. Are there any traits in beginning traders that would suggest to youthat they will eventually become successful?
A. We're all setup junkies, so most that approach me have questionsabout patterns and charts. However, when someone asks me a moneymanagement question, I have the utmost respect for him or her. I im-mediately think, now here’s a guy (or gal) who’s going to be success-ful. Hard work is also vitally important. Trading, on the surface, lookslike the complete life of leisure. You click a few keys, rake in the cashand then go sit on your yacht to count your money. In reality, it’s a lotof hard work. I have yet to meet a successful trader who puts in fewerhours than those in the corporate world. I was once at a seminar sur-rounded by six traders who were dying to know how I go about find-ing stocks to trade. J explained to them that I first tool through about600 charts after the close. Four of the “traders” looked at each other,shook their heads and walked off. 1 suppose they expected me to say,“Oh, I run a magic scan and then I’m off to the beach.” The two re-maining individuals began to berate me with questions: “What chart-ing software do you use?” “Who is your data vendor?” “How fast isLLMore Thoughts 205
your computer?” “How big are your monitors?” and so on and soforth. If I had to put money on who would be successful out of thesix, I think I know which two to bet on.
Q. You have many setups. Do you trade them all?
A. Obviously, everything doesn’t set up every day. But, yes, unlike manywho publish patterns for the sake of publishing, I use every pattern inthis manual either directly in trading or in helping me develop a gameplan for trading.
Q. What setups do you mostly focus on?
A. I focus mostly on the basics, which is covered in the first section of themanual. In fact, this probably makes up about 90% of what I do. Therest is based on more advanced concepts.
Q. Referring to your advanced techniques. Are there any patterns thatyou will almost always take?
A. On the more rare patterns, such as the Double Top Knockout, I'llwatch for entries. I suppose this is because not too many stocks set upat any given time making it easy to track. Also, I’ll strongly considerany pattern that sets up as a combination such as a shallow pullbackin a low volatility situation.
Q. Do you trade every day?
A. Because I write a nightly analysis for TradingMarkets.com, I’m forcedto do my homework. Through this, I can usually find somethingworthwhile. However, if I encounter a string of losses, I'll back wayoff and possibly even quit for a while until I can figure out if it’s meor the markets.
Q. What percentage of your trades are correct?
A. In trading the results are skewed. It can get really streaky. There aretimes when I will go weeks on end and 90% to 100% of my trades arewinners. Other times, it’s just the opposite. You have to realize thatthe majority of your profits come from the minority of trades. If I had tocome up with an average, I’d say about 50% to 60%. But, I no longerworry about being right, instead I focus on making money.
Q. Your examples show exactly where to get in and exactly where toplace your protective stops. Can you elaborate more on what to do af-I206 Chapter 16
ter you've entered and placed your stops? In other words, how tomanage the position.
A. The secret to position management is taking half of your profits oncethey are equal to or greater than your initial risk and then movingyour stop to breakeven (2-for-1 Money Management). This will gener-ate income for your account. This income is vital to long-term sur-vival, as it will help to cover the inevitable and often frequent smalllosses associated with swing trading.
Q. Okay, suppose you are fortunate enough to have taken half profitsand you have moved your stop on your remaining shares tobreakeven. How do you manage the remainder of the position?
A. You're in a great place from both a psychological and financial posi-tion once you have moved your stop to breakeven. This is the easypart. I look to do two things: continue to scale out and trail stops. IfI’m lucky enough to get a parabolic move (e.g., a sharp move higherin a long position) then by all means, I take most, if not all of it.
Q. You didn’t talk much about trailing stops. Can you elaborate?
A. _ It’s really not rocket science. One of my favorite techniques is to trail astop below the lowest low of the prior two bars (for longs). So if onMonday the low is 98 and the low for Tuesday is 100, then going intoWednesday, I'll ratchet my stop up to 97 15/16, right below the lowestof the two prior days. I have an example of this under More Examples(Chapter 15).
Q. What about time stops?
A. After five or six days I find my patience starts to wane. I’m usuallyout by the seventh day unless I’m fortunate enough to be in a strongtrend. At this point, I’ll continue to trail a stop. 
 
CHAPTER 1 7
READY, SET, WAIT!
This manual is the culmination of over 10 years of research, market analy-sis and trading. I strongly believe that I have included everything that aswing trader needs in order to take on the markets and be successful. This isnot to say that you should run out and try all of the methods and conceptsimmediately. Ease into it, especially if you are fairly new to trading. Studyeach pattern and setup in this book. If it makes sense to you, research it andfind historical setups. Which ones worked? Which ones didn’t? What werethe market dynamics at that time? What were the sector dynamics? Is therea modification to the setup that would lend itself more to your style of trad-ing? Are there money-management techniques you could implement thatwould allow you to control risk or capture larger profits? Once you've doneyour homework, then paper trade method(s). Be a realist and carefully doc-ument your records—timestamp your “trades” or use a tracking service.
After you have completed the above due diligence, make sure you gothrough one final checklist before jumping into the markets:
What is the setup?Where is your entry?Where is your protective stop?
Where will you look to scale out?
 
207I208 Chapter 17
What is the overall market doing?Are there any systems that are triggering?Is there momentum?Are there any setups that are triggering?What is the sector doing?Is there momentum?Are there any setups that are triggering?Are you focused, free of distractions and of sound body and mind?
After you have answered all of the above, you should be ready to facethe markets. 
 
CHAPTER 1 8
CLOSING THOUGHTS
As1 complete this manual in late 2000, many of the biggest and best namesassociated with a “buy and hold” portfolio have been decimated. Home De-pot, Intel, Microsoft and America Online are down over 50% from theirhighs; Yahoo! and AT&T have lost over 60% of their value since the begin-ning of the year; Lucent (LU) has lost over 70% of its value during the sameperiod and Apple Computer is 80% off its highs. The list goes on and on.
My method of swing trading allows you to a) participate in the bestnames at the most opportune times and b) when wrong, avoid beingcaught in debacles such as those listed above.
Best of luck with your trading!
Dave Landry
PS. Protective stops on every trade!
209 
APPENDIX
FORMULAS
While the following formula for historical volatility may be of use to a mathema-tician, you should ideally have a software program calculate this for you.
CALCULATING HISTORICAL VOLATILITY
Let Length = length of volatility to be calculatedand In = natural logarithm
Historical Volatility(length) = standard deviation(In(close/ yesterday'sclose),length) * 100 * square root (256).In English:
1. Divide today’s close by yesterday’s close.
2. Take the natural log of #1.
3. Take the standard deviation of #2 for length desired (the number oftrading days, i.e. 50)
4. Multiply #3 by 100.
5. Multiply #4 by the square root of the number of trading days in 1 year(around 256).
211 
212 Appendix
GLOSSARY
The following terms are used throughout this manual. Even if you are amore advanced trader, you might want to skim this chapter to see howthey are defined for purposes of this manual.
Average Directional Movement Index (ADX)—Developed by WellesWilder, this formula is used to measure the strength of a market but notits direction. The higher the reading, the stronger the trend, regardless ifit is up or down. It is calculated based on the Positive Directional Move-ment Index (+DMI) and Minus Directional Movement Index (-DMI). See+DMI, -DMI, “Capturing Trends Through ADX” in this appendix formore information.
Bar Chart—Shows the open, high, low and close of a market.
High
Open “™~Close
Low
Downtrend—A series of lower lows and lower highs.
Lower
par
/)
 
+DMI—see Plus Directional Movement Index.LLAppendix 212
-DMI—see Minus Directional Movement Index.
Exponential Moving Average—A moving average that gives higherweighting to more recent prices.
Fading—Trading contrary to the trend.
Gap Down—Today’s open is less than yesterday's low.
Yesterday'sLowToday's Open
Gap Up—Today’s open is greater than yesterday's high.
Today's Open
Yesterday's _High
Higher High—Today’s high is greater than yesterday’s high.214 Appendix
Higher Low—Today’s low is greater than yesterday’s low.
Historical Volatility—A statistical measurement of how much priceshave fluctuated in the past. It can be used to measure risk and potentialreward. See Chapter 4, Stock Selection, Section Three, Volatility and theAppendix for more details.
Initial Protective Stop—An order placed right after a trade is entered tohelp control risk.
Lap Down—Today’s open is less than yesterday’s close but not Jess thanyesterday’s low.
Today's Open
Yesterday
Lap Up—Today’s open is greater than yesterday’s close but not greaterthan yesterday's high.
Today's Open
Yesterday
Limit Order—An order to buy or sell at a specified price.Appendix 215
Long—A position that seeks to profit if the market rises. To buy.Lower High—Today’s high is less than yesterday’s high.
Lower Low—Today’s low is less than yesterday's low.
Market Order—An order to be executed immediately at the asking pricefor buys and at the bid price for sales.
Minus Directional Movement Index (-DMI)—A component used in thecalculation of ADX that measures the downward movement of a market.If it is greater than the Positive Directional Movement, it suggests adowntrend.
Moving Average—The average price of a stock over a given period. Forinstance, a 10-day moving average would be the sum of those prices di-vided by 10. See Chapter 3, Trend Qualifiers for more details.
Outside Day—Today’s high is greater than yesterday's high and today’slow is less than yesterday’s low.
Yesterday : * TodayI216 Appendix
Pivot High—A high surrounded by two lower highs. Can also be twoequal (or in rare cases three) highs surrounded by two lower highs.
or
 
 
Pivot Low—A low surrounded by two higher lows. Can also be twoequal (or in rare cases three equal) lows surrounded by two higher lows.
 
| | or | | | |Poor Close—The market closes in the bottom 25% of its range.High,
rp Bottom 25%
LowAppendix
Plus Directional Movement Index (+DMI)—A component used in thecalculation of ADX that measures the upward movement of a market. Ifit is in greater than the Negative Directional Movement Index (~DMI), itsuggests an uptrend.
Protective Buy Stop—Used to help control losses when shorting stocks.
The order is placed above the current price of the stock. It becomes a mar-ket order if the stock trades at or above the specified price.
Protective Sell Stop—Used to help control losses when buying stocks.The order is placed below the current price of a stock. It becomes a mar-ket order if the stock trades at or below the specified price.
Range—The high price of the day minus the low price of the day. Seealso True Range.
High
_~ Range
Low
Sell Short—A position that seeks to profit if a market drops in value. See“Selling Short: The Art of Playing Both Sides of The Market” in this Ap-pendix for more details.
Stop Order—For buys, an order placed above the current stock price thatbecomes a market order if the stock trades at or above the order price.For sells, an order placed below the current price of the stock that be-comes a market order if the market trades at or below the order price.Stop orders are normally used to help control risk but can also be used toenter positions.
Strong Close—The stock closes within the top 25% of its range.
IN top 25%
High.
Low
217I218 Appendix
Trailing Stop—A stop adjusted higher for long positions or lower forshort positions as the market moves in the favor of the trade. Used tohelp lock in profits for when the market reverses.
| Buy || \ giopped| Out
Trailing| —_ Stop
ProtectiveStop
True Range—Conceived by Welles Wilder and used in the ADX calcula-tion, the true range is the same as range except that gaps (if they exist)are used in the calculation.
True range is the largest value (in absolute terms) of:
1. today’s high and today’s low2. today’s high and yesterday’s close
3. today’s low and yesterday’s close
True —~ Range
Range 
Appendix 219Uptrend—A series of higher highs and higher lows. See Chapter 3, Trend
Qualifiers for more details.
HigherHighs *\
HigherLows
Volatility—How much prices fluctuate over time.a220 Appendix
I originally published the following article on shorting stocks on TradingMarkets.com in January1999. To my surprise, it quickly became one of the most popular articles and has since beenre-published by other Internet sites. Special thanks to Larry Connors, CEO ofTradingMarkets.com, for allowing me to re-publish this article.
SHORTING STOCKS: THE ART OF PLAYINGBOTH SIDES OF THE MARKET
To the public, selling stocks short can be an intimidating and confusingundertaking. Unfortunately, by sticking exclusively to the long side of themarket, average traders deny themselves the possibility of improvingtheir returns.
Professional traders, by contrast, know playing both sides of the marketis a crucial element of long-term stock trading success. We will try to de-mystify the process by explaining what short selling is and how you canbenefit from incorporating it into your trading plan. We'll also show youthe rules that regulate short selling, and how to know which stocks toavoid.
REVERSING THE RULES
When many people think of stock trading they automatically imaginebuying a stock and hoping it goes up. When it does, they envision sellingit and pocketing a profit. For example, suppose XYZ company was trad-ing at $10 per share. You would buy your shares at $10 (a “long” posi-tion) and sell them later at $12. Your profit from the trade would be thedifference between your entry and exit prices: $12 - $10, a $2-per-shareprofit. Nothing complicated here.
But what about when a market is falling? Short selling is simply a matterof reversing the process described in the previous paragraph to profitwhen a stock drops. For instance, suppose XYZ was trading at $12 butyou thought the stock would drop and you sold instead of bought—thatis, you “shorted” the market. If you later bought your shares back at $10,you would still have a $2-per-share profit.
Your trade consists of the same transactions (a buy and a sell) and netsthe same profit. The only difference is that in the case of the short sale,you sell the stock first and buy it back later—hopefully at a lower pricethan where you originally sold it. 
Appendix
WHY SHORT STOCKS?
The advantage to selling stocks short is simple: Bull markets do not lastforever, and even in the longest bull market there are corrections that lastfrom as little as a several minutes to as long as several months. Profes-sional traders seize these downside opportunities and profit by shortingstocks. Therefore, if you want to make a long-term living trading thestock market, it is to your advantage to add short selling to your toolbox.
WHAT IT MEANS TO SELL SHORT
In a short selling situation, you enter a position without owing the stock.How can you sell something you do not own? The answer is, you can’t.You have to borrow it before you can sell it. For example, suppose youborrowed what you think is a cheap plate from a neighbor. Now supposesomeone was visiting you and offered you $100 for the plate. You recog-nize that $100 is much more than this plate is worth, so you sell it tohim. But now you owe your neighbor his plate—you are, in essence,short one plate. As long as you can replace it for less than $100, youmake a profit.
Many people have a problem with selling before buying-it just seems tofly in the face of what is “natural.” But the short-selling process is reallyno different than when you order something and place a deposit. Thesalesman to whom you paid the deposit is “short” the product he owesyou. As long as he can fill your order for less than what you have agreedto pay for it, he makes a profit. From the salesman’s perspective, the de-posit ensures you will keep up your end of the bargain.
Short selling stocks is a similar process. If you believe a stock is over-val-ued, you put up a deposit (to cover potential losses) and instruct yourbroker to sell the shares short. To do this, he borrows the shares from an-other account and sells them in the market. You are now short the stock.As long as you can buy it back for less than what you sold it, you willmake a profit.
RULES AND REGULATIONS
The Securities and Exchange Commission (SEC) has established specificrules regulating the short sale of stocks. First, you must have a mar-gin/ short account with your broker. Second, the shares for the stock youwish to short must be available to borrow. Third, you can only sell short
221LL222 Appendix
on an up tick. Finally, you must have (and maintain) at least 50 percent(or more, see below) of the stock’s value in your account.
Let's break it down:
1. You must have a margin and short account agreement with your broker.
A “margin” account allows you to use stocks you own as collateral; a“short” account allows you to short stocks. This agreement also allowsyour broker to “borrow” shares from you should other traders wish toshort a stock you own.
2. The stock must be available to borrow.
Your broker must be able to borrow the shares from someone else’s ac-count. If he cannot, no short sale is allowed. Shorting stocks without firstborrowing the shares is known as “naked shorting” and is illegal.
3. The stock must trade on an up tick.
This means that the stock must tick higher before they will allow you to.short the stock. If you attempt to short a stock that trades at $50, $49 3/4,$49 1/2, and $49 5/8, your short trade would not be executed until thefirst higher trade in the sequence ($49 5/8). (This rule was instituted tokeep short sellers from manipulating the market.) You also can short sellon an “equal tick” if the preceding trade was an up tick. For example, ifthe stock traded at $50, $49 3/4, $49 1/2, $49 5/8, and again at $49 5/8,you could short sell on the second trade at 49 5/8-you would not have towait for the stock to up tick again to 49 11/16. Note: as of late 2000, thisrule may be repealed.
4. You must maintain at least 50 percent of the stock’s value in youraccount.
This deposit is required in order to cover potential losses. Just as a sales-man requires a deposit on something you special order, the brokers (andthe SEC) require that you maintain at least 50 percent of the stock’s valuein your account in case your position turns into a loser. If the stock be-gins to rise you would have to add more money to your account (or exitthe position). Conversely, if the stock began to drop you could removeexcess cash (or use it for other transactions) as long as you maintained atleast the 50 percent margin in your account.
While 50 percent is the absolute minimum deposit that brokerages willaccept, some brokers may require a larger deposit. Also, because volatilestocks are riskier, brokerages may require additional margin on these is-sues for extra insurance. 
Appendix 223
SHORT-SELLING STRATEGIES
In general, the majority of patterns that work on the long side of themarket also work (in reverse) on the short side. For instance, just as fromnew highs often present good buy opportunities, pullbacks from lows of-ten present opportunities to sell short.
STOCKS TO AVOID
Just because something appears overvalued does not mean it cannot gohigher. Many traders were devastated by shorting “overvalued” biotechstocks in the early 1990s and by shorting “overvalued” Internet stocks inthe late 1990s. This is not to say you should avoid hot sectors all to-gether; it is just a warning to be cautious and realistic about the possibil-ity of sustained stock rallies.
You should always ask your broker if a particular stock you are inter-ested in is hard to borrow. Avoid such stocks because you could easilyget caught in what is known as a “short squeeze,” which occurs when astock rallies and the short sellers are forced to cover (exit) their positions.This demand far exceeds the supply and pushes the stock much higher.If you believe a hard-to-borrow stock is headed lower, you are muchbetter off buying a put option.
SUMMARY
Shorting stocks allows you to enter the market as a seller and profitwhen a stock declines. Your broker “borrows” the stock from someoneelse’s margin/short account and sells it in the market for you. As long asyou buy back the shares at a lower price, you will profit.
To short stocks you must first establish a margin/short account withyour broker. The stock you wish to short must be available to borrowand you must maintain at least 50 percent or more of the stock’s value inyour account. Also, you can sell stock short only on an up tick.
Professional traders sell stocks short because they know markets areProne to corrections and longer-term declines. Many of the techniquesthat work on the long side of the market also work (in reverse) on theshort side. Finally, avoid hard-to-borrow stocks and be cautious aboutshorting stocks in a hot sector.
Copyright © TradingMarkets.com 1999. Any reproduction of this article or any information on this site with-press written permission from TradingMarkets.com is forbidden. 
224
Appendix
CAPTURING TRENDS WITH THE ADX
The Average Directional Movement Index (ADX) measures the trendstrength of a market but not its direction. The higher the ADX reading,the stronger the trend, regardless if it is up or down.
The ADX, which was developed by Welles Wilder, uses calculationscalled the positive directional movement index (+DMI) and minus direc-tional movement index (-DMI) to measure price movement. Althoughthe entire ADX calculation is somewhat lengthy and complex, under-standing the basis of the calculation—directional movement—is fairlystraightforward and will help you understand how the indicator works.
Below we will show you how to determine the directional movementand interpret ADX readings.
UNDERSTANDING DIRECTIONAL MOVEMENT
Directional movement is essentially the part of a price bar that falls out-side of the prior price bar’s range. In terms of a daily chart, price actionabove yesterday’s high is positive directional movement (+DM), whileanything below yesterday’s low is negative directional movement (-DM).aAppendix 225
FIGURE A.1
 
(b) -.--
— Positive Directional Movement (+DM)
Yesterday (a).--
\
() ----
— Kegative Directional Movememt (-DM)
(@) ----
 
 
 
 
Directional Movement (DM). Price action above yesterday’s high is +DM while that below yester-day’s low is -DM.
In Figure A.1, notice the box a-b above yesterday’s price. For today, any-thing above yesterday’s high (for instance, if the market trades from a tob is +DM. Conversely, anything trading below yesterday’s low (for in-stance, if the market trades from c to d is -DM.226 Appendix
FIGURE A.2
Yesterday ~~
 
 
Plus Directional Movement (+DM).
Notice in Figure A.2 that the price bar trades above the prior price bar(from a to b). This distance is the +DM. Referring to Figure A.3, the rangeof the bar that trades below the prior day’s low (from c to d) is the -DM. 
Appendix 227
FIGURE A.3
Yesterday
 
Minus Directional Movement (-DM).
Obviously, not every trading day sets up like Figures A.2 or A.3. There-fore, we must consider two other possibilities: inside days and outsidedays. An inside day occurs when the entire day’s range is “contained”within the prior day’s high and low. In other words, today’s high is lessthan yesterday’s high and today’s low is, greater than yesterdays low. Forexample, if XYZ traded yesterday between 50 and 60 and trades todaybetween 51 and 59, then today is an inside day. In Figure A.4, noticethere is no DM (either + or -) because the range doesn’t trade above (fora +DM reading) or below (for a -DM reading).reer e reer reer reer ee ee  e228 Appendix
FIGURE A.4
  
(a)----
      
“~~~ Inside day = No DM
  
() ----
 
Inside days have no Directional Movement value.
An outside day occurs when today’s high is higher than yesterday’s highand today’s low is lower than yesterday’s low. For instance, if XYZtraded between 50 and 55 yesterday and between 49 and 56 today, todayis an outside day because today’s range is “outside” yesterday’s. Becausethere can only be one directional movement (either + or -) per tradingday, the outside day presents an interesting problem because it containsboth +DM (today’s high greater than yesterday's high) and -DM (today’slow less than yesterday’s low). Because we are looking to quantify move-ment in price, on an outside day the largest move—either the differencebetween today’s high and yesterday’s high or the difference between yes-terday’s low and today’s low—is the directional movement. This is illus-trated in Figure 5. In the rare case that the move above yesterday's highis equal to the move below yesterday’s low then there would be no DMfor that day. 
Appendix 226
FIGURE A.5
            
Today-- Lo).
-= =f. .(a)----
                
Yesterday a
 putside day — take the largestof +DM or -DM
— {c) oe-(a%---
  
  
} -om
For outside days, the Directional Movement is the greater of the +DM or the -DM.
DIRECTIONAL MOVEMENT (DM) SUMMARY:
1, Today’s high > yesterday’s high (and today’s low > yesterday’s low) =+DM
2. Today’s low < yesterday’s low (and today’s high < yesterday’s high) =-DM
3. Inside day (today’s low > yesterday’s low and today’s high < yester-day’s high) = no DM (either +DM or - DM)
4. For outside days, take the larger of today’s high - yesterday’s high or
yesterday’s low - today’s low. If these figures are equal, there is noDM.
To make the directional movement readings meaningful for all markets,Wilder divided the DM by the market’s true range. This creates a direc- 
230 Appendix
tional movement indicator (DMI) in a form of a ratio and allows for mean-ingful comparisons regardless of various market prices. In other words,the DMI of a $5 stock can be compared to the DMI of a $100 stock.
Because one day does not a trend make, the DMI is then averaged over anumber of days. The magnitude of the trend reflected by the ADX—lon-ger-term or shorter-term—depends on the number of days in this calcula-tion. Wilder’s default, and the number widely used by charting softwarepackages (and TradingMarkets.com), is 14 days.
The Average Directional Movement Index (ADX) is then calculated bytaking the difference between the smoothed +DMI and -DMI calcula-tions. It’s obvious the ADX calculation is very complex, but if you under-stand the directional movement detailed previously, you’ll have a goodunderstanding of how the indicator works and enough background touse it.
FIGURE A.6
 
‘ Amazon.com Inc-Daily
   
 
 
Amazon.com, daily. +DMI greater than -DMI reflects an uptrending market. Source: Omega Research. 
Appendix 231
The ADX measures trend strength but not direction. The direction of themarket is determined by comparing the +DMI to the -DMI. If the +DMIis greater than the -DMI the market is in an uptrend; if the ~-DMI isgreater than the +DMI the market is in a downtrend. Referring to FigureA.é, notice that the +DMI is greater than the -DMI signifying anduptrend. Also, notice that the ADX rose to relatively high levels (above30) as the trend remained strong and the stock quadrupled in value. Onthe downside, in Figure A.7, notice that the -DMI is greater than the+DMI as the ADX remained above relatively high levels (above 30) as thestock continued to decline.
FIGURE A.7
‘ Iridium-D aily
 
Iridium, daily. A downtrend is reflected by a -DMI reading greater than the +DMI reading. Notethat the ADX reading, signifying trend strength, is high. Source: Omega Research.
One word of caution: Many trading books would have you believe youcan simply buy a market when the +DMI crosses above the -DMI andsell the market when the -D