The Best Day Trading Strategy to Use in Overbought Markets

Overbought markets offer some of the best day trading opportunities. The best day trading strategy to use in overbought markets will involve short-selling, since this will allow us to capitalize on the stock when the stock declines in value.

The specific pattern is what I call the “Rubber Band Short”. This is one of the best strategies to get in a low-risk, high-reward trade.

Check out this video lesson for an overview of how to use the Rubberband short setup on trade earlier this week on $NVAX:

Overbought Signals To Look For

– Price Trading At/Near Upper Bollinger Bands on Daily Chart

– Overbought Stochastics

– Multiple Up Days

– Wide Range Previous Day

– Lower Highs Intraday

– Breaking Key Support Levels

None of these signals are black and white. However, when you have multiple indicators aligning, they add to the probability of the trade working out. At the end of the day, the most important trading indicator is PRICE. A trade thesis is only valid if price action confirms it.

Managing Risk

Counter-trend trading is one of the more difficult trading strategies. Risk management is essential in the scenario when you are wrong. Even when you have multiple signals aligning, there is still always the chance the trade might not work. You have to take the loss when it is small manageable. If the trend continues, especially when short-selling, you risk taking a massive loss if you don’t take the loss when it is obvious you’re on the wrong side of the trade.

Don’t be afraid to take a small loss, and then re-attack higher. Even the best day trading strategy in the world has a chance of failing. No strategy has a 100% win rate. The higher the overbought stock climbs, the bigger the fall will be. What you make when you do finally catch the trend change will more than makeup for the small loss you took earlier. Manage risk aggressively, live to fight another day!