How to trade the red to green move
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Is learning the red to green move really necessary?
Starting your stock day trading journey without a plan or strategy is the quickest way to run your account into a brick wall. If you researched the financial markets and equipped yourself with the right knowledge of building a successful trading career, you would know that trading without a plan is not a wise idea. You may be lucky to catch some moves and win some trades at first but rest assured it won’t take long before your account enters an unpleasant free fall.
Having mentioned that, you have probably heard pro day traders and gurus in the financial markets mention and discuss the red to green move trading strategy. If you haven’t, you would have eventually and interestingly you just did. Now that you have cross paths with this often spoken about day trading strategy, one question that’s probably racing through your mind is, what is this red to green move day trading strategy and why is it such a big deal?
What is the red to green day trading strategy?
The red to green move is used to describe a trading scenario where a high volume stock that opened in the red at market open (in the morning) closes at a price that is higher than the previous day’s closing price the keywords are “break previous day’s closing price”. When this market condition plays out, it forms what is known as the red to green move or red to green break out move.
Now that you have understood what the red to green move is all about, the next big question is how does one trade red to green move?
There are two ways you can leverage this move in your day trading strategy. You can either buy stocks before a red to green move or buy after the red to green move break out. Let’s take a closer look at both strategies.
Strategy 1: Buying before a red to green move
Buying stocks or any other financial assets/instruments based on this strategy is best implemented when the market is bullish and is in a strong uptrend. The reason why buying before the red to green move is best executed in a market that’s advancing north full throttle is because trading in the direction of the trend significantly increases the chances of your strategy succeeding.
The idea is to buy into the trade at the early hours of the trading day before the stock goes from red to green. That way, you would have “bought the dip” as it is said in the day trading lingua. However, you are not just going to jump on any stock because you think its price or value is at its lowest from the previous day. It’s always best to make an informed decision by analyzing the market trends and momentum. Then, you should also use other indicators to confirm what the charts are saying. That way, you can conveniently tell the trend (if the market is in an uptrend) and avoid false breakouts. Speaking of false breakouts, it is not unusual for stocks to dip for some time, up to a quarter or halfway the previous candles before going back to their initial trajectory upwards. You should beware of such patterns and watch out for such behaviors with the stocks you have in mind before executing your order.
When you successfully spot reliable stocks that check all the boxes for buying before the red to green move and they satisfy the conditions of your trading strategy, don’t hesitate to take the trade. While you are at it, here are tips to guide you on how to use this strategy.
Top tips for buying stocks before the red to green move
- As we mentioned earlier, always ensure that the trend is up and the momentum is strong in that direction.
- Check to see if the stock has a history of following this pattern. You can start by studying previous price actions.
- Keep an eye out for the previous day’s candle. It should be in an uptrend formation. However, it’s not unusual for the previous day’s candle to be down for some time before picking up steam.
- Remember to check the volume and be on the lookout for strong bullish volume patterns.
- While studying the previous day’s candle, have it in mind that the current candle must not dip or close below the previous day’s candle. It’s okay for the candle to dip up to 50% of the previous day’s candle. If it dips further, it’s a no-no!
- It’s always best to buy the morning dip after getting confirmation about that the price action and strong indications that the price will reverse as the day progresses. Having mentioned that, you need to be careful with where you are placing your stop loss. If you are confident in your analysis and you don’t mind tingling your risk appetite, you can place your stop loss right below the previous candles. However, the previous candle must have exhibited signs of strength. You want the candle running out of steam and coming back to stop you out.
Last but not least, be mindful of happenings at key levels of support and resistance on different time frames (from higher time frames to lower) before taking any decision. Most times, the best entry decisions are made after carefully analyzing price action at key supply and demand levels.
Moving on to the second strategy.
Strategy 2: Buying after the red to green move
If you miss out on buying before the red to green move plays out, you can always enter the market after the red to green move breakout. While this may present you with another golden opportunity to enter the market, you must be careful not to be caught in fake breakouts. To save yourself from getting caught on the wrong side of the swing, here is a tip to help you escape getting caught in the woods. Be sure to confirm the breakout with market volume. Usually, high volume indicates after breakout indicates high demand. However, to increase your chances and odds of making the most profitable entry, buy after a pullback retest a key support area after the first breakout.
Tips on how to buy stocks after the red to green move
The tips we will be sharing are almost similar to those of buying before the red to green move happens. First, ensure that the overall trend is up on higher time frames such as the weekly and daily. Strong volume patterns in the direction of the trend is a good sign and be on the lookout for retest at key support areas you have higher chances of winning your trades there. While you are at it, don’t forget to make use of trailing stop loss to protect yourself from sudden changes in market trends. Trailing stop loss also saves you from a catastrophic loss if your analysis is wrong. That way, your account won’t suffer a devastating hit or get run aground.
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