Price Action Trading - Rule Based Day Trading Strategies

3 Rule Based Day Trading Systems To Consider

Why use a rule-based system, and where does discretion come into play? To answer that, let’s explore the advantages of a rule-based system, the role of discretion, and dive into three distinct trading strategies.

The Case for Rule-Based Systems

Rule-based trading systems have distinct advantages:

    • No Second Guessing: These systems provide clear-cut guidelines on when to enter and exit trades, eliminating doubt.
    • Building Discipline: Such systems are excellent for fostering trading discipline.
    • Testability: They allow for straightforward backtesting and forward testing, which is vital for evaluating a strategy’s viability.
    • Ideal for Beginners: They serve as an excellent starting point for new strategies.
    • Room for Discretion: Traders can later integrate discretion into these systems.

The Role of Discretion in Trading

Even the best traders follow rules, treating them as a roadmap for their trades. Within these rules, they identify specific areas where discretion can be applied, such as in deciding the final entry trigger or adjusting risk levels.

Strategy Breakdown

1. Afternoon Surge – Momentum Ignition

A simple momentum breakout strategy focusing on the continuation pattern, where price trends continue post-pause. Key rules include identifying a trending market with a certain percentage filter, recognizing swing highs and periods of congestion, and executing trades based on these conditions.

2. 6 o’Clock Shock – Mean Reversion

This strategy targets mean reversion trades, particularly looking for extensions away from the VWAP (Volume Weighted Average Price). The rules focus on identifying a non-trending rotational market, price extensions, and bar patterns post-6 pm.

3. Velocity Flow – Momentum Ignition

Velocity Flow takes advantage of short-term momentum, waiting for a pause before scalping the follow-through. It involves stringent criteria like consecutive green or red bars without overlap or inside bars, followed by a specific buying or selling action.

Context is Key

Overthinking or overtrading can detrimentally affect one’s edge. Patience is required in choosing the right strategy based on market trends:

  • In Strong Trends: Implement rule-based momentum strategies like the Afternoon Surge or Velocity Flow.
  • In Rotational Markets: Opt for mean reversion strategies like the 6 o’Clock Shock.

Conclusion

The balance between rule-based systems and discretionary input is important. By understanding and applying these strategies, traders can navigate the markets with more confidence and discipline.

Avoid overthinking and overtrading, as these can diminish your edge. If the price is in a strong trend, be patient and apply a rule-based momentum strategy like Afternoon Surge or Velocity Flow. In a rotational market, consider mean reversion strategies like 6 o’Clock Shock. Remember, anticipation is one of the keys to successful trading.