short Strategies & Patterns

When Trying to Profit from a Falling Stock

The VWAP Fade

The VWAP fade is my favorite, and most successful day trading pattern. As always, the key to this pattern is finding it with good risk/reward.

Keys to VWAP Fade

  1. Establish Premarket Resistance and Supports
  2. Check for Catalyst (Hint: We like stock with no catalyst)
  3. Look for weakness approaching the open

Setting Up the Trade

STEP ONE

Watch for Bearish Trend at the open. This should come with a big washout with high volume through the premarket support.

STEP TWO

Pay attention to level 2 when the stock finally finds a new support and bounces.


STEP THREE

Draw horizontal line on new found support.

STEP FOUR

Use the Vwap line to start to understand your Risk vs. Reward

Analyzing the Extension Levels

Another important aspect of this beginner day trading strategy is to analyze if the stock is over-extended. To do this, you look for gappers from the night before. I tend to prefer stocks that are gapping UP more than 10%. That way, the stock many times will fill the gap going down, and fade off the VWAP in the process. This day trading pattern does happen on gapping down stocks, but is less reliable in my opinion – solely because the stock is over-extended on the down side. This makes the possibility of a reversal gap fill on the upside much more likely. Remember, a huge part of my day trading strategies is taking advantage of over-extended stocks. With momentum, you have to analyze the stocks levels to be able to truly take advantage of the patterns that are formed. If you do not, it could be a sketchy, unreliable trade.

Trade Execution

ENTRY

Locate VWAP and wait patiently for entry. Your entry is to get in on the VWAP or slightly above.

This give you a RISK that can be measured off the nearest resistance or prior support.

TAKING PROFITS/REWARD TARGETS

  • First Target: First support that was just touched from the opening breakdown move.
  • Second Target: Second support down (Hint: Use pre-market levels or historical levels on daily chart)

The VWAP Rejection

Similar to the VWAP fade, this short pattern uses the VWAP area to reverse a bullish (rising) trend. When combined with proper risk/reward, it can be profitable if you approach it correctly.

You’re probably tired of hearing it, but the key is finding lots of resistance above. If not, it can squeeze up quickly.