Improving Your Intraday Technical Analysis Skills

Intraday technical analysis is one of the most popular methods of analyzing and trading financial markets. During the long weekend I received several emails from Market Geeks readers asking me some great intraday technical analysis trading questions.

Every few weeks I collect the most frequently asked questions and answer them in a form of tutorial so that everyone can benefit from these questions. If I missed your question this time around I apologize ahead of time.

1.Using Trailing Stops For Intraday Trading

Trailing Stops are stop loss orders that move along with the position as the position is accumulating profits. The purpose of the trailing stop loss is to lock in profits so that if the position goes against your direction, the position will be liquidated without incurring the initial risk when the position was entered. You can see in this example how the initial stop loss is trailed two times after the position is established.

intraday technical analysis

Trailing Stops Lock In Profits To Minimize Risk

While trailing stops play a very important part in short term and swing trading, I don’t recommend traders use trailing stops for intraday trading. After back testing thousands of stocks and dozens of futures and currency contracts, I found that using trailing stops for intraday trading actually lowers your profit potential by about 30%.

What the test results demonstrated was using trailing stops when entering and exiting positions during the same day actually limited profit potential and prevented positions from realizing their full trading range for the day.

When changing the parameters to leave the original stop loss in place, the percentage of winning trades increased from 40 to 60 percent and profit potential increased as previously stated as well.

This clearly communicates that limiting risk by using trailing stops to lock in your profits actually decreases profit and increases loss over time. Keep in mind this test was performed during intraday trading and did not include holding positions overnight.

2. Do Not Make Trading Decisions During The First Half Hour

Another important mistake many beginners make when applying intraday technical analysis, is making decisions during the first half hour of the trading day. I want to makes something clear from the start, executing orders during the first half hour and making trading decisions are two separate things.

If you have an existing signal from the previous night or a stop loss order in place and these trades are triggered and executed during the first have hour of the day, you are just following your trading plan and that’s what you should be doing.

What I’m referring to is making new trading decisions, changing your trading plan or order placement based on what occurs in the first half hour of the day; this is a very common beginner mistake and something you should avoid doing. The first half hour of the day is mostly trading noise and emotional volatility.

After the first half hour the market sets the tone for the rest of the day and allows you to make less emotional trading decisions.

intraday technical analysis

The First Half Hour Is Mostly Random Trading Noise

3. Ignoring Fundamental News Can Cost You

While this article is about intraday technical analysis, most day traders tend to run away from doing basic fundamental analysis that can impact their position greatly.

There’s two ways to look at fundamental analysis, the first way is to use the information in your trading and the second way is to see how the information impacts the financial market you are trading.

While using fundamental information in intraday analysis is not going to help you very much when your position holding time is less than 6 hours, it will help you tremendously in seeing the relative strength of your financial position based on how it reacts to the news.

For example, if you’re holding a long position in a stock that builds houses, a negative housing starts report that has no negative impact on your stock would demonstrate that the stock is extremely strong in the very short term. Paying attention to how stocks and other financial markets react to fundamental news is one of the most important skills traders must develop and practice on a daily basis.

Take a look at this chart of the Spider ETF; it tracks the SP 500 cash index. Before the opening there was negative sentiment about the federal government cutting their bond buying program, the market opened higher and remind higher for the first part of the trading day. This demonstrated to me that the stock market is still very bullish in light of the negative news.

The Stock Market Was Up For The First Half Of The Trading Day

The Stock Market Was Up For The First Half Of The Trading Day In Light Of Negative Economic News

Following these three simple tips will improve your trading performance and help you become a better trader.

For more information on this topic, please go to: Does Day Trading Work and Is Day Trading Or Swing Trading More Profitable

Wishing you the best,

By Roger Scott
Senior Trainer
Market Geeks