keyboard.
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chapter 15
conclusionthe first million dollars isalways the hardest
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Amidst the hoopla surrounding today’s stock market, the veryhype that probably caused you to pick up this book, forgiveme for stating a tragic little fact. Even in this rising market, asignificant number of traders have lost a significant amount ofmoney. Furthermore, I would bet my entire stash of thirty-yeartreasury bonds that the large majority of would-be day tradersended up in this unhappy group. Unless you too aspire to joinup, you better ask yourself why so many people fail. If youdon’t know the answer, you haven’t been paying attention—lack of knowledge and lack of discipline.Don’t ever forget that knowledge is more valuable thanprofit, especially to the inexperienced, and most especially tothe day trader. Learn from every trade. What you lose in money,gain in skill. It is not enough to critique each trade individually.You must also examine each trading day as a whole. At firstworry only about the trades you have made. Later, much later,you can start critiquing trades you should have made. If you canderive a general, cogent, applicable reason for making suchtrades in the future, then give it a try. If not, then don’t letmissed profits affect your subsequent decisions.It will not take you long to realize that your most important lessons will come from losing trades. Protect your capitalby keeping these losses as small as possible. You must alsoprotect some of your profits, squirreling them away for the dryspells. The novice should operate with a single principle foremost: preserve your capital so as to stay in the game until youcan master it. Increase the stakes very, very gradually. I meanover years, not over months. Traders, particularly day traders,that go in for the kill, are themselves likeliest to get killed.189
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technical trading online
I have done my best to minimize the use of technical termsin this book, but in conclusion I must mention a few that cannot,or at least should not, be avoided. There is an often heard termfor the novice that would read a book such as Technical TradingOnline, then immediately start day trading stocks. In the business, such a person is technically referred to by the term“idiot.” If said person does this trading with money he or shecannot afford to just throw away, then the applicable technicalterm is “complete idiot.”Perhaps, up to this point, you are not quite sure the priceyou paid for Technical Trading Online was worth the knowledgegained. Well, allow me to take one last stab at winning youover. I will give you a tip that, if you have not thought of ityourself, is worth many times the cost of this book. As long asyou follow it faithfully, I will not only guarantee that you willnot lose one red cent, I also guarantee that you will not embarrass yourself. Now here is the tip: Do not use real money.Polish your techniques and learn from your mistakes. Onlyafter the Monopoly money starts piling up, and with no guarantee from me, find an online brokerage firm and try risking alittle real moolah. At first have the discipline to limit yourselfto a few choice trades of small lots, one hundred shares maximum. Avoid thin stocks in favor of the higher volume more liquid issues.Attitude, in stock trading as in almost every other endeavor, is crucial to success. However, different endeavors necessitate different attitudes. Trading stocks, you are competingagainst other traders, pitting your knowledge, skill, and speedagainst theirs. There are lessons to be learned every day. Youbetter learn them, because at least some of your competition isdoing just that. A prize fighter that stops training before he retires gets retired by someone else. The day you stop training isthe day you stop improving. It should also be the day you stop190
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conclusion
trading stocks. You must face every day determined to buildupon your knowledge, your skill, and your discipline as a stocktrader in the same way each succeeding floor of a skyscraper isbuilt upon the floor below. Understand that training is an ongoing progression, not a finite event.Trading stocks is hard, serious work. You must be willingto do this work. Technical Trading Online gave you more thanknowledge. It gave you techniques. Apply them. Customizethem. Perfect them. Make these techniques your own. Thisbook can do no more than point you in the right direction, tellyou some of the things to look for and lookout for. TechnicalTrading Online will enable you to face the stock market at eyelevel. The market itself will be your final teacher and the refiner of your skills.There is no point in my wishing you good luck, certainlyno practical point. Forget about luck. It evens out. The less youthink about it, the less you will depend upon or even hope forit. When pondering a trading decision, never take luck, good orbad, into consideration. That is a sure formula for losing. Thestock trader should not be any more concerned about luckthan the ditch digger. Just follow the rules and guidelines youset for yourself, fine tuning them through experience. Takethings slow, but the sooner you start the better. In fact, thetime to start is now.
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abandon a position Sell a stock that you own or buy (cover)a stock that you had sold short.accumulation
See accumulation trading range.
accumulation phase
See accumulation trading range.
accumulation trading range A trading range in which a particular stock is removed from the market by its purchasers inanticipation of an uptrend (see Figure 2.3).ACPS The average cents per share (up or down) of all stockslisted on the New York Stock Exchange.advance/decline index The preeminent indicator of marketmovement, calculated as the ratio of Advancing Issues overDeclining Issues.advancing issuesarms index
Stocks above their previous close.
See trader’s index.
ascending triangle A trend reversal signal, indicating the reversal of a downtrend (see Figure 4.7).automatic stop loss order A sell order that is only executedif a stock drops to a price specified by the seller, whereupon itbecomes a market order.193
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balance sheetabilities.
An accounting statement listing assets and li-
bear Someone who believes the market will start to or continue to decline.bearish
See bear.
break high
A break in resistance.
break low
A break in support.
break in resistance An increase in stock price significantlyhigher than the stock’s resistance line.break in support A drop in stock price significantly belowthat stock’s support line.brokerage customer’s free balances Cash available withinbrokerage accounts for the purchase of stock.bull Someone who believes the market will start to or continue to rise.bullishbuy long
See bull.Simply purchase a stock.
buy stop order A buy order which is only executed if a stockreaches a specified price. It becomes a market order if andwhen stock price trades at that specified price.call The option to buy a specified number of shares at aspecified price within a specified period of time.candlesticks A superior charting technique developed inJapan. It displays data in a manner that facilitates quick, thorough, and easy analysis.certificate of deposit A certificate representing a cash sumdeposited for a fixed length of time at a fixed rate of interest.194
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comparative relative strength A stock’s relative strengthor weakness when compared to a market index such as theS&P 500 or the Dow Jones Industrial Average.confirmation Agreement among indicators as to future pricemovement, as opposed to divergence, which is disagreement.consolidation A pause in upward price movement that willend in continuation of that upward movement.consumer price index Sometimes referred to as the cost-ofliving index, it is an index that compares the price of basicgoods and services to a fixed base period.continuation signal An indication that a trend will continue,such as the appearance of the Isosceles Triangle or Flag pattern on a graph.contra-trend trading
See trading against the trend.
cover a short The abandoning of a short position by buyingthe stock you had originally sold short. See sell short.CPI
See consumer price index.
crossover The switching of a stock (or average, etc.) from anadvancing to declining issue or vice versa. This is often highlighted by the switching of an indicator light or the stock’sprice from red to green or vice versa.day+ext. hours Regular trading hours on one specified day,plus the extended hours both before and after that day whenavailable. This is an option or condition specified in a stockorder.day trader A stock trader who buys a stock with the usualintention of selling it in a few minutes or a few hours, and absolutely no intention of keeping it overnight. He or she can195
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easily take and abandon fifty stock positions in a day, some ofthem lasting only seconds.declining issues
Stocks below their previous close.
descending triangle A trend reversal signal, indicating thereversal of a uptrend (see Figure 4.7).distribution
See distribution trading range.
distribution phase
See distribution trading range.
distribution trading range A trading range in which an accumulated stock is sold off, distributed back into the market,because those holding it believe its upward price movementhas come to an end (see Figure 2.3).divergence Disagreement among indicators as to futureprice movement, as opposed to confirmation, which is agreement.DJIA
See Dow Jones industrial average.
doji An almost bodiless candlestick representing no changeor a very slight change in stock price (see Figure 3.6, Stock H ).doji evening star This candlestick appears during an uptrend, representing a gap opening up and a subsequent closingat or very near this opening price. It is one of the strongest reversal patterns (see Figure 3.9).doji morning star This candlestick appears during a downtrend, representing a gap opening down and a subsequentclosing at or very near the same price. It is one of the strongestreversal patterns (see Figure 3.9).double bottom A reversal signal, indicating the possibility ofan imminent upturn. It consists of two very similar troughs ina graph (see Figure 4.5).196
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double top A reversal signal, indicating the possibility of animminent downturn. It consists of two very similar peaks on agraph (see Figure 4.5).Dow Jones Industrial Average A price-weighted average ofthirty industrial stocks. It is the grand daddy of all averages,respected more for its age than its usefulness.downtrendtime.
A decrease in value over a relative length of
Dow theory A trend indicator based upon confirmation or divergences of the Dow Jones Industrials, Transports, and Utilities Indexes.ECN
See electronic communications network.
EDAT
See electronic direct access trading.
electronic communications network A network such as Island that enables customer traders to meet among themselvesand provides them all with the same information, such as itsfull book of bids and offers to better gauge a market.electronic direct access trading EDAT gives the trader direct access to the market. The connection is usually by a dedicated phone line. Using a mouse and keyboard, the trader buysthe stock himself almost instantaneously, and without a broker as intermediary. Downloads are lightning fast.engulfing pattern A candlestick pattern that signals a possible reversal of trend. It occurs when the newest candlestickrepresents both a lower opening and a higher close than theprevious candlestick. This larger bodied candlestick can beeither black or white, but it must be the opposite color of theprevious candlestick which it engulfs (see Figure 3.8).enter a position
To buy a stock, or sell a stock short.197
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entrance strategy A checklist of self-selected conditionsthat, if met, recommend the taking of a position.exit strategy A checklist of self-selected conditions that, ifmet, recommend the abandoning of a position.extended hours Those hours before a market’s openingand after its close when trading can take place outside of thatmarket.fair value A statistic that takes into account the fact that$100 in your possession today is worth more than a guaranteed $100 three months from now.flag A continuation signal, found on a graph, resembling aflag. Low volume lends confirmation to this pattern.flow of funds indicators Indicators such as Mutual FundsCash, Hedge Funds Cash, Insurance Company Cash, Bank Customer’s Cash, and Brokerage Customer’s Free Balances. Theygauge not only the flow of cash, but also its availability.futures contract An agreement to deliver a commodity or afinancial settlement at a specified date in the future.gap open When a stock’s opening price is significantlyhigher than the previous day’s high or lower than the previousday’s low.gold futures An agreement to deliver gold or a financial settlement at a specified date in the future.group indexes Indexes of particular industries such as oil,airline, pharmaceuticals, and so on.GTC Good Till Cancelled—a term added to a stock order tokeep it open and ready to be executed until triggered by market conditions. Depending upon the broker, it can really meanonly a limited period such as thirty days.198
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GTC+ext. hours Good Till Cancelled—a term added to astock order to keep it open and ready to be executed, duringboth regular and extended hours, until triggered by marketconditions. Depending upon the broker, it can really mean onlya limited period such as thirty days.hammer A bullish candlestick during a downtrend that indicates a possible reversal of that trend. The same shape as ahanging man, if white it tells us that a serious price drop endedin a recovery, and that the stock closed up. A black hammer isonly slightly less bullish (see Figure 3.7).hanging man A candlestick with a very small or no upperwick. The defining feature is that the lower wick must be atleast twice as long as the body. It can be black or white, but ithas to occur during an uptrend. If you can picture the verysmall upper wick as a head, and the long lower wick as legs,then you can actually picture this candlestick as a hangingman. This candlestick indicates a possible loss of upward momentum and a reversal of trend (see Figure 3.7).head and shoulders The most famous reversal signal—apointed head flanked by pointed shoulders. High volume lendsconfirmation to this signal (see Figure 4.4).hedge fund An investment fund that uses high-risk techniques in quest of large capital gains.index
An indicator such as the Standard & Poor’s 500.
indicator An index, average, graph pattern, and so on, usedto predict future behavior.inflation
A rise in the cost of goods or services.
inside quotestock.
The highest current bid and lowest offer on a
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insolvency
Bankruptcy.
institutional investor Mutual funds, hedge funds, insurancecompanies, banks, Warren Buffett, and so on.isosceles triangle A continuation of trend signal that appears on graphs when a trading range narrows symmetricallyand the triangle formed is neither ascending nor descending.With this signal, you will usually see a decrease in volume accompany the decrease in range. Then when the trend resumesthere should be a jump in volume. However, if the tradingrange continues beyond the triangle tip, this is an indicationthat our signal is no signal at all. Anything can happen, and allbets are off (see Figure 4.8).kinematic Concerning motion itself, without regard to forcescreating this motion.level II screen A screen, provided by an information service,which displays all bids and offers.limited liability corporation A form of business favored byday trading firms. The trader contributes his share of the corporation’s capital, let’s say $50,000, and theoretically he is apartner. The funds of all traders are comingled, thus allowingleverage of 10 to 1 or more, instead of the standard 2 to 1, commonly referred to as regulation T margins.limit order A stock order that includes a limit price. If themarket price is lower than the limit price, the buyer receivesthe stock at the lower market price. If the market price ishigher, no buy is executed and he is protected from spendingmore than he cares to. Of course, in this case, he has failed tobuy the stock.LLC
See limited liability corporation.200
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MACD oscillator Moving average convergence-divergenceoscillator, known for the infallibility of its hindsight.major market index ( XMI ) An option index which closelymirrors the movement of the Dow Jones Industrial Average.markdown phase The period of downward price movementthat often follows a distribution trading range.market order A stock order that will be executed at the market price when the order is received. This is the only way to besure you get a stock, but you cannot be sure how much you willhave to pay. Usually, the price will be close to the quick quote,but a sudden run on the stock is a dangerous possibility.market structure indicator Indicators concerned with,among other things, price trends, cycles, volume, and theirinter-relationships. Examples of market structure indicatorsare the Standard & Poor’s Cash to Futures Relationship, theTrader’s Index, the ACPS, and so on.markup phase The period of upward price movement thatoften follows an accumulation trading range.mutual fundits investors.
An investment fund that manages the capital of
odd lot sales
Sales of less than 100 shares at a time.
OBV
See on balance volume.
OEX
See S&P 100 index.
on balance volume (OBV ) A calculation used to detect if astock is under accumulation or distribution.online
Connected to the internet.
online trader A trader connected to a broker through the internet. The broker acts as an intermediary between trader and201
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stock market. Download times can be long and costly. Seeelectronic direct access trading for comparison.order screen The Web page of an online broker or the screenprovided by an information service that allows you to buy andsell stock with mouse or keyboard.oscillator A graphical indicator used to predict when a market is overbought or oversold, and therefore in line for a reversal of trend.overbought The condition of a market when the buyers, whohave overreacted, are about to turn into or give way to the sellers, thus precipitating a drop in price.overbought area
See overbought zone.
overbought signal A sell signal, such as given by a stochastic when Percentage K, the solid line, crosses Percentage D,the dotted line in the upper area of the graph designated asthe overbought zone.overbought zone The upper area, often 20 percent, of an oscillator’s graph. It is separated from the lower 80% by a horizontal line.overnight traders Traders who usually wait until between3:00 and 4:00 P.M. to put on positions. If they think a stock isgoing to continue in an uptrend the next morning, or perhapseven gap open, they buy long. If they think it is going to continue in a downtrend, they sell short. Ideally, they have closedout all their positions by 11:00 A.M. the next morning.oversold The condition of a market when the sellers, whohave overreacted, are about to turn into or give way to thebuyers, thus precipitating a rise in price.oversold area
See oversold zone.202
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oversold signal A buy signal, such as given by a stochasticwhen Percentage K, the solid line, crosses Percentage D, thedotted line in the bottom area of the graph designated as theoversold zone.oversold zone The lower area, often 20 percent, of an oscillator’s graph. It is separated from the upper 80 percent by ahorizontal line.pennant A continuation signal, found on a graph, resemblinga pennant. Low volume tends to confirm this pattern.pent up demand The desire to buy that has for some reasonbeen held in check.percentage D The dotted line of the stochastic, it is a moving average of the Percentage K line, and therefore the slowermoving of the two.percentage K The faster, solid line of a stochastic, it is the result of a complicated mathematical formula that takes into consideration momentum, rate of change, and range comparisons.point of supplyprice.
Where supply enters a market driving down
position trader A trader who buys stocks with the intentionof keeping them for at least a few weeks.price/earnings ratio The price of a share of stock dividedby the per share dollar amount of the company’s earnings.price markdown
A decrease in price.
price markdown phase Sustained price movement in a generally downward direction.price markup
An increase in price.203
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price markup phase Sustained price movement in a generally upward direction.price spread Usually referring to a stock caught in a tradingrange, the price spread is the difference between the upper andlower limits of this range. This is opposed to “the spread,” usually the difference between the bid and asked prices of a stock.profit taking
Abandoning a profitable position.
put The option to sell a specified number of shares at a specified price within a specified period of time.put/call ratio A sentiment indicator. When there is a highratio of puts to calls, mass sentiment is predicting that themarket is heading down. However, the successful stock traderis aware of the truth in that hallowed proverb, “The massesare asses.”quick quote A complete stock quote—high, low, last sale,change, volume, yield, and so on.quote screen A computer monitor screen that displays oneor more stock quotes. They range from the Spartan onesoffered by some Web sites to the intricately informativeand easy to use screens provided by the better informationservices.real-time quoteslayed quotes.
Up to the second quotes, as opposed to de-
relative strength
See comparative relative strength.
relative strength index
See RSI.
resistance line A line on a graph, often drawn by connectingtwo peaks, which represents a supposed limit that price movement is having trouble crossing.
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reversal of trend The changing of an uptrend into a downtrend, or vice versa.RSI An oscillator derived from a complicated formula thattakes into consideration not only a stocks selling price, but alsotrading volume and other factors. Though a relative strengthindex, it is very different from the relative strength, in that theRSI measures a stock’s relative strength compared to itself asopposed to an index.S&P cash market
See Standard & Poor’s cash market.
S&P cash to futuresindex.S&P 500
See Standard & Poor’s cash to futures
See Standard & Poor’s 500 index.
S&P futures market
See Standard & Poor’s futures market.
S&P 100 index (OEX )
See Standard & Poor’s 100 index.
S&P wave
See Standard & Poor’s wave.
selling short Selling a stock you do not own by borrowing itfrom your broker. This is done in the belief that the stock pricewill fall and with the intention of eventually buying it (covering your short) at a lower price. Your profit or loss will be calculated by subtracting transaction fees and the price you willpay for the stock from the current price, minus interest paid tothe broker for borrowing the stock.sell short stop order A sell short order for entry purposes,that lies dormant until a stock rises or falls to a specifiedprice, whereupon the order becomes a market order to sellshort.sentiment indicators Indicators that deal with psychology.They monitor groups of people—some usually right about the
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market and some usually wrong—and draw conclusions basedupon the behavior of these groups. For example, the Put/CallRatio is one of these sentiment indicators. When there is a highratio of puts to calls, mass sentiment is predicting that themarket is heading down. However, mass sentiment is usuallywrong. Therefore, a high Put/Call Ratio is actually indicatingan imminent rise in the market.short covering The abandoning of a short position by buyingthe stock you had originally sold short. See sell short.spread Usually refers to the difference between the bid andasked prices of a stock. This is opposed to a “price spread,”which usually concerns a stock caught in a trading range, andis the difference between the upper and lower price extremesof this range.Standard & Poor’s cash market The actual current cashvalue of the stocks in the Standard & Poor’s 500 Index.Standard & Poor’s cash to futures index The relationshipof the Standard & Poor’s Cash Market to the nearest Standard& Poor’s Futures Contract.Standard & Poor’s 500 index A weighted index of stockprices for 500 large companies. This index is a respected indicator of stock market trends.Standard & Poor’s futures market The value of a particularS&P 500 contract at any moment in time.Standard & Poor’s 100 index (OEX ) An options index of 100Standard & Poor’s stocks, that closely mirrors the Standard &Poor’s 500 Index.Standard & Poor’s wave Slang for an intraday movement inthe Standard & Poor’s Futures Contract.
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stochastic A dynamic indicator, consisting of a fast line anda slow line, that gives buy and sell signals according tocrossovers in overbought and oversold zones.stop limit order This type of order is most often used if acautious trader suspects a stock is about to break resistanceand go into a markup phase. The placed order lies dormant unless the stock hits a specified price, whereupon it will be filledat that price or not at all.stop loss order When holding a long position, a sell orderthat turns into a market order when a stock trades through aspecified price. When holding a short position, a buy orderthat turns into a market order when the stock trades through aspecified price.stop order A buy or sell order at a specific price that becomes a market order when and if the stock trades throughthat price. A stop order can be used as an entry strategy.support line A line on a graph, often drawn by connectingtwo troughs, which represents a supposed lower limit thatprice movement is having trouble crossing.swing trader A trader who usually keeps positions from afew days to a few weeks.take a position
To buy a stock or sell a stock short.
trader’s index:Advancing issues / Declining issues=NAdvancing volume / Declining volumeIf N is >1, the market is bearish. If N is <1, the market is bullish.The value of N is of interest, but of greater interest are changesin N.
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trading range A phase in price movement (stock, index,etc.) in which price fluctuations take on a redundant pattern,price more or less oscillating between two values.trading against the trend Buying long in a downtrend andselling short in an uptrend, sometimes referred to as contratrend trading.trading with the trendshort in a downtrend.
Buying long in an uptrend and selling
trend Price movement in one general direction, either up ordown.triple bottom A reversal signal, indicating the possibility ofan imminent upturn, consisting of three very similar troughs ina graph. It could also be called a trading range (see Figure 4.6).triple top A reversal signal, indicating the possibility of an imminent downturn, consisting of three very similar peaks in agraph. It could also be called a trading range (see Figure 4.6).uptrendXMI
An increase in value over a relative length of time.
See major market index.
zero line
The horizontal median line of an oscillator.
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index
Accumulation phase, 16–17,18–19, 27–28, 73ACPS (average cents per share),56Advances/declines, 49–50, 122,152American Airlines (AMR)(typical trading case),167–174Arms Index, 50Ascending Triangle (reversalsignal), 80–81Bullish/bearish, 47Buying/selling stocks. SeeTradingBuy signals, 27, 29, 87–89Candlesticks, 61–68, 124characteristics, 63Doji, 65Doji Morning and EveningStars, 67–68Engulfing Patterns, 67Hammer, 66, 67Hanging Man, 66
shaved bottomed, 64shaved topped, 64Capital Management