market mood and confidence. The gaps reflectthe mood for continuing momentum as the market opens and become avery good indication for subsequent market action. The following are theindications of positive and negative gaps, given both positive and negative markets.GeneralMarketPositive
GappingUp
Indication for Macro-MomentumIndicates that momentum is continuing upward.Overnight and pre-market buying has occurred,indicating market confidence. Expectation atopen would be limited or no profit-takingand early buying. Any stronger profit-takingand weaker climbs off the first bottoms couldindicate a turn in momentum.
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GeneralMarketPositive
GappingDown
Indication for Macro-MomentumIndicates that positive momentum could beturning. Overnight and pre-market sellinghas occurred, indicating nervousness or profittaking. Expectation at open would be continuedwith profit-taking on gaps that slightly down,but possible early buying, especially on anylarger gaps down, which become more attractive to bargain hunters. Bounces off the firstbottoms may prove weaker if momentum isturning, and be stronger if momentum is tocontinue upward.
Negative Down
Indicates that negative momentum iscontinuing. Overnight and pre-market sellinghas occurred, indicating continued nervousness.Expectation at open would be negative, but asupside potential grows, bargain hunters couldcome into the picture at any time. Climbs couldoccur very shallow or directly from open. Firstclimbs will prove weak, followed by strongerselling, if momentum is to continue negative,but strong climbing would indicate a turn inmomentum.
Negative Up
Indicates that negative momentum could beturning. Overnight and pre-market buyinghas occurred, indicating bargain hunting andmarket confidence. Expectation at open wouldbe initial profit-taking, but early buying off thefirst bottoms could occur. The amount of thosefirst climbs will indicate whether the market isturning. Strong climbs would indicate that themarket confidence shown in the gaps is beingfollowed through on. If the first climbs are weakand followed by stronger selling, it wouldindicate short-lived confidence and continuednegative momentum.
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CLOSING COMBINATIONSWhere the market ends within its intra-day range is a sign of the generalmarket mood and direction going into the close. In a stable market, thatdirection will carry forward the following day, amplified a bit more bythe overnight investor gaps. Likewise, in individual stocks, where thatstock ends within its intra-day range is also a sign of the ending interestin that stock. For predictable movements, and highest potential, we lookto a combination of these ending ranges to guide our trading decisions.Up ⫽ ending above mid-range pointDown ⫽ ending below mid-range pointMarketUp
StockUp
ImplicationMicro-momentum and macromomentum are upward-bound.Providing a stable market is present,the stock will most likely gap upthe following morning and maycontinue upward.
Up
Down
Macro-momentum is endingpositive, but your stock is not.That is a sign that your stock isnot participating. Its weakness maycontinue the next day. It has brokenfrom the macro-momentum and thusbecomes unpredictable.
Down
Up
Your stock is showing more strengththan the macro-momentum. Thestock is not participating. If macromomentum continues downward,your stock may be pulled down withit on the following day, unless it is anunpredictable exception.
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MarketDown
StockDown
ImplicationBoth micro-momentum and macromomentum are declining. Providingthe market stays in that trend, yourstock may gap neutral to negativethe following morning and continuedownward.
These methods and patterns tend to repeat themselves much likethe short-term patterns discussed in the previous chapters. You mustlearn to track them daily as you did with dumpers, gainers, and newsplays.Let’s trade the QQQ together, and let me explain how I applymomentum to my longer-term trading. Remember I am expecting a trendto begin and last for at least three days. If that does not occur, then I willlose money. Let’s look at a daily chart of the Nasdaq composite and picka day in which a trend begins. For our exercise, let’s ignore all newsevents in the market and simply look at the chart in terms of puremomentum, remembering that a smart trader will be watching forchanges in the winds of everyday trading and make more complexassertions based on the variables flowing in a dynamic market.Following a two-day downturn in a climbing market, we had oneday where the market ended at the high on 1-8-2001. Let’s pretend webought at the QQQ at the end of the day based on expecting the uptrending market to continue. On 1-9-01, the market gapped UP and ended theday above mid-range, indicating the upward trend was intact; we are stilllong the QQQ. The next day begins with a yellow alert because the market gapped DOWN. So if the market ends below mid-range, we EXIT.The market ended strong, confirming we still have an uptrending market and we are still long the QQQ. On 1-11-01, we receive another gapDOWN day and another yellow alert. If the market ends below midrange, we exit the QQQ; it ends near the top again, and we are still longthe QQQ and riding profits and a nice trend. On 1-12-01, the market gapseven and ends down, which is a yellow alert. If the market gaps DOWN,it would be two yellow alerts in a row, so we would exit. However, it gapsEVEN and we are nervous and may end the trade if the market endsbelow mid-range. It does not and we are still long our QQQ at the endof 1-16-01. On 1-17-01, the market gaps UP, indicating positive momentum. But the day ends near the low, and it would be another yellow alert.On 1-18-01, the market gaps UP, so we are OK and still long the QQQ
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and the day ends near the high. On 1-19-01, the market gaps UP but endsthe day at the low for a yellow alert. The next day gaps DOWN, whichis two yellow alerts, and we exit our QQQ trade.These are the basics of following long-term momentum for as longas it lasts. You can reverse the procedure and do the same thing with negative momentum and follow some nice downtrends. If the market beginsto go up one day and down the next and up the next, this method willlose money, but over the years that type of action does not occur veryoften.It is my sincere desire to help struggling traders and I hope this bookhas provided a solid springboard from which you can take your owntrading to new heights, stay at home, and raise your family.
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EPILOGUEIn this book, we have discussed a myriad of topics ranging from the toolsand tricks of the trade required to level the playing field with professionaltraders to advanced market dynamics. Although these topics are criticalfor a momentum trader to fully understand before entering the tradingarena, they are only a start. Theory and methods, no matter how brilliant,are simply that, theory and methods. Nothing can beat the actual trading experience. Anyone can understand theory and methods; the true testof one’s ability is putting these methods to practical use. I recommendyou start slow, take one concept at a time, and let it build into the next.Before you trade actual capital, ensure you fully understand each concept and paper trade until you can prove to yourself that you can successfully and profitably trade them.The education process is not a one-time event, nor is it somethingyou can capture in an afternoon. It is an ongoing process. You must continually educate yourself. With each lesson, you graduate to higher andhigher levels of proficiency and profitability. Find a mentor or a groupof traders to discuss methodology and techniques. If you have troublesor questions, refer to the applicable chapters in this book or feel free tostop by the Mtrader.com or RealityTrader.com chat rooms to ask usdirectly yourself. We love to hear success stories as well as recommendations or new trading methodologies, so drop us a line if you have themat Ken@mtrader.com or Chris@realitytrader.com. Good luck and keepthose stops!
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GLOSSARYAll-or-none (AON):
An order that must be filled in its entirety or not at all.
AMFLY
Ask: Referred to as the “offer.” It is the price at which a trader can buy sharesof a stock.Average down: Buying additional shares of a stock that one holds a positionin and that has dropped in price since the earlier purchase.Ax:
The dominant Market Maker in a stock.
A market that is on a consistent downward trend.
Bear market:Bid:
The price at which a trader can sell shares of a stock.Big institutional buying resulting in large block buys.
Bull market:
A market that is on a consistent upward trend.
Capitulation:
Sellers and long players showing exhaustion after fast selling.
TE
Big blocks:
Chat room: An online chat forum where entry and exit criteria for stocks arediscussed.Closing price:
The price which a security closes at.
Commissions:
The fee paid to brokers for executing trades.
Daytrader strength: A measure of the amount of confidence daytraders havein a particular stock or the market in general.Down-tick: A stock market transaction at a price lower than the preceding onefor the same security.Dumpers: Stocks that are down 20-percent or more from the previous day’sclose.Earnings per share (EPS): Net income for the past 12 months divided by thenumber of common shares outstanding, as reported by a company.Copyright © 2002 by Mtrader.com.Click here for Terms of Use.
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Electronic Communications Networks (ECN): An ECN network’s major brokerages utilized so that they can trade between themselves without having togo through a middleman.Exchange: The marketplace in which shares, options, and futures on stocks,bonds, commodities, and indices are traded. Principal U.S. stock exchanges arethe National Association of Securities Dealers (Nasdaq), New York StockExchange (NYSE), and the American Stock Exchange (AMEX).Execution: The process of completing an order to buy or sell securities.Float: The number of outstanding shares of a security available for publictrading.Front-running: The practice of trading ahead of others, commonly done byunscrupulous room leaders in chat rooms.Gainers: Stocks that are up 20-percent or more from the previous day’s close.Gap: When a stock opens higher or lower than the previous day’s close.Historical market strength: Strength of the market in the recent past.Hype: Touting the potential performance of a particular stock, not backed upby the facts.In-betweeners:
Trades that occur between the Bid and the Ask.
Initial Public Offerings (IPO):
A company’s first sale of stock to the public.
Inside Ask: The best price at which a Market Maker will sell a particular stock.Inside Bid: The best price at which a Market Maker will buy a particular stock.Institutions: Entities with large amounts to invest, such as investment companies, mutual funds, brokerages, insurance companies, pension funds, investment banks, and endowment funds.Level 1: Real-time quotes of the best Bid and Ask prices for a given Nasdaqor OTCBB stock.Level 2: Real-time quotes of the Bid and Ask prices for each individual MarketMaker for a given Nasdaq or OTCBB.Limit order: When a trader places an order to buy or sell a stock at a set price.The trade occurs only at that price or a lower.Market Maker: A broker that makes a market by providing liquidity to themarket in a Nasdaq security by maintaining a firm quote on both the buy andsell side.Market order:
An order to buy or sell a stock at the going price.
Market strength: Strength of the overall market.
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Moderator: A chat room leader who controls the room.Momentum trader: A trader who enters and exits a stock as it drops or risesjust after the momentum and direction shifts. Trades are held for seconds tominutes.Moving average: Used in charts and technical analysis, the average of security or commodity prices constructed in a period as short as a few days or aslong as several years and showing trends for the latest interval. As each newvariable is included in calculating the average, the last variable of the series isdeleted.Open price: The price a stock opens at.Oscillation:price range.
A stock that moves up and down intra-day, wavelike, within a
OTC bulletin board: An electronic quotation system for unlisted, nonNASDAQ, over-the-counter securities.Paper trading:
Trading and tracking trades without using actual capital.
Price-to-earnings ratio (P/E): The share price divided by earnings per sharefor a company’s most recent four quarters.Print: A real-time report of trades of a specific security.Round trip: Entering and exiting a stock. Either a buy order and a sell orderor a short order and a cover.Scalper: A daytrader who enters and exits trades, quickly capturing small profits on each trade, such as .0625 or .125 of a point.Sector strength: The strength of a particular sector of stocks.Security Exchanges Commission (SEC): A federal agency that is charged withregulating the U.S. financial markets.Short: Borrowing shares of a security from a broker with the anticipation thatthe security will decrease in value. Also known as selling short.Small Order Execution Service (SOES): An automated execution system forbypassing brokers when processing small order agency executions of Nasdaqsecurities up to 1,000 shares.Split: When a company splits their shares into a greater number of shares. Atrader who owns 1,000 shares will own 2,000 after the split, at half the price,depending on the immediate action of the stock after the split.Spread:
The difference between the Bid and the Ask price.
Stochastics: A technical indicator that compares a stock’s closing price to itsprice range over a given period of time. The belief is that in a rising market stocks
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will close near their highs, while in a falling market, they will close near theirlows.Stop loss: The practice of setting a specified exit price, limiting losses.Stop order:is reached.
An order to buy or sell at the market when and if a specified price
T-1 line: Extremely fast/high bandwidth connection.Ticker:
A scrolling display of current or recent security prices and/or volume.
Up-tick: A stock market transaction at a price higher than the preceding onefor the same security.
RESOURCE LISTEDUCATIONChat Rooms: Online teaching forums specializing in teaching traders todevelop their own disciplined and profitable trading programs. Features realtime discussion of trades as they occur during the market hours.Mtrader.com. Momentum trading instruction, daily e-mail advisory, chatroom, online university, CD-ROMs, scanners available. Free trial.RealityTrader.com. Tape reading, daily e-mail advisory, Level 2 instruction,chat room, online training course, trading psychology CD’s, scannersavailable. Free trial.MainStreetInvesting.com. Longer-term trading, momentum investing,e-mail advisory, educational material available.Quotation/Execution Services: Services that provide real-time quotation andexecution services.MbTrading.com. Execution/quotes, RealTick, Navigator, education, technical support.Etrade.com. Web-based broker with news, charts, quotes.Abwatley.com. Execution/quotes, RealTick.Datek.com. Execution/quotes.Trading Information/Education: Web-based trading educational and informational sites.TheStreet.comHardrightedge.comSiliconinvestor.comNasdaq.com/reference/glossary.stmWhispernumber.com/Tradersworld.com/links.htm261
Copyright © 2002 by Mtrader.com.Click here for Terms of Use.
ABOUT THE AUTHORSKen Wolff is CEO and founder of Mtrader.com, an Internet-based onlineteaching service that teaches traders how to develop their own successful and profitable trading programs. Ken is a popular speaker and broadcast commentator who has spent the last 10 years refining hishigh-percentage trading techniques. Ken founded Mtrader.com in 1997after recognizing that the Internet was the most powerful forum forreaching a vast worldwide audience. Since 1997, Ken has taught literallythousands of traders to recognize and use the tools and methods previously only available to professional traders.Chris Schumacher is the former Head Trader at Mtrader.com andis currently the CEO and founder of RealityTrader.com. Chris foundedRealityTrader.com based on his own tactics and techniques developedafter years of teaching students online. Chris’s methods are derived fromhis extensive experience with tape reading, trader psychology, andadvanced execution systems. RealityTrader.com teaches students highpercentage Daytrading and SwingTrading methods while removingmany of the common pitfalls that plague active traders.Jeff Tappan is the co-founder of Mtrader.com and was Ken Wolff’sfirst online student in 1997. Prior to entering the daytrading arena, Jeff’sexpertise was primarily in recognizing potentially explosive small-capstocks such as Iomega, Qualcomm, and Ion Laser Technology before theywere recognized by the traders on the street. Jeff brings with him aunique understanding of trader psychology and market dynamics.
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I
N
D
E
X
Symbols.25 spread stocks, avoiding, GoldenRules of Trading, 214
AA (Agilent Technologies), 5, 68AA (Alcoa), 1accountability, fear of loss, 221–223accumulation of stocks, 98acquisitions, affect on earnings, 155active (online) traders, 68advanced tools, 44charting software, 50Level 1 screen, 44–46Level 2 screen, 47lower commissions, 34news services, 50Time of Sales Ticker, 47–48advanced tools for active traders, 44after-hours trading, 187afternoon trading, 150Ameritrade, 6, 32AMEX, 2analyzing data, tracking diaries, 167ANY orders, 40AON orders (all or none), 40ARCA (Archipelago L.L.C.), 5ARCHIPs, 42chippies, 42disadvantages, 43limit orders, 43market orders, 43order routing methods, 42smart routes, 43
Ask column, Level 1 screen, 46assets, online brokerages, 67attitude of traders, 224, 229changing with market, 225flexibility, 227knowing when to enter/exitmarket, 228reevaluation, 228strategy planning, 226ATTN (Attain), 5auto stops, 205–206avoiding stocks, 214ax of stocks, 199–201
BBA (Boeing), 1, 5BAMM (Books-a-Million), 70bargains, momentum investing, 237basic elements of gainer stocks, 96–99bear markets, 242momentum investing, 243rallies, 58best price. See inside price.Bid column, Level 1 screen, 46bio-tech stockscatastrophe, 65news events, 156block trades, 47bottomsoscillation, 196–197short-term, 120bounces, tracking sheets, 168breakouts, 83broker expectation systems,writing down time of trade, 218
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brokerages, 31BRUT (BRASS Utility), 5BTRD (B-Trade Services L.L.C.), 5bull markets, 242bulletin board stocks, 118business plans, online traders, 24Buy options, online brokers, 32
Ccapital preservation, 10Castleonline.com, 34CAT (Caterpillar), 1changing with market, 151channel momentum, 16charting services and software, 44, 50chasing stocks, 179chat roomsnews hypes, 117online trading, 21Chinese stocks, gainers, 94chippies, ARCA, 42CHV (Chevron), 2clearing the spread, Golden Rulesof Trading, 212climbing markets, 125, 141Close column, Level 1 screen, 47close prices, tracking diaries, 165closing combinations, momentuminvesting, 251–252competition mentality, predictablemomentum, 80–82components of online trading, 6–7configuring Level 1 screens, 44confirming expectations,market dynamics, 135consistency, WAS market, 136, 141consolidation, 132controlling trades, marketdynamics, 145core trades, 124CSCO (Cisco Systems), 4, 69CyBerCorp.com, 34
Ddata analysis, tracking diaries, 167Datek, 32Day’s High column, Level 1 screen, 46Day’s Low column, Level 1 screen, 46day’s market action movement, 139daytradingeducation, 10investor alerts, 71market dynamics, 136, 154dead-cat bounces, 58decreased time constraint,SuperSOES, 37defining market, momentuminvesting, 242definition symbols, Nasdaq stocks, 5delayed quotes, 181–182DELL (Dell Computer), 4, 69direct access trading, 35DIS (Walt Disney), 1disadvantagesARCA, 43SelectNet, 40discipline, momentum traders, 10Dow (Dow Jones IndustrialAverage), 1–2Dow, Charles H., 1down gaps, 146down-ticks, 184downside potential, 122drifting stocks, 198dumb money, 63dumper patterns, 92, 106–110
EE*TRADE, 6, 31–32earnings, news events, 156earnings season, overreactions, 147earnings trades, avoiding, 118earnings warnings, pre-earningsseason, 147
Index
265
ECNs (Electronic CommunicationsNetworks), 4, 40anonymous orders, 40ARCA, 42–43INCA (Instinet), 41ISLD (Island), 41–42non-SOES eligibility, 36, 41order routing methods, 40ordering stocks, 5partial fills, 41EDATs (Electronic Direct AccessTrading Firms), 31–34, 38education, momentum traders, 9–10elements of gainer stocks, 96–99eligibility of stock, SOES, 36emotionless loss, 223end-of-day gap patterns, 92dumpers, 112gainers, 111–112end of trading day, marketdynamics, 150exchanges, 2execution routes, EDATs, 34exit point, exiting trade, GoldenRules of Trading, 215exitsmomentum investing, 247–248prices, long positions, 142expectations, 24indicator stocks, 127tracking sheetssecond-day gainers, 172trading, 170–171extended hours trading, 186
Ffast momentum tradesIPOs, 83–84news alerts, 85–89fast stocksavoiding, 118SOES orders, 37turning profit into loss, 180
FDA news events, 156fearmarket dynamics, 53new market momentum, 54of loss, 223first-day dumpers, tracking sheets,166, 169, 172first-day gainers, 93, 146gainer patterns, 104tracking sheets, 166–167, 174first 2 hours of trading day, 181first up-ticks, tracking sheets, 167flexibility in market attitude, 227float, stocks, 69fractional number theory, 184–185front running stocks, 98fuel cell stocks, gainers, 95funnel effect, market open, 181–182futures heading, tracking diaries, 164
Ggainer patterns, 91–93basic elements, 96–99Chinese stocks, 94dumper patterns, 106–110end-of-day gap patternsdumpers, 112gainers, 111–112first-day gainers, 104fuel cell stocks, 95genomics stocks, 95Internet stocks, 94Linux-oriented stocks, 94news patterns, 113–115headlines, 116Pokemon-related stocks, 94runners, 104second-day gainers, 105tracking journals, 101–102trades, 103gainer stocks, 133, 140
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gapsdisappearing, NOW market, 143downward, 146pre-market, momentuminvesting, 249–250tracking sheets, 165, 173GE (General Electric), 1genomics stocks, gainers, 95goals of momentum traders, 12Golden Rules of Tradingavoiding illiquid stocks, 214caution with over .25 spreadstocks, 214clearing the spread, 212exiting trade at exit point, 215know when to quit, 220knowing sources, 218overnight gaps, 219paper trading, 216personal trading responsibility, 219stop losses, 218taking profit when available, 217trade the rule, not the exception, 213writing down trade time, 218greedmarket dynamics, 53new market momentum, 54unrealistic exits, 142
Hhalf-hour interval data, trackingsheets, 165halted stocks, 106, 120headlines and news alerts, 116hedge funds, large block trades, 136herd mentality, predictablemomentum, 74highs, market dynamics, 139hindsight, 22–23, 236historical evidence, marketdynamics, 134, 153–154hype, online trading, 16–19
Iidentifying tradingopportunities, 189–194illiquid stocks, avoiding, GoldenRules of Trading, 214in-betweener buying, 120INCA (Instinet Corp), orderrouting methods, 5, 41inclining markets, momentuminvesting, 243indicator stocks, 126–128expectation, 127mirroring overall marketdirection, 129news events, 126predictability, 127selecting, 130short-term direction of market, 128trends, 132indices, 1–2informed money, 63–65Inside Ask, SOES orders, 39Inside price, 35institutional market–making firms, 4institutional momentum, 55–57institutional money, 67institutions, large block trades, 136INTC (Intel Corp), 2, 69Internetchanges to Dow, 2market dynamics, 137Internet stockscatastrophe, 63–64climbs, 56gainer patterns, 94online traders, 138interpreting market, momentuminvesting, 247intra-day news alerts, 113intra-day oscillations, 125, 183inventions, news events, 155investment exits, momentuminvesting, 247–248
Index
267
IPOs (Initial Public Offerings)avoiding, 118fast momentum trades, 83–84trading via SOES, 37IRIDQ (Iridium in bankruptcyproceedings), 5ISLD (Island), order routingmethods, 5, 41–42
K
L
AMFLY
knowing sources, Golden Rules ofTrading, 218knowing when to quit, Golden Rulesof Trading, 220KTEL (K-Tel), 70
Percentage Change from thePrevious Day’s ClosingPrice, 46stock ticker symbol, 44Volume column, 46Level 2 screen, 44configuring, 47Time of Sales Ticker, 47–48like-mindedness, marketdynamics, 134limit ordersARCA, 43ISLD, 42SOES, 36Linux-oriented stocks, gainers, 94liquidity, 2–3live trading, small shares, 29–30long positions, exit prices, 142long-term bias, momentuminvesting, 235long-term investments,momentum investing, 245lopsided investing cycles, 240losses, online traders, 26–27lower commissions, active traders, 34lows, market dynamics, 139
TE
large block trades, institutions, 136large players, market dynamics, 136last hour of trading, marketdynamics, 150, 181Last Price column, Level 1 screen, 46Last Price Volume column,Level 1 screen, 47Law of Participation,momentum investing, 238learning curve for onlinetraders, 25Level 1 screenAsk column, 46Bid column, 46Close column, 47configuring, 44–46Day’s High column, 46Day’s Low column, 46Last Price column, 46Last Price Volume column, 47Net Change from the PreviousDay’s Closing Price, 46Open column, 47
Mmacro view, tape reading, 191–192marketdeclines, 67defining, momentuminvesting, 242historical evidence, 134research data, online tradermomentum, 59strength, 153