If you’ve spent any time in our trade room, you’ve likely heard the term new high of day (NHOD) thrown around. This term is significant for many reasons, and for the sake of your pocketbook, take note. Today I’m going to talk about the significance of the new day and how you can take advantage of it in your trading.
I like to think the term is pretty self-explanatory. When you hear it thrown around about a stock, it merely means that the stocks at their highest trading price of the trading day. We often see the NHOD trading higher than the previous days close or the current days open. Keep this in mind as later, I’ll discuss the power of the last day’s close and the importance of the present trading days open.
When you open up your stock chart, I suggest four things. One, draw a trend line for the previous days close. Two, draw a trend line where price opened. Three, draw a trend line where the highest candle is – this is your new high of day. And four, a line at the days low. Then, you wait.
You’re probably wondering what all of this information is going to give you? A lot. It’s going to identify gaps or sudden jumps in price with no trading between the two prices (i.e. the price is not trading in a range).
Price is going to do one of two things, either blow through the NHOD or reverse. And that information is precisely what day traders and anyone else who uses technical analysis to enter trades.
Here’s an example using GameStop (GME) (WEN) to illustrate. On February 25th, GME hit a new high of day at $184.21. Since you’re marking your chart, you’ll notice that the stock price closed at $91.70 on the previous trading day. This means there are a gap and gaps typically get closed.
Armed with this information and confirmation from your technical indicators such as volume, you’ll start to see buy and sell signals as market sentiment starts to change. Sure enough, the stock gapped up on the open to $169.62, pulled back and kept rising to $184.21.
As you can see on the chart, this was the NHOD. If you missed the entry on the pullback in the open, I suggest you wait. Watch the stock climb and wait for the reversal cues.
To trade this, simply wait for the pullback to the 20 EMA and short it. I marked the chart so you can see it. Eventually, GME pullback and closed the gap, and fell back to the $90 range. So you would have known not to trade A NHOD with those reversal cues.
What goes up must go down – most of the time. So how do you know when it’s time to liquidate your position? Your stock has hit its NHOD. Will price keep going to the moon, or will it come crashing down to earth?
Well, we do have one telltale sign that it’s time to unload, and that sign is volume. If a stock begins to hit new highs in price in low volume after making a great run, it will likely cease to act like a rocket ship. Yet, in fact, the stock may be beginning to put on the brakes on its spectacular run. When new highs keep occurring in low volume, it’s prime time to be watching for serious sell signals.
A heavy volume price drop means only one thing for sure: More shares are available for sale than there are willing buyers at the current price. People are emotional, and fear sets in when they see a large volume price drop. Panic selling sets in for fear that the price will drop lower. All of this increases the downward pressure on the stock.
And if things couldn’t get any worse, if the price drops below a predetermined level, computer-programmed selling kicks in. Combined, this sell volume continues to fuel the supply/demand imbalance and forces the stock price even lower. On a positive note, the stock will reach a price support level where potential buyers feel comfortable and buy the dip.
I would say the biggest reason why many prefer to day trade is exposure or lack thereof. By unloading their positions within the trading day, they eliminate the possibility of negative overnight news impacting their stock price. From the release of earnings reports, broker upgrades/downgrades and news, lots can happen after-hours. All of this puts one at risk if they’re holding stocks.
Day traders can utilize many different strategies in their trading plans; utilizing the new high of day is just one. Their choice of strategy will typically depend on a few things like their time availability and personality type.
Despite any differences in their actual strategy, a unifying feature among successful traders is that they first develop and then discipline themselves to stick to their trading plan. If you want to get started, Bullish Bears will give you access to trading styles that fit your lifestyle and personality. There’s something for everyone, trust me on that.