If you have been surfing the unsteady waves of intraday trading, you are not alone. Many traders are starving for consistency in the face of this overtly volatile market. And to be found is an easy setup that maximizes the prospect of success and clears signals for entry and exit with ease. One of such reasonably powerful setups that would come to mind is the First Red Day strategy.
It is a strategy that aims at catching those crucial profit-taking moments of an uptrend for any stock. Such a setup can be rightly utilized to great advantage in bringing the trader into the markets at the right time to take on all the intricacies of intraday trading.
About the First Red Day Setup
The First Red Day is an intraday trading setup that captures the point where a strong uptrend loses steam, often leading to a significant pullback. Stocks that have been trending upward over multiple days function best with this setup, especially stocks that don’t have any fundamental news to support the move. A strong blowoff top usually signals a price and volume spike, where it indicates an exhaustion point and allows for a subsequent pullback for profit-taking.
Key Features of the First Red Day Setup:
- Has a clearly established multi-day or multi-week uptrend
- Had a very long price move, accompanied by high volume, making it a blowoff top
- There was no strong fundamental news driving the price up
- The stock shows its first red open day indicating that there can be downside momentum
This is a perfect trade for profit-takers as a stock enters its downward journey.
Why Would Someone Opt for the First Red Day Setup?
This setup gives an advantage by working with the natural behavior of stocks after significant uptrends. Stocks cannot climb infinitely, and as they reach an overextended point, many traders and investors like to take profits, which then triggers a pullback. By looking for signs of exhaustion and entering on the first red day, traders can catch this downside move at the inception.
First Red Day Setup for Identification of Entry Opportunities
The knowledge of when and where to enter a trade is very key for success with this setup. Three specific entry points focus on when implementing the First Red Day strategy are as follows:
Failed Retest of Green
When a stock opens red after several days of gains, it often tries to test the green level early in the session. A failed retest followed by continued weakness down does not bode well as a strong indication that the sellers are still in control.
- Entry Signal: Short the stock against the high of the day if it can’t recover to green.
Lower High Rejection at VWAP
One of the major indicators on intraday charts is VWAP; it shows the average price weighted by volume and price. When a stock shows a downtrend where it tries to reverse but fails and rejects at the VWAP level, it indicates further weakness.
- Entry Signal: Sell short the stock on this failed move to break above VWAP; the high of the day is your risk level.
Break Down Through Consolidation Lows
After a high, stocks tend to consolidate as they look to determine direction. If the stock breaks down through its consolidation lows, it tends to continue its downtrend and can be considered another good re-entry point.
- Entry Signal: Short the stock when it breaks below its consolidation lows, out at the recent high.
Each of these entry setups gives a clear signal to the trader, who can then capture the momentum that is now shifting from bullish to bearish. Concentrating on those signals, traders should approach the First Red Day setup with caution and discipline.
Risk Management Strategies on the First Red Day Setup
Any trading strategy depends on risk management for its sustainability in profitability. Here is how the trader can manage risk in this setup:
- Enforce a Tight Stop-Loss: The most usual placement of the stop-loss is just above the day’s high or the recent resistance level. This also limits the losses if the stock, contrary to all expectations, reverses the direction.
- Employ Position Size: Keep your size modest, especially when dealing with volatile stocks. Avoid over-exposure and protect your capital in the event the trade does not move to your expectation.
- Trail Your Stops: Continuing with the momentum from above, trail your stop-loss as the stock moves further in your favor, allowing you to increase profits. The best way to achieve this is to set your stop-loss at a recent high or low based on the type of move.
- Take Profits Gradually: It often helps lock in profits while a move is still developing, to take intraday trades out at pre-defined levels, like ATR down from your entry point.
First Red Day Setup Example
To understand the power of this First Red Day setup, consider a scenario where a stock has been on a multi-day rally. Each day’s price is pushing higher. So, let’s assume it has now spiked sharply with price and volume peaking—a clear sign that it is time for a blowoff top.
The stock opens the next day red, and it attempts to retest green but fails. Now it is a sell signal to the trader to start trading against the high of the day. Further in the session, the stock again attempts to move up but it fails once again at VWAP, which affirms the bearish momentum. Lastly, when it breaks down on the breakdown from the consolidation low, then the trader can add more position or take some profits according to his set exit strategy.
Entries are taken during the setup of the First Red Day, and by timing them in a way that exploits the momentum shift, they can maximize profit potential during this setup.
Advantages and Disadvantages of the First Red Day Setup
Advantages:
- High Odds: It makes sense because predictable profit-taking is given in overextended stocks.
- Clearly Defined Risk: With entry and exit defined, traders clearly define how much risk is being entered at the outset.
- Quick Profits: The first red day most likely results in a fast pullback and intraday traders will take the profit fast.
Restrictions:
- Patience Required: The pattern waits on a multiple days uptrend; therefore, not very often it’ll be triggered within any market circumstance.
- Susceptible to Reversals: Unusual buying force or information concerning the fundamentals can break up the pattern, and there’s a chance of getting a reversal or losing it.
- Experience Dependent: Identifying conditions of exhaustion that include a blowoff top and managing entries around critical levels heavily depends on experience and market knowledge.
Such identification of pros and cons can help traders to know when and how to apply this setup in the most appropriate manner to make maximum edge over the market.
Conclusion
Among all those beneficial intraday trading strategies, the First Red Day is one of the most effective ones. It’s designed to work off a momentum reversal from an overextended stock that starts to pull back. By emphasizing clear key entry points, such as the failed green retest, the lower high rejection at VWAP, or breakdown through consolidation lows, it may be executed in a systematic way.
For any trader looking to improve their trading skills and catch lots of high-probability opportunities, adding this First Red Day setup to their arsenal could be transformational.