I’ve had hundreds of traders ask me if we can day trade equally well in bull markets vs bear markets. The truth is, the overall market conditions have very little effect on the majority of my day trades. As day traders we make money by finding volatility in the market.
We hone in the handful of stocks each day experiencing volatility due to news, earnings, or another major catalyst. These catalysts are almost always stronger than the greater market conditions. Let’s say for example that the market has been tanking for 2 weeks straight but a company like $LULU Lululemon comes out with a big earnings beat.
We see $LULU gapping up and we know the catalyst is so strong this stock will buck the trend of the overall market and move up. By focusing only on stocks with a momentum catalyst we can mitigate the influence greater market conditions could have on our trades.
For trend based trading on non-catalyst stocks the greater market conditions can have a big impact on the end result of your trades. I found this type of trading to be very frustrating because you can get caught in choppy, sideways price action.
One of my methods of risk management is reducing the amount of time I’m holding stocks. Risk can be viewed in a number of different ways, the amount of money in a trade, the difference between your entry and your stop, and the amount of time you’re holding a position. I focus on trading stocks with a catalyst because they tend to make quicker and more well defined moves.
The reason they make cleaner moves is because there are thousands of other retail traders moving in and out of these stocks at the same levels. We all have access to the same charts and see the same patterns.
When a bull flag or ascending wedge is forming we all see it and know where to buy and sell. On a stock without a catalyst there aren’t as many people watching the patterns unfold and therefore there is much less follow through in the pattern.
One of the tricks to determining the strength of a stock is looking at the relative volume. Volume is relative for each stock, some stocks trade hundreds of millions of shares per day and others trade less than one hundred thousand shares per day.
The relative volume indicator tells us how much volume a stock has relative to its recent history. Stocks with high relative volume indicate a much higher than average amount of volume.
High volume typically comes from one of the catalysts we look for. So instead of hunting for news, we can scan for stocks trading on high relative volume and then research the news.
Find Stocks with Trade-Ideas
I have always used Trade-Ideas as my go to stock scanning software. They have created a piece of software that is the ultimate tool for any day trading strategy or swing trading strategy. This is how we find stocks.
New traders always ask me how did you find that setup? And the answer is almost always Trade-Ideas. In order to find the stocks with high relative volume, gapping up with low float, or surging out of the gates, we need a tool.
Trade-Ideas provides the tools! We can plug in our basic filters and let those stock scanners run all day long. This allows us to focus on finding entries and managing open positions instead of hunting for new setups. You if you haven’t already read my detailed review of Trade Ideas you can find it here.