0 11:00 1200 13:00 1400 1500 16:0010:00 1100, 12:00 19100 14100 S100 16:00
 
On December 6, 1996, the DOW trades 140 points lower but Paccar, avolatile NASDAQ stock, trades only 1 3/4 points lower. Within 90 min-utes, the stock starts moving higher and proceeds to trade up for the dayin spite of the market closing down approximately 60 points for the day.116 Chapter 15
FIGURE 15.3 Maxim
700 8:00, 9:00 100011001200 13:00.
7:00 8:00 -9100 1000001200 13:00.
 
On December 19, 1997, the S&P’s dropped as much as 30 points intradaywhile the Dow was down as much as 265 points.
Maxim (MXIM), after selling lower, shrugs off the market decline andbegins rising quickly.
In spite of the day's sell-off, this Torpedo rises more than 5 3/8 points forthe day.
SUMMARY
This is a volatile strategy and one that leads to quick profits. Rememberto keep your initial stop tight and let your profits ran when they occur. 
SECTION FIVE
OPTIONSSTRATEGIES
A few years ago, the options columnist for Barrons ran a survey of itsquarter million readers. He asked if any non-market maker could provethat he or she had made money trading options for the past three con-secutive years. I am recalling this story from memory, but as I recollect,only one person (an elderly gentlemen) could prove he was a three-years-in-a-row profitable trader.
The odds are greatly stacked against your success in trading options.Most options (other than the OEX) trade with a 10 percent spread andwith slippage and commission added in, the “take” is just too large.
With that said, I believe the option game can be beaten, but only by trad-ers who are patient enough to wait for the few times when prices are outof line and can be exploited.
 
117 
SECTION SIX
DAY TRADING
In 1994, I had my best year (in percentage terms) trading in the tuturesmarkets. I produced this performance predominantly by day trading.
In spite of having a solid year though, the mental strain was enormous (Iwas at the same time overseeing my private equities investment partner-ship). By the end of the year my brain was about as tired as it could be,and I knew that a few more years of day-trading would make me theonly resident of the local nursing home who was under 40 years old.
This does not mean you should not day trade. Jeff Cooper has success-fully done it in the equity markets for more than a decade. But the truthis that the wear and tear of day trading is tough and you should askyourself how much torture you are willing to endure before you commityourself to it.
With that said, the following are what I consider to be among my bestday-trading strategies. I feel that if you only traded two, the “15-MinuteADX Breakout Method” combined with the “10% OOPS” strategy, youcould make a comfortable living.
145 
CHAPTER 20
15-MINUTE ADXBREAKOUT METHOD
In this chapter we will look at a day trading strategy I created a fewyears ago. This strategy is not for the faint of heart or for conservativetraders. It is for very aggressive traders who are willing to take larger thannormal risks in hopes of achieving larger than norma! gains.
With the “15-Minute ADX Breakout Method,” you will be trading thestrongest moving and, many times, most volatile markets nearly everyday. Profits come quickly, but so do losses. With that noted, this strategy,if harnessed correctly, has the potential to lend itself to some of the mostspectacular day-trading moves you will ever experience.
Before looking at the rules, I want to make sure you understand concep-tually the underlying forces that make it work.
Let's first look at the characteristics of a bull market. Bull markets areusually associated with daily closes higher than the daily opening. Thismeans that in an ideal world you want to buy the market near the open-ing and sell it higher later in the day. Unfortunately, just blindly doingthis does not work. One never knows when a strongly rising market willopen at its high and then collapse. Therefore, to fully maximize the effec-tiveness of a bull market bias, we daily want to wait for the market to tip
 el
148
Chapter 20
its hand early in the session. This is done by letting the market trade for15 minutes and then, and only then, do we enter when the high of thatfirst 15-minute bar is taken out. We will have entered what looks to besetting up as a typical bull market day with us buying low soon after theopen and selling higher later in the session.
Let’s look at the rules:
FOR BUYS (SELLS ARE REVERSED)
L
7.
We will use this method only in the strongest trending markets!Therefore, we want the daily 14-period ADX reading to be above 30and the 14-period +DI to be greater than the ~DI.
Wait for the first 15 minutes of trading to pass.
' Place a buy stop one tick above the first 15-minute bar high.
(This is critical.) Place a protective sell stop one tick below or at thefirst bar 15-minute low.
Hold onto your hats as you will probably experience more volatilitythan you ever have.
Where you take your profits is a personal choice. Ideally, you willuse trailing stops to help lock in the gains. Also, please read the“Two-For-One Money Management Strategy” chapter. With a meth-odology as volatile as this one, it is important to be prepared tolock-in profits on half the position and let the other half run.
Close all positions out before the end of the day.
Let’s look at a move in coffee to help understand how this strategyworks. Please note these are the daily trades beginning April 29 and run-ning through May 15, 1997.Cl15-Minute ADX Breakout Method 149
FIGURE 20.1
 
 
CLOSE
Lost 246.00 on 5/19/97
High 262.00 on 5 715/97«Close?
 
 
 
Here we see the ADX for July 97 Coffee crossing above the 30 level in lateApril 1997,ee)150 Chapter 20
FIGURE 202
 
 
1. The first 15-minute bar and our buy stop is placed one tick above itat 194.60.
2. We are filled and the protective stop is near the first bar low of192.00.
3. The market closes 1.8 cents above our entry.RS
15-Minute ADX Breakout Method 151
FIGURE 20.3
 
 
3:30 10700 10/30 11-00 11:30" 12-00 1230 13-00 13:90
 
 
 
1, The formation of the first 15-minute bar. Our buy stop is placed onetick above the bar.
2. | We buy at 199.70 and our stop is near the low of the first bar of 196.
3. After a small rally, the position closes the day for a loss.el152 Chapter 20
FIGURE 20.4
 
 
 
 
 
 
 
1. The opening 15-minute bar.2. The buy stop is filled at 202.10 and the sell stop is near 200.40,
3. A better than eight-cent gain ($3,000/contract) if you held until theclose. Multiple contract traders should certainly take profits on apiece as the day progresses,PSS15-Minute ADX Breakout Method 153
FIGURE 20.5
 
 
 
9:30 10-00 10:90 14-00 $8990 12-00 12-30 43:00 13°30
 
 
1. A buy stop is placed one tick above the bar.
2. We are filled and the market immediately collapses, stopping usout for an approximate two-cent loss. It then does what a goodvolatile market should do and re-rallies allowing us to re-enter (andgiving us enormous stress’).
3. The trend is too powerful and the market rises approximately 10cents from our initial entry. 
154 Chapter 20
FIGURE 20.6
 
1. 15-minute opening bar.
2. No trade for the day and we avoid the sell-off.SS ese Ss15-Minute ADX Breakout Method 155
FIGURE 20.7
 
 
 
930 10:00 1030 31°00 11990 12-00 12-90 13°00 13:30hers,
 
 
 
1. A buy in the 221 range and...2. A loss of 3.5 cents for the day.156 Chapter 20
FIGURE 208
 
 
 
9390 10°00 10:30"! 1100, 11:30 12100 12:90 13000 12190me 6
 
 
Buy entry.A loss of two cents.Re-enter.
Another loss of two cents.
ys oP Ww oN oe
1 will not enter a trade three times in a day. Two losses are mypsychological limit.15-Minute ADX Breakout Method 157
FIGURE 20.9
 
 
 
 
 
 
We avoid the sell-off as our buy stop is never triggered.a a a,158 Chapter 20
FIGURE 20.10
 
1, Our buy stop is filled and our stop is near 209.50.2. A profitable trade.Per SAS15-Minute ADX Breakout Method 159
FIGURE 20.11r
 
 
 
 
 
1. Weare filled at 217.50 (the second-bar low comes before our fill).
2. The market closes at 217.90 and the trade is basically a scratch.el60 Chapter 20
‘[GURE 20.12
 
 
 
30” 10-00 10+30 41-00 190 rT 43¢00 130" >
 
 
1. Our buy stop is filled after 1.5 hours and it leads to...2. A better than five-cent gain.a a aa ace a15-Minute ADX Breakout Method 161
FIGURE 20.13
 
 
 
 
 
9130 “10-00 10:30 4n00 41:30 32:00 12-30 13:00 13:30
 
 
1. Filled at 234.10 and it closes for a better than $2,600 profit.SS162 Chapter 20
FIGURE 20.14
 
 
 
9:90 to-00 | 101907 11-00 11030 12:00 12:30 1300") +13090me 14
 
 
 
1. Filled at 246.102. Stopped out at 245 (and avoiding a sharp sell-off).a a aT:
15-Minute ADX Breakout Method 163
FIGURE 20.15
 
 
930 10:00 30:30 411100. 1290 12:00 12:30 13:00 13°90rey 15,
 
 
Bought near 244 and closed above 255. Notice also that at one point thegain is as much as 18 cents ($6,750/contract).
SUMMARY
The coffee examples replicate the pattern this strategy takes~-smalllosses, sometimes three, four, or five in a row, and large, sometimes spec-tacular gains. Again, I encourage you to please be sure that you can han-dle this volatility both emotionally and financially before taking on thisstrategy. 
164
Chapter 20
TRADING THE 15-MINUTE ADX BREAKOUTMETHOD WITH EQUITIES
This strategy provides more opportunities in the equities markets than itdoes the futures markets. This is because there are only 25~30 commoditymarkets to choose from but there are over 10,000 stocks. Unlike the fu-tures markets, stocks as a whole do not provide large leveraged day-trad-ing moves. Therefore, to maximize the effectiveness of this method, youmust trade volatile stocks that have large intraday ranges.
To identify these stocks, please look again at the chapter entitled “TradingWhere the Action Is” in the Volatility section. In it you learn how to selectthe most volatile stocks using what I consider to be the purest indicatorto accomplish the job: historical volatility. The ideal situation is to tradethose stocks whose 100-day historical volatility is above 40 percent andwhose price is at least $40/share. These two criteria combined give youthe stocks which have large daily ranges. The daily range is critical asyou want the stock to be able to move at least a few points intraday inorder to capture good profits.
Thus, the filter for the stocks to trade with the 15-Minute ADX BreakoutMethod is as follows:
FOR BUYS
1. ADX>30,+DI > -DI
2. — Price must be above $40/share.
3. 100-day historical volatility of 40 percent or higher.
FOR SHORT SALES
1. ADX > 30,-DI> +DI
2. Price must be above $40/share
3. 100-day historical volatility is 40 percent or higher.
Finally, I suggest you program the stock search in your computer. Thereare thousands of stocks to choose from and it is too time consuming todo by hand.
  
15-Minute ADX Breakout Method
FURTHER INSIGHTS INTO THE 15-MINUTE ADXBREAKOUT METHOD
1. The higher the ADX, the stronger the trend and the higher the vola-tility. :2. Markets are correlated. If you have a high ADX reading in heating
oil, you will most likely have one in unleaded gas. Trade only onecorrelated market at a time.
3. You should be in the position to watch the screen all day. This is apro-active methodology which must be constantly monitored in or-der to maximize its effectiveness.
4. Reminder: If you are stopped out, it is correct to re-enter. These sec-ond entries tend to be the best trades.
5.  15-minutes is not the only time frame to use. I have traded this with10-minute bars. This is a personal choice and you should use thetime frame you are most comfortable with.
6. Be prepared for higher than normal slippage. Greed, fear, and panicare many times at their highest.level in these markets.
7. One last caution—I have yet to trade a methodology that is thiscrazy. It is so wild that I cannot trade it unless I have absolutely noother positions and setups to look at. The 15-Minute ADX BreakoutMethod requires total concentration on the position. 
CHAPTER 2 1
10% OOPS
Ce
In the 1980s, Larry Williams introduced traders to his “Oops” strategy.The strategy stated that when a commodity gapped above (below) theprevious day’s high (low) and reversed, a sell (buy) signal is triggerednear the previous day’s high (low). In Street Smarts, 1 introduced a strat-egy that filtered the Oops strategy with ADX and traded only in the di-rection of the trend.
Here is another gap reversal strategy I use to very good effect. This strat-egy was originally mentioned in Techniques of a Professional CommodityChart Analyst, written in 1980 by Arthur Sklarew. We will also look at oneyear’s trades on the S&P’s using this technique.
The “10% Oops” strategy is a derivative of the 80-20’s strategy fromStreet Smarts. Briefly, an 80-20's sell setup occurs (buys are reversed)when a market opens in the bottom 20 percent of its daily range, closes inthe top 20 percent of its range, trades higher the next day and then re-verses back into the previous day’s range. The 10% Oops applies thesame principles as this strategy but includes a gap.
Here are the rules:
167 
168 Chapter 21
FOR BUYS
1. Day one—A commodity or stock must close in the bottom 10 per-cent of its daily range.
2a. Day two—The next morning, it must gap lower (night data is omitted).
2b. If Rule 2a is met, buy at the day-one low. Your initial protectivestop should be near the day-two opening.
3. Lock in profits with a trailing stop or sell MOC.
FOR SELLS1. Day one~A commodity or stock must close in the top 10 percent ofits range.
2a. ‘Day two—The next moming it must gap higher.
2b. If Rule 2a is met, sell at day-one high. Your initial protective stopshould be near the day-two opening.
3. Buy MOC or take profits via a trailing stop.
Here are some examples of what the setup looks like:
FIGURE 21.1 December 96 Cotton
 
 
 
 
 
 
 oo10% OOPS lao
FIGURE 21.2 February 97 Pork Bellies
 
 
 
 
1am not recommending this as a mechanical system as | am a discretion-ary trader and prefer to use trailing stops to take profits. Finally, 1 recom-mend using this strategy with all commodities except bonds. Bonds havetheir big moves off the morning economic reports and the Street Smarts“Moming News Reversal” strategy works better on them.
Here is how the 10% Oops strategy fared in 1996 as a mechanical systemwith no stops.A170 Chapter 21
 
S&P1/1/96 to 12/31/96
01/09/9603/19/9603/28/9603/29/96
 
 
 
 
07/24/9608/09/9611/15/96
 
 
 
12 profitable3 unprofitableTotal P & L includes $100 slippage and commission = $19,880
Le
SUMMARY
This strategy is a good companion to the ADX Gapper strategy and the80-20’s strategy from Street Smarts. Those of you who also trade equitiescan use it to good advantage. My recommendation is to supplement itwith the volatility filtering technique presented in this book’s chapter,“Trading Where the Action Is.” This will assure you of being in the stocksthat will take best advantage of the setup.
 
  
CHAPTER 22
REVERSALS OFF THEMORNING CALL
This strategy is a method you can use to profit from extreme overreac-tions off the opening. Even though the strategy works for both the buysand sells, the sell side usually leads to the larger gains.
Here are the rules:
FOR SELLS (BUYS ARE REVERSED)
1, Identify a market that is called to open significantly higher due tosome fundamental event; i.e., weather for the futures, an earningsreport for stocks (a gap is not needed). This information is availablefrom most news services and your broker.
2. Monitor the call for any signs of weakness. For example, a stock isoriginally called to open at 57-59. The call is then lowered to 56-58and the stock opens at the low end of the range. This is an obviouswarning signal of overhead supply at higher levels.
3. After the opening, place a sell stop (sell-short stop for equities) atyesterday’s closing price.
 
171 
172 Chapter 22
4. On being filled, a protective buy stop should be placed one tickabove the high reached thus far today.
Let’s look at three examples:
FIGURE 22.1 General RE Corp.
 
 
 
10:00 11-00 12-€0 13:00 14:00 15:00 16:00
10:00 14:00 12:00 13:00 14:00 15.00 16-00
 
eB SE Fea 7
 
 
1. The first example is General RE Corp. (GRN). On February 6, 1996,after the close, the reinsurance company announced better than ex-pected earnings. The next morning, the stock was indicated to openat 156-158 (previous day's close was 151 5/8). The indication wasthen lowered to 154-156 and in fact opened at the low end of therange at 154. Because of the weakness off the morning call, a sell-short stop is placed at yesterday’s close of 151 5/8.
2. After trading sideways for a short time, the market collapses. Asyou can see, the stock closes more than five points under our shortsell price.
 A SSS
Reversals Off the Morning Call 173
FIGURE 22.2 Orange Juice
 
 
      
pe30:90 $4+00 44130 12:00 12:30 13-60 19:90 44-00
 
5 10:30 14:00 44:90 1200 42-20 13°00 13 39 14-00
 
 
On February 5, March OJ is called to open 400-600 points higher due tocold weather. OJ in fact opens only 215 points higher and after a briefrally collapses. A sell stop in the 125.80 range is filled and a protectivebuy stop is placed at today’s high of 130.50. The market proceeds to im-mediately lose over 900 points from our stop before gradually recovering.LT Sa —174 Chapter 22
FIGURE 22.3. Cigna Corp.
 
 
11-30 13-00 14:90 16-00 to.00.10°00 11303100 14:30 16-00.
 
1. _ Before the opening on February 14, 1996, Cigna Corp. reports betterthan expected earnings. The stock which is originally called to openas high as 126, opens only at 124 1/2 {an indication of overheadsupply) and begins to immediately sell off.
2. A sell-short stop is placed and filled at the previous day’s close of121 5/8 and Cigna closes the day at 120. The selling followsthrough the next morning with the stock opening at 119. Over thenext few days, the sell-off continues taking the stock to as low as115 1/8.
SUMMARY
The weakness off the morning call leads to potentially large gains. Obvi-ously not all opening call reversal weakness follows through. Howeverthe ones that do lend themselves to significant profits.
The examples show that a reversal off the morning call can lead to panicselling. One drawback to the strategy is the number of times the reversalsnever take place. A trader must be patient and disciplined to fully takeadvantage of this phenomena. In the long run though, your patience willbe rewarded.CHAPTER 23
WIDE RANGEEXHAUSTION GAPREVERSALS
As you have seen, J am a fan of Larry Williams’ Oops strategy. In realitythough, it is impossible to identify and trade every potential gap setupon a daily basis. This is especially true in the equities markets with over10,000 stocks now publicly traded. I have therefore, over the years, at-tempted to focus only on the potential gap reversals that have the highestprofit possibility.
In the section “More Advanced Trading Strategies,” in the chapter enti-tled “Large-Range Days,” we will look at markets that have had a twostandard deviation daily move. We will see that these markets tend torest for three to four days after the move (the opposite of conventionalwisdom). When these same markets have a large move (measured againby two standard deviations) and then gap the following day, there is ahigher than average likelihood that this gap will be an exhaustion gap.This is tied into the reversion to the mean principle that is inherent involatility and to a lesser (but just as important) degree, price. In thesesituations, both price and volatility have been pulled too far from themean and from this condition the likelihood of reversals increases.
175 
176
Chapter 23
Let's look at the rules and then look at examples.
FOR BUYS (SELLS AND SHORT SALES ARE REVERSED)Day 1
1.
Identify a market or stock that has had at least a two standard de-viation daily move to the downside.
Day 2
2.
Tomorrow, if this market gaps lower (night data is omitted), place abuy stop near the previous day’s close (not its low!). I use the closeinstead of the low to acknowledge the increased volatility periodwe are trading in.
Your initial protective stop should be placed at the day-one low.Please note, if the day-one low and close are extremely close, giveyour stop some additional breathing room. The key here is to risk asmall amount in order to participate in those reversals that provide largemoves.
If the position closes in the top 10 to 15 percent of its daily range,carry it into the next morning, Otherwise, lock in your profits nearthe close.A SSS
Wide Range Exhaustion Gap Reversals 177
FIGURE 23.1 Zitel
 
 
COMPOS ITE TRADE
Lot 4425 on 1231-96High 727 on 12/30/96
pve 48.695 (Close?lov 35 on 12/3196
 
 
220696 24 a 26 D 30 au 18897
 
 
 
This is an extreme example but it does show what happens when mar-kets pull too far.
1. —_Zitel has a larger than two standard deviation move.
2. This is followed by a large gap reversal and another two plusstandard deviation move.
3. This is then followed by another profitable wide range exhaustiongap reversal. 
178 Chapter 23
FIGURE 23.2 American Online
 
 
Here is an example from American Online:
1. _A two standard deviation move.
2. The stock gaps to 41 3/4 and our short sale is triggered near yester-day’s close at 39 7/8. 
Wide Range Exhaustion Gap Reversals 179
FIGURE 23.3 3COM
 
on 12717796on 12710796<Cloge>
on 12717096
 
 
 
Here you see four setups over a two-week period in 3COM. Though thismany setups over such a short period is rare, it does show the reality of“pulling the rubber band too far” and reversing. 
180 Chapter 23
FIGURE 23.4 Nikkei
 
 
13-97
Last 15470 on
High 16690 on 1706/97fe 13505 Closedlow 15050 an 1171397
 
 
1. _ A two standard deviation move.
2 Buy.
SUMMARY
Even though I showed equity examples, this strategy works equally wellon the futures markets. Wide Range Exhaustion Gap Reversals are fairlyrare but when they do occur, they should be traded. By combining themwith the other gap reversal strategies, you will have isolated what I be-lieve to be the best gap setups to trade. 
SECTION SEVEN
MORE ADVANCEDTRADINGSTRATEGIES
AND CONCEPTS
G@eeteseees et et eset ee ee teste eee eee eo eee
This section of the book covers a mixture of strategies. Two of the chap-ters are written by friends of mine, Mark Boucher and Derek Gipson, andreveal how to identify and enter strongly trending markets. I considerthese strategies and the strategies presented by Fernando Diz and JeffCooper to be among the best presented in my Professional Traders Journal.
The next to last chapter covers a topic I have been fascinated with formany years. “How Superior Individuals Become” looks at whether greattraders are made or born. As with most things in life, the study stressesthe importance of hard work and the lack of importance of genetics.
 
181 
CHAPTER 24
TRADING RUNAWAYMOVES
Mark Boucher is the author of the following. Mark is a long-time friend and avery successful hedge fund manager from Northern California. In 1990, I pur-chased one of Mark's original courses. To this day, I feel it has had a large andmost profound effect on my trading. Mark has grown his fund using the tech-niques from his course into one of the most consistently performing funds in thecountry.
One of the most reliable and profitable situations a stock or futures con-tract can develop is after a strong breakout of a flag-type trading range. Aflag trading range is a pattern in which a vehicle runs up strongly andthen consolidates for a prolonged period of time before breaking out inthe original direction again. Particularly in stocks, but also in futures,strong breakouts from flag trading ranges often lead to prolonged moveshigher. In fact, simply trading flag trading ranges in their own time framecan be a very profitable endeavor.
However, for the purposes of short-term trading patterns, we will be dis-
cussing how to take advantage of these situations in order to positionshort-term by mixing time frames. In mixing time frames, one will often
 
183 
184
Chapter 24
find that he or she is able to position with low, short