Learn Technical Analysis for Intraday Trading

Understanding Chart Patterns and Setups

Chart Patterns

Chart patterns are formations that emerge on price charts as a result of collective investor behavior and emotions. Some of the most common chart patterns used in intraday trading include rectangles, flags, pennants, triangles, head and shoulders, double tops and bottoms. These patterns help identify potential support and resistance zones in a stock’s price movement. Chart patterns are identified based on changes in price action and trading volume over time. For intraday traders, it is essential to look for patterns that form within a single day or over a couple of days. The more consolidation a stock shows through a pattern, the stronger the potential breakout. Some tips for spotting patterns include scanning stocks near the 52-week lows/highs and those showing little to no price movement on the day.

Setup Identification

Once a potential chart pattern is identified, the next step is to analyze the stock’s technical indicators and price action for a viable setup. Traders should look for patterns that are more than halfway formed with volume confirming the price movements. As the pattern nears completion, it is important to watch for bullish or bearish divergence signals on indicators like RSI and MACD. A break above or below key resistance and support levels in the pattern confirms the setup. Tight stop-losses should also be placed to control risks.

Executing the Trade Plan

Entry and Exit Signals

For an intraday setup to be actionable, traders need to have defined entry and exit levels in place. The pattern breakout is usually the entry signal, while the stop-loss protects against an adverse price move against the trade. Profits can be booked using percentage targets or by trailing stops. Some traders also opt to exit partially on quick gains and let some position ride for bigger targets. It is important the whole trade plan is decided before taking any position.

Optimal Order Types

While regular market orders suffice for quick entries on breakouts, limit orders give better control over entry pricing. For exits, stop-loss orders prevent manual mistakes. Additionally, bracket orders that combine a stop and limit are useful risk management tools. Choosing the right order types based on the trade viability, liquidity and volatility of the selected stock is important. Novice traders should stick to limit entry, stop-loss exits initially.

Monitoring the Trade

Once in a position, it is vital for intraday traders to monitor price action closely. Charts should be viewed on multiple timeframes to identify changing market conditions early. Position sizing must be adjusted dynamically based on how the trade unfolds. Partial exits may be taken if targets are met quickly. Intraday traders need to be ready to exit positions that do not work out as expected without hesitation.

Managing Risks Through Discipline

Size Appropriately

Position sizing is critical to risk management in intraday trading. Only 1-2% of total capital should be allocated per trade to survive drawdowns. Positions taken on very volatile stocks require smaller sizes compared to those in more stable ones. Traders must avoid becoming oversized on winning trades by following exact percentage-based position sizing rules.

Cut Losses Early

Strict stop-losses are a must for intraday setups as markets can turn against positions very quickly. Stops should be placed at logical support/resistance break points and not trail stops which could get hit on whipsaws. It is better to cut small losses than waiting too long in losing positions. The saved capital can then be deployed on other viable setups.

Review and Learn

After each trading day, it is important to analyse performance, review trades and learn from successes as well as failures. Post-day reviews help understand trading psychology and areas needing improvement like sticking to plans or avoiding revenge trades. Keeping detailed trading journals also aids in long-term development by tracking profitable and losing trades.

Automate Your Process

With practice, many intraday trading procedures tend to become automated. For example, using customized scans to generate daily watchlists based on specific criteria help stay objective. Similarly, having preset risk-reward ratios, clear entry/exit rules and position sizing policies minimize emotional biases. The goal should be to develop an almost mechanical rules-based approach to intraday trading over time.

Conclusion

Intraday trading done professionally using sound technical principles can be very rewarding. However, it requires substantial effort to learn the concepts, control emotions and develop an optimized methodology. Traders must start small, stick to a predefined plan rigorously and continue honing their skills through experience and analysis. With patience and discipline over time, consistent profits are possible from this approach to trading in the stock market.