and begin to spread out.
2. A lower low. We will look to go long tomorrow at 53 15/16, 1/16above today’s high.Market Timing for Swing Trading 151
On 01/05/2000, CV Therapeutics (CVTX) sets up as a Trend Pivot Pull-back and a low-volatility situation.
FIGURE 10.15
 
 
 
 
 
 
1. CVFX is in a strong uptrend.2. The stock forms a Trend Pivot Pullback on 01/04/2000 (Chapter 6).
3. On 01/05/2000, the ratio of the 6/100 historical volatility drops below50%, suggesting that a large move is imminent. We will look to golong tomorrow at 26 11/16, 1/16 above the pivot high (2).reer e reer reer reer ee ee  e152 Chapter 10
On 1/6/2000 we get entries on CVTX, GILD and ALXN:
FIGURE 10.16
 
 
 Market Timing for Swing Trading 153
FIGURE 10.17
 
 
 
 
FIGURE 10.18
 
 
 
 
 
 LL154 Chapter 10
The entries are further confirmed (after the close) on 01/06/2000, by abuy signal in the Trin Reversal System.
FIGURE 10.19
 
NYSE Short Term Trading-Daily..01/06/2000..C=1.00...,..... 2.2
 
 
 
 
 
1. On 01/05/2000, the three-day average of the TRIN hits a 30-day high.
2. On 01/06/2000, the average “flips down” (today’s average is less thanyesterday’s) signaling a buy signal in the Trin Reversal System.Market Timing for Swing Trading 155
Over the next few days, the S&P, Nasdaq, Biotech Index and the stocksthat were set up: CVTX, GILD and ALXN all trade higher.
FIGURE 10.20
 
       
S&P 500 Stock Index-Daily o1/t¢ 0/2000 C=1457.60eh
[enti i illH ll
 
 
 
FIGURE 10.21
 
NASDAQ Composite Index-Daily 01/10/2000 4200tl | 4000 |an tf 3800 |
 
 
——Dec, Created with Super-harts by Omega Research ©1997
 
 
 I156 Chapter 10
FIGURE 10.22
AMEX Biotech Index-Daily 01/10/2000 C=440.64 -
 
 
 
 
 
FIGURE 10.23
 
CV Therapeutics Inc-Daily 01/11/2000 C=32.937
   
"Eleated wih Supercharts by Omega Researe
 
 
 LLMarket Timing for Swing Trading 157
FIGURE 10.24
 
 
 
 
 
 
FIGURE 10.25
 
Alexion Pharma Inc-Daiiy 01/10/2000 C=33.125: : vee cleveceesteeeete thane cop cures Entry... ... |. £36
 
   
Teated with SuperCharts by Omega Research © 1997
 
  
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Chapter 10
SUMMARY
As you can see, the odds are stacked in your favor as a swing trader bycombining discretionary analysis, mechanical systems and sector analysisalong with setups in individual issues.
O&AWhere can I find more information about the VIX indicator?
Contact the Chicago Board Options Exchange at www.cboe.com. Also,Connors VIX Reversal Signals are published nightly onTradingMarkets.com.
Do you only trade when you have signals and setups in the indi-ces/sectors such as those mentioned in your walk-through?
I'll trade as long as I have some sort of feel for the market. If I don’t,then Ill take smaller position sizes. If these trades turn into losing po-sitions, I may stop trading until I have a better feel for the markets.But, yes, ideally, I like to see systems kicking in along with patterns inthe overall indices and sectors.
In your walk-through, you had systems, patterns in the overall indicesand sectors all occurring around the same time frame. During thesetimes, do you tend to take larger positions sizes?
Yes, to some extent. There are only a few times a year when every-thing lines up. During these times, I may take a larger position size orpossibly increase my leverage by taking an options trade. But, eventhough I know what the market should do, I keep risks in check just incase I’m wrong. 
SECTION FIVE
OPTIONS
eocoooeceaeoauoscoseseaaenonesese oe 6&6 oe oe eo ee eB eB ee 
CHAPTER 1 1
A FEW WORDS ABOUTUSING OPTIONS WITHSWING TRADES
The setups and concepts described in this manual are designed to captureexplosive short-term moves in stocks. As such, they often lend themselveswell to option trading. Be warned, however, options are an extremely com-plex vehicle and you must use utmost caution when trading them. Makesure you fully understand the nuances and risks involved. There are entiretexts devoted strictly to option trading, pricing models and volatility. Istrongly urge you to leam as much as possible about options before at-tempting to trade them.
It has been estimated that as much as 90% of those who trade optionslose. Why? Because most who buy options do not have a strategy, amoney-management plan in place, and tend to buy extremely speculativeout-of-the-money options. The following guidelines, while by no meansexhaustive, will help improve your odds when using options to initiateswing trades.
Avoid Out-of-the-Money Options—One of the main reasons most peo-ple lose when trading options is that they buy mostly out-of-the-moneyoptions. Although cheaper in absolute dollars, these options are normally
 
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very expensive in terms of true value. And more often than not, they ex-pire worthless. Even if the underlying stock price rises sharply, these op-tions often do not increase enough in value to make trading themworthwhile.
In order to avoid the pitfalls associated with out-of-the-money options, agood rule of thumb is to buy options that are 1 to 2 strikes in the money.These options will tend to trade in tandem with the underlying stock.For instance, if the stock rises 1 point in value, an in-the-money call op-tion would also rise one point in value. In option lingo, this is known ashaving a delta of 100. This means the option trades in a similar mannerto 100 shares of outright stock.
Buy the Nearby—As a swing trader we are looking to position ourselvesfor the next two to seven days. We do not have to increase our risk bybuying longer-dated, higher premium options. Therefore, look to tradethe front-month options unless the expiration is less than seven tradingdays away. In these cases, go to the following month’s expiration.
Those familiar with options may argue that nearby options have worsetime-decay profiles than longer-term options. I understand this argu-ment, but believe that the potential of the patterns in this manual tomake an immediate move far outweigh these drawbacks.
No Tickie, No Tradie—As discussed in Chapter 2, Landry’s Rules andMoney Management for the Swing Trader, you should not buy or sellshort a stock unless it triggers a setup. The same holds true for buyingoptions. Only buy options if, and only if, a setup triggers in the underly-ing stock. Be warned, however, if the stock is in a fast move when it trig-gers the setup, the spreads on the option will likely widen. In these casesyou may have to be willing to forgo an options position.
Consider Options as a Stock Replacement on Profitable Stock Posi-tions—Once a swing trade entry is triggered, in most cases, it’s mucheasier to enter the underlying stock than it is to buy options. This is espe-cially true during fast markets that often occur when setups are trigger-ing. Therefore, you may want to consider options as stock replacementafter you have entered the underlying stock and only if the positionshows a reasonable profit.
For instance, if after entering a swing trade, you are fortunate enough tohave a large profit, rather than carry a large stock position overnight, youmight look to sell the position and buy options with a piece of your prof-its. This is, of course, provided the options are reasonably priced. ThisIA Few Words About Using Options with Swittg Trades 163
way, you have banked a profit and will still have the potential for awindfall profit on the option position with defined downside risk.
If You Hit a Double, Bank Half—Option prices often fluctuate wildly.Therefore, whenever you initiate an option position, you should immedi-ately place a limit order to sell half of the position at twice your originalcost. For instance, suppose you buy four options for $5 each, you wouldthen place a limit order to two options at $10 (or slightly higher to covercommissions). Should the option spike higher, you'll get filled on thislimit order and have covered the cost of the entire position. You shouldthen look to scale out of these remaining options by following manage-ment principles outlined in this manual.
O&A
Q. You mentioned buying calls to replace stock in order to help reducethe risks of holding overnight. Why not just buy puts to hedge the po-sition?
A. You could but often the premium on the puts is often quite high be-cause many with profits will be looking to hedge off risk. Also, if youbuy puts, you now have to manage a hedge along with your originalposition. In other words, you have two positions to deal with. For in-stance, what if the stock continues to rise? You now have to buyhigher strike puts in order to remained hedged. For me, it’s easier tothink and manage one position in one direction.
Q. You don’t mention option pricing models in your guidelines. Do youuse them?
A. As I said earlier, there are entire texts devoted strictly to option pricingmodels and volatility. My goal with this manual was to provide acomplete manual for the stock trader. I do look at the implied volatil-ity on the options and compare it to the historical volatility. I use thisas a general guideline to gauge how expensive the option is. However,keep in mind that no option pricing model or technique can accuratelypredict future volatility. There are (albeit rare) times when optionsmay appear expensive on the surface but are actually a bargain in re-ality.
Q. Can you give us an example of when this occurs?164 Chapter 11
A.
Sure, in a blow-off market, no one knows how far and how long itwill go. For instance, in early 2000, call options were fairly priced butin reality, due to the extreme nature of the market, were actuallycheap. Many at-the-money options became 10, 20, 30 or more points inthe money in a matter of days. No option pricing model could haveaccurately predicted this.
Do you have a favorite pattern for trading options?
The best setups are those that occur during a low-volatility situation(see Chapter 9, Finding Explosive Moves: An Advanced Lesson inSwing Trading). In these cases, option premiums tend to fall right be-fore a large increase in volatility and stock price. This is the best ofboth worlds for the buyer of options.
What about covered calls, spreads and other option strategies?
As mentioned earlier, the focus of this manual is predicting theshort-term directional moves in stocks and not options trading. I pre-fer to keep it simple: I'll occasionally use calls if I’m bullish or puts ifI’m bearish. 
 
SECTION SIX
PSYCHOLOGY 
 
CHAPTER 12
TRADER’S PSYCHOLOGY
The Speculator’s chief enemies arealways boring from within.
—Edwin LeFevre,Reminiscences of a Stock Operator
I'm afraid that some times
you'll play lonely games, too.
Games you can’t win
‘cause you'll play against you.
-—Dr. Seuss, Oh! The Places You'll Go!
In trading, there are many psychological barriers that you must overcome.The first step you must take is to realize that the trading world is much dif-ferent than the “real world.” For instance, in the “real world,” as long asyou perform your job to the degree expected of you, you'll continue to re-ceive a paycheck on schedule. In trading, however, you can work hard, doeverything “correct” and occasionally still lose money. Even worse, the mar-kets will sometimes lull you into a false sense of security by rewarding “badbehavior” such as being careless and taking excessive risk.
In the real world if something goes awry on the job, it can be covered up,the blame can be shared and in some cases, insurance will cover the
167I168 Chapter 12
losses. In trading, however, there is no safety net and nowhere to hide.You must take responsibility for your actions. Your account balance does-n’t lie.
In the real world, you are expected to stay busy. After all, they’re notpaying you to sit on your butt. In trading, however, sometimes the bestthing to do is just that—nothing. Trying to make something happen inthese environments can be detrimental to your account. The old saying,“Don’t confuse activity with accomplishment” applies here.
Obviously, operating in the unstructured environment of the tradingworld versus the real world can be difficult. You have to manage your-self and your emotions. Below we will look at ways to recognize andovercome the psychological pitfalls of trading.
Realize That Losses Are Part of the Game—You can’t take a loss person-ally. If you think about it, the guy on the other end of your trade has theexact opposite opinion of you. You can’t both be right. Therefore, everytrade has the potential to be a loser.
Money Management, Money Management, Money Management—Proper money management will help solve many of the psychologicalpitfalls of trading. For instance, if you are only risking 1% to 2% pertrade, then any individual loss should be of little consequence.
Have Confidence—You ‘must be comfortable with your methodologies.You develop this comfort through historical research, real-time observa-tion and trading. This does not mean that you are confident to the pointthat you are infallible on any one trade. Rather, you know that through aconsistent approach, you will make money in the long run.
Remain Humble—This may seem like a contradiction to confidence buta good trader must also be humble. The best traders are confident abouttheir methods but humbled by the fact that market can do anything itwants in spite of their opinions.
Realize That You Have No Control Over the Markets—The market cando whatever it wants. It is made up of millions of individuals who youhave absolutely no control over. The best setup in the world won’t workif some hedge fund or large trader decides to dump his position (forwhatever reason) right after you enter the market. Also, you have nocontrol over outside influences. This doesn’t have to be something obvi-ous like a war or even an off-the-cuff remark from a world leader. It canbe something as simple as the actions of some lunatic. For example, |once was knocked out of a perfectly good and profitable S&P futuresTrader’s Psychology
trade because some psychopath decided to start shooting people in ournation’s capital building.
Forget About Being Right—In swing trading as many as half of yourtrades will result in a loss. Yet through controlling those losses, the win-ning trades will more than make up for the other half. Your goal is not tobe right. Your goal is to make money, period.
Realize That No Methods Are Perfect—Be a student of the markets butrealize that there is no “Holy Grail”’—an infallible system that will leadto riches without risk. Stick with simple conceptually correct methodssuch as those outlined in this manual. In the past, many have made bil-lions on simple systems such as those developed by Donchian. In hiswords: “In this field of technical study, it is probably safe to state that the be-ginning of wisdom comes when you stop chasing rainbows and admit that nomethod is perfect. When you find yourself willing to settle for any comparativelysimple method that, in tests over a long period, makes money on balance, thenstick to the method devotedly, at least until you are sure that you haven't discov-ered a better method.”
Be Consistent—You must be consistent in your approach to the markets.You will never be successful as long as you are jumping from method tomethod. Find something that works and stick to it.
Keep Emotions in Check—Those who become euphoric when things aregood are also those how tend to fall the hardest things turn bad. Strive tostay on an even keel in good times and bad.
In Times Of War Prepare For PeaceIn Times Of Peace, Prepare For War
—Sun Tzu
In good times, you must realize that you are just around the corner froma string of losses. Conversely, after a string of losses, better times oftenfollow.
Embrace Who You Are—We are all individuals with our own psycholog-ical makeup. Recognize and embrace what makes you different and useit to your favor when trading. For instance, I was raised with a strongwork ethic. Phrases such as “There’s no free lunch” were common in myhousehold when I was growing up. However, as mentioned previously,sometimes in trading, the best thing to do is nothing. This goes com-pletely against my upbringing. At these times I would feel lazy and
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guilty for “not working.” I would then try to make something happen byestablishing positions even though I knew I shouldn’t. I finally realizedthat during poor market conditions, I must channel my energy intosomething other than trading. I’ve discovered that if I used this time toconduct market research, I felt productive without having to expose myequity unnecessarily.
Treat Profits as Your Own Money—Chances are, if you are a successfultrader, you have worked very hard to achieve this goal. Therefore, whenyou make money trading, you are being paid for that hard work. It’syour money and should be treated no differently than a paycheck. Donot become careless and violate your rules because it is the “market'smoney” or a “free” position. It’s ok to occasionally press a little when youhave windfall profits, just make sure you keep the lion’s share.
Only Trade When You Are Of Sound Body And Mind—Do not tradearound major life events or when you are sick, distracted or simply notprepared.
Only Trade When You Have an Edge—The best times to trade are thetimes when the overall market and individual sector(s) are suggesting aclear direction. It is at these times you will find yourself having troublechoosing between ail those wonderful setups. Other times, when its ex-tremely difficult to determine market and sector direction, it will benearly impossible to find decent setups. And when you do, you'll oftenfind yourself quickly stopped out. At these times, you must be patientand wait for better times.
Be Positive in Life But Skeptical in the Markets—In life, we are taughtto be positive. “Look on the bright side,” “Things normally work out”and “Have faith” are phrases we have all heard over and over. However,having faith and hope for a losing position is fruitless. The best tradersdon’t focus on what they will make on a trade but rather how much theycan lose and how to manage that risk. Successful traders are positive inlife and confident that their methodologies will work over the long haulbut remain skeptical on any given trade.
Don’t Expect Immediate Success—Some of the worst novice traders Iknow are medical doctors. Why? Because they are successful in whatthey do and automatically assume they can transfer their success to trad-ing. They forget that it took an intense study of 10 years before they wereallowed to cut on their first patient.Trader’s Psychology
My intent is not to pick on doctors, I also know incredibly successfullawyers, engineers and even a rocket scientist that think that they canquickly pick up trading because they have become masters in their ca-reers. What they fail to remember is that it took them more than a fewweeks to become successful in their professions.
Learn from Your Losses—A loss in the market is not a total loss as longas something is learned. For instance, after getting stopped out numeroustimes only to watch the trend resume, I discovered the Trend Knockout(TKO) (Chapter 6).
Work Hard and Love What You Do—You should be passionate abouttrading. It is not something you should do casually. Because money is theultimate motivator, I can assure you those on the other sides of yourtrades have dedicated the better part of their lives to trading. And, theyare all too happy to take money away from those less serious.
Keep a Journal—Other than finding a methodology that makes sense toyou and applying strict money-management principles, the best way tobecome a better trader is to monitor yourself and your own performance.I strongly urge to you keep a trading journal. Whenever you enter atrade you should write: What motivated it? What was the setup? What isthe overall market doing? What is the sector of the stock doing? If thetrade is a larger- (or smaller-) than-normal position size, why? Print andlabel any charts that support you claim. Once all the mechanics aredown, make sure you include a little about yourself. Are you feelingwell? Are their any stresses weighting you down? Have you experiencedany major life changes recently? Have you been making money lately?
Plot Your Equity—The value of your trading account does not lie. If youmade it this far in this manual then by now you should know what atrend is. Therefore, if your equity curve is trending steadily higher, thenyou are doing something right and/or market conditions are favorable.On the other hand, if your equity curve is trending lower, then you aredoing something wrong and/or market conditions are unfavorable. Stoptrading and reevaluate the situation with a clear head. The name of thegame is long-term survival. The markets will always be there.
I know several traders who know very little about market timing, yet arealways out of the markets when conditions are at their worse. How?They stop trading after a string of losses, wait for better times and thenslowly ease back in.
171I172 Chapter 12
Reflect At the end of the day, take a few minutes to quietly reflect onyour trading. Mentally rehash the day’s events. What did you do right?What did you do wrong? What could you have done better? Did youkeep losses in check? Did you honor your stops? Did you take partialprofits if they were offered to you?
SUMMARY
The trading world is vastly different from the real world. There are manypsychological barriers that must be overcome. However, if you strive tobecome successful, I can assure you that it will be well worth the effort.With hard work and devotion, there is no limit to what you can achieve.Think about it. How many times at work have your accomplishmentsgone unnoticed and un-rewarded? How many times have others takencredit for your actions? This will never happen in the trading world. Youand only you control your own destiny. 
CHAPTER 13
LESSONS LEARNED
Over the years, I have learned many lessons about trading through theschool of hard knocks. In more recent times, by being a public figure in thetrading world, I have been able to re-learn these and new lessons throughfellow traders. The following are some of my favorites.
START TRAINING ON MONDAY,COMPETE ON WEDNESDAY
My wife Marcy asked me if I would discuss trading with two of her cli-ents and their spouses. She explained to me that they are all going toplop down $3,000 dollars each on a weekend seminar that would teachthem “everything they needed to know to immediately start earning aliving trading.” Marcy knew that none of these individuals had everytraded and feared the seminar would be a waste of their money. Andworse, she was concerned that they would lose much more moneyshould they decide to jump into the markets. I agreed and we all haddinner the following Sunday night.
After patiently listing to a regurgitation of the motivational speech thathad been given to them, I studied the materials that were to be covered.To my surprise, it involved technical analysis and didn’t involve any“magic” systems. However, much of the material was dated and wasn’tanything you couldn’t get from a good $50 primer on the subject. Fur-
 
173I174 Chapter 13
thermore, it certainly wasn’t enough for a novice to become a full-timetrader a few days later.
I tried to talk them out of the seminar in several different ways. I offeredto loan them books, suggested they get a free trial toTradingMarkets.com and even was willing to give them private lessonsfor free—provided of course they were serious about learning. I empha-sized that they should do this before plopping down money on a get-richseminar. All of this fell on deaf ears as they once again repeated the salespitch to me.
As I watched them drink their water and eat their bland chicken andvegetables, finally it hit me, I had to speak in their terms. The gentlemenwere body builders and their wives were fitness fanatics. All had the ut-most discipline and had been training for years. One of the men heldseveral regional bodybuilding titles and the other was preparing to com-pete in his first amateur competition. For dramatic effect, I put a wholejumbo shrimp into my mouth, took a big slurp of my 25-ounce beer andslammed it down on the table. Talking with my mouth full, I then said,“You know what? I’m going to finish this beer, my fried shrimp appe-tizer, my 14-ounce steak and fries and on Monday I’m going to starttraining and dieting (I was about 30 pounds overweight at the time).Then, on Wednesday, I’m going to compete in a bodybuilding contest.”
Follow-Up: Couple A heeded my advice and avoided the seminar. In-stead, they continued to focus on growing the business they owned. Infact, the business has grown so much that they have recently consideredfranchising.
Couple B attended the seminar, quit their jobs, and after a brief stint attrading, are now searching for the next get-rich-quick scheme.
The moral: Becoming a successful trader is possible, but it takes morethan a weekend.
ENJOY THE RIDE
Joe is a successful long-term trader who decided to try his hand at swingtrading. I began working with Joe and he became quite successful in ashort period of time. The fact that he started during the greatest bullmarket blow off in last 20 years didn’t hurt either.
One day we were discussing the markets and he said that he had alreadymade over $35,000 and it wasn’t even noon. He was bragging that this 
Lessons Learned 175
just about covered his tricked-out sport-utility vehicle that he had or-dered the day before. At this point, I told him, “As soon you hang up thephone, cash out, write a check and pay for your new truck.” Then, nomatter what happens to you in the markets, at least you have nice truckto ride around in. He took my advice and paid cash for his truck.
Follow-up: Ironically, Joe suffered a severe loss in the markets in the fol-lowing few weeks but is really enjoying his SUV.
The moral: Take something out.
NURSING POSITIONS
Longer term, Bill was a successful trader but had recently entered somebad trades. We were talking one day about all the setups there were. I as-sumed that he must be printing money as we were both looking at thesame stocks and they were all moving nicely. When I inquired about hisposition size, he replied that he did not take these new positions becausehe was too busy “nursing all his bad positions.”
The moral? Because he was focused on positions that were not working,he missed all the opportunity of the new stocks that were setting up. Toquote Livermore, “The chap who is compelled to lug a corpse a year ortwo always loses more than the original cost of the deceased; he is sureto find himself tied up with it when some really good things come his
”
way.
WHO MAKES A BETTER TRADER:
AN MBA OR A RECEPTIONIST?
Many years ago, I worked on a base where they used to test rocket en-gines. The base was so large that it had its own fitness facility. One day, Iwalked into the gym with a long face.
The receptionist: “What’s wrong?”
Me: “I’m in a bunch of bad stocks.”
The receptionist: (with a perky little smile and a high-pitched bouncyvoice): “Well, sell them and buy a bunch of good stocks.”
Her statement infuriated me. After all, I had recently completed my MBAand had been studying the market for a few years. I thought, “What thehell does a receptionist know about trading?” 
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Follow-Up: Evidently, she knew a lot more about trading than I did atthat time. Taking this simple advice would have saved me about$30,000—a lot of money for a kid fresh out of school!
The moral: Trading is not rocket science.
THE GENIUS
Mike, an accomplished long-term trader, has recently begun swing trad-ing. He calls me a few times a week. Almost always, it’s the same con-versation:
Mike: “I’m up 4 points on XYZ, what should I do? “
Me: “Sell half and move your stop on your remaining shares tobreakeven.”
Mike: “Man, that’s great advice. You're a genius!”
The moral: Simple money management is not rocket science.
NEVER-WRONG MAN
Never-Wrong Man never loses money trading. Even when he’s followinga mechanical system, he “forgets” to take the losing trades. There’s al-ways an excuse. “I got busy and forgot to check my signals.” Or “thebroker screwed my order up, so while I thought I was losing money, inreality the trade didn’t go through.” When he does take what would tumout to be a losing trade, there’s always another excuse. For instance, “youknow, I can’t explain it, but I just decided to sell the stock afterhours, fiveminutes before the bad news came out.”
I used to be intimidated by Never-Wrong Man. I would think, “Geez,what’s wrong with me? Why do I make mistakes? Take bad trades? Getstopped out? Why can’t I be more like Never-Wrong Man?” I later real-ized that no one is immune to losses in this game, not even Never WrongMan. You win some, you lose some and hopefully, by being consistentand controlling losses, you make money overall.
The moral: Big Foot, The Loch Ness Monster and Never-Wrong Man al-legedly exist, yet their existence has yet to be proved.
ANTHILL
Bob entered a swing trade and failed to place a protective stop. Withinhours, he was down over 20 points. The next day, he got an incredible 
Lessons Learned
break, the stock came all the way back plus some. Bob was smug abouthis trade as cashed out for a 2-point