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When day trading, it’s essential that your winnings outnumber losses by multiple times. This ensures a favorable risk/reward ratio and increases chances for success.
What is a First Red Day?
Traders can utilize first-red-day patterns to short stocks that have become overextended on the long side and seek them when investing in stocks that have experienced persistent gains without experiencing a correction.
These trading patterns rely on the idea that what goes up must come down; they also work best on stocks with significant momentum that are not subject to excessive market congestion or OTC stocks that may not receive extensive mainstream news coverage and have more illiquid markets.
This strategy requires finding a stock that has already experienced a multi-day run-up on high volume and has continued its climb for multiple days. You should look for one with an excellent win/loss ratio and plenty of growth potential; additionally, set yourself an acceptable risk level and stay with it – otherwise, any mistakes could quickly erase all gains made!
An effective first-red-day pattern trading strategy typically relies on overhead resistance as its risk threshold. Overhead resistance could arise from any number of sources, including losing momentum, reduced potential buyers, or bears believing a stock is overpriced – any one of which may lead to panic selling and reverse the initial uptrend.
Regardless, buying puts may provide an ideal opportunity if a stock can’t overcome overhead resistance and begin falling back toward its support level. Since their prices often correlate with those of their underlying stocks. To start your put trading journey, search daily and weekly charts of your favorite stocks for the “first red day.”