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The PULLBACK is the easiest and most probable entry. It's like a lay up shot in
basketball if
you're familiar with that. It has no resistance other than the high or low from which
it began.
Follow through is easy to gauge with a new high or low. Master the PULLBACK
and you can
quit your day job....
PULLBACK KEY:
THE BETTER.
The PATTERN is trickier. Still probable, it has resistance built in at the swing
high/low points
which define it. This is because the price action is counter trending in earnest. I'm
more careful with
entry and follow through on these.
PATTERN KEY: ONLY TRADE THESE WHEN YOUR CROSSOVER SIGNAL
COINCIDES WITH A
PATTERN (Trend line) BREAKOUT. Go back to the sample screen shots if you
must.
NOTE: MANY CROSSOVERS OCCUR WITHIN LARGER CONSOLIDATIONS. DO
NOT TRADE THESE
(Refer to attached screen shot Tutorial 4 Patt 5 and Tutorial 4 Patt 6).
You'll immediately notice PATTERNS are more complicated. So don't trade them if
you don't want
to do the work. Wait for pullbacks. That's what I do most of the time.
There is a tendency to over analyze these. Don't make it more complicated than
it is.
WORK BACKWARDS. Use the following plan to organize your work:
1) Wait for a 3X6 CONTINUATION ENTRY SIGNAL
2) Look for a TEST OF THE LONG-TERM EMA (18 EMA for me)
3) Verify the HIGH or LOW (which precedes the COUNTER TREND) as significant
4) DETERMINE COUNTER TREND PRICE ACTION to be a PULLBACK or a
PATTERN
5) COMPLETE ANALYSIS (if pattern, does 3X6 coincide with Pattern BREAKOUT?)
6) ENTER THE TRADE when the price breaks OVER (long) or UNDER (short) the
TRIGGER BAR
All you really ever have to do is wait for your 3X6 signal and then call the
ball. Let the crossover
mechanism do most of the work; your Price Action assessment will do the
rest. No need to
waste time watching these things form.
There you have it. Once this clicks you'll understand why a discretionary trader will
outperform
a mechanical system in any environment. No wonder trading random crossover
signals produces
mediocre returns. The essence of the system is mechanical, but learning to read the
tape and
assess price action will make your trades tactical, efficient and profitable.
TREND CYCLE
Lets review the trend cycle as described in
the eBook. A stock or market will be in a
confirmed trend when price action has sustained the 3-EMA
system sequentially in one direction. This
generally includes a counter trend and subsequent
continuation.
Prices will begin to move against the trend
until the Price EMA (3) and Short Term EMA (6)
trade above the Long Term EMA (18). This is our
focus: the Crossover.
CROSSOVER SETUP/ENTRY RULES (3x6x18 System
assumed)
An entry signal occurs when a price breakout
over the 18 coincides with the3 crossing over the
6 (refer to screenshot 4.1.1).
To reiterate, the price bar which crosses over
the 18 is also the one at which the 3 crosses over
the 6 in the same direction. Ideally, prices should
have been trading on the opposite side of the 18
for some time; preferably in a
confirmed directional trend (refer to
screenshot 4.1.2).
This tutorial will only detail the basic
strategy. Trade management and risk control
will be thoroughly discussed in Tutorials #5 and #8.
LONG ENTRY**
NOTES
Long Crossover Breakouts are typically more
profitable than Short Breakouts
Trade Crossover Breakouts which follow a
confirmed trend in the other direction
Use Crossover Breakouts to time the market
and/or trade
indices
(refer to screenshots 4.1-3, 4.1-4, 4.1-5, 4.1-6)
Weekly Crossover Breakouts have historically
preceded large market moves
An excellent strategy: TRADE LONG
SIGNALS, exit market on SHORT SIGNALS
Use Weekly Crossover Breakouts for long term
equity positions
> (refer to screenshots 4.1-7, 4.1-8)
V-PATTERNS
As you study the attached screenshots and do
your own analysis, you'll notice that in
the best setups there evolves a sharp V-pattern
prior to the breakout. By definition, this
consists of 3 or more higher (long) or lower
(short) closes. This helps determine a
meaningful trend change and the greater likelihood
of a sustained move (refer to screenshot
4.1-11).Keep in mind that 3 or more higher or
lower closes is not necessary, however, to produce
a winning signal.
EMA RESPECT
>
>
>
>
THE DISTANCE BETWEEN THE HIGH AND LOW OF THE TRIGGER BAR IS YOUR
RISK.
This is very important and will be used for MONEY MANAGEMENT.
TRIGGER BAR HIGH - TRIGGER BAR LOW = MAXIMUM RISK
2) When the stock appreciates by an amount greater than or equal to your MAXIMUM
RISK,
SELL 1/3 of your position and move your SELLSTOP to the low of the ENTRY BAR
PROFIT = MAXIMUM RISK than CLOSE (Sell) 1/3 POSITION
SELLSTOP 0.01 below ENTRY BAR LOW
3) Set a target for liquidating your remaining position when price appreciates to 3
TIMES
THE MAXIMUM RISK.
PROFIT = 3 X MAXIMUM RISK, CLOSE remaining 2/3 POSITION
TRAILING STOPS
1) Place trailing stops 0.01 below any swing low bars (pullbacks) where price
resumes trend
and makes higher high. These will be apparent in the attached screenshots.
2) Place stops under ANY BAR WHICH BREAKS OUT OVER AN EXISTING
HORIZONTAL PRICE LEVEL
(See screenshots for examples of these as well). This is the 'trader vic' short
setup.
INTEGRATION
TRAIL STOPS AT ANY TIME THEY EVOLVE DURING THE TRADE MANAGEMENT 3 STEP
PROCEDURE
SHEDDING = BREAKEVEN
Step 2 of the management procedure is your RISK SHED. This move should bring
you to BREAKEVEN
if stopped on the remaining 2/3 position (provided your entry bar is reasonably close
to your trigger price).
Simple math will tell you if you're in the ballpark. If you're still under
water, SHED more shares.
If you're taking too many cookies off the plate, sell fewer shares. YOU
WANT TO OWN AS MANY
SHARES AS POSSIBLE FOR THE REST OF THE RIDE.
TARGET = 2.5 X RISK
If you SHED RISK at the appropriate 1 X MAX RISK level and achieve the target on
remaining shares,
you should realize a profit of 2.5 TIMES YOUR RISK (2.33 actually but close
enough). Again,
this figure is important for MONEY MANAGEMENT - which will come later.
ALTERNATIVE STRATEGIES:
You may wish to stay at the party longer than 2.5 RISK. Many strong trends
(specifically in high RS
stocks early in the broad market move), can last weeks and result in the stock price
doubling or
tripling.
IN ANY CASE -- ALWAYS FOLLOW TRADE MANAGEMENT PROCEDURE AND
COMPLETE STEP 2. I
REPEAT: ALWAYS SHED RISK. YOU'LL NEVER BE SORRY AND YOU'LL
THANK ME FOR SOUND SLEEP!
1) After SETP 2 - SHED 1/3 AT 3 X MAX RISK and hold remaining 1/3 (choose a
stop listed below:)
2) After STEP 2 - TRAIL swing low stops (as described above) until stopped out.
3) After STEP 2 - HOLD remaining position until 3X6 countertrend signal evolves.
4) After STEP 2 - PLACE trailing stops 0.01 below ANY BAR WHICH BOUNCES ON
THE 6 EMA and rallies.
5) After STEP 2 - Trail stops 0.01 below the LOWEST OF THE LAST 2 BARS (2-BAR
LOW)
This permits a 1-bar pullback (to be discussed later) but no
greater correction.
The screenshots attached to this email should clarify the procedure. I'm offering a
variety of stop
strategies so that you may develop your own style. In any case you'll be letting
your winners run
and managing your risk on every bar of the trade. Don't feel as if you have to
do it all. Follow
the 3-step management strategy and you'll be ordering the Porsche in no time...if
that's your thing.
In the next TUTORIAL (#6) we'll discuss how to time your signals with the broad
market. By now
the strategy should be coming to life for you.
If it trades through it, I don't even bother. Remember, as I stated in the eBook,
YOU
NEVER KNOW IF THE COUNTERTREND IS JUST THAT OR THE BEGINNING OF
A DOWNTREND
VIA CROSSOVER. No need to sweat it. Let the market tell you.
2) TRADE STOCKS AS SURROGATES FOR THE BROAD MARKET
This is rather self-explanatory. When the DOW makes a continuation move in any
given interval, find a stock that is doing the same thing. Pictures help. Refer to
screenshots
Tutorial 6-1 and Tutorial 6-2.
3) USE THE 3X6 ON THE WEEKLY DOW INTERVAL AS A 'RED/GREEN BULLBEAR' INDICATOR
This strategy will always keep you on the proper side of the long term trend. Turn
'cautiously bearish' when the 3X6 crosses down while over the 18 until it goes
through it. Turn
'cautiously bullish' when the 3X6 crosses up while under the 18 until it passes
through it. Then
simply watch the DAILY DOW interval for earlier turns. These will or will not be
confirmed by
the weekly chart. You can catch an early turn this way. DON'T WORRY ABOUT
MISSING A
BOTTOM OR TOP. WAIT PATIENTLY FOR YOUR SETUPS AND FOLLOW THE
PLAN.
This may sound more confusing than it is. We'll analyze the March 2009 low as an
example.
Refer to screenshots Tutorial 6-3 and Tutorial 6-4.
Strategy 3 works extremely well for long term investments to which you add funds
on a
regular basis (such as a 401k) because re-entry is not a factor. I was able to use
this simple
RED/GREEN tool to completely avoid the 2008 meltdown. I told all my
friends to go to cash
after the first week of November, 2007 and again at the end of December.
Some of them
listened (Refer to screenshot Tutorial 6-5).
IGNORE A WEEKLY 3X6 CROSSOVER DOWN AT YOUR OWN PERIL. If you
heed the warning,
you will NEVER SIT THROUGH A LONG TERM BEAR MARKET. The result can
be life changing.
There you have it. Everything you ever wanted to know but were afraid to ask about
timing
the market.
theoretically
reduce or eliminate risk, then I can open an additional position or two.
Imagine that. TOTAL CONTROL. Never again will you have to ask your broker if a
30% loss
is really OK. Let me tell you...if the worst I can do is a 2.5% drawdown I'll surely
survive
to play another day. Of course no one will believe that I don't have to assume more
risk. I
am in control of my money. The choices are mine.
But what is the upside? Well, if I hit the target in the thought experiment I profit
$6,000.00.
That's 6%....72% a year......144% if I leverage the account 2:1 with standard
margin. Buffet
never did that well.
119,855 - balance
Bill does a scan the next week. He will place a new trade in sub-account 2. When
he
has assembled a portfolio with accounts 2-5 he'll return to position 1. When he
finds a setup
for this sub-account (1) HE WILL INVEST 39,855.
Could Bill have made 20K in four (4) weeks daytrading and watching screens all
week? Maybe....
Could he have done it as effortlessly? NO WAY, MAN! (and he DOESN'T OWE TAX! )
Attached are some additional screenshots of a few of my all time runners. Some I
managed
well, others not, some I sold way too early. In TUTORIAL #10 I'll discuss how to
use options
for these setups....very exciting indeed.
5) Ensure the option is liquid and doesn't have a big spread. If you're an
option trader
you know this is very relative. You have to work with what you're given. Also, if
you're trading a weekly chart and you know the stock is a potential doubler or
tripler,
you can be less choosy here.
Ok, let's put it all together. Most people try to buy really cheap options a month or
two
out because the premium is absurdly low and the potential return is high. This
doesn't
work effectively as a long term strategy. Time keeps tickin'. If the stock slows for a
few
days or a week, Theta (decay) will sack you.
Therefore, choose an option about 6 months out (no wasting asset cycle),
that is
slightly ITM (again, low theta and you're buying MORE INTRINSIC VALUE
than speculative
premium), with a delta of 65 or better (as your stock rallies you're premium
will rocket
into the 90s faster and may even achieve parity).
Raise your hand if you've ever bought an option with a 30 or 40 delta (OTM),
watched the
stock rally and simultaneously watched your option do NOTHING..... Yes, I know.
DON'T LET
THIS HAPPEN. LEARN TO TRADE OPTIONS AS SURROGATES FOR STOCKS BY
FOLLOWING THE
STEPS ABOVE. AVOID THE PREMIUM LAG THAT EXISTS FROM OTM to ITM. Start
with ITMs
and your premium will appreciate as soon as the stock rallies.
EXAMPLE - It's August 2009. Stock ABC has evolved a great setup around $40 per
share. You
investigate the option chain and discover the JAN 2010 37.50s and 35.00s are good
candidates
with 65 and 72 deltas respectively. You choose the 37.50 with a $4.25 premium.
This gives you
plenty of time for the trade to work out and the best chance to avoid volatility burn.
I can
guarantee that if the stock trades to $45 in the first week your premium will be
worth 7.50 to
8.00...right on track with the delta skew. And it will probably have a delta well over
80.
YES, OPTIONS TRADED PROPERLY WILL COST MORE. SO WHAT? It's safer
and you're more
likely to walk away a winner. Trust me....I know.
PART 2 - SOME GREAT OPTION STRATEGIES TO USE WITH THIS SYSTEM
DAILY VOLUME, THE HIGHER THE 'LOW FLOAT' CAN BE. A good way
to measure this is with simple math: DIVIDE THE FLOAT BY THE AVERAGE
DAILY VOLUME to arrive at approximately HOW LONG (in days) IT WILL
TAKE TO TURN THE FLOAT OVER (theoretically).
For example, in JUL-AUG 2009, CROCS, INC (NASDAQ: CROX) doubled in a
few weeks. The float was around 80 MILLION. HOWEVER, the average daily
volume was 3.6 MILLION shares. This means that FLOAT TURNOVER occurs once
every 22 days (about once per month - 80 / 3.6 = 22).
THAT'S LOW FLOAT!
By contrast, IBM has a float of 1.3 BILLION. The average daily volume of
trade is about 7 MILLION shares. It would take about 185 days to turnover the
float (1.3B / 7M = 185).
THAT'S NOT LOW FLOAT!
DOUBLERS
The next criteria I noticed about these massive winners was that prior to my
setup entry the stock had doubled in price off its 52-week low. This means
that if I divided the 52 week high by the 52 week low, the quotient was more
than 2. Pretty simple.
It makes an obvious conclusion. If a stock is going to rally 5 or 10-fold over a year
it must first pass through the doubling point.
A POINT TO PONDER
Before you send an email with some stock that rallied 10 points and had neither
doubled in the last year nor had low float.....hold on....
Let me clarify what I consider to be a huge momentum gainer: a stock that
triples, quadruples or (in the case of TIE in 2005) yields a 10-bagger (rallies
10-fold). I'm not talking about a few points here. I'm talking about companies
with massive earnings growth potential that undergo LONG TERM
INSTITUTIONAL
ACCUMULATION.
Yes, you can trade the setup on any security and achieve profit with a trend
continuation entry. And, yes I suggest YOU DO FOCUS ON THE SETUP. But
learn to spot high RS stocks which are low-float doublers and you can position
yourself in what later will be considered massive historical moves.
Next time I'll discuss a few additional fundamental elements which can greatly
improve your momentum stock screens.
Welcome to Tutorial #12: FUNDAMENTAL ANALYSIS.
This segment will complete our analysis of non-technical momentum
EARNINGS GROWTH (QTRLY) is the % change in Earnings per share quarter over
quarter. No surprise there. The higher the better.
INFANT INDUSTRY - Microsoft Windows, Starbucks Coffee, the Apple IPOD,
Memorex cassette tapes in the 80s....All these companies had cutting edge products
or services with phenomenal growth potential. The massive ROE (return on equity)
of these firms demonstrated little competition and burgeoning new industries.
I remember in 2005 when I first took positions in Valero Energy (NYSE: VLO). The
company had a unique method for refining very sour crude oil. It was innovative
technology. The stock became a 'story' and was a leading momentum gainer that
year.
risk.
I'm looking for long term winners in the 'story' stocks with outstanding growth
potential.
In the speculative momentum category I'll generally employ the 3:1 risk/reward
strategy.
To wit, I don't expect speculative momentum to continue in my direction forever.
That about does it as far as fundamental analysis. Don't get too distracted or try
to discern WHY a stock is trending. JUST RECOGNIZE THE TREND, WAIT
FOR A LOW
RISK SETUP, CONTROL YOUR RISK AND TAKE THE TRADE. One can spend
years
performing superfluous, complex technical and fundamental analysis. Or
one can
focus on the setup, manage the trade properly and benefit from the ancient
law of
PROBABILITY. The former may or may not prove beneficial. The latter will
get you
early retirement.
Welcome to Tutorial #13: TREND ANALYSIS.
In this segment we'll discuss how to analyze trends. After you enter the
position and control risk, one of two types of market action will ensue.
Understanding these individual trend characteristics will enable you to
choose the best trade management technique.
Once understood you will know when to sit in a strong trend and simply
trail stops; conversely you'll know when to establish a target and take
profit in those 'flash in the pan' trends.
Let's begin by defining each type of trend.
QUIET TRENDS
- Steady, upward/downward price movement (about 45 degrees), NOT PARABOLIC
- Average range price bars, typically within normal range
- 3 and 6 are equidistant and relatively close, NO DIVERGENCE (3 pulling away from
6)
- 3/6 remain equidistant to 18, NO DIVERGENCE (3/6 pulling away from 18)
- Frequent 3 or 3/6 testing (3+ times)
- Small one bar pullbacks to moving averages (3, 6 EMAs)
- Price closely follows a trend line
VOLATILE TRENDS
- Parabolic moves, prices bolting up/down at unsustainable angles
- Large range bars, often several times larger than those in the countertrend
- 3 diverges from the 6
- 3/6 diverge from the 18
- Price may diverge/pull away from 3, NO 6 TESTING
- No pullbacks initially
- Price diverges from a trend line
With this knowledge you want to determine the trend type and react
accordingly.
For quiet trends you're looking to trail stops according to one of the several methods
detailed in Tutorial 5. In many cases it is possible to profit 5-10 times risk (R), or
more.
For volatile trends, you'll want to establish the price target (3 times Risk) and exit
the
trade when the target is reached.
WHY, ED? WHAT'S THE LOGIC? .....well, several reasons, thanks for asking:
1) PULLBACKS greater than 2 bars are potential REVERSALS (frequently).
2) The above method will allow you to land a WHALE on the daily or weekly
interval
and actually STAY IN IT (so you can stop telling fish stories at cocktail
parties)
3) You're competition doesn't understand this and blindly treats all entries the same
with some static mechanism while you trust your intuition, use your head and
allow
the the market to guide your management decisions.
4) By learning to EXIT VOLATILE TRENDS you won't spend lots of time in multiweek/ month
consolidations which tend to evolve after very quick, parabolic (volatile) price
action.
5) YOU WON'T WASTE TIME. Profits from volatile target exits can be funneled
into
QUIET TREND trades. You can maximize your effort.
6) THE BEST TRENDS DEMONSTRATE SMALL RETRACEMENTS, USUALLY 1BAR PULLBACKS.
DON'T BE LIKE THOSE ROBOTIC SYSTEM TRADERS WHO THINK HISTORY REPEATS
ITSELF,
THAT THEIR 'SYSTEM' SHOULD PERFORM EXACTLY LIKE THE 'BACKTEST', AND THAT
EVERY
ENTRY SHOULD BE HANDLED THE SAME WAY.
This is a rule-based strategy, but flexibility, awareness and choice will make your life
so much easier.
A QUICK TRICK
If the price is really far above or below (if short) your stop, you're probably in a
volatile
trend. Think of it this way...if you wouldn't want to give back that much profit if
your
stop is hit, the trend is probably volatile.
KEEP IT SIMPLE
Use the indicator for nothing more than CONFIRMING NEW HIGHS or
CONFIRMING NEW LOWS. Remember, a new high in price should be
confirmed with a new high in the indicator.
Be especially aware of these situations when the DOW has turned
RED (3x6 down) after an uptrend. You can frequently avoid entries
at the beginning of a downtrend or market correction.
HIGHS
AND LOWS. Doing so will result in confusion. If you recall Tutorial #7, continuation
trend trades involve countertrends which produce conflicting (counterintuitive)
signals in popular indicators. Taking advantage of these reversals is the cornerstone
of the system logic.
For that matter I would not recommend using any other indicator for
confirmation.
You will be wasting your time. Trust me, I've tried them all. The best you can
do is pass on continuation setups that are diverging. Doing so, in addition to finding
low-risk, high probability continuations (bounces off the 18), will guarantee your
success. All you have to do after that is control your risk and manage the trade
effectively.
A FEW WORDS FROM THE AUTHOR OF THIS TUTORIAL
'Diverged (unconfirmed) highs' will typically occur at the end of broad market trends.
You will not see them too often at the beginning of a bull run, unless the stock has
been bucking the trend for some time.
Downside divergences seem to be more volatile than their uptrend counterparts.
The
stock (or market) will often make the lowest low of the trend on a diverged spike
and
quickly reverse to the upside. This is how 'bottoms' form. The public has
capitulated,
sold in panic and handed their shares to the smart money.
But you, my friends will not care. You'll simply be aware of the situation
and stay alert
for LOW-RISK, HIGH PROBABILITY CONTINUATION ENTRIES. YOUR FOCUS
WILL BE ON
THE SETUP AND CONTROLLING YOUR RISK. You...will be in control. This
should make
you smile.
KEY DIFFERENCES
TIME
Ultra-short intervals require decisiveness, precision and skills not necessary
or even desirable for daily or weekly intervals. It can resemble a day job.
ERROR
Technical difficulties, real-time chart/data errors, physical trade error, misplaced
orders and a host of other pitfalls can trigger emotional responses and imbalance
even a seasoned trader.
SCANNING
Easily spotted in retrospect, real-time entries can slip through your fingers like
sand at the beach. A very organized, focused desktop with appropriate technology
is necessary to locate and effectively manage even a moderately sized watch list.
ONE MARKET CONSPIRACY
Watch only one market or stock and you risk wasting an incredible amount of time.
Watch too many and the best moves will slip past like a burglar though an unlocked
door
in a dark alley. The best trades come from individual stock moves. So why is
everyone
touting single-market systems? Because managing a watch list adds a whole new
dimension to the crime. I knew a guy who bragged about trading only the S&P mini
contract. Now he teaches other people to trade the S&P mini contract. What does
that tell you? Indexes and ETFs can stagnate for hours or an entire day. Guess he
was
a few setups short of an income...
COUNTERINTUITIVE TIME DEMON
Everything about our culture encourages diligence and hard work. "Hard work is
rewarded."
The 40 hour work-week....blah, blah. These axioms are inverted in daytrading.
Trade
the first and last two hours and you can make a fortune...or not. Trade all day like
a desk job and you'll soon have one. Your friends will probably stop calling as well.
The less you do, the more you'll make.
BROKERS, RULES AND LEVERAGE
Thank the tech bubble bust at the turn of the century for the SEC daytrading rules
and minimum account requirements. To play the game you need huge leverage
(much
more than the 4:1 offered by most brokers) and DIRECT ACCESS execution
capability. That's right...you want to be able to post bids and offers directly into
the ECN or DOT (NYSE) system. Choose any other way and you won't be
competitive.
THE BIG BOYS ARE OUT FOR BLOOD
From hedge funds whose primary strategy is running public stops to greedy
specialists
and front-running clearing firms, everyone is out for your lot. Think they don't know
how you cleverly placed that stop at the same place there are 400 other orders?
Think
again. Think they won't come get them? Think again.
be more
focused, and free to deploy your larger accounts for daily and weekly entries.
10) ENSURE THIS BROKER IS USING A COMPETITIVE DIRECT ACCESS PLATFORM
(Try Instaquote
or RealTick). Some 'prop' firms have their own proprietary platform with more
bugs than an outdoor
barbeque. Be careful.
11) GIVE IT TIME. It can take a year or two to master the game, build and outfit
your trading
desk and acclimate to real-time price ticking. The setup you have learned will
severely
reduce your learning curve, however.
broad market or index ETF. These have a 'bull' or 'bear' fund. You can long the
bear sibling in lieu of shorting - IF the pattern appears. It very well might not.
5) FOCUS ON THE STOCKS WHICH ARE 'UP THE MOST' (highest percent change)
FOR
THE DAY. These are most likely to resume an uptrend after a morning
countertrend.
6) FOCUS ON GAPS. Stocks with 'unfilled gaps' are excellent candidates for
continuation
moves later in the day.
7) BUILD A MANAGEABLE WATCHLIST OF HIGH BETA (LARGE RANGE), HIGH
VOLUME,
EXPENSIVE (greater than $30) LISTED STOCKS. No more than 100 is necessary.
8) ACQUIRE THE NECESSARY TECHNOLOGY (I recommend Esignal) WHICH
INCLUDES
SOME TYPE OF SCANNING SOFTWARE. Try a resource-rich gaming PC with
ample
screen space (monitors) to reduce the workload and stress.
9) IF ALL ELSE FAILS....FOCUS ON THE SETUP. IT WON'T LET YOU DOWN.
I REPEAT: FOCUS ON THE SETUP.
Every time I read this tutorial I find about twenty things that are missing. Frankly,
I believe it only skims the surface of how to best trade in real time. Is it worth it?
For most, probably not. But the above checklists will give you a fighting chance if
you're one of the few who can manage it. Just remember, FOCUS ON THE SETUP.
REDUCE RISK. FOLLOW THE TRADE MANAGEMENT PLAN.
Please...if you can't successfully master the setup and yourself on a weekly, daily
or hourly interval, you won't be able to do it daytrading. I would suggest you work
down from a long-term interval until you locate the best spot for YOU on the interval
scale.
Study the attached screenshots to familiarize yourself with the cycle flow of down
to up trend then countertrend setup. When your eyes are blurry I'll see you for
#16. :-
ADVANCED ORDERS
Advanced orders are relatively new to online trading. In the last few years
many commercial deep discount brokers have moved to totally electronic
platforms. It wasn't always like this. In the early 1990s you entered your
orders electronically (online) but typically there was a human 'middle man'
between you and the exchange, presumably for risk or margin purposes.
These orders permit much more flexibility. Used properly they can automate
trade management and drastically reduce screen time and stress. This is good.
First we'll cover the various types and then proceed to strategy.
CONTINGENT ORDERS
A contingent order is exactly that. It places some type of market, limit or
stop order when a predetermined price is traded on any given market, stock,
option, etc. For example, let's assume for some preposterous reason I want
to enter a LONG POSITION for IBM when the DOW hits 10,000. Assuming I'm
using the DIA as a DOW surrogate, I will place a CONTINGENT order where the
TRIGGER PRICE of the DIA is 100. Accompanying this contingent trigger will
be a MARKET ORDER for 100 IBM LONG. If or when the DIA trades through
100, my broker will automatically execute an order to buy 100 IBM at market.
Contingent orders are popular for options. You can use the underlying stock
or index as a contingent trigger and buy or sell a call or put when the
contingency criteria is met.
Not available on all platforms, this order will trigger two (2) subsequent orders
if one is executed. An example of this phenomenon would be to place a
BUY STOP LIMIT for a trade setup and (when executed) automatically enter
your TRAILING STOP ORDER and your TARGET SELL STOP ORDER. Really,
really, ridiculously cool.
THE BOOK
When a stop is placed on an ECN or exchange it is listed and available for
any specialist, operator - or anyone else who has access to order flow information to see. This knowledge lends itself to manipulation on the form of stop hunting,
stop running or whatever you wish to call it. To that end you may want to hide
your stops - or effectively not advertise where you will be selling that juicy
10,000 share lot.
TRY THIS
Use an OTO or One Triggers Two to simultaneously post a maximum risk
SELL STOP (below) and SHED RISK SELL STOP (above - when the price advances
1 times RISK). You may have to revisit Tutorial #5 to be certain about trade
management.
Or, you can place a One Triggers Two to simultaneously post a maximum risk
SELL STOP (below) and a TARGET SELL STOP (above - at 3 times RISK).
Either way you can achieve much more peace of mind and control. Simply use
an audio or email alert to inform you that some action has taken place. And you
won't have to interrupt your appointment to test drive the new Porsche Boxster S,
or afternoon tea...or that spa appointment at the Agave.
OPTIONS
Contingent strategies function for options but I still prefer to work my ENTRY orders
manually. Unless the option bid/ask spread is 0.05 or less and very liquid (and
I'm certain I can achieve a reasonable fill), I prefer to check the bid/ask market
action prior to entry. I don't know how volatility may have affected prices.
As for EXITS, contingents are amazing. Once your trailing stops are ITM (in
the money), contingents can be used effectively for stop placement and
target exits. If I'm long 20 IBM JAN 100 CALLS and my target is IBM trading
at $125, I can set a contingency to sell the calls when that price is hit. Always
use Limits with options, of course.
LIMITATIONS
The caveats here are obvious and numerous. Remember that advanced orders
are software-based triggers originated by your broker. And they don't always
work. I have actually watched prices trade through a contingency and the
platform fail to enter/execute my action order. It happens. Some vigilance is
necessary. We put men on the moon by software glitches are a way of life.
I have heard horror stories about contingent orders at some online option brokers.
So be careful with these. You should monitor your trades more closely through
the risk and shed areas anyway.
Advanced orders are not a license to be asleep at the wheel, but they can be
used effectively to enhance your discipline and effectively manage your trade.
Speaking of that, it's time to manage the rest of this sunny afternoon. I'll
see you for #17.
Cheers,
Ed
The SOLUTION
Setup trading: locate the highest probability entry pattern and attempt
to exploit it in a variety of traded securities (data) using various intervals (time).
The trader is allowed to submit to the proper form of rule-based mechanisms,
but remain flexible in the right areas: risk control, choice and implementation.
If the trader learns to effectively control risk and manage the trade within
the framework of a well defined, highly probable edge, he will be using his
resources most effectively. He can learn to effortlessly change as the market
does.
The pattern you have learned and may choose to master was apparent in
price charts 30 years ago. It will be apparent somewhere next week. Why
does it continue to work when many mechanical strategies fail? Because it
is found and traded 'in time'. It's probabilistic. You won't find it everywhere
you look.
No Drawdown
The best characteristic of the system is that you will rarely, if ever, experience
DRAWDOWN associated with mechanisms that frequently and drastically miss
changing market dynamics. Why? You'll almost never be on the wrong side
of the market other than the occasional small stop out.
Implementation of the strategy lends itself to a wide variety of effective uses.
From hyper-leveraging single positions to portfolio management for retirement
funds, there is a solution and means to achieve your goals. A few well-placed
high momentum trades per year can easily achieve double digit returns in a single
account. Consider it...you can actually control your destiny. Forget financial
planning. I did a long time ago.
I hope this brief discussion sheds light on the benefits of trading setups and
puts you in a more flexible, yet rule-based frame of mind. The control you'll
find is liberating, enjoyable and full of profit.
Have a great day,
Ed
PROBABILISTIC TRADING
Probabilistic trading involves the mastery of an edge and a firm resignation that
you have no idea what will happen next; that indeed, you do not have to possess
that knowledge in order to make money. This is more than many people can accept.
Money and security are at the base of their most fundamental belief systems. They
have to be 'right'. To not be so is catastrophic for the ego.
Do not be like these people. Understand that ALTHOUGH HISTORICAL
PRECEDENT
DICTATES YOUR TRADE, ANYTHING CAN HAPPEN. It is impossible to duplicate
an
EXACT historical entry because of the thousands of hidden variables. Accept this.
Accept the fact that all the setup claims to be is the higher probability of
one
thing happening over another. This is why many 'backtested' systems fail or fall
short in actual trading. TOO MUCH EMPHASIS IS PLACED ON THE PAST. NOT
ENOUGH EMPHASIS IS PLACED ON TRADE MANAGEMENT AND THE 'GAME'.
THE RULES
1) There is a random distribution of wins and losses for anything defined as
an 'EDGE'
2) Anything can happen - I do not know what will happen next - I do not
have to know
3) Effective trade management can make a mediocre system profitable
4) Each SETUP EDGE is NEW AND UNIQUE
Burn these statements into your subconscious. Create a new belief system around
embracing the unknown. Love the unknown. In the unknown there is an ironic
certainty. It will always be there. Think of it as your favorite holiday destination.
It will make you free. It will also make it easy to enter one trade after another, after
another - until your goals are met.
I made a small fortune doing this at the turn of the century in options. I purchased
lots
in round numbers. For example, I would buy $1,000 worth of premium. I was
willing
to lose the entire amount as risk capital. However, I would wait until I had $3,000
in profit before offsetting the position. Similar to the game mentioned above, I had
effectively achieved a system with a 2.5:1 reward/risk ratio. I never looked at the
chart again. I merely managed fluctuating premium.
But it gets better. What I learned after many samples was that I never lost more
than
$500.00. So I changed my rules to risk only 1/2 of my initial premium. Immediately
I
realized I could take profit sooner so I reduced my target to $2,500. This way my
game
built in an expected 3:1 ratio (either a $1,500 profit or a $500 loss) AND I was
turning
over positions more quickly. For a while I even ran the game with a 2:1 ratio taking
profit at $2,000 and any loss at $500.
I had dozens of positions on constantly. I was trading a simple, common breakout
system.
The more opportunities I could find, the better. The larger the sample, the more
money
I made and the more my results became statistically viable.
GRAIL SHMAIL
Hence the whole notion of how foolish it is to search for the perfect system. It
doesn't
exist. But you can waste a lot of time looking. This is commonly referred to as 'grail
syndrome'. Traders aimlessly go from one system to another, never achieving
desirable
results because they simply don't understand the ancient law of probability.
Commit yourself to a period of sacrifice. Learn the setup. Master it and you will
master yourself. The discipline you create will allow you to build a game that suits
your
short and long-term goals. It really is that simple. But I know it's not that easy.
Financial independence, however, is worth the effort.
Have a great day,
Ed
opportunity.
ONE MONTH LATER.....
Fiasco is still sitting in his fabulous setup. It's been as high as $11. But now its
consolidating and frustrating the **** out of him. His kids avoid him. His wife
seems
to think he's put on a few pounds....
SCANNING
If you are determined to maintain a large watchlist, I'd suggest some
type of scanning tool to generate a shortlist of 3x6 crossovers in the
proper direction. Remember: the crossover is all you need. Work
backwards from there to establish the entry as defined in TUTORIALS
#3 and #4.
TIME
You should only need about 10-15 minutes each evening to scan for
daily entries and a similar period on a quiet Saturday or Sunday to
complete the weekly scan. This small time investment will keep your
trading business alive and well.
Be easy on yourself. Remember there is a time for all things...a time
for long, a time for short and a time for cash. Accept this. Submit
and don't resist quickly passing time and missed opportunities. Like
fish stories in a bar there will always be the "one that got away". Make
the most of each cycle, each setup opportunity, each day - and let
the trend do the work. Somewhere in there you'll find balance.
I hope this helps you plan and implement a stress-free trading business.
Have a great day,
Ed