ana is stuck in a trading range. Some fastresearch points him toward the conclusion that this is an accumulation range. Still, even if it is, other factors, from microscopic insects to huge hurricanes can come into playpreventing an uptrend. Yet he is tempted to take a positionlong and do so fast. Still, something vague holds him back.Sure bananas and steel are a natural fit, but he isn’t so sureabout radishes.If our position trader could follow trading ranges formore than two minutes at a time without nodding off, he
figure 6.1 Organic Bananas and Radishes
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would probably do some day trading, too. He can’t, so he won’t.He can’t walk away either. At Point 9, he decides to buy 1000shares if Organic Banana breaks out of its trading range in theright direction and rises an additional two points, two pointsthat no voracious day trader would give up without a fight. Ourposition trader has no intention of staring at his monitor in themeantime. Instead, his entry strategy consists of putting in abuy stop order, then taking his all-time favorite position at thestern of his all-time favorite fishing charter boat.Sure enough, one week and sixty-four pounds of fish later,Organic Banana breaks out of its trading range and hits Point12, thus setting off his buy stop. This happened of coursewhile our trader was off fishing. By the time he found out, thestock had closed up another two points and he already had atwo thousand dollar profit. So now he is in, and in for the longhaul, expecting a sizeable return on investment. That leaveshim with the problem of figuring the exchange rate betweenhis paper profits and various available fishing charters.At Point 20 on our graph, to our trader’s pleasure, thetakeover rumors prove true. To his displeasure, the “experts”question the fit. Share price plummets. Still, our trader is confident that the stock will recover. Something tells him thatsteel and bananas are too good a fit to be dragged down byradishes. Besides, it is definitely not his game to sell short on areaction. Sure enough, two weeks later at Point 25 on ourgraph, for the first time in his tenure, the CEO of Organic Banana finally does something to rate his bloated salary and larcenous stock options. He announces a spinoff of the entireradish works. The “experts” swoon in approval.Stock price takes off and our happy position trader holdson for the ride. He has no thoughts of doing anything else untilPoint 50. Here he finds himself in one more boring tradingrange. Now, if he were sure this was merely a holding pattern103
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in a continued uptrend, he would be glad to hold on himself.Yet, there is too much evidence that this is a distribution trading range that will end in a downtrend. At Point 52, the nextpoint of support, he decides to sell at a very handsome profiton the next point of resistance, which turns out to be Point 55.It would take a long time to spend all his profits on fishing,so at the same time he sells his 1000 shares, he shorts 1000shares. Incidentally, as a stop loss strategy, he also puts in abuy stop for an equal amount at two points over resistance.Sure enough, Organic Banana and Steel breaks support at Point60. Our position trader ignores all reactions on the way down,and does not cover his short until Point 90. He picked a winnerand stuck with it, long and short. Of course, he has also beenknown to pick losers. Still, he has never been know to sit gluedto his monitors for days at a time.A pure swing trader is not interested in holding a stockfor four months, then selling it short and waiting two moremonths to cover that short. He attempts to make his money ina much shorter timeframe. Let us now return to the tradingrange between Points 1 and 8. The difference between supportand resistance never amounts to much more than a point, andis often less than half that. This is too narrow a range to interest a swing trader. He has a feeling that this is an accumulation phase, but he is not sure enough to bet on it. The break inresistance reaches Point 14 before he is convinced that Organic Banana and Radishes is in a significant uptrend. Beforehe can act, the reaction between Points 15 and 17 renews hisdoubts. Still, he cannot resist the following upturn, buying 500shares long at Point 18.Remember, a pure swing trader does not hold positionsfor the long haul. Whereas a position trader ignores reactionssuch as that occurring between Points 20 and 25, the swing
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trader abandons his positions as soon as he can, in this casePoint 21, doing so even though he believes rightly that thisdownturn is a temporary reaction, not a reversal of trend. According to our Rule 3, “Trade with the Trend,” our tradershould not sell short here, then cover that short as close as hecan to the upturn at Point 25. Many successful swing traderswould disagree with me. I stand by Rule 3. If you insist on getting more out of this uptrend, I would advise doubling yourlong positions as opposed to bucking the trend. My adviceconcerning the downtrend between Points 60 and 85 would bejust the opposite. Trade with the trend by selling short andcovering, without taking any long positions on the reactions.Returning to the other side of our chart, a swing trader wouldtake another position long after Point 25 as soon as he thinksthe reaction is over.Trading ranges involve similar choices for the swing trader.First of all, let me emphasize again that the accumulation phasebetween Points 1 and 8 is too narrow to entice him. However,the first half of the distribution phase between Points 40 and 52offers some mouth-watering ranges of between two to threepoints. Again, many swing traders both buy on support andshort on resistance no matter whether the trading range in anaccumulation or distribution phase. Also again, I recommendagainst this. An accumulation phase ends in an uptrend, noplace to be caught selling short. A distribution phase ends in adowntrend, no place to be caught holding long. My advice is tofirst determine the type of trading range with which you aredealing. Buy long or sell short accordingly. Do not do both.Looking at Figure 6.1 again, we see that with this particular stock, the position trader took and abandoned only two positions in six months. The swing trader made numerous trades,holding positions for periods from days up to weeks. Now the
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day trader, depending on his indicators, could have made hundreds of trades all over the chart, picking up a half point hereand a quarter point there. The overnight trader, limited to onetrade a day in a particular stock, could have made more tradesthan the swing trader but far less than the day trader. Obviously, the longer you hold a position, the greater the necessitythat it be profitable and the larger margin of profit necessaryto justify the trade.As stated previously, rarely does a stock trader limithimself to only one of the four methods of trading. Still, successful traders usually focus their efforts on one or two approaches. Each of the four methods requires its own skills,some acquirable some innate. It pays to find out where yourskills lie, and to find out fast. If you are the strong-willedtype, spelled s t u b b o r n, convinced that you are equallyskilled at all four methods, and you are willing to spend all ofyour time away from the monitor doing the necessary research, then go right ahead. However, allow me to mention,that even if you do make enough money to buy a life, you willnot have any time to live it. My advice is to concentrate yourefforts and capital on the stock trading method you find mostfinancially rewarding.
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trading stocks online“this program has performed an illegaloperation”—Windows®
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You have probably been wondering irritably if the online partof Technical Trading Online consists solely of one word in thetitle. In fact, some of you more suspicious readers may haveeven decided that putting online in the title was just a trendygimmick to get you to buy this book. Well, I can say in all honesty, that in your case it obviously worked.Actually, there has been a cleverly hidden, integral onlinecomponent throughout this book. To trade stocks technically,you need technical input—graphs, indicators, analysis, andother necessary data. Were it not for online sources, thiswould all be unavailable in a timely enough manner to the vastmajority of stock traders. The next few chapters will show youthe extent of online sources and how to tap them. I do have tomention the reason why this information is largely segregatedinto a few chapters, as opposed to being integrated throughout the book. I am confident that the material contained inTechnical Trading Online up to this point will be relevant anduseful to stock traders for many years to come. However, muchof the material in the next few chapters will be outdated by thetime this book goes into print, not to mention by the time youread it. In fact, for simplicity and sanity’s sake, I will not evennote where a few of the generalizations that I will make alreadyhave their exceptions. To keep up to date with what is happening online, you have to get online and you have to stay there.Despite this unfortunate fact, the following material shouldprove helpful in that process.The past few years have brought a revolution to the business of buying and selling stocks. Surprisingly, the newer methods by which much of this business is now conducted were more109
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a necessary cause of this revolution than a result of it. There arebasically three ways to buy and sell stocks. The traditional, andstill important way, is through a personal broker. The next step,a technical one, is online, substituting a computer interface forthe personal broker, and in the long run, probably replacing thepersonal broker as we know him. The third way, technically thestate of the art, is Electronic Direct Access Trading (EDAT). Ourconcern in this book is method number two, online trading.However, to best understand this method, it is helpful to knowhow it differs from the other two methods.When dealing with a broker, the customer meets him inperson or speaks to him on the telephone. This provides an opportunity for the broker to offer his opinion on the market as awhole and a few stocks in particular. The novice trader oftenlived and died by this advice. Since the broker makes his incomefrom fees that are based on the volume and value of the stockshis clients buy and sell, it is to his advantage to keep his clientsliving, or at the very least, to make sure they die slowly. However, it is also to his advantage if his clients do a lot of buyingand selling. What we have here is an inherent conflict of interest. Now I am sure no broker ever consciously churned hisclient’s accounts, but, human nature being what it is, there mayhave been a rare few who, when in a personal financial pinch,might have honestly convinced themselves that it was to theirclient’s advantage to sell or buy one hell of a lot of stock fast.There have also been dark rumors that on occasion, certainbrokers have actually overhyped certain stocks to raise pricesand unload their own holdings at a handsome profit. Let ushope these rumors are nothing more than unfounded lies.The online trader is a breed apart. He has no time towaste on small talk with brokers, no trust in the spoken word,whether for scuttlebutt or for making a trade. He also spendsless money on broker fees—online charges being much less110
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than those of full service brokers. He does his research andgets his information online at the speed of his modem, sometimes so fast he ends up drowning in it. No, our online trader,and make no mistake, he is the hero of this book, would ratherlook at his computer monitor, making his trades face to interface, until Windows freezes over, which seems to be more andmore often with each new edition.On the brighter side, if you pay close attention to the restof this book, you just may make enough money trading stocksonline to pay other people to look at your computer screensfor you.I will return to online trading in the next chapter, but firstfor some very important reasons, we must discuss ElectronicDirect Access Trading (EDAT). For four not so important reasons, we shall keep our discussion as short as possible. First,the subject of EDAT can get extremely complicated. Second,what is true today is likely to be outdated information tomorrow. Third, EDAT trading is not the subject of this book. Fourth,it is possibly the subject of my next book. Though online trading is much faster than trading through a personal broker, EDATtrading is faster still. In both EDAT and online trading, you findyourself staring at a monitor. What you see on those monitorsmay also be similar. Do not be fooled. It is what’s behind themonitor that makes the difference. Online, you are connected toyour broker through the Internet. You are not buying the stockyourself. You are asking your broker to acquire it for you. Often,instead of doing this himself, he sells your order to a middleman. In addition, download times can drive you nuts. In crisissituations, they can even drive you to violent acts, not to mention naughty language. With EDAT, you are usually connectedby a dedicated phone line with direct access to the market. Youbuy the stocks yourself, almost instantaneously, with mouseand keyboard. Downloads are lightning fast.111
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These speed advantages accelerate not only the buyingand selling of stock, but also the researching of stocks—fromquotes, to charts, to breaking news. In business, time ismoney. In the stock market, time is often the difference between solvency and insolvency. And the faster you get to themarket, the more likely you are to get your target price, and infact to complete your trade at all. However, the actual value ofspeed varies according to conditions. News that breaks at sixo’clock in the evening may be just as valuable anytime overthe next nine hours, up until the market opens. The day trader,making his living off minute, temporary price fluctuations,needs his information instantly, or at least as fast as anyoneelse is getting it. A seasoned EDAT day trader would feel veryconstrained online, and possibly, shortly, insolvent. The position trader, buying a mutual fund for the long haul, can walkback from the water cooler slowly enough to keep fromspilling half the cup down the front of his pants. A day traderwho can make money online, can probably make more moneyon EDAT. He or she should perhaps try it, but there are addedcosts and dangers we will discuss later.Online trading is most often done from the home or office,and this office is nearly always one where the online trader issupposed to be doing something other than trading stocks. Thefact that this online trader, by his very trading, is often disposing of the ill-gotten gains he is accruing for supposedly doingthe job he is in fact ignoring while instead trading stocks, lendssuch a sense of elegant symmetry to this tiny aspect of our limitless, wondrously chaotic universe that it would tend to makeeven the most vicious murderer, rapist, stock broker, or evenIRS agent believe, for at least a brief instant, in the existenceof God.A Level II screen is an expensive option that can benefitall traders, especially day traders. In addition to showing the112
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highest price bid for a stock and lowest price asked, it alsogives you the next levels of bids and asks. This better enablesyou to gauge a stock’s strength. With practice, you will gainskill in judging which bids and offers are legitimate and whichare bluffs.EDAT trading, especially day trading, can be done remotely, in the home or office. However, a full home setup cancost you from a few hundred to a thousand dollars a month.For this reason, EDAT trading is almost always conducted onsite, in an office designed especially for this activity. Traderssit side by side in rows, staring at numerous monitors thatdisplay real time stock information. In rare cases, thesetraders are risking other people’s money for a percentage ofprofits. Most often, they are trading their own money, andsome of these traders work under the umbrellas of LimitedLiability Corporations (LLCs). Their transaction charges arefractions of standard personal brokers’ fees. The funds of alltraders are comingled, thus allowing leverage of 10 to 1 ormore instead of the standard 2 to 1, commonly referred to asRegulation T margins.The trader contributes his share of the corporation’s capital, let’s say $50,000, and theoretically he is a partner. And if thetrader really believes this, he is way too naive to go outside hishouse unless accompanied by an adult. Do not worry. He won’tbe outside for long. High leverage is not a tool for beginners. Inno time, bad trades will have gobbled up his $50,000, and he willbe back home, safe and insolvent where he belongs. Partners ofLLCs are in effect clients of them. Only in one extreme casedoes theory meet reality, making all the traders of an LLC infact partners. That case is bankruptcy. Rest assured there arenumerous safeguards to prevent one of your high-rolling partners from wiping out the entire firm’s capital. Also rest assuredthat these safeguards have not always worked.113
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A far more common problem is individual traders gettingwiped out, some of course deservedly. Don’t be surprised ifthe SEC clamps down by tightening requirements on LLCs.However, this won’t eliminate another pitfall of trading bymouse and keyboard. Computer monitors have a way of mesmerizing people. Mesmerized people make silly mistakes. Inthe stock market, one silly mistake can mean financial ruin.Let’s say you are having a good day, but nothing compared tothe fantastic night that preceded it. And let’s say that not asingle minute of this fantastic night was wasted on sleep. Andlet’s say one more thing, that you are not one of these infamous, greedy, beady-eyed day traders. No sir, not you. Onemore little trade and you will cash in and go home for a nap. Asyou decide this, it occurs to you that never in your whole lifehave you traded a single share of IBM. You’ve always wantedto. There is something about those three pretty letters. Theymean strength, intelligence, and most important, class. It’stime you owned a thousand shares of Big Blue. No, it has beena good day. Make it ten thousand shares, with a 1⁄4 stop forsafety’s sake. You start tapping on your keyboard, thinking,“This EDAT is easy as marbles.” Unfortunately, you shouldhave been thinking about numbers not marbles, because youjust bought one hundred thousand shares instead of ten thousand. Wouldn’t you know it, IBM hits your stop just as you realize this. Just then you realize something else too. Trading onEDAT may be as easy as shooting marbles, but EDAT has noequivalent of calling, “Slipsies!”If you can’t make money trading without the advantagesof EDAT and a Level II screen, do not deceive yourself intothinking that they are the only difference. However, if you aresuccessful without them, then there is a very good chance thatyou can be more successful with them.
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I think it appropriate to end this chapter with the admonition that while trading online or through EDAT may facilitatethe making of your fortune in far less time than this would havetaken through a personal relationship with a broker, thesemethods of trading can facilitate equally well the quick lossof your fortune. Of course, if for you profit and loss are minorconsiderations compared to time saved, then this admonitionshould not concern you in the least. Then again, neither shouldthis book you are reading. Allow me to remind you that Technical Trading Online is written for people who are interested inmaking money through the purchase and sale of stocks.
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setting up your monitor“you don’t know jack”meets “doom” meets “winky dink”
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The following chapter is probably a good place to oil and getthe rust off of your speed-reading skills. If you do not have amonitor yet, then you will probably forget most of this chapterbefore you get one. If you already have a monitor, and it is setup, you may want to keep your monitor the way it is. However,there is nothing in this chapter that in itself will cause you oryour financial statement any permanent damage. In fact, thereis a good chance it contains a few sentences here and therethat will prove both new and valuable. In short, if the word“short” can still be applied, this chapter is to be read quickly,certainly not studied and memorized.First, let me state that if there is any correlation betweenparticular screen setups and trading success, I haven’t foundit. Second, individual screen setups probably vary as much asindividual DNA. In setting up your monitor, the objectiveshould be to find the arrangement that is the most effective,comfortable, quickest, easiest, and safest to use. If I have givenyou the impression that setting up your screens is a job to betaken lightly, I have given you the wrong impression. A brain’soutput is dependant on its input. Unfortunately, our societyplaces too low a value upon quality input. Perhaps this is because too many people, many of them stock traders, have meatgrinders for minds. Superior input is not foolproof, but it certainly does no harm. More to the point, in the best of all possible worlds, every buy and sell decision you make should bebased upon, or at the very least confirmed by, the informationyou see on your quote, graph, and other screens.Now it is not absolutely necessary to have a differentmonitor for each screen. All you need is a mouse to point and119
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click from one screen to another. In fact, this is the best thatmost online brokers can offer you (at least as of five minutesago). However, you can also subscribe to an information service as I prefer to do. Information services can be very, veryexpensive. It takes an experienced stock trader to get his orher money’s worth. Besides, the novice trader can go onlineand get more information than he can digest for free. Usingan information service involves using at least two monitorsattached to one PC with a splitter card, or better yet, twoPCs. One monitor will show information about the market,arranged to enable quick and easy analysis. We shall refer tothe screens on this monitor as quote or graph screens,though they will actually display much more. The other monitor is connected online to a broker and usually displaysorder entry screens.One quote screen can contain all the information weneed, and many traders find just such a setup sufficient. Idon’t. I like to see my graphs large, and I do not like them overlapping and covering up other information. For this reason, Iset up my information monitor so I can toggle between printedinformation and graphs.Setting up your quote screen, you have to keep two objectives in mind—displaying all necessary data and doing so ina simple, uncrowded, and easy to use format. Unfortunately,these are two very conflicting objectives that I myself have yetto completely reconcile. Unless you prove more successful,you too will have to compromise on both objectives. There isno point in giving you an illustration of a well set up quotescreen. All the free online and broker supplied screens havedifferent setups and options. None of them are capable of providing all the information I consider necessary on a quotescreen, nor do all the pay services. Instead, I will go over what
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I find necessary, some of it only available from pay services.The novice is surely better off starting without this added expense. It will take a while before he or she even learns to takefull advantage of all data available from free sources.The first necessary display we shall discuss is the time.Even the most mystical stock trader finds it helpful to knowwhen the market is about to open or close, and whether he istrading during regular or extended hours. Day traders whofade the opening want to be back trading with the trend by10:30 A.M. at the latest. They also want to avoid the marketbetween 12:00 and 2:00 P.M., when volume dries up. Most ofall, they want to be a flat, in other words, positionless by4:00 P.M.A comprehensive list of market indicators is essential.Though it is always tempting to start by checking individualstocks, your analysis must begin with an examination ofthe market as a whole, thus providing a context in whichto examine each particular stock’s price and movement.Table 8.1 provides a list of indicators and their corresponding symbols.Once you have a feel for the market as a whole, it is timeto examine the group indexes, again before you check individual stocks. Obviously, if you are interested in an oil stock, youshould also be interested in the XOI, the oil index. Less obviously, if the oil index is moving in a different direction thannearly all the other indexes, it is definitely worthwhile to knowif and how this will effect your position. Sometimes you caneven detect relationships between specific indexes. A changein the CEX, the chemical index, may foreshadow a change inthe XOI or vice versa. The group indexes themselves should belisted together as a group. If you want each index listed alongwith the stocks that comprise it, then list them in both places.
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Table 8.1 market indicatorsSymbol
Meaning
INDPINDUTRANUTILCOMP.QSPXSPX/NSPU.ZSPU/NIADVIDECVOLUUVOLDVOLVOLQTICKTRIN
Dow Jones Industrial Average, e.g., 1056Change in INDP, e.g., +52Dow Jones Transportation AverageDow Jones Utility AverageNasdaq Composite AverageStandard & Poor’s 500 IndexChange in SPXStandard & Poor’s Futures ContractsChange in SPU.ZAdvancing Issues N.Y. Stock ExchangeDeclining Issues N.Y. Stock ExchangeTotal Volume N.Y. Stock ExchangeTotal up Volume N.Y. Stock ExchangeTotal Down Volume N.Y. Stock ExchangeNasdaq Total VolumeNet Ticks plus or minus N.Y. Stock ExchangeTraders Index
If possible, for easy identification of trends, advancing indexesshould be listed in green and declining in red. Table 8.2 is a listof group indexes and their symbols.Most of your quote screen should be taken up by all relevant stocks listed separately by group. Opposite each stockshould be its current price, again in red and green if possible.This will facilitate finding the groups and the stocks withinthem most in line with the trend of the market as a whole. Ifnearly all the stocks in a group are the same color, they getyour attention. Of even greater interest is a group’s switchingfrom predominantly one color to another.In a convenient place, you should also list all stocks inwhich you have taken positions or are thinking of taking positions. The prices will be listed opposite them. If available, you122
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Table 8.2 group indexesSymbol
Meaning
HCXDRGBKXBIXXCICE XRLXXOIXAUIUXSOXCMRCYC
Health CareDrugFinancial #1Financial #2Technology #1ChemicalRetailOilMetalsInsuranceTechnology #2ConsumersCyclical
should also show a more detailed quick quote or streamer containing the one or two stocks you are most interested in at themoment. If these sustain your interest, then the next step is totake a look at some graphs. This is usually accomplished byclicking a mouse to overlay some graphs or by switching to agraph screen.Each graph screen usually contains graphs pertaining toone particular stock, as in Figure 8.1. If possible, it pays to develop standard graphs, incorporating the same indexes and indicators in the same places. This enables almost reflexiveanalysis with a minimum of errors. At the very least, try to usea standard graph for each group of stocks such as airlines orchemical companies. Graphs can and should be modified togain different perspectives.If enough space remains, and you are into status symbols,you can list a couple of popular option indexes. The MajorMarket Index ( XMI ) is made up of 20 stocks. It closely mirrors123
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figure 8.1 Candlestick graph
Source: Used with permission of Omega Research.
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the Dow Jones Industrial Average. The Standard & Poor’s 100Index (OEX) closely mirrors the Standard & Poor’s 500 Index.This explanation should be enough to impress any novice whoasks. However, in case someone that does understand the intricacies of option trading starts discussing these indexes, you