Here are some simple set ups that are commonly used by day traders to spot a good trading opportunity. It is important to understand that set ups are by no means a sure fire way to success. You have to be familiar and comfortable with the set ups to be able to take advantage of them. This takes practice and experience from paper and real trading.
1) Bearish Open on Bullish Daily Chart
What you are looking for in this stock is that it must have a large audience following the daily chart. This is fairly typical of most stocks that day traders look out for. The stock needs to be going up steadily for a few days. In the morning of the market open, you want to see a very weak open, which means the chart has opened lower than the close of the previous day or if the stock has plummeted at the opening bell. This is normal in a bullish chart because many people want to take profits in the morning especially when the chart has been gradually trending up and they get a little shaky in their emotion. If this set up occurs, you will want to watch this stock carefully for an entry.
If the stock plummets at the open and people are taking profits, the best time for entry is for a higher low point to appear. NOTE: Some stocks reverse sharply and bounce straight up without doing a double bottom. Chasing these stocks is not advisable. In this type of long, you typically want to place your risk on the low of days. Once the chart fails to hold its higher low, you need to cut your losses and reassess the chart! Never let the chart take you for a ride.
2) Multiple Time Frame breakouts from consolidation
Multiple Time Frame breakout is a breakout over the line of resistance that is across a longer time period, usually 3 to 6 months. It is important that the support and resistance lines are growing tighter and tighter at the breakout so that more people are anticipating it. It should be at the tip of a triangle shape at the point where it is about to breakout. The more people that are anticipating it, the stronger the breakout will be. The crowd will want to jump on the wagon once the breakout happens to avoid missing the trend. If you are trying to find these types of charts, you can simply head over to finviz.com and filter the charts by “horizontal line of support/resistance”. The site gives you a nice list of charts that may fit into this category.
3) Cup and Handle
Cup and handle is a classic long chart that has a proven record of winning. If you can couple this with the MTF breakout setup mentioned above, it will give you the best odds of winning. However, it is not always easy to find these charts and they are rare to come by. Generally in this type of charts, you want the chart to be slowly perking up towards the high of day. If the stock spikes up hard, there is a good chance that the perking up is not going to work because a good number of people will be looking to take profits. However, if the chart slowly starts to perk back towards the high of day, that is where you want to get long with a risk based on the bottom of the dip. The cup and handle is one of the best technical indicators you can use, and should definitely be in a day traders arsenal.