These are notes I took from a 15 July 2013 Moneyshow video by Ken Calhoun from Day Trading University called How to Day and Swing Trade Morning Breakouts.

In the video, Ken goes through how to scan for top-moving entries and exits, and how to easily trade the morning’s strongest moves, for both intraday and swing trades.

In Ken’s opinion, you only need to be right 30% of the time as long as you scale into winning trades and keep a tight stop on everything else.

Swing Trading Morning Breakouts

  • Ken suggests a 90-Day Candlestick charts with a 50, 100 and 200 Simple Moving Averages to allow for top-level scanning– This does a very good job of identifying key candlestick patterns, pivots and continuation plays.
  • Use a 15-Day, 15-Minute Candlestick charts for more momentum-based swing trading (anywhere from overnight up to a couple of weeks)
  • To avoid false breakouts: Wait until something’s moved at least $0.35 above a 15-Day High
  • Scale in to your swing trades at every 2 points to add to winners on stocks priced between $20 and $70 per share.
  • Put in a maximum 1.5 point stop/trailing stop
  • Most instruments should be between $20 and $70 per share. Under $20 instruments are more susceptible to manipulation.
  • He likes instruments that trade at least 1 million shares.
  • Ken also likes a 10% range (from the low to the high)

Setups
From a Momentum Continuation breakout standpoint, look for trades after wider range candle bases (i.e. when you see a lot of narrow/short candles and then wide range/taller candle – one that is at least twice the real body at a 90-day high above all three MA lines). That’s usually a good set up for a trade on the day or two following (see below)

wide-candle

Also look for cup pattern and enter when they are at least $0.35 above the previous high so you don’t get shaken out and then scale in every 2 points on the momentum break (see below)

cup-pattern







Minor gaps (those that are up less than 5%) usually continue in the direction of the gap.

Day Trading

For Day Trading, Ken uses a 2-Day, 1-Minute chart – The key is to reset all data to 1-hour prior to market opening – i.e. 8am EST – to see pre-market directional bias. This can really help with trading minor-gap continuations (one of Ken’s favourite set ups).

Ken says that you don’t want to trade within a previous day’s range (i.e. the stock’s high/low range). One of the best tips is to make sure you only trade outside this range. This can drastically reduce false breakouts because New Day Highs or Lows attract institutional money flow.

To easily see which stocks are having the strongest breakouts, sort your quote box to show Change from Opening (with updates every 3 minutes). Like a horse race, it will show you which stocks are strong “out of the gate”.

Also take a look at the relative strength of the sectors and what they did in the previous trading session. Trade the instruments that are tied to those sectors. For example, Biotech was up yesterday, so AMGN is up today.

THe $QMI NASDAQ 100 Pre-Market Indicator is a really good signal as to the strength of the market and how to best trade the open. Look at it for price changes between 8am and 9:30am (or even to just before opening at 8:55am, but not at 9:30am because there is usually a spike). During that period, a upward range of 4 points or better will show good case for a strong long where you can look to buy new highs. Thw QMI will also indicate a lower or choppy market. This is what Ken says he uses to dictate how he will trade the open

Another thing you should do is identify the previous day’s strongest movers and look to trade them at new highs.

Ken is not a pivot trader. He uses pivot signals to identify a breakout trade, but for entries he likes new 2-day highs.

By setting up your order order with buy-stops, including scale-in trades, you will have a rack of orders ready to trade as soon as the market opens.

Scale-in lightly until the position proves itself. For day-trading you want to add at every 20c or 30c and expect to be all out by 50c.

You are looking:

  1. for a minor gap up
  2. To buy New Highs

In low-volatility, choppy markets, use wider entries further away from trading ranges.

In high-volatility, hot markets (i.e. we’re at a 2-day hight or a 2-day low), use tighter entries closer to current trading ranges and add secondary scale-in entries to capitalise on the volatility.

Risk Management: For day trades Ken only looks at risking only 10c (up to 40c for higher priced stocks) maximum. Once it’s moved 20c in your favour, trail a stop at breakeven and sell half a position to lock in a gain. For a 100-200 day trade on a $70 share, this makes for a good confidence boost. You want at least a 2:1 risk/reward ratio. For swing trading, he uses a point and a half (or so).

When the Market Opens

Look at the size of the candle of the E-mini S&P Futures in the first minute as the market opens as this is a good lead indicator for break-outs on New Highs.

Don’t do anything in the first few minutes of the open, as this is where you will see reversals.

http://www.moneyshow.com/video/webcast/101/5b544431bede4b948a5b0942c2af7fac1/how-to-day-and-swing-trade-morning-breakouts/