Most people don’t realize that the majority of swing trading strategies can also be applied to day trading.
One of my favorite stock pullback strategies that works for both trading techniques is the tail gap swing strategy.
So in this write up, I’ll explain how everyday traders apply the tail gap swing strategy to day trading stocks and futures contracts.
1 Stock Pullback Strategy That Works: The Tail Gap Swing Strategy
In a nutshell, the tail gap swing strategy is a simple pullback plan that involves a short deviation from the main trend. When applying the tail gap swing strategy to day trading, I look to see a gap against the direction of the main trend.
The pullback must make a 10-day price low, and have a gap between the high of the 10-day price low and the previous day’s low.
And because we’re day trading and not holding positions overnight, I’m OK with the stock being in a trading range instead of trending strongly.
I will not go against the trend no matter what time frame I choose to trade.
Let’s go through a few different examples so you can see how this stock pullback strategy works, as well as the rules we need to follow to use it correctly.
How to Use the Tail Gap Swing Strategy Correctly
Once you identify the setup correctly, you can place a buy stop order $0.02 above the high that was made on setup day. Make sure you place your buy stop before the next trading day.
This setup often triggers immediately at the opening bell or a few minutes after.
To avoid having to watch the market second by second and risk being late to the game, I recommend a simple buy stop order 10 to 15 minutes before the opening bell.
Once you place your order, you should monitor the market or make sure your brokerage firm has a way to quickly notify you of your fill.
There’s a chance that the stock could drop quickly after filled.
That’s why it’s important to place your stop loss as quickly as possible to prevent the stock from dropping below your stop-loss level before you have a chance to place it.
After you place your protective stop-loss order, you should place your exit order.
The exit is simple, and from testing several methods used in day trading stocks, I find that Market-On-Close (MOC) orders work well with this pullback strategy.
Stock Pullback Strategies That Work: Day Trading Short Side
I also want you to understand that this stock pullback strategy works just as well to the short side as it does going long.
As a matter of fact, I prefer to trade the tail gap swing strategy to the short side because markets move faster when they drop than when they rise.
Keep in mind, because we’re day trading, I don’t mind trading range-bound markets instead of strong trending markets when I use this method. I won’t trade against the trend… but if there’s no trend and I see a good setup, I’ll take it.
Notice in this example below how the market is range-bound and trendless.
You can see the stock makes a 10-day high and gaps up.
As long as the trend isn’t moving upward, the trade is valid and worth taking. That’s because this strategy tends to move quicker and produce more volatility to the downside over the long term.
Once you identify the pattern, you need to place your sell stop order.
This will be your entry order, so I want to make sure you don’t confuse sell stops with buy stops.
When you’re short trading this stock pullback strategy that works, you want to place a sell stop to enter, and a buy stop as your protection order. This is the opposite of how it works when you go long.
Assuming you are filled the next day, you’ll want to place a buy stop order immediately after you get filled.
Never wait until the last minute because the stock can rally past your exit level while you wait. It doesn’t happen often, but it does happen once in a while.
After you’re filled, you’ll want to place a Market-on-Close order so you don’t have to watch the market all day.
Getting out at the close gives you the most time for your position to work in your favor.
1 Stock Pullback Strategy That Works: The Final Example
Here’s one last example so you can see the entire progression from beginning to end.
I’m using another short example because I prefer to trade this method to the short side. But remember, it does work equally as well trading to the long side as it does trading to the short side.
You can see in this example a perfect tail gap swing strategy formation.
We need to be patient here and wait for setups like this one to come along.
Don’t forget to place your protective stop-loss order after you get a confirmation of your entry fill price.
Here is what a good setup will look like:
After you receive confirmation of your fill, and you place your stop loss and your profit target orders, there’s very little to do.
Don’t let intraday emotions get the better of you. Stay with the trade and ride it out till the close no matter what happens.
Keep in mind, this stock pullback strategy and most good day-trading patterns need volatile stocks that move quickly.
You don’t want to get stuck in a stock that’s moving like a tank when you’re day trading the tail gap swing strategy.
For more on other trading strategies and topics like this, check out my article on the 4×4 trading pattern. It’s one of the best pullback strategies for beginners.
All the best,
Senior Strategist, WealthPress