Day traders who include end-of-day charts in their analysis are better placed to find good trading opportunities. Strong intraday rallies can continue through to the following day and these strong intraday rallies show up on daily charts as wide range days with strong closes.
The daily bar chart for Market Corp. NYSE:MKL is shown below.
Chart 1. Daily bar chart for MKL
The daily bar chart for MKL shows a stock in a strong uptrend. The trending nature is confirmed by the 50-day moving average (50MA) which continues to slope upwards and the stock is trading above its 50MA. MKL has pulled back to its 50MA numerous times and rallies back up. MKL closes strongly with a wide range day.
A 5-minute intraday bar chart for MKL is shown below.
Chart 2. Intraday 5-min bar chart for MKL
Displaying the previous trading day on the 5-min chart shows the MKLs strong performance. MKL closes strongly having reached a resistance level for the last two hours of trading. MKL opens and rallies through the prior day's resistance and pulls back to just below that resistance level. The stock then starts to rally and the day trader could take a long position.
Taken a position on the rebound would likely be filled at around $1118.
The risk-reward for the trade should be considered.
The risk is determined by the initial stop which can be placed at around $1111 which is below the low of the minor pullback. This is a tight stop and the stock is sold if it trades back below the pullback's low.
The reward can be determined by using the previous day's range where the stock ran up from $1080 to $1117. This $37 range when added to the day's low of $1113 gives a target of $1150.
The risk-reward can now be determined.
Likely entry price of 62.00 and an initial stop of 61.75 with a Profit Target of 65.00 gives:
Profit = 1150 - 1118 = 32
Risk = 1118 - 1111 = 7
Risk reward ratio = 32 / 7 = 4.6
With a risk-reward ratio of 4.6 this is a trade worth taking as a lot of trade setups have ratios of less than 2.0.
Some day traders may prefer to use a trailing stop and ride the trend until the market close while others will simply use the initial stop and profit target as exits.
Stock Analysis for Finance Students and Investors