gain.
The moral: Mark Boucher refers to a strategy like Bob’s as an “Anthill”strategy: Ants can build a significant mound with tiny little bits andpieces but all it takes is one big footprint to smash it down.
METHOD MAN
Method Man is a setup junkie. He reads everything he can get his handson regarding trading. The problem is, he runs out and tries to apply con-cepts with his hard-earned money literally minutes after reading aboutthem. He doesn’t take the time to do the proper research, to prove thatthe setup has worked historically and through real-time observation.Method Man occasionally gets lucky but never has consistent longer-termperformance.
The moral: Find something that works and stick to it.
SHOW-AND-PULL
I once checked out a chat room full of daytraders just to see what it wasall about. There were a few smaller “wannabes” in the room, but for themost part, it was made up of larger, well-capitalized traders. One of thenewer traders entered a small position in a thinly traded stock. The stocklooked impressive and fit all the criteria for a good setup. After mention-ing the stock to the group and the fact he was long 100 shares, one of thelarger traders in the group decided to have a little fun. He said, “Hey, ev-eryone, pull up XYZ on your Level II quote screens...now watch this...”He then put out a 10,000-share offer on the stock. He laughed as thesmaller began to squirm and beg him to take it down. A few secondslater, he removed the offer.
Now here’s a guy that was screwing around just to get a few laughs.However, this could have had a material impact on the stock. What ifother traders would have been scared out of their position based on thisbogus offer? A chain reaction could have knocked the small trader out ofa perfectly good position.
The moral: All it takes is one jerk to screw up a perfectly good trade.
177 
178
Chapter 13
GET YOURSELF A PUNCHING BAG
Steve, a daytrader, always had a chip on his shoulder. He was constantlymad at the market makers for “screwing him.” In fact, on some days,Steve would send me numerous emails complaining about the above. Hewould even go through the painstaking process of providing time andsales information and other information to support his claims. He be-came so obsessed he began watching stocks that he had no intention oftrading just so he could prove his point. J couldn’t image where an activedaytrader was finding so much time intraday. I knew he had to be miss-ing numerous opportunities while expending all that negative energy.Finally, after getting tired of reading all his emails, I decided to take ac-tion. I explained to him that he was wasting far too much energy onthings he couldn’t control. Further, I admitted that I, too, occasionally gotmad at brokers, market makers and the market in general but instead ofobsessing over it, I go to the back of my office and beat on my punchingbag. After a few minutes of this, I return to my screens focused and re-freshed. Next!
The moral: Get yourself a punching bag.
RETIRE ON A SAILBOAT
John, a friend of mine, became incredibly bullish on a certain stock.Starting with $5,000, he began buying options on the stock. Turns out,John’s analysis was right. The options soon became worth many thou-sands of dollars. As the options neared expiration, he sold them and par-layed the money into more further out-of-the-money options. He beganto repeat this process over and over. This strategy was so successful thathe quit his day job. As he approached the million-dollar mark, I sug-gested that he lock in his profits and place them into a secure fixed-in-come investment. He explained to me that when he reached four millionhe was going to buy a sailboat and retire.
Follow-Up: Unfortunately, the stock began to implode soon after he
reached a million dollars. His entire account was wiped out over the nextfew weeks.
The moral: Don’t expect the market to fulfill your dreams. To quoteLivermore: “There isn’t a man on Wall Street who has not lost money try-ing to make the market pay for an automobile or a bracelet or a motorboat or a painting.” 
Lessons Learned
THE BEAR HAS EYES
In the late ’90s during one of the greatest bull markets in history, BearMan, one of the best daytraders in the world, was constantly faxing,emailing and calling me to talk about how the bull market was comingto an end. He’d support his claims with articles and newsletters alongwith market statistics and historical comparisons. His research was oftenthorough and quite convincing
The conversations were almost always the same. After about 10 minutesof listening to his bearish arguments:
Me: “Okay, I know you are bearish. So what are you trading?”
BM: “I’m long, ABC, CDE and EFG.”
Me: “Why no shorts?”
BM: “Because the market is going up.”
The moral: Bear Man never confuses being right with making money.This is why he is one of the greatest traders in the world.
OH, I DON’T LIKE TO TAKE A LOSS
After just a few months of trading, Mike had become a very successfultrader. In fact, he was so successful that he was on the verge of shuttingdown his successful law practice so he could focus on trading. Impressed(and somewhat envious) with his immediate success, I inquired about hismethods. He told me that he buys the hottest stocks on the momentumlists. When I asked about his risk control, he stated, “Oh, I don’t like totake a loss . . . they'll come back.”
Follow-Up: I can’t say for sure that Mike has been wiped out, but I doknow that his law practice has been dissolved and he appears to havevanished off the face of the earth. I hope the best for Mike but fear the
worst.
The moral: Use a stop.
IMPRESS YOUR FRIENDS
John was lucky enough to pick a hot Genomic stock as his first trade.The stock shot up from 20 to 70 in a few days. When I asked him how hewas going to exit, he replied “I’m going to wait until it hits 300 so I can
179 
180
Chapter 13
tell my friends I was in it at 20.” A few days later, the stock implodedand was trading below his entry.
The moral: If you want to really impress your friends, throw a party andspring for the beer.
BALANCE
Sharon achieved the success that many aspiring traders dream of. In ashort period of time she amassed a small fortune through her trading.This was not done through pure luck alone. She studied the marketsmorning, noon and night. She did not take trading casually, it was herlife. In fact, she worked so hard that it was beginning to cause problemswith her home life. She finally had to decide between trading and herfamily. She realized that if she chose trading, eventually the tremendouspsychological burden from her family would hurt her performance. Shechose her family and placed most of her profits with a professionalmoney manager with a long-term track record.
The moral: Work hard but balance your life.
I’M THE KING OF THE WORLD
In late February of 2000, I was having my best year ever in my privatetrading. I was up several hundred percent in nearly all of my accounts.Further, my ego was being fed by the readers of my TradingMarkets.comstock column. They were sending me emails praising my stock-pickingabilities. On top of all this, my wife was scheduled to deliver my firstchild in a few weeks. I felt bulletproof and invincible, kind of like Leo-nardo DiCaprio’s character on the front of the Titanic. Jeff Cooper warnedme that it wasn’t a good idea to trade around major life events. He sug-gested that I bank profits and take a break for a while. Unfortunately, Ididn’t heed his advice. I continued to trade actively. In fact, I was evenplacing trades from the delivery room in-between my wife’s contractions.Ironically, my daughter, Isabelle Florence, was born minutes after theNasdaq closed above 5,000 for the first time in history. As I held her upto the CNBC screen for my bragging pictures, I remember thinking that,at the rate I was going, I would have her college paid for within the nextfew weeks. I was invincible.aLessons Learned 181
Follow-Up: My accounts peaked the same day my daughter was born.Although I was able to stay in the black, I gave up a significant portionof the profits over the next month or so.
The moral: The “king of the world” eventually went down on the Titanic.Keep your ego in check and don’t trade around major life events. 
SECTION SEVEN
PUTTING THEPIECES TOGETHER 
CHAPTER 14
NIGHTLY PREPARATION
If people only knew how hard I worked to gain my mastery,it wouldn't seem so wonderful at all.
—Michelangelo Buonarroti
As I stated in Trader’s Psychology, money is the ultimate motivator. Assuch, it attracts some of the brightest minds in the world. I can assure youthose on the other sides of your trades are prepared. And they are all toohappy to take your money away from you if you are not. The following ishow I prepare for the next trading day. It’s a lot of work, but for me it’s likebeing on a treasure hunt.
POSTMORTEM
Right after the market closes, I take a few minutes to review and recon-cile the day’s trades and plot my equity. I then find a quiet place andspend 5-10 minutes mentally reviewing the day’s actions. As mentionedin Trader’s Psychology, it is at this time I think about what trades weretaken and why, what went right, what went wrong, what could I havedone better and so on and so forth. I then make the appropriate notes inmy trading journal.
 
185 
186
Chapter 14
ANALYZE A SMALL DATABASE
I keep a small database of 400-600 stocks that I download shortly afterthe close. The database contains the bellwether and popular stocks suchas Intel and Microsoft, the 30 Dow Jones Industrial Average stocks, manytech issues from the Nasdaq 100, a few cyclicals such as oils and oil ser-vice and representative stocks from a variety of sectors. The above makesup the core database and it rarely changes. The remainder of the data-base is made up of momentum stocks and the current “glamour” stocks.I cull these out as they drop below certain levels (usually $10 per share)or lose momentum. New stocks for the database are found by goingthrough momentum lists, such as the TradingMarkets.com ProprietaryMomentum (and Implosion) lists, TradingMarkets.com StockScanner,talking with other traders, stocks mentioned on CNBC and any otherstocks I find in my nightly analysis. This database grows and shrinks asvarious sectors heat up and cool off.
My charting software allows me to “click” through each and every chartin this database. On average, I spend between 2-3 seconds on each chart.Even though I have scanning software to scan for most of the patternslisted in this manual (more on this below), I still like to look through thecharts because it gives me a feel for what’s going on in the markets.Sometimes I can pick up on “themes” that cannot be found via com-puter-based scans or through overall sector analysis. For instance, ]might notice some “hidden” aspects, such as pockets of strength in other-wise down sectors, or “old tech,” or under-performing “new tech.”
In going through the charts, I'll also stop and analyze any chart thatmade a large move for the day. I then ask myself, could J have predictedthis ahead of time? Is it one of my patterns? Is it possibly a new pattern?
The exercise of actually going through all of these charts (vs. relyingsolely on the computer scans) not only unearths potential for the nexttrading day, it also makes me a better chart reader. It’s no different than amusician practicing.
ANALYZE SPECIALIZED DATABASES
Depending on market conditions, I often keep separate small databasesfor specific sectors. For instance, in late 1999/early 2000, the Genomicstocks were on fire. Therefore, during such periods, I'll keep a completelyseparate database of only these stocks. This helps to me to focus on thehottest stocks in the hottest sectors. Obviously, these databases change 
Nightly Preparation 187
with the times. They range from the complete sector such as telecommu-nications down to a specific niche within that sector (e.g., fiber optics).
ANALYZE IPOS
I also keep a small database of the Initial Public Offerings (IPOs) thatwent public over the last three months. These can be found throughInternet sources such as TradingMarkets.com and IPO.com. Often thesenewer stocks offer great swing-trade setups as the euphoria over thepromise outweighs the reality. As nimble swing traders, we can oftencapture a piece of these moves before that reality sets in.
SECTOR ANALYSIS
After completing my analysis of the above databases, I then look throughthe main sector charts such as the semiconductors, banks, biotech, oil ser-vice, major drugs, gold and silver, broker/dealer, telecommunications,etc. I look for setups in these sectors, bigger-picture patterns and momen-tum in general.
OVERALL MARKET ANALYSIS
I then look at what the overall indices are doing. This analysis was cov-ered in detail under Chapter 10, Market Timing for Swing Trading.
STUDY FUTURES MARKETS
I download and analyze about 30 active futures markets. Even if youdon’t intend on trading futures, it’s a good idea to know what's going onhere because markets don’t exist in a vacuum. For my stock swing trad-ing, I pay careful attention to what’s going on in the index futures andthe bond market. I'll also analyze what's going on in the currency mar-kets and commodities in general (e.g., crude oil).
ANALYZE SCANS
All of the above takes between one-and-a-half and two hours. Duringthis time, I have scans running on my main database of over 5,000 activestocks. These scans give me pullbacks, Double Top Knockouts, Bow Tiesand most of the other patterns and concepts outlined in this manual.I188 Chapter 14
I also look at of the stocks produced by TradingMarkets.com indicators.Not only does this provide me with potential setups, but it also may giveme themes that I might not have picked up on through my own analysisand scans. Further, it also often provides me with stocks that may beworth watching for setups over the next few days.
FINAL PREP
I then take all of the above analysis and put together my game plan. Imake a list of the stocks I want to watch for the following day. I alsocheck to see if they are optionable, make specific notes about where Ishould enter and where my protective stops should be placed. I plug thestocks into my quote screen and set alarms near the trigger points.Finally, I check the after hours index futures for any late-breaking newsthat could throw a wrench in any of my analysis.
When I arrive at my office the next morning, I have a game plan in frontof me and my screens are ready to go. There’s no last-minute stress orscrambling involved with not being prepared. I sip my coffee and waitfor the opening.
Q&A
Q. You mentioned only spending 2-3 seconds per chart while toolingthrough your small database of up to 600 stocks. What can be gath-ered in such a small amount of time?
A. A time of 2-3 seconds is only an average. If I don’t like a chart, I mightonly spend a fraction of a second on it. On others, I might spend aminute or longer or make a note to come back to it later.
Q. How do you know to only spend a “fraction of a second on a chart’?
A. After a while you begin to memorize the charts. For instance, I knowthat XYZ has been trading in a low-level base for months. When I getto this chart, unless the chart is showing some signs of life, I think, oh,that’s XYZ, I see it’s still in the toilet. Next!
Q. Why not rely solely on the scans?
A. Most people are looking for the easy way out. And the scans do awonderful job of reducing the workload and finding setups. However, 
Nightly Preparation 189
looking at charts gives you a much better picture of what's going onunder the surface.
Q. Why look at so many charts?
A. I’ma technician. And, technicians predict the markets through the useof charts. The more charts I look at, the better I get.
Q. By looking at so many charts, obviously you must see lots of stockstake off or implode (for shorts). By missing these setups, doesn’t thisirritate you?
A. It used to. Now it just motivates me to see if I could have caught itahead of time. This makes me a better chart reader.
Q. You said you set up your quote screen with alarms “near” your en-tries. Why not at your entries?
A. When a stock triggers, especially if it’s an obvious setup, it can moveawfully fast. I want to know when it’s getting close to triggering. Idon’t want to know after the fact.
Q. Do you ever enter before the trigger?
A. If the markets are really in gear, then I might attempt to enter earlyand use a tighter-than-normal stop and look to re-enter if stopped out.Conversely, if the overall environment is mediocre, I might let setupstrigger and wait to see if they follow through or possibly wait for asecond entry.
Q. For your own scans, do you have parameters to reduce the number ofstocks that fit the pattern?
A. Yes. My goal with my scans is to show me the best setups on the beststocks. Often, I’ll use historical volatility and ADX as filters along withminimum volume requirements.
Q. Where do you set these parameters?
A. I normally set the average volume to 100,000 or higher. For the HV, Inormally keep it above 40 but may raise it to as high as 80 dependingon market conditions. ADX, when used, also varies. I’ll usually keep itat 25 or higher, but raise or lower that threshold depending on overallmarket conditions. 
190
Chapter 14
Q.
A.
You mentioned you look at the futures market. The indices and bondmarket makes sense, why other commodities?
It all depends on the situation. If crude oil is at 10-year highs and itlooks like it’s going even higher, then that will likely drive interestrates higher and affect the indices. Markets are interrelated. For in-stance, in the summer of 2000, someone joked on Bloomberg that ifyou predict the stock market, the euro and the crude oil market, thenyou can trade bonds.
Are there any fixed relationships?
There used to be. For instance, you could pretty much predict thebond market with the stock market and vice versa. Now, it seems thatthe relationships only matter when traders decide to fixate on them.However, they’re still worth watching.
You mentioned you check to see if the stocks you are interested in areoptionable. What are you looking for here?
If the options are cheap enough, occasionally, 1 might just buy optionsversus the underlying stock or, I know that I might be able to usethem to hedge, should I be blessed with a profit. I also look to see ifthere is a large open interest in a particular strike, especially when ex-piration is near.
Some traders stress the importance of writing down market stats, forc-ing them to recognize market conditions. Do you do a similar exercisedaily?
This is a wonderful exercise. One of the most successful traders I
know wakes up early each morning and fills out a sheet of about 50market statistics. He has done this religiously for the past 30 years.
In the past, I used to keep daily stats. In fact, 1 have tons of notebooksfull of market data lying around my office collecting dust. I would rec-ommend anyone getting started to do similar exercises. Due to timeconstraints, I now lean on my computer to keep the database for me. Iwill note any anomalies or extremes in my trading journal.
Such as?
If the VIX is at an extremely low level historically, I’ make a note of itand take notes on what it has done in the past during similar condi-tions. Things like this often become an early warning system. 
CHAPTER 1 5
MORE EXAMPLES
MONEY-MANAGEMENT EXAMPLESI192 Chapter 15
On 07/14/2000, Immunex Corp. (IMNX) sets up as a simple four-bar
  
deep pullback.FIGURE 15.1IMMUNEX CORP-Dally 07/20/2000 C=54.997 2.998. |ry |
 
 
 
1. An entry on 07/15/2000 is triggered at 57 15/16, 1/16 above the priorday’s high.2. Because the low of the formation is more than 5% away from the en-
try, a protective stop is placed at 54 15/16 for a 3-point risk (approxi-mately a 5% risk).
3. IMNX rallies over 3 points to 60 15/16 and we exit half of our posi-tion.
4. The protective stop is moved up to breakeven (57 15/16, the same asthe entry), and we are stopped out for a scratch on the remainder ofthe position. ~
5. The market gaps lower and trades below our original entry. As youcan see, if money management was not used, this overall profitabletrade would have resulted in a loss.aMore Examples 193
On 07/20/2000, Viratra (VRTA) sets up as a simple three-bar pullback.
FIGURE 15.2
 
 
ySuperCharts
 
 
 
1. An entry at 74 7/16 is triggered, 1/16 above the prior day’s high.
2. Set a protective stop at 71 1/16, 1/16 below the low of the setup for arisk of 3 3/8 points.
3. VRTA hits our profit target of 77 15/16. We exit half of our positionfor a profit of 3 3/8 and move our protective stop on the remainingshares to breakeven (1). Note: On such a wide-range bar, you mightwant to exit additional shares.
4. The stock trades at 74 7/16 and we are out for a scratch on the re-maining shares.
5. The stock implodes. As you can see, what could have been a losingtrade is modestly profitable due to money management.I194 Chapter 15
Anadigics (ANAD) sets up as a Double Top Knockout (DT-KO).
FIGURE 15.3
 
   
Anadigi
 
 
 
1. The stock triggers an entry at 52 1/16.
2. The low of the setup bar is more than 5% away from our entry, so weplace our protective stop at 49 7/16 for a risk of approximately 5% (25/8 points).
3. The stock rallies to 54 11/16 and we lock in half of the profits for a 25/8-point gain.4. We move our stop to breakeven (the same as the entry).
5. Trail a stop higher. Here we used a simple two-bar low. As swingtraders we would look to continue to scale out of the position as itcontinues to move in our favor and would likely have been out by theend of the seventh day. For those willing to stay in the market for ex-tended periods, you could have trailed a stop on a piece of the posi-tion. In this case, this simple trailing-stop technique would have keptyou in for a 38-point run. 
More Examples 195
TREND QUALIFIERSAND SETUP EXAMPLES
FIGURE 15.4
 
         
Lehman Bros-Daily 08/07/2000 C=127.000 -2.625 _
fg).
he lot(eh, a TW . i
ith rift,ae lu! lt
  
 
 
a. Lehman Brothers, a stock in a strong uptrend, forms a High-Level Mi-cro Double Bottom.
b. The stock breaks to new highs on an expansion of range.c. The stock gaps to new highs—another momentum clue.d. New highs again.
e. The stock begins to pull back forming a three-bar pullback and a Sim-ple Pullback.
The stocks resumes its uptrend on an expansion of rangeNew highs.
A four-bar deep pullback (Snapback).
High-Level Micro Double Bottom.
ma rn
—I196 Chapter 15
FIGURE 15.5
 
Genome Therapeutics C-Daily 06/21/2000 C=37.000
 
 
 
 
a. Genome Therapeutics (GENE) has a wide-range bar higher and strongclose.
b. The stock gaps to a two-month high.
c. A Bow Tie forms: the moving averages converge and then spread outagain combined with a lower low.
d. Positive slope in the moving averages.
e. An entry for the Bow Tie, which is also a simple three-bar pullbackfrom highs.aMore Examples 197
FIGURE 15.6
 
Transwitch Corp-Daily 02/29/2000 C=58.750 |
 
 
 
 
a. Transwitch (TXCC) forms a high-level “running saucer.”b. Double Top Knockout.
c. The trend resumes... Daylight.
d. Positive slope in the moving averages.
e. Simple four-bar pullback.I198 Chapter 15
FIGURE 15.7
 
 
 
 
a. PMC-Sierra makes new highs and forms a high-level micro cup andhandle.
b. This also sets up as a Double Top Knockout.
c. Trend Knockout.
d. Positive slope on moving averages and Daylight.e. Trend Knockout
f. Simple three-bar pullback.
g- Trend Knockout
h. Trend KnockoutMore Examples 199
FIGURE 15.8
 
Viratra Corp-Daily 03/06/2000 C=99.312 +26.997
 
 
 
 
a. Viratra Corp., a stock in a strong uptrend, makes a new high.b. Three-bar pullback.
c. Positive slope in 10-SMA, 20-EMA and 30-EMA. Also, Daylight (owsgreater than moving averages).
d. New High.
e. Simple six-bar pullback.
f. Simple three-bar pullback.g. Trend Knockout.I200 Chapter 15
FIGURE 15.9
 
Genome Therapeutics Corp-Dally, (03/02/2000 —
 
 
 
a. Daylight.
b. Wide-range bar higher/base breakout.c. Three-bar pullback.
d. Another pullback.
e. Daylight, positive slope.
f. Trend Knockout (TKO).
g. TKO. 
More Examples 201
FIGURE 15.10
 
 
 
 
a. Daylight.
b. Positive slope in moving averages and 10-SMA > 20-EMA > 30-EMA(proper order).
c. Bow Tie entry, new two-month high on expansion of range.d. Another new high.e. Simple three-bar pullback.
ps
High-Level Micro Double Bottom.
New two-month high on expansion of range.
mr ge
Deep pullback (Snapback).
 a202 Chapter 15
Here we have an example in the Technology SPDRs (“Spiders”).
FIGURE 15.11
 
 
 
 
 
 
a. The Tech Spiders (XLK) form a cup.b. Daylight ows greater than moving averages).
c. Moving averages converge and then spread out forming a Bow Tie.Also, moving averages now in proper uptrend order(10-SMA>20-EMA>30-EMA).
d. Bow Tie entry.
e. Simple three-bar pullback.
f. Trend Knockout (TKO).
g. Another Trend Knockout. Very similar to Double Top Knockout.
h. Base breakout. 
 
CHAPTER 1 6
MORE THOUGHTS
Q. Why write this book?
A. It’s funny. Trading is about the only profession in which you get criti-cized for writing a book. I suppose it’s because the business is a com-petitive one and not a cooperative one. I’ll admit that I did write it forthe obvious reasons: ego and money. It would be great to be knownas an authority on swing trading. Making some money in the processdoesn’t hurt either. However, there’s something over and above theobvious. I have struggled for years to become a successful trader.There were times during extended drawdowns when I felt completelyworthless. In spite of all my formal education, during these periods Ifelt like about all I was good for was flipping burgers. Knowing howpainful this is, I would hate to see any struggling trader go throughthis process. My intent was to write a complete manual that anytrader serious about being successful could follow. Also, though it wasnot my original intent, soon after I began writing, this manual becamea manual for me. It forced me to realize when I was violating my ownrules. Putting everything down in writing cemented the process. Infact, 90% of my losing trades while writing this book occurred when Ididn’t follow my own rules.
203a204 Chapter 16
Q. Are you worried that someone will come in, take your patterns anderadicate the edge?
A. My patterns are all designed for swing trades. Large traders and insti-tutions can’t make money on this time frame. Due to their size, theyhave to scale in over a period of days to weeks. Also, if someone hasachieved the status of a “large trader” or institution, chances are theyhave their own ways of doing things. They‘re not going to run outand read a book and apply the concepts. One last point: most peoplewhen they read about a method don’t follow it to a “T.” They puttheir own twist on it.
Q. What would you suggest to a beginner who’s dedicated to learninghow to trade?
A. First and foremost, they should learn as much as possible aboutmoney management. Memorize the drawdown charts. Know that ifyou lose half of your money, it'll take a 100% gain to get back tobreakeven. Look at charts, lots of charts. Find something simple andstick with it. Also, be optimistic but realistic. Some of the best moneymanagers in the world, on average, only return between 20% and 30%per year, but do so with very minimal drawdowns year in and yearout.
Q