you willalso miss those that turn against you in the last few minutes and in thelong term, your winning percentages will be greater. I play gainers forthe gap play just as we do dumpers for the gap; only the criteria changes.The criteria are• The majority of the trades in last 5 minutes should be buys, notsells.• Stock ends up near the top of the pattern at end of day.
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• Gainers have been gapping up, as determined by your trackingsystem.• Take into consideration the general market mood and check ifany government numbers are due out in the morning possiblyshaking the market into a sell-off.• Consider any news, as I feel many investors come home fromwork and read the stories on stocks and place overnight orders.The best ones usually will be reported on CNBC and give addedbuying overnight.The safe method for exiting an overnight gap play is to exit at orjust prior to the opening bell the next day. However, at certain times youmay want to hold a bit longer, depending on the external forces actingon the market as a whole, as will be discussed in the next two chapters.Less-experienced traders should always exit at or just prior to the opening bell to avoid the potential for the stock not bouncing after the firstinitial sell-off. I have seen many traders get stuck in losing trades, whichwipes out a large chunk of their portfolio by holding past the openingbell as their stock enters a death spiral and never comes back. Advancedtraders can use the advanced methods and techniques in the next twochapters to modify their sell criteria.
END-OF-DAY DUMPER (PLAYING THE GAP)End-of-day dumper gaps are played in the exact same manner as thegainer gap plays; only the criteria changes. The entry and exits are thesame. Two of the biggest differences are that you do not require all ormost of the trades at the close to be buys, only a minimum of a 50-50 splitbetween buys and sells in the last five minutes. The second major difference is the pattern does not need to end up near the top of the patternbut actually needs to end up near the bottom of the pattern. The criteriaare• At least 50-percent buying (50-50) in the last 5 minutes• Stock closing price ending up near the bottom of the pattern atend of day• You consider news to be not too damaging• You have determined by your tracking diary that dumpers arecurrently gapping up a good percentage of the time
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As I said previously, holding stocks overnight adds a certain amountof risk. Stocks can and have gapped down after additional news comesout after the closing bell, but if you track your patterns and follow theguidelines, it puts the odds in your favor.
NEWS PATTERNSThe last pattern I would like to discuss is the intra-day news alert. Thisoccurs when a stock receives news of some kind while the market is openfor trading. Normally, the news will come across the news wires andactive traders will jump on it. News like FDA approvals, stock splitannouncements, or possible craze headlines like Pokemon stocks that Imentioned earlier in the chapter provide quick profit potential. Thesenews alerts are mostly for the faster traders. At times they will providesmall profits, but at other times, extraordinary profits can be made.I happen to love these plays as I can enter quickly and then sell tothe late-to-the-party buyers as they either get caught up in the excitementof seeing the stock moving higher or someone is telling them to buy athigher prices.Basically, if you can’t get into the stock within .15 of a point of theprice level the stock was alerted at, it is best to let the trade move awaywithout you. Otherwise, you will be more likely to chase the stockhigher and possibly be buying from traders like myself who are morethan happy to sell you my shares. Do not get caught chasing news alerts.Either get in fast or leave the trade alone.Many times I make just as much money waiting for the stock toclimb and dip, and then I enter the trade after the first sell-off on a highmomentum stock. If you missed the day’s story, do not worry; you canstill make money. I buy any high-momentum stock the day after the storyhit on the first low of the day, which usually occurs early. This practiceis a consistent moneymaker as stocks usually continue with goodstrength off the low. Anytime you purchase a stock, your target shouldbe at the low of the day. Unless you are quick in reading the news andanalyzing it, this is the safest way to trade as most stocks will bounce offtheir lows.The news alert has a few key points that need to be discussed.Remember that news is just a catalyst for momentum. Traders actuallymake the stocks move higher and lower. Therefore, we need to go back
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to our Level 2 and our risk assessment when this comes up. First, wewant to know that if we enter, how easy will it be to exit if the trade failsto move higher. If the bids are thin, I may be less inclined to enter.Secondly, I want to know the volume to see if maybe the news hasalready come out. The higher the volume, the more likely the news hasalready come out or people were anticipating the news.Some use intra-day stock charts on the tick chart to see if a pricespike on the day has already occurred. If it has, the freshness may not bethere and the stock may offer less potential. Experienced traders will beable to assess the risk within a few seconds. If the risk is low and tradersfeel comfortable with the trade, they will hit the ask price with their buyorders hopefully no higher than 1⁄8 above the best price at the time of thenews alert. As the stock begins to climb, they will be exiting into thestrength created by the late buyers. Sometimes these produce nice gainsnear .75 to 1 point in potential. Other times, they only offer a .25 point.Either way, watching and assessing the individual price action willallow you to know when the right time to exit for you will be. Exitinginto strength is normally the best way to go. Waiting for selling pressureto hit may cost a .25 point in slippage, and on a potential for only .50 to1 point in potential, a .25-point loss in slippage is considerable. On 1,000shares, that is $250. I’d rather trade with missed profits than lost profits.Exits on news stories can be a complicated process. As I said previously,the safest method is to exit as the upward momentum pauses, but as wewill discuss in Chapters 7 and 8, you may want to hold your trades a bitlonger, depending on the external influences on the market as a whole.
FINDING NEWS-GENERATED MOMENTUMThe best way to find a big mover is to scan your Dow Jones headlinesconstantly and wait for a big story. I work toward being there when thebig stories break with my capital in hand. I look toward investing in thesure thing. I am waiting for that small bio-tech stock to find the cure tocancer!I have seen stocks such as BAMM climb from 4.50 to 40 in one dayand ENMD going from 12 to 83 in one day. GERON (GERN) is an example of a great news story (see Figure 6-7). Geron Corp announced thatthey had successfully cloned a gene that could potentially aide the fightagainst cancer and old age.I do not enter into any stock until I am sure of the direction of theprice. The story moves the stock. The best time to receive stock-moving
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stories is a few minutes before the stock market opens and a few minutes before the close. You can then react before the market can fullyunderstand the impact the news will have on the stock. Investors comehome from work, find the story, and buy the stock overnight.A few years ago I was ready when the news came across my ticker5 minutes before the market close, declaring that ValueJet had beencleared to fly again. I made a no-brainer 1.40 when I sold the next morning. It doesn’t take many of those types of trades to rack up incredibleprofits. I have many times doubled my trade overnight by recognizingand being ready for a great news story. Needless to say, patience is definitely a virtue in trading.Another way of finding the big moving stocks is to look on theleaders board. These are the stocks that have the largest volume and thehighest percentage of gains or losses. Programs are available that willscreen all the stocks on the stock market, such as Powertrader or FirstAlert, and give you the big movers. Various other sources to find themare available such as www.mbtrading.com (movers and shakers).When I find a big mover with good volume, I put it on my quotescreen and watch it trade. If a large price swing occurs from the high ona big gainer and I feel potential profits are there, I will buy when I canidentify the low with buying increasing over selling. The temptation willbe to guess, but do not buy unless you can, without a doubt, identify thebottom.
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HOW TO RECOGNIZE A GOOD STORY BY THE HEADLINERecognizing a good story by the headline requires patiently educatingyourself. While scanning your news headlines, write down the storiesyou feel will move a stock while placing the symbol of the stock on yourquote screen and watch its action. After a while you will get the feel forwhich ones create momentum and which ones don’t.Generally speaking, a story should have an impact on the immediate future earnings of the company. For example, a $50-million order willhave little impact on a stock trading at $90 per share, but it would be asignificant order for a stock trading at $3.50 per share. Write the symbolon a piece of paper and then rate the story using a 1 through 10 numbering system, one being the least impact you feel the story will have onthe stock and 10 being the greatest. Watch the stock trade and note howmuch the stock price rises before the sell-off, the first oscillation.A good story should propel the price at a quick pace over 10percent, depending on the price. Many good stories will only move thestock .25 of a point before it starts to sell off. That does not leave muchroom for you to enter and exit, but if you have entered your limit buy atthe initial rally price, you should be able to get out of the trade withouta loss. Note the time involved that it would take to place a trade beforethe price goes up. Generally, you will need 20 to 30 seconds after placing your trade for your broker to execute. Note to see if the spreadremains relatively constant.Keeping an accurate log of specific stock movements will soon makeyou an expert at rating the momentum strength a story will have ona stock. I look for great stories that propel a stock at percentages over20-percent, but knowing the impact good stories have on a stock will prepare you for the great ones that always come along sooner or later. Manytimes the impact is also dependent on the sector the stock is in. If it is ahot sector, the impact will be much greater than a sector that is on theouts with the street. Again, this will be fully covered in Chapter 8.I use a news scanner provided by MB Trading where I can put inkeywords to give me a news alert by their news reader. It is extremelyhelpful to flag potential news stories that might move a stock. The keywords are taken from the following story headlines I constantly look for:• Unexpected record earnings• FDA approval• Patent approval
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• New product revealed• Earnings expectations• Multi-million-dollar pact• A large company agreeing to use or sell a smaller company’sproduct• An agreement of a large company to pay royalties to• Use a smaller company’s patent• Large notable investors, such as George Soros buying a stock• Pacts between companiesI have noticed that other news sources do not move a stock like DowJones will, but if I get a big story on PR Newswire before Dow Jones picksit up, I can often make more money. The buying on a PR Newswire storywill likely move slower but should be bought reasonably well.I make it a practice to watch CNBC all day long not only to get afeel for stories that affect the market as a whole, but at times you can pickout stories that create incredible momentum.
CHAT ROOM NEWS HYPESI see anecdotal phrases in the chat rooms and on bulletin boards afternews plays are announced. They are mainly the same types that I notedbefore in previous chapters. If a trader misses a news alert and the stockis moving well, I will read this statement:“The news isn’t really that great. I don’t see why people are biddingthis stock up so high.”The translation is:“I didn’t enter this trade because I hesitated, so I have to rationalize not entering to myself to make myself feel better.” Or “I am short thisstock now and I want to scare people into selling their shares.”Or I may read this:“This stock is going to the moon. This is the last time you will beable to get this stock in the single digits.”This translates to:“I am in this stock already and I am trying to get you to buy it tooso I have someone to sell it to.”As you can see, these comments again are not for your benefit, butfor theirs. They are said to serve their originator’s motives. Be cautiousof comments in the room and trade what is before you. Enter fast or leave
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it alone. Exit into strength or risk the downside move when selling hits.Either way, news plays are mainly for the faster traders, not the newertraders. Don’t let anyone push you into a trade you are not ready for orone in which you cannot assess the risk properly.
PATTERNS TO AVOIDI avoid trading several types of patterns and stocks. I am sure successful methods are available to exploit these types of patterns, but they simply do not work for me. I tend to shy away from bulletin board stocks,or pink sheets as they are referred to. These stocks have been de-listed fromthe Nasdaq Market due to failure to comply with requirements for listing. These stocks have very sporadic movements mainly based on illiquidity and interest. Many of the stock scams on the Internet or onbulletin boards and free chat rooms try to pump and hype bulletin boardstocks. Normally, they do this because on some issues, any majorbuying can move the stock due to its lack of liquidity.Meanwhile, those who have entered the stock at low levels are againselling to the late buyers who are caught up in the hype. I have read manystories of sharp spikes and fast drops on this kind of stock manipulationeither by fake newsletters or bulletin board and chat room leaders.The main point to take away from this is that bulletin board stocksare de-listed for a reason. If they cannot meet the requirements of eligibility for the Nasdaq Market, then you must think about putting yourcapital at risk in such a stock. Some opportunities may be legitimate inthese stocks, but the majority of the time, it is in your best interest to staywith stocks that have more liquidity in the Nasdaq Market. Obviously,problem stocks are on the Nasdaq board as well, but their requirementsare being met and the stock is being monitored closely for illegal actionsthat may possibly go unnoticed on stocks trading in the pink sheets.I have mentioned them earlier but will mention them again. InitialPublic Offerings (IPOs) can be the kiss of death for many new traders forthe reasons I described earlier. This also holds true for very fast movingstocks as they are usually one in the same.Two more unpredictable trades are the earnings trade and the stocksplit anticipation trade. These two trades are strictly gambling in myopinion as one has no control over the action of the stock both in anticipation and then, if or when the news finally does come out, the reaction. As we discussed before, stocks can gap up on good earnings just as
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easily as they can gap down on good earnings. The predictability is verysmall.Any management team can doctor their books enough to beat theestimates by one penny. I have seen things like investment incomeincluded in earnings. If a computer hardware company is selling investments to meet earnings, then I’ll have some concerns on their core operations. If others focus on this issue, although the stock met or beatearnings, trades could see this as negative and gap the stock down.Also, traders may front-run the earnings report and sell the news.Whether the selling hits the stock in pre-market or not is totally unknownand it would be just a guess. First, you’d have to expect earnings to bebeaten. Secondly, you’d have to assume everyone loves the earningsreport. Lastly, you’d have to hope that the “sell the news” effect doesn’thit the stock in pre-market trading. If you are long this stock, you havethree strikes against you. If you are short the stock and traders love thenews, you can expect a nice gap up to ruin your morning. In short, it isbetter to trade the reaction, rather than front-run the expectation.A stock split is another trade that causes the excitement of the biggains versus the reality of the huge losses. Mainly traders who expect astock split to occur at the next earnings meeting will buy the stock priorto the expected date. When the news of the split is released, they expectthe stock to gap up and offer a nice profit. Stocks like Yahoo, Rambus,Dell, and Amazon.com all saw huge price gaps on announcements of thiskind in the last three years. This added fuel to the trade and made sometraders great one-time gains.However, this is another risky trade for two reasons. First, if thestock split is not announced, all those who bought in anticipation willbe selling. If on the next day the split is not announced, pre-market trading will normally be lower and harder to exit as everyone is beating downthe stock in pre-market trading costing anywhere from 1 to 5 points ormore in loss potential. Secondly, if the stock split is announced, the entirefront-running of the stock may again fall prey to the “sell the news” effectand the stock will not perform as well as expected or, worse yet, producea loss.Furthermore, traders don’t have a methodical approach for whento buy the stock. They don’t say whether they should buy it one daybefore the expected announcement, five days, one week, or whenever.What happens if a trader buys one week before the expectations, hoping not to miss out on a run, and the market turns sour and dives? Whereis the stop loss regiment on this type of play? There probably isn’t a very
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safe one. Again, although the rewards may be high, this type of speculation offers big losses over time. Most professional daytraders will notrisk trading 10 anticipation trades to hopefully have one or two work out,especially if those one or two do not cover the losses on the other eightor nine failed trades.To be safe, I will always play the reaction rather than front-run theexpectation. This way I keep control of my capital and control of thetrade. On these types of trades, I am giving my control to the othertraders and the market itself. With the idea that these two forces exist totake my money from me, I will not be giving them any more control thanI have to.Another trade to be cautious of is the stock that is moving very faston either the buy or sell side, but no news is attached. At times like this,the stock is a prime candidate for a stock halt so that the stock can bereviewed for such action. Normally, the stock is usually just moving onunfettered rumors, but sometimes the action can be explained by suchnegative comments as fraud or positive comments such as a takeovercandidate. Either way, if a stock is making a strong move up or down onno news, be very cautious as these are prime halt candidates. Again,halted stocks could be halted for a couple hours or a couple weeks. Eitherway, losing control of that trading capital is frustrating with no guaranteed re-open time. Once the company issues a statement, the stock is usually re-opened, but there is no telling where that stock will open at. It alldepends on the news and the reaction by the traders to that news.
IDENTIFYING SHORT-TERM TOPS AND BOTTOMSSo far we have discussed the core niche patterns that I play. We havelooked at the proper entry and exit points based on what our trackinghas historically shown, but I have not explained how to determine yourexact entry and exit points or how to identify bottoms and tops. In thissection I will show you how I have been able to identify the bottoms andtops of intra-day swings with great accuracy. I call it my, pause, inbetweener buying method.The bedrock of my trading success has been my unique ability tocall the short-term bottoms and tops of stocks. This is a learned talentand with some practice you can also learn how to do this with increasing accuracy. Using this simple technique, I have been able to nail theintra-day tops and bottoms of stocks with great accuracy time after time.
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It takes a bit of time to learn, but it is well worth it. It is a simple method,which does not use the Level 2 techniques discussed throughout thisbook and is a good place for traders to start before moving on to thoseadvanced methods. Advanced methods will be discussed later in thisbook.The normal action I would expect from a dumper at the open is asell down from the open price. I watch the rhythm of the Bid and Askchange and ignore the trades at first:1. The first indicator of the first bottom on my trade is a pause inthe rhythm of the down-ticking Bid and Ask. This can be seenon your Level 1 screen.2. I now focus on the trades as much as possible, ignoring any outof-bounds trades (trades that occur at a price below or abovethe Bid and Ask).3. After I have noticed a pause, I look for an in-between in the Bidand Ask trade. If a dumper has sold down to a 9.15 bid by a 9.25ask, I will look for a trade at 9.20, which is the inbetweener(trades between the Bid and Ask are the second indicator to thebottom).4. Now I will look for buying to pick up in momentum and whenit does, I will signal my bottom call. The pace of the buying canbe determined by watching your Level 1 screen for an increasednumber of trades at the ask. In many software packages, youcan see this by the total number of blinking green trades (tradesat the ask) as opposed to blinking red trades (trades at the bid).Calling the top is much the same as the bottom, except everythingis reversed. Again, it depends on the trade. A simple but very effectivetechnique in spotting momentum shifts. When you combine this withthe information in the next two chapters, it forms an unbeatablecombination of identifying momentum shifts.
UPSIDE AND DOWNSIDE POTENTIALThis is a very important concept. If you do not figure out yourupside/downside potential (the amount you believe it will bounce ordrop), then you have no valid reason in being in any trade. You mustdetermine potential built into the action or you have no reason to believeanother new high will occur.
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Before we can understand this concept, we must first talk about thelaw of narrowing oscillations (see Figure 6-8). A stock generally makesits largest movements within the first two hours of the trading day,between 9:30 A.M. and 11:30 A.M. EST. This is normally when the momentum, volatility, and volume are the greatest. As a result, this is where astock shows the widest intra-day swings.Not always, but a good percentage of the time, the swing from thefirst high to the first low is the largest oscillation a stock will show forthe day, and the oscillations on average will only get smaller and smalleras the day progresses. This means that the next swing in the oscillationwill normally not be as high as the last oscillation, just a bit smaller, likea bouncing ball.Your upside potential on the first oscillation down is the previoushigh before the sell-off. The low that was hit on the first sell-off becomesyour current downside potential because you have no reason to believean oscillating stock will make a new low and so on. The next highbecomes your upside potential and the next low your downside.A low is a new low only when it is lower than a previous low andcan be only counted as a new low if it climbs in price by at least a .25point. So if I have a stock that has come off the high by enough percentage where I think the upside potential will support a .75 to 1-point profit,I will buy.Because of the law of narrowing oscillations, they become smallerand narrowing, so you must keep adjusting the potential based on themost recent low and high if you intend to make money in the middle ofthe trading day. In fact, the potential on each oscillation must be reducedfrom that last high or low a small amount because the next oscillationwill be a bit less than the last.The opposite is true if you intend to short sell a stock. The downside potential is calculated by knowing the previous low. If XYZ tradeddown to $7.50 and then rose to $9, my downside potential would be 1.50.Actually, it will be a bit less if you consider the law of narrowing oscillations. Calculate the downside potential and if it is worth the risk, shortit at the top.Many times you will find stocks that oscillate every day enough foryou to make profits. I know traders who follow such stocks and onlytrade them, knowing their intra-day patterns like the back of their hands.An example of this type of stock is Iomega (IOM). I began watching thisstock every day in mid-September of 1996. I noticed it had been soldalong with the other technology stocks, but there was still strong inter-
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est in this stock every day. I noticed that it would open up, sell off, andthen go up to its high and above almost every day. It could have beenbought at the end of each day and almost always opened up the next.Then the intra-day trading pattern would repeat itself. What a greatconsistent moneymaker for the wily investor.
CORE METHODSThese are the core trades that usually make up my trading day. I try tostick with the trades that fit my risk criteria and are providing me withenough reasonable and predictable potential based either on my tracking expectations or my ability to read individual stock action and execute the trade accordingly. I have learned to weed out the uselesscomments I see in trading rooms and trade what is before me based onmy knowledge of the patterns and my abilities as an efficient trader.When one pattern begins to change, I will change with it or ceaseto profit from it. When a play becomes too difficult to reasonably execute, I will become less aggressive on that trade. Over time, my patternsand trades will be focused on those trades that give me a higher percentage potential for profit. Although I certainly don’t trade with 100 percent effectiveness, trading off these patterns creates a high enoughpotential to be consistent over time.The explanations of these core methods so far have been fairly basicand a successful trading program has many moving parts. In the nexttwo chapters, I will discuss how to use an advanced look at the overallmarket as well as some methods that will force you to re-examine thebasics described in this chapter and modify your entry and exit decisions.This is where most traders stop their learning process, at the core methods of any trading program. It simply is not enough to compete inthis competitive arena. What makes a good trader a great trader is tounderstand the external forces that are acting on the stock and adapt yourdecisions based on them.
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INDICATORSIn the last chapter, we discussed my core methods and patterns that Itrack and play. These patterns and methods are good for beginning tointermediate-level traders and have proven to be quite successful. Whatseparates a good trader from the great trader is the ability to see what ishappening around them and not just the price action of individualstocks. If a trader does this, he or she is not looking at the whole picture.More forces are acting on a stock than simply the individual momentumof the stock we are watching.This chapter explains an advanced technique that I use to determineintra-day shifts in the overall market. It is a way of identifying the movement of the macro-momentum. This macro-momentum can and doesaffect the movement of individual stocks. In the next chapter, I will gofurther into these forces that pull and tug on individual stocks and giveyou some insight on how to identify and further modify your tradingdecisions built on in the core methods discussed in the preceding chapter.
INDICATOR STOCKSThe incredible market climb in 1999 and 2000 lulled traders into a falsesense of security. Every downward market dip was met with an upwardcorrection, making new highs everytime. I call this a climbing market,and it rewards anyone who buys for any reason and holds, even ignoring stop losses. This is the tide that floats all boats and many daytradersget sucked into the whirlpool of investment. It is obvious that thismethod of trading is what wiped out many good traders in the year 2000and is continuing in 2001. The market is no longer rewarding the investoror anyone who is willing to buy and hold, and it may never be the sameCopyright © 2002 by Mtrader.com.Click here for Terms of Use.
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again. We are moving up and down to the latest round of news like a yoyo on a string, and the volatility and unpredictability is causing manysleepless nights for those who make their living at trading stocks.The foremost thing that denotes the pro from the amateur is that thepro will not trade until he is aware of the percentages of success he canexpect, and the amateur continues to trade when the odds are againsthim. In a volatile market, how does one know when the market haschanged and the storm clouds are moving in? I have developed a methodfor changing with the market in a matter of seconds, and it has enabledme to not only know when to change, but I can even change right alongwith the market and continue to make money.The statement has been made that once the market falls, daytraderswill lose their money, and some did. Those daytraders who were caughtholding stocks played the buy and hold game. Many investors and daytraders made good money as the market continued to climb to recordhighs during 1999. The professional daytrader played a different game.Let me give you an example. Let’s say, for example, that XYZZ had adecent news story in a climbing market and gapped from $20 up to $25.In a strong market, we would expect about $1 of profit-taking at the open,and we would buy at around 24 and expect the first swing up to rewardus $5 or $6. We would exit at the top and, providing there was sufficientprofit-taking in the day or days preceding, we would go short. Wewould ride the momentum down for $2 or $3, then reverse again, andgo long for another $2 or $3. Theoretically, we have just made $9 to $12on a $20 stock in one day. We have seen $4 stocks move to $35 in one day,which gives us even more potential, and we continue to do that, providing the stock is still swinging day after day. In six months, you maysee the stock at 75 and think, “Gosh, I wish I had held that stock!”Hindsight sucks you into the buy-and-hold investor world, while the trueprofessional has taken a lot more money out of the stock and ended eachday in cash. That is the strength of the professional daytrader, and unexpected market moves will not affect him. We essentially do not care whatthe market does. All we ask for is movement in either direction.It is important for a trader to understand the dynamics of newsevents. The amount of movement for any one event is a tip-off as to howstrong or weak the market is on any particular day of trading. In a perfect daytrading world, we would get the same story on the same stockeveryday and watch the pre-market volume and gap to understand justhow many buyers and sellers are in the market. The more a stock gapsup, the more incentive there is to take profits and the more selling I would
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expect to see. A professional trader has a historic idea of just how certain stocks move given certain news events. This is an important