might want to bone up enough to hold your own, or at least tofake it.
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buying and selling online“our business is built onpersonal relationships”—motto ofnow defunct brokerage house(the name of which escapes me)
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All online brokers have different stock order screens. Even theterminology sometimes varies. Be careful. Do not assume yournext order screen works like your last one, or like the followingexample, graciously provided by Datek Online (datek.com).That said, you can begin your next speed reading drill.As soon as you are seriously considering taking a positionin a particular stock, it is time to move to the stock orderscreen. As I said, there is no standard screen among brokers.Even a single broker’s order screen may have a few variationsto enable different activities, such as placing a stock order,placing an option order, and modifying an order.Datek refers to the order screen in Figure 9.1 as its Quotesand Trades screen. Right away we see the date, time, and someindexes in the upper left-hand corner. Let us say you are considering taking a position in Firstwave Technologies, Inc. You typeFSTW in the Enter Symbol box, and click on Go. A quick quoteappears across the center of our screen. You are interested butnot sold. Just above and on the right side of the quick quote youhave some pull down menus for news, charts, and research.Trips to all three screens prove helpful. You are now sold, deciding to buy 1000 shares. With your mouse, click on the Buycircle in the lower left-hand corner, type 1000 in the Quantitybox, and type FSTW in the Symbol box. Skip the Price box for aminute and go to the Order Type box. This is a pull-down menuwith four choices: Market, Limit, Stop Market, Stop Limit. Amarket order buys the stock at the market price when the orderis received. Choosing this option means you do not go back andfill in the Price box. This is the only way to be sure you get thestock, but we cannot be sure how much you will have to pay.129
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figure 9.1 Datek order screen
Source: Used with permission of Datek Online.
Usually, the price will be close to the quick quote, but a suddenrun on the stock is a dangerous possibility. Only the very experienced trader should use a market order. Anyone else shouldstick to a limit order. Let us say FSTW is selling at $20. Youchoose Limit from the pull-down menu, then go back to the Pricebox and type in $21. This means you will still get the 1000shares for market price, as long as market price does not exceed$21. If, when your order is received, share price exceeds $21,you will not get the stock, but in the meantime, you do not haveto worry about losing the farm.The third choice in the Order Type box is Stop Market. Onecircumstance in which you might make this choice is if FSTWis about to test its resistance line at 22. You feel that if itbreaks resistance, the stock will go into a markup phase. Tocatch this ride, choose Stop Market from the Order Type box,
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then go back to the Price box and type in 223⁄ 8 , for example.Your order will lie dormant unless the stock price hits 223⁄ 8 ,then it will be filled at market. This is dangerous!!! If FSTWdoes go into a markup phase, there is no telling at what priceyour order will be filled. For this reason, I recommend stoplimit orders. In the Order Type box, choose Stop Limit. Leave223⁄ 8 in the Price box, and this will remain your activationprice. However, now move to the last box on the right, the StopLimit box, and type in a price ceiling such as 24. Now if FSTWdoes break resistance, your buy order will be activated at223⁄ 8 . If your order cannot be filled before the price rises above$24, again you won’t get the stock but you won’t have to worryabout losing the farm in the meantime.The pull-down menu in the Expire box also gives you fourchoices: Day, GTC, Day+Ext. Hours, GTC+Ext. Hours. ChoosingDay automatically cancels an order still unfilled at the end ofthe day. You make this choice as opposed to GTC. GTC standsfor “Good ’Till Cancelled” (actually good for 30 calendar days,with Datek), a choice that should only be selected after consideration of how often you find yourself in your garage, tryingto remember why the hell you went out there in the first place.We ignored the choices with +Ext. Hours because this meansthe trade can take place after normal trading hours, and I haveno intention of getting into that. So click on the Enter Orderbutton, read and fill out the confirmation page, and then leaveDatek’s Quotes and Trades page behind.
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online informationsourcesmortgage your houseand follow your mouse
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The question is, “What’s so great about online informationsources?” The answer is, “Just about everything.” For example, take charts. Today, any amateur, connected online to anyof numerous Web sites, can bring up at no charge, just aboutany stock chart he or she cares to see. A few years ago, thesecharts were available only to professional traders. Now alsoavailable online are myriad sources of information on how tointerpret these charts.Charts are just the beginning. Online and for free you canfind original and reprinted news articles, research, analysis, instruction, training, actual courses, ratings of software, ratingsof services, ratings of Web sites, tax information that will helpyou save money, tax information to help you fill out your return,tax information that could easily get you thrown out of H&RBlock, tax information that could probably get you thrown intojail, portfolio services that keep track of all your holdings nomatter how vast, E-mail addresses, E-mail newsletters, E-mailbulletins, beeper notification if among many other things yourstock hits a specified price, real-time quotes, for the weakhearted delayed quotes, chat rooms, message boards, onlinestores containing 100 percent junk, online stores containingonly 99 percent junk, and most important, links to an endlesschain of other links. If you don’t find all this exciting, then obviously you have actually been online at least once in your life.Now is the appropriate time for me to list all the most useful Web sites, and to give a detailed description of what theyeach have to offer. Unfortunately, I ain’t the appropriate author to do said dirty work. Besides, much of this informationwould probably be outdated by the time I typed the period at135
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the end of the sentence containing it. Instead, what you aregoing to get is an incomplete list of useful Web sites, more orless connected by some awkward sentences containing sometruly interesting information. I recommend you give each mentioned Web site a quick, superficial examination, then gothrough them very thoroughly, one by one. Follow your mouseand really get into them. Click on every page available. Avoidlinks to other sites until you know just about everything eachWeb site has to offer. Then, before you check out your nextWeb site, shave off your beard, take a shower, and get something to eat. It’s a fact, anyone who really gets into any of theseWeb sites does so at their own risk. I will gladly tell you something that AOL never would: Many a Web surfer of these pagesI am about to mention has disappeared without a trace. Theyhave gotten so far into them that if they have in fact everemerged, it was on the other side of the universe. Believe mewhen I say, black holes have nothing on Yahoo!Finance. Enoughsaid about our first Web site, finance.yahoo.com.Let’s delve even deeper into our next Web site, TheStreet.com—a fine source of online information. TheStreet.com’s news itemshave the reputation of being up to the minute and free of hype.Its contributors have a reputation for intelligence and insight, ifnot big portfolios. One of them, Gary B. Smith, a highly respected trader, contributes columns on technical analysis. Irecommend that you read him.We should get away from this Web site before we sink intoit, but first allow me to give you one example of how useful itcan be. Let’s say you are looking for your first online broker, orperhaps you are not satisfied with your present one. You couldtry that old tried and true method for getting bad advice: Ask afriend. You could research it on the Web until you have eitherfound a broker or gotten too dizzy to continue. However, if youwere a faithful visitor to TheStreet.com, you could have solved136
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this problem my way, the lazy way. Sure enough they had areader’s poll. It not only ranked online brokers overall, it rankedthem on 17 separate criteria in case some of these were of particular importance to you. Not only that, it divided the rankinginto two groups mysteriously referred to as “leagues.” This way,the smaller brokers in League B did not get overpowered by thelarger ones in League A, which of course received more votes.With TheStreet.com’s gracious, if self-serving, permission, Ihave included both of these rankings in Figures 10.1 and 10.2.What other goodies can you find free online? A lot morethan you can digest. For example, instead of just knowing thehighest bid and the lowest ask for a stock, it would be helpfulto see the other bids and asks right down the line. No way areyou going to stumble upon a Level II screen online. One ofthose will cost you money. However, at isld.com and alsothrough various links, you can bring up the ECN Island’s limitorder book, which is as close as you are going to get to a LevelII screen for free. On thinly traded stocks, Island’s order bookwill be of very limited value. Still, on high volume stocks it cansometimes give you a fairly close approximation of a Level IIscreen. The closeness of Island’s narrowest bid and ask to thatof the market’s as a whole is some indication of what you aregetting.There is one sure fire way to save some money by takingadvantage of an online resource. Instead of doing your experimenting with the milk money, do it with Monopoly money on anonline trading simulator such as can be found at sandbox.com/business/ or cybercorp.com/simulators/. However, keep in mindthat a simulator is no more than that, and success on one in noway guarantees success in the stock market. Still, simulatorsare a no lose proposition. Even if they teach you nothing, thetime they keep you away from the real market will most likelysave you some real moolah.137
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figure 10.1 TheStreet.com’s rankings of large online brokers
Source: Reprinted with permission of TheStreet.com, www.thestreet.com.
Just five of many more interesting and worthwhilesites are ragingbull.com, fool.com, wallstreetcity.com,marketguide.com, and cbs.marketwatch.com. Following linkson all the sites I have mentioned will lead you to many othersites. Listing and describing Web sites, especially new ones,has become standard operating procedure for newspapercolumnists whenever they can’t or are too lazy to think ofsomething really worthwhile to write about. Also, askingfriends and acquaintances can turn you on to some hot sites.Finding valuable information online will never be a problemfor you. Finding the stamina to absorb it all might.138
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figure 10.2 TheStreet.com’s rankings of small online brokers
Source: Reprinted with permission of TheStreet.com, www.thestreet.com.
The stock trader trying to make use of online resourcesinvariably comes up against two problems:1. Finding relevant information and2. Being overwhelmed by irrelevant information.Fortunately, there are some find and filter computer programs that eliminate this problem. Unfortunately, they cancreate another problem for the stock trader—being overwhelmed by relevant information. Often, when you installthese programs on your computer, you are given the choice139
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of a minimum setup with check boxes to add more complexfunctions and information. I recommend mastering the minimum capabilities of a program until you are completely comfortable with them. You can add the extra bells, whistles, andfog horns later, one by one. For example, you just bought aprogram that serves up real-time market data, both daily andintraday. If you have survived so far without real-time intraday data, you can survive another few weeks without it. Inthe meantime, use the unfamiliar computer program with thedaily data so familiar to you. I realize this sounds like common sense, but the common mistake of doing just the opposite proves it isn’t.If you really want to get technical about technical tradingonline, then you should probably get some software to assistyou. Omega Research’s ProSuite 2000i is a consistently toprated example. Let us just say that almost everything it does,which is a lot, revolves around helping the user develop, test,perfect, and implement trading systems.For example, you are on the lookout for long positions instocks that have stochastics giving buy signals and RSIs in theoversold zone, during full moons. However, your last few systems have not only left you and kept you broke, they have costyour millionaire father-in-law even more money. He is in nomood to talk to you, forget about back you. ProSuite can help.It can program far, far more complicated indicator criteria,along with myriad entrance and exit determinants. Not onlycan it locate the stocks you are looking for, it can E-mail orbeep you every time it succeeds. Unfortunately, it cannot talkyour father-in-law into backing you. However, it can certainlyhelp you to do so.There is no way of being certain how your system will doin the future. Still, ProSuite can test how it would have done in
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the past—back five, ten, even thirty years—and come up withdetailed, dollar and cents results that you can shove in yourfather-in-law’s face. Don’t worry if ProSuite comes up with results that your father-in-law would shove right back in yourown face. A quick switching of variables, in this case from fullmoon to new moon, can cut your losses in half, to about thesize of the national debt. The addition of only one or two moreindicators will surely have you showing a profit. Pardon us ifwe move on and leave you staring at the ProSuite screen in Figure 10.3.You must have noticed that when I mentioned the availability of information online in this chapter, I never once insertedfigure 10.3 Prosuite screen
Source: Used with permission of Omega Research.
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the word “good” before the word “information.” Ah, I wish Icould have. Unfortunately, we must end this chapter with avaluable yet dirty little nugget of fact: A significant portion ofthe information available online can be hazardous to your financial health. Alas, the printed word carries much too muchweight with some people, even when that print comes overthe Internet. Some novice traders take positions because oftips they receive in chat rooms or off message boards. Theywould have completely ignored most of these tips if they hadbeen given in person. Remember, you too can be a messageboard guru, even if you are homeless, which some of thesetipsters probably are or doubtless will be. And if someone’stips don’t pan out, all he has to do is change his online alias,or at the most, his message board. Think about the reasonspeople give tips to complete strangers, even your own reasons. Think hard. Qualifying for sainthood didn’t come tomind, did it?Anyone with the memory of a turnip will be amazed howoften “legitimate news” from supposedly reputable sourcesturns out to be misinformation, not to mention hype. Peoplejust don’t seem to derive any inferences from the fact that thebiggest slimeball from back in high school is now a hotshotreporter. Hell, by comparison with him, even most of today’sstock brokers and lawyers were straight arrows then. Ethicsaside, they also had way more brains.Analysis could be just as dangerous as “news,” if not forthe fact that most traders either ignore it completely or take itto mean whatever they want it to mean. However, you True Believers ready to live and die by the last piece of analysis thatyou read should keep one interesting fact in mind. If you canhold off on taking a position just long enough to do somemore research on the good old Internet, you can probably findsome equally impressive analysis saying exactly the opposite142
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of the last brilliant piece you read. The trick is no more thancommon sense. Weigh what you read by your past experience.Test the water before you dive in. If you strike gold, rememberwhere. And also remember, that though the overuse ofmetaphors is indicative of poor writing, it is not necessarilyindicative of bad advice.
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developing a systemat the very least you’ll rememberwhat the hell you did
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You have just spent some valuable hours of your precious timereading Technical Trading Online. The only cogent reason fordoing so was to add to your knowledge of stock trading. If youdo not apply this knowledge, then you have wasted your time.You cannot apply this knowledge if you forget it. The only wayto keep from forgetting it, is to use it. The best way to use thisnewly acquired knowledge is often, and as part of a system. Ifyou do not have a system, it is time to develop one.Trading stocks through your own personal system offersa number of advantages. First of all, it allows you to do morethings reflexively, which means faster. The ability to act reflexively frees your mind to focus on evaluations and optionsthat do necessitate thought. The ability to act quickly, pureand simple, translates into greater profits, especially to theday trader. A refined system allows your mind to work decisively, in a straight ahead fashion instead of zigzagging all overthe place. There is comfort in repetition, doing the same thingwith the current stock that you have done with thousands ofothers. If unexpected problems arise, chances are you havehandled similar ones before. If not, then the next time you willhave. A tried and true system gives you the confidence to actdecisively, and the clear head necessary to do so. It will helpyou keep your emotions in check, so as not to cloud decisionsthat should be made with cold calculation. It is when you stopand ask yourself, “What should I do now?” that fear takes hold.If you are already applying the next step in your system, youhave no time to fear. According to Hollywood, “Greed is good.”Well in this case, Hollywood is half right, admittedly quite animprovement. The only time greed is good is when it is in the147
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other guy’s eyes, not yours. A familiar system can keep greedin check. It is up to you to develop this system and also to cultivate the discipline to stick with it.A system is not a magic formula that cannot fail. A systemis a specific, disciplined, structured method of finding the rightstock, watching it, deciding whether to take a position, determining when, immediately concocting an exit strategy, decidingnot how much profit is possible, but rather how much will beprudent. Most important, the best system is worthless withoutthe discipline to stick with it.The time to develop your system is right now, when thetechniques covered in this book are still fresh in your mind.Weigh their relevance and value, choosing the most insightfuland dependable. I certainly hope your system begins with theFour Golden Rules of Stock Trading:1. Cut your losses.2. Let your profits run.3. Trade with the trend.4. Never average down your losing positions.The other components are up to you. No matter howgood the system you develop, it can be of little value if you donot apply it religiously. Applying it, you will learn the worth ofeach component. Do not hesitate to add and subtract techniques. Your system is not a proven theorem. It is an inexacttool that can be and should be refined.
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the daily planif you want to make God laugh,tell Him your plans
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As a sop to all you New Agers and Tony Robbins True Believers, it is jingle time again. Here goes: “If you don’t have a plan,you are planning to fail.” Ignore these words and someday theymay enter your head and never leave. That’s a thought thatshould scare you!The following plan is in a day trader’s timeframe, but easily expandable into that of any trader. However keep in mindthat the day trader’s trend is an inconsequential blip to the position trader, and the position trader’s trend is about as relevant to the day trader as a light year is to a mayfly.Your daily plan can be divided into three sections:1. Pre-opening2. Post-opening3. Post-closingA pre-opening strategy allows you to start trading at the opening bell.
pre-opening• Check the daily and weekly charts to see if you can findstocks that can be located on our model.• Apply stochastics and RSIs to these stocks, and lookfor buy or sell signals.
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• Divide the stocks giving signals into stocks to bebought and stocks to be sold short, according towhichever trend takes hold.• Decide whether they closed strong or weak, in anticipation of how they will open.• Examine cash to futures ratio to predict where marketis going.
post-opening• Use the advance/decline index to determine the trend.• Find the group or groups of stocks stronger than theuptrend or weaker than the downtrend.• Within the stronger and weaker group or groups, findthe stronger and weaker stocks.• See if any of these stocks are in your pre-opening plan.• Take a position based on buy or sell signals.• Immediately, if not sooner, formulate an exit strategy.
post-close• Analyze what you did and the results of what you did,finding and defining the relationships between causeand effect.• Push your ego aside and if necessary modify yourplans and methods.Once you have an overall strategy and a daily plan, youmust have the discipline to follow both, no matter how muchyour ego and emotions interfere. Let us say you buy long sure
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that a stock is going up, and low and behold, it drops below itsmental stop. Even if that drop is only 1⁄ 8 , you must have the discipline to sell. No matter if subsequent movement proves youwrong about the stock. You were not wrong to follow your plan.You can always modify your plan, but do so after the fact. In theheat of battle, trust your plan, not your ego or emotions.
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casesthings you won’t find in books,not usually
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In this chapter, we make the anticipated, perhaps overly anticipated move from theory to practice. We are going to apply,step-by-step, many of the theories and techniques covered inthis book. We shall follow some real stocks within the framework of real time. Unfortunately, you will notice that some ofthe real profits derived are far less than those accumulated inour previous fictitious examples. I am sure you realize that inthose examples the exaggerations of price fluctuations andtime were merely for clarity and to aid the learning process.There is no way I would have strayed from reality merely tokeep your greedy little eyes wide open.
case 1I’m the type that likes to start slow and finish fast, so we willbegin these cases from the point of view of the position traderand his slightly more active cousin, the swing trader. Assumeyou are a position trader. A good night’s sleep and a casual,comfortably late breakfast has left you in a satisfied mood.Hunting up a nice stock would increase your satisfaction. Casually, you head for your favorite hunting grounds, the interdaycharts. Today you just don’t have the patience to get into stochastics and RSIs, so you decide to concentrate upon price andvolume. A questionable decision where realism is concerned,but a fortunate, simplifying one for illustrative purposes.The date is September 4, so your interday charts all end onSeptember 3. The first one you come to, Figure 13.1, catchesyour eye. Morgan Stanley Dean Witter seems to be developing atrading range. The market is bullish, and you are willing to bet157
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figure 13.1 case 1, chart 1
Source: Used with permission of Omega Research.
on a long term uptrend. If MWD is in an accumulation phase,this could very well lead to a markup phase and one of thoselong uptrends that are your bread and butter during rising markets. You will definitely have to come back to MWD, and that isexactly what you do, every single day. You even bring some ofyour swing trader friends along with you.On September 29, the trading range has narrowed considerably, as we see in Figure 13.2. You are not sure what to makeof this. Some of your swing trader friends have lost interest,but you haven’t, not yet. On the October 15 chart, Figure 13.3,your interest is rewarded. You think you have yourself a fairlywell defined trading range with a very generous spread. Infact, one of your swing trading buddies has profited nicely( Figure 13.4). On October 11, he goes short off resistance,then long on support on October 19. However, swing trading is158
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figure 13.2 case 1, chart 2
Source: Used with permission of Omega Research.
figure 13.3 case 1, chart 3
Source: Used with permission of Omega Research.
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figure 13.4 case 1, chart 4
Source: Used with permission of Omega Research.
not your style. You are waiting for a break high and the longmarkup phase it may portend.From Figure 13.4, we see that the break high came onOctober 22. Even more reassuring, it comes with strong volume. Some of your swing trader friends jump right on. Theovernight traders had also shown interest, but were dissuadedby the fact that MWD did not close near its high for the day.The bread and butter of overnight traders are stocks thatclose at or very near their highs or lows, with enough momentum to keep them going into the next morning.Battle hardened position traders like yourself are still noteven tempted. You take your time, not like those slimy daytraders ready to dive for a teeny 1⁄ 8 point profit. No, you want tosee if there is a pullback after the break high, one with low160
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