5 Consistent Day Trading Setups (With Charts)

Watch for These Patterns When Day Trading

Each trading day is different. Traders won't find two days in the market that are exactly alike. Yet even though each day isn't exactly like another, there are still patterns that tend to occur over and over, hidden within the seemingly random daily price movements.

These five day trading setups (entry strategies) occur most days, and almost always at least one or two of them occur each day (but not necessarily all in one day). Learn all these trade setups to starting exploiting their profit potential.

Patterns Within Context

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Knowing a pattern and watching for it isn't enough to day trade successfully. The patterns you are about to learn occur frequently, but they are only powerful when they appear within a certain context.

Getting a great day trading entry is about understanding price action, and seeing when a group of traders (who went long or short) are trapped and likely to cause the price to surge in a particular direction as they are forced out of their trades.

The trade setups you will soon learn often occur at these "emotional" points, where a group of traders are likely to feel pain or greed. Unfortunately, that doesn't mean these patterns will occur before all big moves, or that these pattern will always result in a big move. We can't know exactly what other traders are thinking, or how they will act, but by watching for price action patterns that occur regularly, and that often produce a similar result, we can improve our chances of getting into a profitable trade.

Getting into a trade—which is what this article covers—is only a small portion of the trading battle. A profitable exit is also important (see Where to Take Profit When Day Trading), as well as managing risk with a stop loss and controlling position size.

Impulse-Pullback-Consolidation Breakout

day traidng setup in trending direction
Impulse-Pullback-Consolidation on 1-Minute Stock Chart. TradingView

A trading session often begins with a strong move in one direction. This usually occurs within the first 5 to 15 minutes after a stock opens for trading. This is called an impulse wave. The price then pulls backs and stalls out, forming a consolidation where the price moves sideways for two or three (or a bit more) minutes. This consolidation should occur within the range of the impulse wave. For example, if the price falls off the open, the pullback and consolidation should occur below the open price. See larger image here.

Based on the direction of the initial impulse, wait for a breakout from the consolidation in that same direction. A breakout in the opposite direction of the impulse isn't traded. For example, if the price rallied off the open, then pulled back and consolidated (consolidation must occur above open price), then wait for the price to breakout above the consolidation, triggering a long trade. Enter long one cent above the consolidation high point (or one cent below the consolidation low if a short trade develops).

The consolidation should be relatively small compared to the impulse wave that preceded it. If the consolidation is large compared to the impulse wave, the pattern is less effective. There should be a distinct impulse wave, a distinct pullback and a distinct consolidation during the pullback. If each part isn't distinct from the others, the pattern is less effective and should be avoided.

This pattern occurs throughout the day and is how trends form. Therefore, it is a trend following strategy that can be utilized on most time frames and in most markets. Typically, the most powerful moves in a market occur near the open, therefore, catching the first trade of the day with the strategy can have a big impact on overall profitability. When this pattern occurs later in the day, it will often produce smaller price moves (compared to near the open).

Reversal-Consolidation Breakout

reversal day trading setup
Reversal Trade Setup on 1-Minute Chart. TradingView

Not every impulse is followed by a smaller pullback (and consolidation). Sometimes you get a big move one direction, but then you get an even bigger move in the opposite direction right after. This is called a reversal, and now your focus should be on the most recent big move. See larger image here.

For example, assume the price drops $0.20 off the open. It then rallies $0.30. Don't be distracted by that first drop; it doesn't matter anymore because you now have an impulse to the upside. Your focus should now be on watching for the price to decline a bit (pullback) and then consolidate. If the price breaks above the consolidation (one cent), go long.

The same rules apply as in the setup above. We are going to wait for a pullback in the opposite direction of the impulse. The pullback must be smaller than the impulse. Then we wait for a consolidation and a breakout of that consolidation in the impulse direction.

Reversal at Support/Resistance

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Day Trading Support/Resistance Setup on 1 Minute Chart. TradingView

Support or resistance may be a horizontal line or diagonal line, yet is a point that the price has reversed off at least two times before (including the starting point of the support/resistance line). See larger image here.

It's important to note that support and resistance are often areas, not an exact price. Therefore, when looking for a trade setup near support or resistance, the setup doesn't need to occur exactly at support or resistance (as drawn). Rather it can occur slightly above or below.

The support or resistance just tells us to be on high alert, because a reversal (or breakout, discussed next) could be close at hand. With that information, we are going to wait for a consolidation near support or resistance. We have a trade signal if the price breaks above a consolidation near support, or breaks below a consolidation near resistance.

If a reversal signal occurs, take the trade when price moves once cent above the consolidation near support, or one cent below the consolidation near resistance. We are expecting the price to bounce off support or fall off resistance if this pattern occurs. If the price doesn't do that, and instead breaks above the major resistance area (and consolidation) or breaks below the major support area (and consolidation), get out of the trade immediately, and consider taking a breakout trade if applicable (discussed next).

Strong Area Breakout

day trading setup where price breaks resistance/support
Price Breaks Resistance on 1-Minute Chart. TradingView

While trading a breakout above a major resistance area or below a major support area is a popular strategy, it is one of the toughest. The other strategies discussed above are preferred, but it is worthwhile having this strategy in your tool belt for when special situations arise. See larger image here.

The basic strategy is to watch for levels that pushed the price back in the other direction multiple times. For example, the price rallies and reaches 25.25 but then falls. It may do this several times yet is unable to break through the level. After the price has tested that area more than three times, you can be assured lots of day traders have noticed this. All of a sudden, if the price is able to reach 25.26, that could signal an important shift.

Unfortunately, a breakout doesn't guarantee a big move. This is why this strategy should be used sparingly, because often the price will break an important boundary, but fail to produce a big move.

After the price has tested an area, it should make a visually significant move away from that area before returning to it. If the price stays near an area, without getting significantly rejected by it, then the pattern loses its effectiveness. In other words, you want to see the price get visually rejected by an area multiple times.

The power of the pattern comes from traders pushing the price back to that level (and eventually breaking it) despite the fact that the level sent the price in the opposite direction on multiple occasions in the past. The persistence of traders to push the price back to that level on multiple occasions, and eventually push the price through that level, shows they have more resolve than the traders going in the opposite direction.

False Breakouts Help Confirm Trades

day trading setup using false breakouts to confirm trade direction
False Breakout to Upside Helps Confirm Move Lower on 1-Minute Chart. TradingView

By learning all these patterns, each one can help you trade the others. For example, if the price plummeted off the open and you are trading an impulse-pullback-consolidation setup, expecting the price to fall again, then a false upside breakout would help confirm this trade. The price tried to go higher, and couldn't, so if it then breaks out the bottom of the consolidation, "all systems are go" for a short trade (and you wouldn't have been trapped by the false breakout, because we had no interested in going long based on the initial impulse to the downside). See larger image here.

This type of confirming false breakout occurred in the Reversal-Consolidation Breakout example. We were expecting a move lower after the pullback because the last impulse wave was down. The price consolidates but has a false break above the top of the consolidation. The price then falls out the bottom. We were waiting to go short anyway, but the false breakout in the opposite direction further confirms the trade.

If the price tries to go one direction and can't (at an important area like this, that aligns with a trade setup), it's probably going the other direction, lower in this case.

Consider Slight Setup Alterations

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These patterns tend to identify when another move in a particular direction may be occurring. Just relying on the patterns probably isn't going to make you successful, though. As indicated, think about why these patterns work. Understand the reason and you will be much better able to take advantage of great trading opportunities that don't align exactly with the setups discussed above.

For example, assume that a large triangle has formed (price is moving between a well-defined support and resistance area). There is no major directional bias, except that the price is oscillating within this pattern.

If you wanted to go long near support, you could wait for consolidation near support, and then buy when the price breaks out of the consolidation to the upside. But what if a consolidation doesn't occur? The price could form a bullish engulfing pattern instead. If the bullish engulfing pattern occurs near support, it is a piece of evidence that suggests the price is bouncing off support and likely to head higher (potentially toward resistance at the top of the triangle). Whether it is a consolidation breakout or an engulfing pattern, the result is the same. You have information that suggests the price is bouncing off support and you should be getting long.

If the price then proceeds to fall below the triangle, instead of moving higher like expected, get out of the long trade and go short immediately. The initial trade was based on the Reversal at Support strategy, but once support is broken, abandon that setup (it didn't work) and focus on the Strong Area Breakout Setup.

Adapt to changing market conditions, and do it fast. When day trading, opportunities come and go quickly. That said, wait for the good opportunities. No good setup? Then don't trade.

Final Word on Day Trading Setups

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Learn the trade setups, but also think about why they work. This understanding will make you much more adaptable, as no two days will ever look exactly alike. Think about why these patterns often cause prices to move in a particular direction (are lots of traders stuck in a painful position, which is about to get worse?). Use one setup to help you better implement the others. If you have lots of conflicting information and signals, it is probably best to step aside and wait for one of the signals to more clearly define itself.

These are patterns that occur nearly every day. They are not special nor magical, but in practiced hands they can produce positive results.

The best way to practice these patterns is to start by looking through historical 1-minutes stocks charts. Note the patterns and how the price reacted. Take notes on which patterns produced the best results. What conditions were present? If certain conditions tended to produce poor results for a setup, note those conditions so you can avoid trading in them.

Trading is all about context. We need to practice applying each setup in the right context. All these patterns not only help find trading opportunities, but also help us to analyze how the price is moving when it is trending, when it is reversing and when it is stuck between support and resistance. Even if you don't end up taking a trade based on a particular trade setup, you can use these setups to help analyze the market and better gauge where it is going.

Getting into a trade—which is what this article covers—is only a small portion of the trading battle. A profitable exit is also important (see Where to Take Profit When Day Trading), as well as managing risk with a stop loss and controlling position size.