There are many trading strategies that people come up with that it can become quite overwhelming to know which one actually works best. Here's two red to green strategies that we know are good.
So what is a red to green move? It is defined as a high-volume stock that has opened red, bottoms out in the morning after market open, which is then followed by a move higher to break the previous day's closing price. This creates a "red to green" break-out move. We have 2 wayswe trade red to green moves, and we'll discuss both of them here.
Strategy #1: Buy Before a Red to Green Move
When we look to take bullish trades based off of this strategy, we mostly look for stocks that are in a strong uptrend, whether short-term or a bit longer term. This is because going with the direction of the trend will improve your odds of success.
Here's what the pattern looks like on a daily time frame chart:
GOGO stock daily time frame.
Let's zoom in on this same stock and look at what was happening intra-day during the August-September run up on the weak open red/green days.
Here's the same stock, but intraday:
GOGO stock 5 min time frame.
Refer to the notes and arrows in the images above showing the opening candles for a few days of intra-day price action on the stock GOGO. The 2 green candles on the morning dip can be enough of a hint that a short-term support was created. What is also good to know is that it didn't dip below the previous swing low that you can see at the very beginning of the chart. Higher lows are an indication of an uptrend. Here's another example on the daily time frame using WW stock:
You'll notice there are bottom wicks in the candles that are highlighted. These were all morning dip opportunities to get in before the stock went red to green (we remember because we traded this setup). WW stock kept dipping into the previous candle before going higher.
We see stocks do this quite often. They will usually dip a quarter or half way into the previous green candle and then continue higher. Of course, this is usually only in a strong trend and only with certain stocks. Make sure the stock has a history of doing this pattern!
Once you find a stock that is reliably providing these dip trades, you might want to start taking them.
9 Rules For Trading Strategy #1
1. The stock should be in a strong trend on the daily time frame. 2. The stock should show history of following this pattern in the past. This does not work the same for every stock because notevery stock acts the same. Check its past price behaviour. 3. The previous day's candle should be an "up" candle, not a down day, although there are some cases where it works after a small down day. 4. Look for high relative volume and bullish volume patterns, it definitely helps. 5. The current day's candle (that you are trading) cannot go under the previous day's low. In other words, do not buy any morning dips that go below the previous day's low. Remember, usually the stock will dip just a little bit or halfway into the previous candle if it has good strength, not all the way below it. 6. Buy in the morning on a dip after seeing some confirmation that the price is reversing higher. Place your stop under the low of the morning dip! The earlier in the morning it dips, the better, as there will be more volume to confirm the trade. If you're feeling more risk tolerant and are looking for a bigger move, you can place your stop under the previous days' low. 8.Takeinto consideration any key support/resistance levels on the daily time frame before taking a trade. A trade may work better or worse depending on if it is at an important support or resistance level. For example, if the red to green break out zone is a major resistance level that you've noticed from previous days, it's likely to fail at that resistance, or break out explosively if heavy volume comes in. 9. This has only been tested on individual stocks, not currency pairs, ETF's, or commodities.
7. Days where the stock opens flat (instead of opening red) work too.
Strategy #2: Buying After the Red to Green Break Out
You can also buy the stock on a "red to green break out". Sometimes break outs can fake you out by looking like they are breaking out and then coming right back down. To improve your odds of success, there are two things you can do.
First, you can confirm the break out withvolume. An increase in volume as a stock breaks out is a sign that there is buying demand. But, what we like to do isbuy on a pull backthat is retesting the red/green support area after the initial break out. Here's what we mean by this, check out this 5 minute time frame chart of LX.
Notice how LX perfectly retested the red to green area after breaking out. If you went long around that area you were confident that a support formed, you could've used the low of that move as your initial stop loss area, and potentially used a trailing stop too. Here's the same chart, but on the daily time frame for some perspective. The stock is in a very strong up trend, it has volume accumulation patterns (which you can read about here), and it gapped down right to the 9 EMA, which can often be a support level. LX stock had a lot of the right traits for a strong red to green move.
Below is a different example using JMIA stock on the 5 min time frame. It retested a red to green break out area before going higher.
As you can see from the notes in the chart, the first candle may have been hard to catch, but the stock offered another chance for a long position after showing signs of forming a bottom. The stop loss could have been under any of the arrows.
JMIA stock 5 min time frame.
8 Rules/Guidelines for Strategy #2
5 of these rules are taken from strategy #1 because they're applicable to both.
1. The stock should be in an overall uptrend on the daily or weekly time frame. 2. The stock should show history of following this pattern in the past. This does not work the same for every stock because notevery stock acts the same. Check its past price behaviour.
3.
Strong volume patterns are an added bonus.
4. If buying a red/green directly on the break out, make sure you have an exit strategy if the break out fails. This can be placing your stop loss under the break out level.
5. We prefer buying the retest of support though. After buying the retest, place your initial stop loss under the low of the retest.
6. Retests don't need to be exact like the LX and JMIA examples shown above. They can be slightly above or slightly below the red/green level and still be valid. Gives trades some wiggle room!
7.Takeinto consideration any key support/resistance levels on the daily time frame before taking a trade. A trade may work better or worse depending on if it is at an important support or resistance level. For example, if the red to green break out zone is a major resistance level that you've noticed from previous days, it's likely to fail at that resistance, or break out explosively if heavy volume comes in. 8.This has only been tested on individual stocks, not currency pairs, ETF's, or commodities.
How to Find Red to Green Setups
Thanks to TrendSpider, you can do complex intra-day stock scans. We came up with a somewhat basic one to scan for stocks that have already gone red to green on the day (ideal for strategy #2). You can see it below:
Here is the criteria if you don't want to read the picture.
1."Daily 20 EMA greater than daily 50 SMA."
2."Daily 9 EMA greater than daily 20 EMA."
The first two steps are set for the purpose of only finding stocks in an up trend. The next steps are:
3."1 min price close greater than daily price close 1 candle ago." Thismakes sure that the most recent 1 minute candle closed green on the day.
4."Daily volume greater than 150,000."This weeds out low volume, illiquid stocks. You can change the volume parameters to whatever you're comfortable with.
5."Daily price open less than daily price close 1 candle ago." Thismakes sure that the stock opened lower than the previous day.
Don't forget to checkmark "current candle" so it scans the current candles.
Run this scan in the morning a few minutes after open to find stocks that have gone red to green.
After you run the scan, you will then have a list of stocks that meet the criteria on the right side of your screen. You can easily scroll through the list with your keyboard and the chart for each stock will show up on the left side of the screen. See below:
This scan is just a basic one and it can be adjusted to be much more complex if you want it to be. Scans are relatively easy to set up on TrendSpider and there are tutorials on them too.
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