4 hours, for the mathematically challenged).  Using these charts, day traders are able to make decisions based on where the price has been.  It is common for traders to use intraday charts in multiple time-frames when trading.  You should stick to 1 minute or 5 minute charts, and only trade off of one of them, depending on the time of day.   When not actively trading you can scan through 1, 5 and 60 minute charts to keep an eye on the whole picture.

Perhaps you’ve noticed this, but free online stock charts are usually delayed 15 minutes.  This information is not useable for the purpose of day trading.  I wouldn’t even recommend swing trading off of this information, and even entering long term positions on delayed info is a bit shaky.  Your broker is a great source for free intraday charts that are real-time and actually useable for trading.  Broker’s typically have charts you can analyze directly on their site, or they’ll have a stand-alone product that allows for proper chart and technical analysis.  Often, you can trade directly off of these charts using multiple order types.  Another option you have, if you have a compatible broker, is to use your broker’s data feed combined with NinjaTrader.  I find them to be the best for free intraday stock charts.  Their charts are highly customizable to your trading style, with many indicators available, including time/sales (the tape).  The only issue is that you can’t trade directly from these charts unless you pay a monthly fee.  It’s up to you whether or not you think that convenience is worth the cost.  Other than that, the charts are fully functional.

As I said above, having reliable intraday charts is crucial to your success as a day trader.  Finding the right time-frame and indicators to fit your style will require a bit of trial and error, but once you find a set you’re comfortable with, you’ll notice that your day trading will improve over time.

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You might be wondering about how to read an OHLC chart (or bar chart), and that’s understandable.  Next to the candlestick chart, this is one of the most widely used day trading charts.

Let’s start simple.  What is an ohlc chart?  Well, it’s also called an open high low close chart, and that name just about explains it.  Each piece of the bar in a bar chart represents one of those 4 elements.  The open, high, low, or close for that time frame.

Before I discuss that further, what do I mean by time frame?  Well for OHLC charts, each bar represents a period of time set by you, the user.  This can be days, weeks, months or, for day trading, hours and minutes.  The most commonly used time frames for day trading are the 5 minute chart and the 1 minute chart.

Okay, back to dissecting the bars in an ohlc chart; so each piece of the bar represents one of the four elements mentioned. In the illustration here, you can see those elements and how they pertain thepieces of a bar chart.  The left horizontal tick always represents the opening price.  This is the first price the stock trades at within the chosen time frame.  The highs and lows are the shown as the tips of the vertical line.  These are the highest prices traded within the chosen time frame.  The closing bar is the right horizontal tick represents the closing price, or the last price the stock traded at within the chosen time frame.

This one bar is only a piece of the chart though, stock charts are actually made up of many of these charts in series to give you a picture of where the stock is.  Technical analysts also use this information to attempt to predict which direction has the highest probability of going.  Below are examples of a single color ohlc chart, and a two color chart.

As you can see they’re both fairly easy to read, though sometimes it’s difficult to make out exactly where those opening and closing prices are.  It’s for that reason that I prefer to trade using candlestick charts, but to each their own, I suppose.  Anyway, that’s the OHLC chart in a nutshell.

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I figured since I am the (self-proclaimed) Chart Shark, I should probably give some basic idea of how to read stock charts.  I wrote a post a while ago that was pretty much a joke regarding the subject, but sometimes I forget that people are looking for real information.

3 Types of Stock Charts

Reading stock charts is actually quite simple.  There are 3 main types of online stock charts that you’ll find.  Lines charts, bar charts, and candlestick charts.  The first I want to cover is the line chart.  This chart is almost completely useless as a day trading chart.  If you watch it during the trading day, it just sits there and wiggles about and doesn’t give much real information.  Even using it to analyze stocks on a day-to-day basis is pretty useless because it doesn’t give you any idea about what happened during that day.  If you’re online day trading, stay away from line charts.

OHLC Charts, or bar charts are the next on the list.  These charts are better than line charts because they give you a better visual idea of what’s happening in the market in real time.  They are also easier to read than a line chart because, as the name implies, they give you the opening, high, low, and closing price on each bar.  Each bar represents a time-frame of your choosing from months, to minutes.  They aren’t the easiest to read quickly though, especially if you’re looking at a black and white bar chart.  This requires a sharp eye to pay attention where those tails are in order to identify strengths and weaknesses in a trend, which is why the OHLC chart is inferior to the next chart on our list.

Japanese Candlestick Chart

The final, and best type of chart for intraday trading is the japenese candlestick chart.  I find this to be the easiest chart to read, and analyze.  Even single color candlestick charts can be easily read.  This is because they use a “full” and “empty” candle stick to designate a decrease or increase in price.  ”Full” or black candles indicate a decrease in price while “empty” or white candles represent an increase in price.  The main parts of the candlestick are the body, and the wicks.  The wicks indicate highs and lows in the price, while the top and bottom of the body indicate opening and closing price for the time-frame selected.  If a candle consists of only wick with no body, this is called a doji.  A doji occurs when the opening and closing price are the same or very close.  They look like either a cross, and upside down cross or a plus sign, depending on the length of the wicks.

The candlesticks in a chart are lined up in series to give you a picture of intraday trading activities.  Below is a free stock chart courtesy of BigCharts.com.  In this chart below you can see that green candlesticks indicate an increase in price, while the red indicate a decrease.

The time frame for the chart is 5 minutes, which is the most useful for trading after 11am.  Before 11am I prefer to use a 1 minute chart, though I will glance at the 5 minute chart to get an idea of the greater trend.  Beyond that, before the market opens, I will also analyze the greater trends, and support/resistance of hourly and daily charts.

As you can see in the chart, the price ranged 2 points or 2 dollars for the day.  There were probably several opportunities to make money on this stock.  The interesting thing is that the days opening and closing price are only about .25 points apart, so the stock has hardly moved from one day to the next.  There was certainly a possibility of making much more than that if you were watching this intraday chart.

The next piece of basic chart reading is the ability to identify trends.  I have indicated some major trends on the chart above.  The first trend on the left is a pretty vague trend.  Ideally you want something more like the second or third trend where the candles touch the trend several times without breaking it.  Some people will trade these breaks in trends.  It’s not something I trade off of, but I will use trends as strength indicators, and I employ stock chart analysis to spot trading opportunities within the trend.

One final note in this basic article about how to read stock charts is that for online day trading, you’re obviously going to need stock charting software that displays real time stock charts.  This is absolutely necessary for intraday trading because you need to see the chart form and the trades happen as they happen.  You don’t want delayed information, because by the time you get that information the stock chart pattern you thought you saw might be 15 minutes old.

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You seem to think chart analysis is a lot more difficult than it really is.  Instead of giving it a go on your own, you rely on the wisdom of us brilliant chartists to hand you money-making set-ups on your favorite stocks.

I am here to tell you, friend, that it’s not that difficult to do some basic technical analysis on your own.  Let’s take a walk through the basics, shall we?

Connect the Pointy Bits

On a stock chart, you have peaks and troughs.  In order to identify the trend of a stock, you simply find these peaks and troughs and connect them with a line.  In order to make the chart fit your thesis, it is acceptable to plot the trend slightly below, or above the actual lows or highs.  Whatever looks prettiest works best.

Color Within The Lines

Though you may take some liberty with the actual placement of the trend line, don’t go overboard.  Stay on one side of the candlesticks.  I realize it’s difficult to grasp at first because there are just so many pointy bits, but you will get it with some practice.  I promise.

Adjust Accordingly

If you have publicly posited a thesis involving a current trend, and that trend is soon broken, you may feel slightly embarrassed.  This is a rookie mistake.  The pros know you can simply change the trend to fit the chart as it develops.  Then you simply say that the trend has shifted.  Place all blame on the stock or the market in general.  The truth is, we’re all pretty much making this shit up as we go along.

Learn the Simple Chart Patterns

With a clever combination of a stock chart and your trend lines, you can even draw some really cool shapes.  Above, you will see everything from simple geometric shapes, to male genitalia.  These patterns are presumably to help us chartists trade better, but really we just think they look super awesome.

There you have it; Charting 101.  It’s really not as hard as it looks. I have done the illustrations in the style of a 4 year old, because a 4 year old can do this.  Go ahead, and give it a try.  If you want a more serious walk through on some charting basics, check out how to read stock charts.

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Last week, First Solar (FSLR) ran up significantly on news of a large deal for a solar power plant in China. The second day of the run was highlighted in my post about Opening Gap Reversals.  That day saw a huge run up early in the morning and a slow burn back down to its opening price which formed the Long-Legged Doji in the stock chart above.

Long-Legged Doji

The long-legged doji is a specific form of the standard doji.  While the doji signifies indecision, the long-legged doji shows that a deeper and more extended battle occurred between the bears and the bulls that ended in exhaustion as well as indecision.  Due to the exhaustion, the long-legged doji is a stronger reversal signal than a standard doji.  This long-legged doji is even more predictive of a pull-back due to its long upper wick compared to a small lower wick.  This gives it a similar appearance to a shooting star.

For candlestick patterns, confirmation is required for entry.  While we did not get a confirmation the following day, the long-legged doji was followed by another bearish reversal pattern.

Bearish Engulfing Pattern

The bearish engulfing pattern is a two-candle pattern that signals a reversal.  The formation starts with a small bull candle.  This candle is followed by a bearish candle that has gapped up but has closed below the bottom of the body of the previous candle.

The idea is that the second morning started out with a lot of buyer exuberance, but exhaustion set in. This time the bears have really taken control and have pushed the price below the previous days close.

Candlestick Pattern Combo

While the doji as a reversal signal is considered weak, and the bearish engulfing pattern moderate at best, the combination of the two makes a strong case for a temporary pull-back.  Another telling reversal signal is the fact that the tall bearish candle in the bearish engulfing didn’t quite reach the highs of the doji before the bears shoved the price back down.  We’re going to want to see weakness next week to confirm the reversal.

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I discussed the standard opening range breakout in my last post.  Now I want to talk about a variation of the Opening Range Breakout . It’s called the Opening Gap Reversal.  It’s just another of the many useful setups for day trading online that you can add to your arsenal.

The Play

The chart above shows the opening range reversal that occurred when First Solar (FSLR) failed to fill its gap today. The standard mantra of traders is that gaps fill more often than not. I don’t know how true that is, but I do know lots of people believe that it’s true.

What happens when the market proves a lot of people wrong? You get a range breakout. The idea of the Opening Gap Reversal is that a lot of people who had anticipated closing the gap are getting out of that trade. There are also those of us who are there to take advantage of that, which adds to the momentum of this variation of the opening range breakout.

The entry for this trade occurs on the breakout from the morning range.  You can see in the First Solar (FSLR) online stock chart, that the price reached a high of 137.44 before attempting to close its gap.  FSLR was about half a point away from closing its gap before it took off.  You can see how the volume ramped up as it approached and broke that morning high at 137.44.

The Result

After the breakout, FSLR ran up a point and a half before taking a breather.  Then it decided to run another 6+ points (after nearly falling back into the morning range).  It would have been rather lucky for anyone to catch all the available movement on this one, but there were plenty of profit taking opportunities.

As I said above, the Opening Gap Reversal is a type of Opening Range Breakout.  For more tips on how to play the Opening Range Breakout, check out “3 Factors for Opening Range Breakout Success.“

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The Opening Range Breakout is one of the simplest day trading set-ups to understand.  The first hour of the trading day is the most volatile.  Bears and bulls are battling it out in the stock market, trying to show you who’s going to be the boss for the day.  This volatility creates a price-range you can trade from.  Like all breakout trading set-ups, this is a great set-up because it offers a very low risk entry.  If there is no follow-through on the opening range breakout, you should exit the trade immediately.

The Time-Frame

You are looking for opening range breakouts to occur between 9:50 am and 11:00 am.  This gives a stock enough time to develop the range while giving you enough information to determine which direction it will breakout.  The chart above is the chart for Apple (AAPL) from Friday, September 4th, 2009. In this example, the range developed between 9:30 & 9:45 and the opening range breakout occurred at 10:35.

Factors for Breakout Success

There are 3 factors that need to be considered in order for the opening range breakout trade to be probable and profitable.

1. The price has to show a bias towards one side or the other.  You can see in the stock chart above that the price started low, made a high at 168.60, pulled back but then began trending towards the high.  The uptrend signifies a strong bias towards the high and increases the probability of a follow-through if the high is broken.
2. The high or low needs to be tested.  In the Apple (AAPL) chart, the high was tested shortly before the breakout.  Without this test, this level hasn’t proven to be resistance or support so a follow-through is less likely to occur.
3. Volume should be high.  Something to keep in mind with any breakout trading play is that the volume should increase on the breakout.  The trades on the tape should be increasing in size and quantity as the level is broken.  This ensures that the trade has the momentum to continue on to your targets without falling back into the opening range.

These 3 factors will ensure that you get the maximum probability of a follow-through on the Opening Range Breakout.

Exit Strategy

Checking out the 5 minute chart, you can see that this would have been a successful opening range breakout trade.  To exit, I like to scale out.  It is no secret that I love whole numbers as natural support/resistance which makes them great targets.  169 is a great target to lock in some quick profit.  170 makes another great target for 2 reasons.

1. It’s the next whole number.  Whole numbers are important psychological levels.
2. It provided significant resistance on September 1st, just a few days before this breakout.

There it is; the opening range breakout.  If you have any questions or comments, just leave them below.

PR: wait… I: wait… L: wait… LD: wait… I: wait… wait… Rank: wait… Traffic: wait… Price: wait… C: wait…

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The great thing about science is that it full of fun facts and formulas.  The fascinating thing about trading is that it is not.

I pointed out a support level on Apple (AAPL) at 168.67 in another post. In that post, I also mentioned that I was long Apple (AAPL) above 168.67, and short below that level.  Then, this morning, I tweeted a short trade even though the price was above 168.67 on my day trading charts.

“You’re a liar!” you might have shouted; “You tricked me!  I went long because you said to go long!”  I also qualified that statement with “It depends on where it opens on Monday, and where the market takes it from there.”

Why I Went Short

I saw Apple (AAPL) gapping up from a big support level. Then I noticed that the market was making new highs, but Apple refused to go up, so I got short.  I covered half at the whole dollar (169.00) and left the rest open with a 2nd target of that support level at 168.67.  As I was watching other stocks, Apple (APPL) came right down within a hair of that price (168.70)  & reversed. I ended up closing out at break even.

If you take anything away from this blog, I’d prefer that it’s the ability to learn these strategies & implement them rather than trying to copy my trades.

Support & Resistance is Not Exact Either

I should have been keeping an eye on this one.  That inverted hammer (a bullish reversal candle) so close to such a major support level would have been a great place to reverse that position and get long.  Just because the price didn’t exactly touch this level, doesn’t mean it missed the support.

First off, people like “round” numbers (5s, 10s, etc), so it’s possible there were many buy orders waiting at 168.70 which was the closest “round” number to the support.  Second, support and resistance is often more of a price zone, rather than an exact price point.

I often exit positions a few cents above or below support/resistance because I’d rather ensure a fill and miss those few pennies, than have a position reverse on me.  Don’t give it too much space, though. Generally 3-4 cents is good enough. It’s important that you realize that support/resistance is frequently a “close enough” situation. It’s not an exact science.

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I use this method regularly on stocks on my core watch list, and every time I pick a new “in play” stock to add to my watch list. You can use this method to identify overall trends as well as key levels to trade from.

I have chosen one of my core stocks, Apple (no pun intended), to use as an example. I always keep an eye on Apple because it has loads of volume, plenty of daily price range, and it makes predictable moves.

Starting with the weekly stock chart above, you can see that Apple (as well as the rest of the market) had been in a downtrend, but seems to have bottomed out recently and has begun to trend upwards. Both the price & the new trend line have recently broken the weekly downtrend which gives the uptrend more credibility.

Also worth noting is that the current price is well above the trend line. This means that while the weekly trend is up, there’s plenty of room for some downward movement.

All right, now let’s zoom in and take a look at the daily chart.

Here we see that the daily trend is also up. The price here is also significantly above the daily trend, which means there’s still plenty of room to head down. You should also note that the price is channeling sideways with a resistance level being established at 168.67. This could have been a great place for a swing short.

Let’s zoom in further to the hourly chart.

It looks like the current trend in the hourly chart is also upward. Looking at this chart, we can see that Apple (AAPL) has created a new high of the year.  You can also see that it had great difficulty getting through this level.  This shows that there were some serious sellers sitting on that level, willing to give up their stock at that price.  There was probably also a decent amount of short speculation hoping for downward bounce.

Finally, let’s have a look at the recent action in the 5 minute chart.

This chart also shows the current upward trend in the 5 minute chart.  It further illustartes the significance of that 168.67 level.  The amount of traders interested in this level will make it a very significant level in the upcoming week.  Above this level I would be long on this stock and below this level, I’d be short.  It depends on where it opens on Monday, and where the market takes it from there.

This is just an example of how I find significant trends and price levels in the stocks I trade.  You can apply this same type of evaluation to any stock that you trade.  Notice that you don’t see, nor do I talk about any other indicators.  That’s because I often find them unnecessary.  I like to keep things simple.

Go ahead and give this method a try, and note any significant levels you’ve found in the comments below.  Keep an eye on these levels and let us know if they worked out as you’d expected.

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I had quite a morning day trading today.  The following is a transcript of my Tweets sent via Stocktwits as I traded RIMM. Since it all happens so fast, it is difficult to really give followers a picture of what I’m actually thinking, so below I’ve added what I was thinking at the time, and since I am not very smart, I have added what I assume a more prudent trader may have been thinking in the same situation.

The trading day started a little rough, and some guy prosed the following question;

9:44 am – “$SPY how do u day trade when no trend?”

To which I sarcastically replied:

9:44 am – @victorcharlie very carefully

What I was thinking – Hm… good question… today might suck…

Prudent trader’s thought – you day trade with a nimble mind, a sharp eye, and tight stops

9:46 am – $RIMM is running

Me – I’m going to catch a big fat piece of this run.

Prudent trader – If the stock market allows, I will take a calculated entry based on several well-honed criteria.

9:51 am – $RIMM @ resistance @ 78.13

Me – Yesssss, if this breaks, I’m in!

Prudent trader – Not yet… wait for it…

9:55 am – And now she’s dropping $RIMM

Me – WTF?  This is BS.  Good thing I didn’t enter.

Prudent trader – There was no way that run was going to continue.  The tape knows all.

10:00 am – Looking to short $RIMM below 77.61…

Me – I’m going to make money day trading today if it kills me.

Prudent trader – Having witnessed previous resistance at this level, it has now set up as support and a break of this level may cause it to run down.

Full Time-Line of Trade Tweets

10:02 am – Hm… nevermind on the short with the $SPY acting behaving the way it is.

Me – What is going on with SPY?  Is it drunk?  Am I?

Prudent trade – Choppy day… There may be no day trading for me today…

10:04 am – $RIMM I lied, shorting w/ tight stop

Me – Fuck it, I’m in.

Prudent trader – “F” it, I’m in.

10:06 am – $RIMM Target at Friday’s high coming up…

Me – I’m getting some money out of this ASAP.  Mmmm easy money.

Prudent trader – Previous day’s highs and lows often provide support/resistance.  This is the first logical place to take some profit off of the table.

10:09 am – $RIMM took some profit @ 72.10, new stop at B/E.

(clearly I meant 76.10 here, but tweeting and day trading (day twading?) can be a pain in the ass)

Me – ka-ching!

Prudent trader – Nice trade according to plan, where’s my next target?

10:13 am -  $RIMM approaching day’s lows.

Me – Woot!

Prudent trader – WTF does “Woot” mean?

10:15 am – $RIMM stop moved to 76.92.

Me – don’t want to lose my hard earned monies

Prudent trader – having previously had a difficult time churning through this level, it appears to be  significant, and a break above will likely mean a short term reversal

10:32 am – While waiting for $RIMM to move, took a short in $AMZN, but stopped out for a loss. Looking to short $AAPL below the dollar mark.

Me – Woops.  F AMZN.  Dicks.

Prudent trader  – AMZN appeared to be dropping with the market.  Oh well, now we know otherwise.  AAPL appears weak though, and may drop here…

10:35 am PS Raaaar I’m a bear. Right now… A shark in bear’s clothing.

Me – I’m hilarious

Prudent trader – The market may be starting a downward trend here.  I am short on the market until it proves otherwise.

10:37 am – And for those of you who love dead whales (you know who you are) – http://su.pr/2jFWwI

Me – Omnomnom

Prudent trader – Sharks love the occasional dead whale for dinner.  Observe:

10:38 am – Short $AAPL… stop above the dollar

Me – Finally, I knew it.

Prudent trader – That was a well taken entry.  I will keep a close stop on this one since the market still seems tentative.

10:42 am – Still short on $RIMM, just got in on $AAPL – going to let these one’s run with the market for now.

Me – Oh yeah, we’re going down today.

Prudent trader – It seems the market may be setting up to trend down today.

10:59 am – Out of $AAPL @ B/E. Looking to get out of $RIMM above 76.25.

Me – Shit shit shit.  WTF happened?

Prudent trader – It appears the market is either reversing or its going to be a choppy day.  Watching closely…

10:59 am – Out of $RIMM

Me – Screw this, I’m going to go play Xbox.

Prudent trader – 1 winner, 1 loser, and 1 B/E; not a bad bit of day trading for such a horrible trading day I think I am out for today.  One of my day trading secrets is that 1 big win is a good day.

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