that shifts the powers of the three Wizemen closer to theshort-term lights, that is, the short term direction of a stock. In order not to confuse the issue, we will referto these substitute or proxy Wizemen and the three direction indicators. In fact, my day-trading setup nolonger allows me to see the Three Wizemen. Because the longest lights are now minute lights, theyassume added importance for the day, or even shorter term. In fact, they help me focus on what I am reallymost interested in, trades that will take place in very short period of time, always less than a day. There isalways some give and take; the day trader using this setup gives up any thought of remaining in the tradefor a long period of time, but gains in increased reliability in the short term. If the trade is going well nearthe close, the trader can switch to a swing-trade setup and decide on whether on not to let the tradecontinue as a swing trade, but that is not the subject of this e-book.With this new light setup, it is far easier to identify trading setups, continually trade the same stockslong and short, and short a stock that has just completed a long rally. I truly believe that using this setup issafer and helps the day trader focus on those issues most important to entering a short-term trade.There are several Wizetraders who have been experimenting with day-trading light setups. I havetraded at least six different setups including one exotic set of charts based on Fibonacci numbers and aseries of ratios. In the end, I have settled on a rather traditional set of charts that work just fine. For thepurpose of presenting examples with consistency of continuity, the following generic day trading setup willbe used. Of course, you are free to experiment with any setup you feel is appropriate (also see light setupson page 31). If you select to trade very volatile, high speed, short term scalps, you might wish to havemore short-term minute lights. I found that I was being shaken out of perfectly good trades by the shortterm lights, so I have gradually placed more importance on the longer-term minute charts.Generic Day Trade SetupTiming Lights
2Min
5min
10min
TriggerLights
Direction Indicators
15min
30min
60min
90min
150min
TradingLights
The illustration above is of a generic day-trading setup. I have named the various parts of the setupso that we can refer to them in the following examples. Please understand that there are other setups; onethat comes to mind is the strategy used by John Tuma that uses the 1, 2, 3, and 5 minute-lights for theshort minute charts. I often use an 8-minute light instead of the 10, but for training purposes, please bearwith me as we work with this generic setup.
Defining the Day-Trading SetupI know what you are going to ask. Why do we need so many timing lights, or trigger lights or directionindicators? I used to be a college professor and I’m way ahead of you. The answer is that for any particularstrategy you might use just one trigger or one trading light, but because we are going to present manystrategies, we will have different triggers, timing lights, etc. That is the reason that I recommend becomingproficient in just a few strategies, because the rules and procedures change as you switch from strategy tostrategy.
The following define the components of aGeneric Day Trade Setupgeneric day-trading setup:Timing LightsDirection IndicatorsDirection Indicators: these three indica510 15 30 60 90 1502tors replace the traditional three Wizemen. Remember, you do NOT trade the colors, you tradeMin min min min min min min minthe charts. The colors are a heads up that something may be happening in the chats. In thisexample, all three Direction Indicators aregreen; you guessed it, we may have a long. IfTriggerTradingyou wish to have the least amount of risk in aLightsLightstrade, don’t trade against the Direction Indicators. Heck, we’ve already eliminated the tradiNote: Sometimes I use a 20-minute light insteadtional Three Wizemen, you don’t want to fudgeof the 15. Some stocks trade better or are easierto read in different time frames.on the substitutes.Timing Lights: these charts are used tofine tune entrances, give a heads up on the continued direction, or change of direction of a trade, or to fine tune the exit from a trade. They also forewarn of a possibleentrance as they move from left to right: the wave. I sometimes switch the 2-minute chart to 1-minute tocatch the last little bit of a trade, or finely tune an entrance.Trading Lights: usually one of the middle indicators such as the 30-minute or 60-minute chart. Thetrading lights or charts play a key role in the decision to enter or remain in a trade.Trigger Lights: A trigger light, usually a fresh cross in the direction of the trade, is used to time theentrance. Mark McDonnell says: “I like to have something to hang my hat on.” This is the hat rack. I alwayslike to enter a trade on a brand new something. Why so many triggers, because different types of tradescall for longer or shorter lights. Have you ever wanted into a trade as you watched a stock climbingsteadily, only to enter and have the 10-minute light go red? It’s happened to me more than once. That’swhat happens when you don’t get a fresh cross on the trigger. So much for nomenclature, let’s address howthey are used in real trades. (Also, see page 31 for additional information on using the lights and setups.)
4: Using the Charts to Manage A TradeGreen is Up and Red is DownI once had a phone call from a friend I had trained who was trading GILD. He told me what he was infor and I was proud of him; I thought he was in a profit in a short. Wrong. He was long and losing big time.Silly me, when I spotted the red Direction Indicators I just assumed he was short. When questioned aboutwhy he was long, I was told that: “there are just too many things to remember.” Fair enough. I just boiledit down for him: green is up and red is down.There are specialty trades in which you trade against the Direction Indicators.For the time being at least, we are going to address standard vanilla trades (Bb tradesfor you musicians), your everyday garden variety going long and short with the lights.I can usually evaluate a potential trade in just a few seconds. Beginning on the right,I click through the charts evaluating, making mental images, looking at the volumeand indices, and ultimately making a decision on whether or not this is worth taking, or Example of awhat signals I will have to wait for before pulling the trigger.gator mouth.The longest Direction Indicator simply needs to be in the direction of the trade. If Lines pointing inyou plan on a long, then it has to be green; even an embryonic cross will do. It goes differentwithout saying that a strong cross, or even divergence only strengthens your position. directionsThe 90-minute chart (see example) helps to make a decision since it may be easier to indicates thatthere is a tug orinterpret than the 150 or 180 (many traders are also using the 130). After looking at thewar between150, the next key Direction Indicator is the 60—it has to be strong—period. If is em- buyers andbryonic, lying on its side, or just taking the day off, I usually pass on the trade, unless sellers.I see unusual strength developing in the 30. I refer to the 60 and the 30 as the tradinglights. They are very close to where I am going to be working (trading) and will be a deciding factor inwhether I pursue the trade any further. In regard to the 60, it has to be strong, but not too overextended; ifit has been running for three days I will usually pass. A few black boxes are OK, however. Oh how I love tofind a fresh, strong cross (no gator mouth) on the 30. If I find a fresh 30, and everything to the right is
acceptable, I know I have a trade. The 30 and the 10 will let you know in a hurryhow the stock is doing, right now. If the 30 has been running a few boxes, then Icheck the 10-minute chart. Here is where it gets tricky.Note: If you are new to trading and/or Wizetrade, you may think it takes along time for the lights to change. If the time is right, the lights can switch ina heartbeat. I was watching a stock (MXIM), which was all red when itrallied. In a matter of three or four minutes the 150 went from a short to along as did the 2 minute light and everything in between. Wizetrade sensedthe increased buying pressure and volume increase and flipped all the lights.The stock rallied for $1.74 in a very short time.
If the 10 is fresh, I might get right in, especially is the 30 is strong andgetting stronger and we have increasing volume. If the ten is out a box or two ormore, but still strong or getting stronger (diverging lines) I might look at shorterlights, even the 2-minute chart, for a quick recycle and new entrance. Remember, I prefer getting into a trade on a fresh something. I will even go down and getan entrance from a 1-minute chart. If the ten has been running for a while, thenI will probably wait for a retracement and a new entrance. The trader has tomake a lot of decisions—quickly.
Here is a 30-minutechart that you shouldNOT enter on. It isoverextendedandconverging with fallingvolume.
Managing and Exiting A TradeIf I timed my entrance properly, I usually move quickly into profit. Usingthe 8-minute chart instead of the 10-minute will often get you into place beforethe stock really starts to move. This has happened to me numerous times andeach time I think that I made a mistake, nothing is happening, and then thestock takes off—amazing—and very helpful in getting into a trade before themarket maker senses a rally and starts to raise the ask. Once in a trade, sometraders simply trade the 8- or 10-minute chart. Try to keep track of the lightsaround the trade as well as well as the volume. Many traders keep the QQQsand SPYs up on Wizetrade to see if the market is pulling back or rallying. Watchout for greed. Once you are in a profitable position you should not take a loss ona trade. Earlier I discussed a trade on big MO (Philip Morris). I started to getconcerned when the 5-minute light went red, then the 10, and finally the 30. MObegan pulling back but I remained in this trade. Why? Because the 30-minuteThis an example of achart went flat but did not pull back, because this occurred in the middle of thestrong entrance on the10 with good indicesday when most stocks retrace a little, and most importantly, because the 60and increasing volume.minute chart was diverging, that is, getting stronger. The strengthening 60-minutechart was the deciding factor. There would have been nothing wrong with getting out and taking a $720 profit, but by following the charts, I closed my positionfor $1160 (this is called leaning on a stock).I’d like to give a rule for exiting, but there are too many valid reasons. First of all, it depends on whatkind of trade you are on. A few weeks ago I was on a short-term scalp (maybe a five-minute trade) andexited when the 1-minute chart started to converge. All the lights were green. The second I got out,everything went red. I knew the stock and how it traded. I knew that it could give up 50¢ to 70¢ in seconds,so I was ready for it. This style of extreme scalping requires you to have a seatbelt on your chair and a barfbag. Another reason for closing a trade is reaching a goal; you may remember that I mentioned the 2.5%limit used by many traders. Sometimes I leave just because I am satisfied with the profit and the volumeis dropping and the charts are flattening out, its the reversal period (lunch), the market is starting to tank,the 30 is converging and the 2 is pulling back—any number of reasons. Once I took $300 from SLABbecause my wife needed help with something. I returned to the computer only to find out SLAB had madea six point move (the story of my life). If you are trading a particular curve such as the 30 and the 10changes to red, begin looking at the short timing lights for a possible exit. Don’t give up a lot of profit; youcan always reenter a trade later if the stock begins a new run.
Setting StopsBefore entering a trade, you should already know at what point you will exit if the trade goes againstyou. Are you willing to draw down $100 before exiting? If that’s the case and you draw down that much,then you should take the loss. That’s a mental stop. I only use mental stops because market makers havea nasty habit of stealing stock (if you can hide your stops on Level II, go ahead and use them). Those pricespikes that occasionally stick up or down on bar charts are not problems with your signal feed. Here is anexample. You bought XYZ at $15 and it’s now $16. You wish to protect yourself so you set a stop at $15 sothat you will at least protect your trading capital. You plan to raise the stop as the price goes up; suddenlythe price drops a point or two for a few seconds and your stock has been sold at $15. What a deal, themarket maker bought your $16 stock for $15—I try not to give market makers that opportunity. On theother hand, if I must leave the screen, I will set a very tight stop and remove it when I return.
Forcing A TradeAs we finish this section on trading, there are several little items worth mentioning to those of youwho are new to day trading. First of all, don’t force a trade. Forcing a trade occurs when something is notright, but you really want to trade. You take the trade any way hoping that it will work out—it rarely does.Trading against the indices (S&P, DOW, NASDAQ), entering a trade when the lights going back and forthbetween red and greed (buyers and sellers are almost equal), taking weak signals, entering when yourtrading chart (light) is overextended—these are some of the reasons leading to poor trades. There aretimes the market is so bad I just pass. For example, the afternoon before the start of the Labor Dayweekend. The volume just dried up. It just wasn’t worth the risk.
5: The Most Important Factor in Finding A TradePC + RVI = M — The Formula for Guaranteed SuccessThis formula is my way of stating that there are only two important criteria for finding a long or shortthat really make any difference. The first has to do with price change; if it is a long, the price must beramping up. That’s often what the gainers and losers in Wizetrade show you: which stocks have gone upthe most. If many stocks are going up, it’s difficult to select the best trade, even by looking at the volume.Volume is a relative measure. If Microsoft has gone up 30¢ by 9:40 (AM) on 100,000 shares, that’s not assignificant as some small cap stock, that usually trades 200,000 shares per day on average, trading 70,000shares in the open. In reality, it is the small cap stock that will probably make the biggest move on thistrading day, maybe become a one-day wonder. It’s not which stock trades the most volume, but whichstock has the greatest relative volume that matters. However, there is no way for you to make this judgement in the first few minutes of the market since you cannot compute each stock’s relative volume. As youread on through this e-book, I will actually tell you how to do this, and, by having this information, be ableto select the very top stock, or stocks, for the day. You see, price change combined with an hugeincrease in the relative volume equals momentum. When you find a stock that has both, you will findcharts that have separation and angle, sometimes with the green line standing straight up. These are thestocks we talk about after the market. These are the ones that move 2, 3, or more points in the morningand climb four points or more during the day. There are many systems in use by traders to find thesestocks in a hurry every day. Recently, the message boards have had a lot of chatter about rockets. Thissystem actually works to the extent that you will probably find decent trades. Actually, all of the day-tradingsystems that are going to be covered by this publication work. However, finding the really BIG TRADES,the screamers, is elusive, and only occasionally did I stumble over them, until recently. As you read on, I’lllet you in on a system that will bring you PC + RVI = M stocks all day long. Stocks that are just beginninga rally, at the open, or at any time throughout the day. It’s easy to run gainers and losers or Wizefinder atthe open and find trades, but many of these stocks quickly run out of steam. Finding a stock that is juststarting a new rally at 10:27, or 12:15, or 2:05 is really tough, unless you park yourself on a stock. The goodnews is this problem may have been solved, so read on. We address methods of finding trades in the nextsection.
6: Tools of the Trade: Finding A TradeDo I Need A Broker?I once trained a new trader and was on the phone forhours, covering much of what you have already read. Whenwe finished he asked: “Will I need a broker?” Yes—and thereare a lot of other handy tools available to the Wizetrader, someof which, if you have been paying attention, have been hintedat several times. Following are some of the resources available to you that will be mentioned when we define trading strategies (presented in no particular order):Intraday Scanner from CBS MarketwatchThis is an excellent financial web site for kinds of tradinginformation (cbs.marketwatch.com). Keakadog (real nameJack) has a strategy for the open that calls for having stocksthat have had a 10% move the previous day. He has a relatively involved method for selecting these stocks. I find thatthis scanner can get me what I need in a hurry. You can selectlongs or shorts, your volume requirements, percent of increaseor decrease, and lots of information (see screener on right).Once the data appears, you can sort by clicking at the top ofany of the columns. If, for example, you want to see the largest price move rather than percent, then click on the prices. There is no charge for any of these web sites.Finding the Volatile Stocks and More at Lycos Finance:http://finance.lycos.com/home/research/mostactive.aspThis is another site that will provide data to the day trader such as: largest range, most volatile,unusual volume, and unfilled gaps.Other Useful Web SitesI have book-marked dozens of sites for one reason of another. I mention a few of them here, but don’twant to confuse new traders. The fastest way I know of to find support and resistance is to go to www.stockconsultant.com. Just type in your stock and find all the support and resistance points and lots moreabout any stock. You can also get support and resistance at www.barchart.com. Price, support, pivot andresistance are given after you select a stock and click opinion. The days of drawing lines are over folks.The VIX is a volatility index for the markets. When the VIX goes over 40, start watching for a rally.You can find the VIX at www.cboe.com.Map of the Market (www.smartmoney.com)Each box represents a major player in the overall market. On the day that this snapshot of the Map of the Marketwas taken, I seriously considered shorting (black representsstocks that are going sideways and red, stocks that are tanking. By placing your cursor on a box, you will be given information about the particular equity such as the name, stocksymbol, amount and percent of gain or loss. A further clickwill bring you to more information about the company including a quote, average daily volume, and a chart.The stocks are grouped by sector and industry groupsso it is possible to drill down to, for example, to tech, thenchips, and then—you get it. So if retail is hot, you can drilldown to the stock that has made the biggest move for theday. This information is not in real time, that is, it appearswith a twenty-minute delay, so it is no very timely for day traders.
Pre-Market ActionEvery morning I watch the stock shows, switching back and forthlooking for interviews from the trading floors. I try to get a feel about howthe markets will open, what the latest financial reports say, (usually about8:30 EST), upgrades and downgrades, the pre-market indices, and maybea heads up on some report that is expected later in the day. I guess ishelps a little, but not much.NASDAQ has a Pre-Market Heatmap, shown on the right, which visually represents what the NASDAQ 100 are doing in the pre-market. TheHeatmap Strategy, which is addressed in the next section, utilizes thismap which can be found at www.nasdaq.com and then following the links.
7: Tools of the Trade Part II:Finding A Trade In Real TimeDo I Need A Plan?I used to trade the same stocks everyday. My planhas changed and I start the trading day with a blankWizetrade. Every day traders approache finding tradesdifferently. If you don’t believe me, look at some of theposts on the message boards. Let me mention a fewapproaches to finding a trade. Some traders trade just afew stocks all the time, other have a group of fifteenstocks loaded in Wizetrade and look for fresh crosseson the 150 or 180 (some use the 130). They then movethe best longs or shorts to the front page depending uponwhether we are having a positive or negative day. Others are waiting for e-mails from Delta Alerts, while sometraders are on the message boards. There are two primary message boards: if you have Wizefinder you will find a club link by logging in after 9:30 EST andreading the posts for the day (good music to trade by at times). Others are on the Yahoo site which you canfind by following links from Wizetrade.com. You can do all of the above while listening to the daily broadcasts and training from Wizetrade through Wizefinder.In the past I traded with a group of buddies and we communicated by using Yahoo’s instant messaging. After a while, this drove me to distraction. Now Itrade in quiet, in an organized, methodical manner. It’s abusiness after all, not a carnival.What do some of our serious brethren do? Youknow, the ones who are posting their finds (you can findyour own—why wait for postings)? Some people waitabout ten minutes after the start and run Wizefinder. Remember, this section is to let you know some of the typical tools that Wizetrader’s use, not to describe the strategies.In your Wizetrade database, you have up to 500stock symbols. I’ve had as many as 900 and it workedfine, (if you work in Tech Support, please note that Icleaned it out and now have only about 300). Thesestocks should be your favorites, not the ones that camepre-loaded from the Wizetrade. They should be in yourprice range and meet your volume and other parameters. After specifying your scan requirements in theparameters section, many traders run the Gainers and Losers to see what’s running. Several strategies arebuilt around this tool and are addressed in Trading Strategies after this section.
HotScansI want to share an experience with my fellow Wizetraders that has completely changed my daytrading. I planned on releasing this e-book back in early December, but I wanted to test HotScans beforecommenting on its reliability and validity. For those of you who forgot your statistics, reliability refers to asoftware program generating consistent results. Validity has to do with searching for the right informationor data, in this case. Validity would be poor, for example, if it found shorts when I was looking for longs.There are many scanning programs on the market and I wanted to be absolutely certain that this was thebest—in a new league.In early October I was invited to be a beta tester for HotScans which is not a new firm, just a newproduct. It is produced by MarketGauge® which is already an industry standard for the “professionals.”After agreeing to participate, I took part in numerous conference calls with their programers who asked meexactly what is is that I want to find. That is easy. All Wizetraders who are day traders could have told themin a heart beat what they hoped to find every trading day, but rarely found. What the heck—I told them. Thepeople with whom I was dealing at MarketGauge® turned out to be former pit traders, market makers,hedge fund managers, and professional traders (as in trading companies). These are the big boys whomwe always like to kid about as in the market maker drove the price down so his friends could get in cheaper,or, did you see the price he got in at; who does he know? I did a little research and following are excerptsfrom a review of MarketGauge® published in the prestigious Stocks and Commodities magazine:MarketGauge provides traders with capabilities and access to data that until recently were the exclusive domain of professional traders. It’s true that there is anincreasing number of excellent stock screening and market analysis web sitesand software packages on the market; it is equally true that MarketGauge takes aback seat to none.- David Penn, Staff Writer for Stocks and CommoditiesIt was the intent of MarketGauge® to produce a similar product geared exclusively for the use ofprofessional day traders. This was a pipe dream to me. I had described the perfect real-time trade finder tothe programers and other professionals, and then, sort of forgot about the software. Then one day I received an e-mail with the link that would take me into the special web site that had an operating version ofHotScans. It was a down day (DOW down -177 and the NASDAQ down -47). I started looking for longs, INTHE MIDDLE OF THE MORNING! The first thing I did wasHotScansenter my parameters at the top of a blank page; you knowthe drill, price range, volume requirements, exchanges, etc.Then I pushed run and voila, 25 trades appeared, rankedfrom strongest to weakest trade. I pushed again—this timethere were a few changes. I had selected Rallying Now fromamong the many trading choices. I stopped trading and testedHotScans for the rest of the day. I checked out more thanthree-dozen recommendations. Every single one of them hada great rally. The worst was good for about 50¢, the best rana point or two. They all had strong crosses, separation, andgreat volume. Can you image, great longs on an extremelydown day? Of course, I also found stocks tanking, that is,great shorts. Sure, you can find screamers at the open, but Iwas finding them during lunch, at 1:45 PM—any time I pushedthe button. I was so euphoric that I wanted to call every traderI knew. Of course, as a beta tester, I was not allowed to tellanyone.I’m going to describe a few of HotScans’ many features. When HotScans is later mentioned as ameans for finding a trade in a specific strategy you will already be familiar with the tool.Let me tell you a little about how HotScans works. It’s web based so I do not have to load anysoftware. I log in to HotScans in the morning and reduce it to the tool bar. Whenever I want to trade I justclick on the tool bar and push run. The returns are filtered and ranked, so the best trades are probably onthe top, but I am getting ahead of myself.
HotScans works in time increments; if you run a five-minute scan looking for rallying stocks, you canpick up stocks that have just received, for example, a fresh cross on the ten. What has amazed me is thatwith the thousands of stocks on the three major exchanges, there is always some stock making a move. Itmight be a stock that was flat or down all day, but now it is beginning a rally. The same is true for shorts,they are just as easy to pick up, even in an up market. Although you may select a 5-minute scan, you canelect to have the program show you, and scan, another time frame in another column. Therefore, If youpick up a stock that is beginning to rally, you can also check on how it has performed since the open, duringthe last hour, or perhaps for the past twenty minutes.The results of a scan are displayed in vertical green or red bars. A green bar represents an increasein price movement or relative volume, a red bar graphically represents a decrease in price or relativevolume and are always displayed for each time frame selected. One bar represents the least movementand five the maximum. Occasionally a stock will be displayed with a “+” sign after the five bars—this is ascreamer. Earlier I mentioned a stock that had a $4.60 move; it had five green bars with a “+” on both priceand relative volume—a certain winner. These are the stocks that are in play, the stocks that are driving themarket at that particular moment, or for that matter, the day. A stock with solid signals will run at theopen and keep on running all day. The following may help to clarify what is meant by the term relativevolume:Relative Volume is a term that refers to the volume of a stock during a specific timeframe as compared to, or relative to, the volume this stock typically has for that timeframe. For example, if the average daily volume for a stock is 470,000 shares but on thisparticular day it is 1.7 million shares, there is a large increase in the stock’s relativevolume. Relative volume can be found for shorter time frames. For example, if a scanreveals that for the past twenty minutes a stock has had a 6,000% in increase in relativevolume, as compared to the average volume for that period, concurrent with a priceincrease, this indicates that a significant rally is under way. Scans can be run for periodsas short as five minutes, thus alerting the trader to fresh rallies, usually coinciding with afresh cross on a 10 or 30 minute chart on Wizetrade. Because of the large number ofstocks in the three major exchanges, rallies are available almost all of the time and canbe short or long.
In addition to scanning for rallies (Rallying Now) in various time frames, scans may also be run forfalling stocks and stocks with Big Volume Now. I ran Big Volume Now towards the close of the market andfound the stocks most likely to gap the next morning, easy as pie. HotScans is also developing a wholeseries of presets that are trading strategies in themselves: Opening Range Breakout Up, Opening RangeBreak Down; Day Traders At New Highs; At New Lows; Gaps Falling; and Gaps Following Through are justa few of them. Links will take the trader to Hot Stocks, Hot Groups, and Hot Sectors—another featurewhich will soon be available, allows the trader to access a select group of the two-hundred best stocks today trade based on average volume, bid and offer, opening range versus average trading range, total pointrange, among other criteria. By linking to this group, you will know instantly which of these MarketGauge200 are having the biggest intraday moves on big volume. To reiterate, every signal I have taken wasvalidated by Wizetrade and followed through as a profitable trade.Does this sound complicated? My learning curve lasted about twenty minutes. It’s very intuitive andI needed no instruction. In fact, there was no tutorial for the beta test (there is one now), and I did not needone. A little common sense won’t hurt, however.Let’s look at an actual trade that I took before Christmas. I was looking for a long on one of those alltoo often dreary trading days with no volume and negative indices. The scan, which you can view on thenext page, came up with twenty-five potential trades (it was mid morning), some long and some short; thescan was on the setting Big Vol. Now. On the next page, I will interpret the results of the first two returnsfrom the scan.What are you waiting for? Turn the page.
The first stock to come up was FE on the Big Volume Now scan. Its current price is $32.89. It has lost9¢ or 0.2% for the day. The fourth column shows one grey bar and one red bar. Every column has a grey