Using Directional Bias to Improve Your Daytrading



Posted: Tuesday, October 13, 2009

by Scott Cole
Power Golf Training

An easy way the daytrader can improve his/her results is by utilizing directional bias. In other words, the daytrader only takes long positions in individual stocks if the overall market is trading up, and short positions if the market is trading down.

The obvious difficulty is in being on the right side of the market! However, a little chart analysis is all the trader needs to stay on the right side of the market most of the time.

First of all, identify the current intermediate term trend. I define this trend with a 13 day and 34 day moving average. When the 13 day average is above the 34 day average, the market is in an uptrend, and the market is in a downtrend if the 13 day is below the 34 day. However, any set of moving averages can be used, such as a 10 and 20 day average, 20 and 50, etc.

Next, I look at the trading pattern over the last 3 to 5 days. If these days are up, I will have a bullish bias, unless I see any kind of a reversal pattern, such as declining volume and a narrowing trading range as the market trades higher. The best pattenrs are those where the market trades against the trend for a few days, and exhibits signs of resuming that trend. Inside trading days are also among the favorite patterns to look for.

It is also helpful to identify seasonal patterns that may offer directional bias in the stock market. For instance, when the market is in an uptrend, and approaching the end of any month or quarter, there will usually be some bias to the upside, as portfolio managers load up their portfolios with winning stocks. Trading days before holidays tend to have an upside bias as well.

When I see one of these patterns in place, I will enter a long position when the market shows intraday strength. Usually, I look for some sort of intraday breakout in the major averages, and look to trade very liquid and volatile stocks in the same manner.

The key to all this is that if the market is up solidly, the majority of stocks will also trade higher. Therefore, it makes no sense to try and trade against the underlying trends.

If you trade in the direction of the underlying market, you should become a more profitable daytrader!

Copyright (c) 2009 Scott Cole

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Scott Cole is a private market analyst who operates the website http://www.bestdaytradingstocks.com
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