Ebook 3 - Strategies - Trade The Pool - Stock Trading Prop Firm (2024)

Now that we have seen what day trading really is, who the market players are and the importance of choosing the right stock, let’s take a look at some of the most popular techniques and strategies that traders adopt.

A trading strategy is a method used to buy or sell in the stock market while making a profit. It’s very often an algorithm of pre-defined rules and criteria based on technical analysis and past trading patterns.

Be careful, mistakes are made everyday by new traders entering the market under the premise of the “Holy Grail of the Perfect Strategies” on social media.

Your trading strategy must be built or chosen around you, your objective, your investment, your capital, your character and your own risk tolerance. You can hardly do a “copy and paste” with someone else’s strategy and remember the fact that a certain strategy works with another trader, doesn’t necessarily mean that it will work for you too.

Let’s take the example of a trader who is just starting out. Let’s just say he’s a young man who has just finished university and has excelled in his studies.Let’s imagine this new trader is of the reflective type and likes to ponder a little longer before making a decision, and likes to evaluate all the pros and cons of any given situation. He has thought long and hard before answering each question of his exam and since that’s part of his character, ideally, he should have the possibility to do the same when trading.

Let’s say that because he’s only just starting out, our young trader does not yet know of any reliable source of information and trading education. He comes across someone on Instagram who seems to offer the “Holy Grail of Trading”, a strategy with a success rate of 70% and daily profits of up to $5000. Let’s also imagine that this type of strategy forces whoever uses it to scalp the price of a security and that, therefore, requires confidence and quick thinking.(scalping is a trading method that sees a trader entering and exiting positions incredibly rapidly, sometimes in a matter of seconds).

Well, how successful do you think this new trader is going to be if he chooses to use that strategy? We think “not much”.
His character is not suitable for this type of strategy which could work very well and be profitable for another trader and not necessarily for him too.

The important thing to consider here is that building a strategy comes after months of trial and error. Any new trader should start his trading journey by examining and trying out each type of strategy. He should then try to discover and understand which strategy best fits his character and how to make it his own.

Remember, this is true for both long and short-term trading strategies.

Let’s take a look together at the most popular techniques and strategies among traders.

1. Momentum Strategies
2. Trend following Strategies
3. Trend Reversal Strategies

1. There must not be a resistance level that can prevent the stock from moving higher.
2. The first move up must be accompanied by a high volume.
3. The trading volume in the consolidation must be significantly lower than the volume from the first move up.
4. You have to see at least two “higher highs” at the consolidation
5. There must be hot news related to the stock.
6. The entry will be on the first candle that breaks the “lower low” at the consolidation.
7. The stop will be at the low of the most recent “higher high” at the consolidation.
8. The profit target has to be at least 2:1 the size of the stop loss.

The bull flag pattern got its name because it resembles a flag on a pole.

One of the main things to look for in this pattern is volume. A large volume entered after the hack, increases the likelihood that the setup will succeed.

It is very important to find the right point to enter and know how to wait patiently until it happens. One of the mistakes new traders often make is that they will try to enter the trade earlier to reduce their stop. In reality, the pattern might not start at all and the trader would end up losing on a trade that was not part of his trading plan in the first place.

1. There must not be a resistance level that can prevent the stock from moving higher.
2. The first move up must be accompanied by a high volume.
3. The trading volume in the consolidation must be significantly lower than the volume from the first move up.
4. The consolidation must be at least two candles.
5. There must be hot news regarding the stock.
6. The entry will be on the first candle that makes a new high.
7. The stop will be at the low of the consolidation.
8. The profit target has to be at least 2:1 the size of the stop loss.

Trend following or trend trading is a trading strategy that is based on the assumption that price trends tend to endure.For this strategy we want to see the price reach higher highs, this shows that although the price is consolidating and falling a little, the trend is to the upside.

There are several methods to trade this strategy but we will focus on one method, very accurate and popular among stock market traders

Trendlines are one of the simplest, yet most powerful tools traders use.A trendline is a line drawn over pivot highs to show the direction of the price, the angle of ascent, the strength of the move and the relative strength of the trend.

The more “higher highs” a trendline goes through, the stronger the trendline itself because it becomes more recognizable to more traders.

1. Establish current price trends.
2. Draw a trendline with at least two connecting “higher highs”.
3. Extend the trendline into the future.
4. Wait for the price to touch the trendline for the third time.
5. Enter the trade in the direction of the trend when the stock has confirmed that it can hold the level of the trendline.
6. Place a stop-loss order under the new “higher high”.
7. Set a take-profit order at least 2:1 the size of the stop loss.

A trend reversal occurs when the direction of a stock is changing and moves back in the opposite direction.

Reversals often occur in intraday trading and happen rather quickly.A reversal in most cases happens when the stock reaches an important price area. A reversal occurs after a stock price increases to the point of reaching an important price level.

Ideally, for the pattern to be confirmed, what we would like to see is a price struggling to sustain and break through the new level and starting to concede to selling pressure due to profit-taking and market exits.

One of the advantages of reversal strategies is that they provide a clear indication of where to set the stop-loss (in most cases, this is above the daily high and above a strong resistance level). If the price reaches our stop-loss it means the pattern has failed to hold the level.

A double top is a technical reversal pattern formed after a stock reaches an important price level twice in a row but fails to break it.

Confirmation happens as soon as the stock price drops below the higher high price made while trying to break out a second time. It is a must to be patient and identify the critical support level to confirm the identity of a double top.
The stronger the level that price is trying to breach, the greater the strategy’s chances of success; a weekly resistance level, for example, is considered much stronger than those on a smaller timescale.

1. Look for the stocks that moved up the most.
2. Draw price levels at which the stock could stop.
3. Put alerts on those levels so that you can track the price closely when they reach the key level you’ve marked.
4. When the stock reaches one of those levels, expect a slight price drop and wait for an upward correction and a second breakout attempt in the hope that it will appear accompanied by a reversal pattern and large volume
5. Place a sell order below the “higher high”
6. Place a stop-loss order above the daily high
7. Set a take-profit order at least 2:1 the size of the stop loss.