3/4.
4.  Opens 10 3/4 points lower the next day.
CONCLUSIONA  false  breakout  combined  with  a  range  expansion  helps  "flush  out"weak breakout players. These breakout traders are caught on the wrong
side and help create a short-term panic. This panic causes prices to movefurther than normal, which allows us an opportunity to profit.
CHAPTER 16
IGUANAS
strategies derived from daily bar charts. However, this doesn't mean we
As  a  short-term momentum methodology, Hit and Run  Trading is built on
should ignore weekly bar charts. Learning to look at the behavior of theweekly  chart  can  often  help  put  some  pieces  together.  For  example,  if  astock has a  strong reversal down on  its weekly  charts, it is  often a  signalof distribution.
on a weekly basis.
You are familiar with the Lizard and Gilligan reversal strategies I showed
in Hit and Run  Trading I.  In  this chapter, I  am going to reveal  a strategythat  utilizes  the  same  concept  as  the  Lizard  and  Gilligan  strategies,  but
Chapter  16
2.  The week's open and close must be in the bottom 25 percent of the
weekly range.
OR
3.  A stock must gap open to a new four-week high on Monday  andclose below the week's open on Friday.
4. 
The following week, short 1/16 below the prior weeks low only onMonday or Tuesday. Risk 1 point.
hold at least half the position overnight, as it is likely to followthrough the next day.
If the setup is triggered and the stock closes strongly in your favor,
5. 
Since the strategy is based on a weekly reversal, I have found it is often a
ing gains with a trailing stop.
good  idea to let  a piece  of the position run for  two  to five  days, protect-
Let's look at some examples.
EXAMPLE 16.1 POS (week ending 10/24/97)
POS  made  a  four-week  high  and  the  open  and  close  were  in  the
bottom 25 percent of the weekly range.
Monday, 10/27, a short is triggered when POS trades at 51 11/16,1/16  below  the  prior  week's  low.  POS  closes  Monday  at  48  7/16.The next day POS opens at 47 1/4.  We move our stop down to 48
1/4 and are stopped out with a 2 3/8-point profit.
102 
Chapter  16
EXAMPLE 16.2  MTZ (week ending 9/26/97)
1. MTZ makes a four-week high but closes poorly, and in the bottom
the following Monday or Tuesday.
25 percent range. MTZ will be a short should it trade below 47 on
2.  The trade triggers at 46 15/16 and closes the week at 40 1/2.
EXAMPLE 16.3 TBR (week ending 7/11/97)
Iguanas 
103
2. The stock opens at 151 3/4 and closes at 146 1/4 on Tuesday. By
1.  A gap opening, and a poor close. TBR is a short 1/16 below 151 1/8
on Monday.
the end of the week, the stock closes more than 20 points lower.
CONCLUSIONThe Iguana, although it occurs infrequently, does  a solid job of identify-ing weekly  reversals  and provides a  strategy to capitalize on a continu-
ation of the selling momentum early into the following week. As with all
profits when they exist.
reversal strategies, you must be extremely diligent with your stops. Manytimes  these reversals  are  sharp and short  lived  and  you must lock in the
SECTION FOUR
TECHNIQUES OF APROFESSIONAL TRADER
important pieces of trading mat most traders ignore. Among the topics we will look atare money management, stop placement, and exiting positions. We will also look at
This  section  is  as  important  as  the  previous  three  sections  combined.  It  focuses  on
daily  preparation  and  a  number  of  intangible  factors  that  separate  top  traders  fromeveryone else.
I  strongly  urge  you  to  read  and  re-read  the  following  chapters.  Understanding  andmastering these principles will  greatly improve your trading results.
CHAPTER 17
MAXIMIZING PROFITS
WITH TRAILING STOPS
One of the toughest decisions to make as a short-term trader is where to
take profits. Some traders become excited when they have a 1-potntprofit and close their position out only to see that if they had waited afew hours more, they would have made 3 points. Other traders tell them-selves a 1-point profit isn't enough (even though they see the stock re-versing on them) and let their gain turn into a loss.In this chapter, I will show you how I use trailing stops to lock inprofits and how they can help you maximize your gains. By combining
closing them out at or before the close), you will have a formula to helpyou become an even stronger trader.
this  chapter  with  the  next  chapter  (holding  positions  overnight  versus
want to immediately put in a protective stop to assure us of keeping our
side for short positions).
proximately break-even. This means that if we buy the stock at 41 1/2and our initial protective stop is 39 1/2, when the stock trades up to 42
Before  looking  at  the  first  example,  let's  look  at what we  hope  to  accom-plish  using  trailing  stops.  Initially,  upon  our  position  being  filled,  we
loss small if the trade doesn't work. This is considered our insurance pol-icy.  To  protect  ourselves  from  a  reversal,  we  will  usually not  move  ourprotective  stop  until  we  have  a  3/4-point profit  (for NASDAQ  positionsthis will be measured against the bid side for long positions and the offer
When our 3/4-point profit occurs, we immediately move our stop  to  ap-
we will move our stop to 41 1/2 or 41 5/8, assuring us of at worst"scratching the trade" if there is no follow through.
1/4  (actual trading price for NYSE and ASE and bid side for NASDAQ)
When  our  stock moves  to  a  1  1/4-  to  1  1/2-point  profit,  we  will  moveour stop  (for at least 1/2 the position)  to 42  1/8 or 42  1/4.  Whether youdecide  to  lock  in  the  profit  with  the  other  half  position  is  a  personal
choice; for me, the decision is based on experience and it is much more ofan art (gut feeling) than a science. The most important aspect, though, isto never allow a profit of at least 3/4 of a point to turn into a loss!
profits must be protected!
Remember, day-trading and short-term trading is a game of eighths, and
Finally,  as  the  stock  becomes  more  and  more  profitable, your likelihoodof  locking  in  profits  on  half  the  position  should  increase,  and  of  courseyou must continue to trail your stops to maximize your gains.One final note: As of this writing, many NASDAQ market makers won'taccept trailing stops.  The  solution  to  this  is  to  (1)  only  trade  NYSE  andASE  stocks or  (2) use mental stops and be disciplined  in  locking in yourprofits when a stock begins to move in the opposite direction.Now, let's look at three examples of trades that triggered recently. I chose
these three for their educational value, and I have intentionally included
two short-sale setups to help you get used to aggressively shorting stockswhen the market turns down.
EXAMPLE  17.1 
IBM
Maximizing  Profits  with  Trailing  Stops
1. Our short sale is triggered on the uptick at 143 on a 142 7/8 stop
Coming into February 28, 1997, we have a 180 short-sell setup on IBM.
Within a few minutes, IBM is trading at 142 1/4 and we immedi-
and  we  risk  1  point  with  our  protective  buy  stop  placed  at  144.
ately move our stop to break-even at 143.
2.  The stock trades to 141  1/8 giving us a 1  7/8-point profit. We moveour  stop  to  142  (give  or  take  an  1/8),  and  we  have  the  option  ofbuying back 1/2 our position to lock in a quick, solid gain.
IBM trades to as low as 140 5/8, giving us a 2 3/8-point profit and
3. 
4. Our gains are locked-in and we watch .. .
... money in the bank lost by those traders who don't use stops!
5. 
we need to move our stop to 141 1/2 to further protect our gains.
110 
Chapter  17
EXAMPLE  17.2  CL
111
Maximizing Profits with Trailing Stops 
stop), and our initial protective stop is placed at 104 1/2.
Colgate Palmolive has a 180 buy setup that triggered on March 4,1997.
1. 
The  180  buy  triggers  on  the  opening  at  105  1/2  (on  our  105  1/4
2. 
The stock trades in a tight range until finally giving us a 3/4-pointprofit.  We  move  our stop  to  105  1/2  or  105  5/8  to at worst scratchthe trade.
No follow through for the stock and we are filled.
3. 
4. Our trailing stop strategy allows us to scratch what would have
been a losing trade if we held it into the close. As I have repeatedlymentioned,  I  never  mind  scratching  a  trade,  especially  when  it
would have eventually turned into a loss. This is the key to pre-
serving capital.
112 
Chapter  17
EXAMPLE  17.3  CMB
Maximizing Profits  with  Trailing Stops 
113
which triggers the following day.
On March  11,  1997,  Chase Manhattan Bank has a  Gilligan's  Island setup,
1.  Chase  opens  at  105 5/8,  and  the  short  sale  is  triggered  on  the  up-tick  at  105  3/4.  Our  initial  protective  stop  is  at  106  3/4,  risking  1point.
2.  The stock slowly sells off, and within 2 hours we have a 3/4-point
profit and we move our stop to break-even (105 3/4).
3.  Another  1/2-point  profit,  and we  should  move  the  stop  to  the  105
1/4-105  1/2 range to at least lock in a small profit.
4.  Our  profit  increases,  and  when  the  stock  trades  at  104  1/4,  weshould  look  to  possibly  buy  back  half  our  position  and  move  ourstop to 105.
5. A sharp sell-off, and the stop needs to be tightened to at least 103
3/4.
6.  A 2-point profit is locked-in.
CONCLUSION
As I have stated before, I became a more profitable trader when yearsago I implemented trailing stops in my trading. The only downside all
locking in profits and to protect myself against large losses.
traders have to contend with in using this approach is being stopped outonly to  see  the  position  then move back  in  its  original  direction.  This  ispart  of  the  game,  and  I  am  willing  to  tolerate  it  in  order  to  assure  my
WHEN TO HOLD 'EMAND WHEN TO FOLD 'EM
In the  last chapter, we  looked at how  to properly  use  trailing stops  toboth protect  ourselves  from reversals  and  to  lock in profits.  In  this  chap-
ter, we will look at the all important situation of when to get out of posi-
One of the hardest things to do as traders is to let profits run. It is humannature to want to grab the profits and move onto the next trade. Many
tions intraday and when to hold them overnight.
be improved by implementing the following principles.
times,  as  "Hit  and  Run  Traders,"  this makes sense, but  there  are  timeswhereby  holding  the  position  overnight  can  greatly  improve  yourchances of increasing profitability.
Maximizing profits is a never-ending quest that can never be made per-fect.  I  have  found  though,  through  my  research  and  trading,  that  it  can
I.  Never, never, never, hold a losing position overnight.
In  the  book  Market  Wizards,  Gary  Biefeldt  was  asked  what  are  the  ele-ments  of  good  trading.  His  reply  was  short  and  to  the  point,  "Staying
with your winners and getting rid of your losers." This obviously makesa great deal of sense and can be immediately implemented in your own
Chapter  18
If a stock is closing poorly (in the opposite of the desired direc-
2. 
you bought at 69 is trading at 71 going into the final hour. Ideally, you
trading by getting out of all  losing positions  before  the dose. This one practicealone will  greatly  increase  your  chances  of profitability,  as  it eliminatesthe chances of a small loss turning into a catastrophe! (See Example 18.3.)
tion), take your profits no matter how small they are.
This rule will allow you to lock in profits intraday.  For example, a stock
will  want  this  stock  not  to  trade  under  70 3/8  (give  or  take  an  1/8) be-fore  the  close.  If  it  starts  selling  off,  you  need  to  be  aggressive  about
locking in the gains, as this sell-off may be a warning sign for tomorrow.
This one rule alone will help you further your profits more than any
shorts) have a higher than average likelihood of following through intothe next morning. Is this observation 100 percent correct? No! But overtime, you will be able to participate in those moves that do follow
3.  The  most important rule to maximize profits:  Hold  strong closes
(weak closes for short positions) overnight.
other.  My  experience  has  taught me  that  strong  closes  (weak  closes  for
through overnight and these moves can at times be substantial.
Let's look at some examples.
EXAMPLE  18.1  SLB
When  to Hold  'Em and  When  to Fold  'Em
placed at 103 3/4. As you can see, the stock drifts sideways most of theday before exploding to the upside in the final 30 minutes. There is abso-
©Here  Schlumberger  triggered  a  Lizard  buy  at  104  3/4  and  our  stop  is
lutely  no  reason to sell, as the  stock closes very neat the  high  of theday.  Holding  the  position  overnight  leads  to  an  additional  1  1/2-pointprofit <2) on the opening and as much as 2 3/4-point profit intraday.
118 
Clmpler IS
EXAMPLE  18.2  DELL
Dell had a nice Gilligan's short-sale trigger on April 10, 1997, and closedat the bottom of its range. Staying with it led to a lower gap opening andan additional 4 points the next day.
EXAMPLE  18.3  MGX
When  to  Hold  'Em and  When  to Fold  'Em
Mossimo  was  a  high-flying  stock  in  the  summer  of  1996.  On June  6,  ittriggered  an  unsuccessful  180 buy  at 50  1/8.  Our protective  stop  is  not
hit, but the stock closes with a 5/8-point loss. Ignoring the rules and not
getting out of this  losing position before  the close unfortunately leads  to
a 1 1/2-point loss on the opening the next morning.
own a stock that is trading at 5 1/2!
P.S.  Those  "buy  and  hold"  investors  who  do  not believe  in  stops  now
120 
Chapter  18
EXAMPLE  18.4  GUC
Gucci had a 180 buy setup at 74 1/8. By the end of the day there was a 1
5/8-point profit, but because of the way it closed, it lead to a 3 1/4-pointprofit on the opening the following morning.
where the opposite of what I am writing about will happen, but if you
you an even greater edge.
CONCLUSIONBy  combining  the  last  chapter  with  this,  you  are  now  in possession  ofhow to  properly  exit trades.  As  I have mentioned before,  this  methodol-ogy  is  not  perfect,  but  it  is  very  good.  There  will,  of  course,  be  times
stay  disciplined,  consistent,  and  focused,  these  methods  will  help  give
CHAPTER 19
PREPARING FOR
DAILY BATTLE
schedule •which helps me maximize my effectiveness. In this chapter, I will sharewith you what a day looks like, and hopefully this can help you identify areas inyour own daily preparation which can be made more efficient.
and Run Trading and ask me how I prepare for the day or what a typical
From  time  to  time,  I  receive faxes  and  letters from  traders  who  have  read  Hit
trading  day  looks  like.  Because  it  is  critical  to  my  profitability,  I  have  a  daily
nals, not only for my own trading, but for my daily trading service sub-scribers. While this is going on, I begin scanning the stocks that had largemoves for the day. I attempt to look for recurring themes, i.e., lots of
bought and oversold indicators. I am looking for either extreme over-
Expansion  Breakouts,  lots  of  reversal  sells,  etc.  This  gives  me  the  firstclue as to what to expect for tomorrow. I then go on to look at my over-
bought  or  extreme  oversold  conditions.  This  will  allow  me  to  decidewhich side  of the market I want to focus on.  For example, if we  are very
Tomorrow's  trading  day  begins  today,  one  hour  after  the  market  closes.At 2:00  P.M. PST T begin my routine.
The  first  thing  I  do  is  download  the  closing  prices  onto  my  computer.This  takes  almost one  hour  and  it is needed  for me  to  generate  my sig-
overbought, I ideally want to be a short-seller tomorrow and if we arevery oversold, I want to be a buyer. When this is done, I move onto the
long, I will be especially interested in the buy setups, and if I have a biasto be short, I will look closely at the short setups. Also, another gauge Iuse is if the overwhelming number of my setups are buys I know that themarket will likely be higher (or lower if there are numerous sells) tomor-
printout of tomorrow's setups. If there is  a bias from my indicators to be
While all this is happening, I have CNBC on in the background to see if
row.  I  first  and  foremost  look  at  the  setups  from  my  weekly  Hit  Listwhich I make each weekend,  and I then move onto the non-Hit List set-ups.
any  events  after  the  close  may  affect  the  market  tomorrow.  For  example,recently  Seagate  announced  unexpectedly  bad  earnings  after  markethours, and that was an indication that the techs would be weak the next
day (they were).
After this analysis is completed, I put the best setups onto a daily trading
sheet, both for myself and my subscribers.  This is my "focus sheet,"  andit  allows  me  to  have  everything  organized  when  I  come  in  the  next
I am at my desk at 5:00 A.M. PST the next morning. I immediately look at
morning. The entire process takes about three hours, give or take 30 min-
utes.
then put on CNBC for the news, and I scan Investor's Business Daily for
to touch base with at least one trading desk I use in order to see if they
When the bell goes off at 6:30 A.M., I am prepared. In spite of this, I al-
the  night markets  (S&Ps, bonds,  and currencies), and I  glance at  the  for-eign  markets.  This  gives  me  a  feel  for  the  sentiment  for  the  morning.  I
any interesting stock movements I might have missed. At 6:00 A.M., I try
have  any  news  of interest.  I  also  use  the  time  to  confirm  any  positionsheld overnight.
ways  have butterflies  in my stomach  (a  permanent  condition),  and I  am
tense. The stocks I am focusing on for the day are on the screen in frontof me, and I place orders (stop orders) as my setups trade close to thetrigger point. I also place protective stops in on positions held from the
previous day.
The first 60 minutes are for me the most hectic and stressful. Setups oftentrigger at the same time, and I must be alert and quick. Because I onlytrade momentum stocks, a 30-second lapse can cause me to enter a trade
personal matters until the night. After 7:30 A.M., I usually speak with oneor two trading friends and we share thoughts and ideas, but my eyes and
hours until 12:30 P.M. PST when things get stressful again. In the last thirtyminutes of trading, I need to decide whether or not I will get out of any
focus  are  on  the  screen.  This  scenario  plays  itself  out  for  the  next  five
Preparing 
for  Daily  Battle  123
late and turn what should have been a winning trade into a loss due to apoor fill.
As far as  outside interference, I have virtually none.  My wife  knows notto bother me during the trading day (unless she is dying) and to hold all
or  all  my  positions  or  carry  them  overnight.  Ideally,  I  will  carry  thestrongest performing ones overnight, but on strongly trending days,  thiscan  be  four  or  five  positions.  This  is  usually  too  much  exposure  for  me,and I need to decide which positions I will pare off. At 1:00 EM. PST, themarket  closes,  and  I  spend  the  next  30  minutes  on  the  phone  with  thetrading desks confirming  my trades.  I then take  about a half an hour toeat lunch (and relax) before beginning the routine for tomorrow.
The following are sample worksheets that I trade from daily . ..
*NOTE: You will see a strategy identified as HG2. This is a term I origi-nally used for a pullback setup co-created with a friend. It now stands forany setup which I like but does not fully comply with the rules.
124 
Chapter 19
unless you commit yourself 100 percent to this game, your results will
stakes profession. There are lots of very smart people and lots of very
advanced computers that are vying to do the same thing that we are, and
I hope this gives you some insight into the way I conduct my businessand it provides you with some thoughts on making your day even more
fall short. This is the one thing I can guarantee. On the other hand, withthe  chance to make a nice living and a chance to answer to nobody butyourself, the effort is worth it.
efficient. This added efficiency will take your profitability even further.
CONCLUSIONThere  are many outsiders who think that traders have  the easy life. Theybelieve,  for example,  that because I  live on  the west  coast,  I  trade  from6:30A.M.to 1:00 P.M. and by 1:15 P.M, I am surfing. I wish this was true, but itis not. Trading is  a full-time profession, no different than any other high-
CHAPTER 20
THE EDUCATION OF ASTOCK TRADER
Over the past two years, I have been interviewed by a number of news-papers, radio shows, and website chat rooms. I thought it would be inter-esting to have a trading friend take the best questions, add a few of his
own, and have me answer them in one session.
Q: You often talk about the importance of being prepared each day.
Can you expand upon this?
A: 
I  believe  daily  preparation  is  key.  You  must  have  the  names  youare going to  trade,  you must be  aware  of their trigger points,  andyou  must have  a  plan of attack well before  the morning bell  rings.Many  people  are  lazy  and  try  to  wing  it.  Sorry,  but  this  doesn'twork.  Daily preparation is tedious, but it is also a necessity.
Q:  Beyond preparation, what role  does money management and entry
techniques play?
portant. It will sustain you through choppy markets and dry peri-
scratching a trade or taking a small loss. When I learned to scratch
ods.  I  tell  people  they  should  pat  themselves  on  the  back  for
A:  Entry  technique  is  important, but money management  is  more im-
a trade or take an 1/8 or 1/4-point loss, I became a more profitable
trader.  It  leaves  me  with a  fresh opportunity  to  take  another tradewith more potential.
Q:  Do you have a favorite strategy/pattern?
A:  Stepping in Front of Size™ is  first.  I  also  very much like  pullbacksin  strong  trends  such  as  the  1-2-3-4  strategies  and  the  5-Day  Mo-mentum  Method.  Also,  some  of  my  biggest  gains  have  come  on
stocks that had multiple setups pointing in the same direction.
Q:  You have at least two dozen strategies. Do you trade them all?
A: 
It is impossible to trade them all at the same time.  I do trade themall over time.
Q:  How  often  are  you wrong?
A:  More than most people think. I am wrong at least 40 percent of thetime,  if not higher.  This  is  where  the protective  stops come  in  and
get me out with only a small loss.
Q:  Why do you think most people eventually get chewed up trading?
A: Two reasons. First, they are in the wrong stocks. You must be in the
stocks that are strongly trending and have some volatility.
Second,  they  don't know how  to  take  a loss. They  let small lossesturn into large losses, and this paralyzes them both emotionally andfinancially.  I  can't  tell  you  how  many  faxes  and  letters  I  receivefrom people  who have read my book and  still  don't use  protectivestops! They call my office asking for my help. I tell them, to re-read
my book and make darn sure they have stops in on every trade.
Q:  On most days, there are too many stocks with your setup patterns.
How do you pick the ones  to  trade?
A: 
I  work  four  to  six  hours  after  the  close  on  Friday  identifying  the
best trending stocks (up and down). From this, I create my "hit
list." Each day I spend up to three hours focusing on the action that
occurred. I am first looking for multiple setups on my list, then thebest setups from my list and then any other setups from my uni-verse of stocks that look interesting. Obviously, this process is quite
will come up with.
subjective,  and my names won't be  the same  names someone  else
129
The Education of a Stock Trader 
Q:  Then does gut and intuition play a role in your trading?
I have a sense of how certain stocks trade and their personality. My
A: 
intuition began to blossom as I created my methodology and had
odologies for years will be much better than someone trading it for
fewer  things  to  focus  on.  Someone  trading  the  Hit  and  Run meth-
the  first  time.
Q:  Let's talk about taking positions home overnight.
A: 
If a  stock closes strongly in my  favor, I will  often carry  at  least half
the position into the next day. I almost never carry a losing positionovernight. The few times I have, I paid for it dearly.
Q:  Do you take overall market activity into consideration?
A:  Yes, the market tone guides me to how aggressive I want to get. Nomatter how strong a setup is, if the overall market is moving in the
Q: Your methodology is to hit a lot of singles. Ever get the urge to hit
a home run with your trading?
opposite direction, I know the setup is less likely to succeed.
triggers at 85 1/4 and I buy 1,000 snares. If it's a thinly traded stock
A:  Sometimes, but not often. It will happen when, for example, a setup
Q: Do you ever add to a position intraday?
and someone bids 10,000 shares at 85 3/4,1 will step in front of him
and buy another 500 shares. The buyer is protecting me, and the
odds favor this as a low-risk entry.
Q: Are all signals created equal?
A:  Of  course.  The  temptation  is  always  there.  Fortunately,  I  havelearned  to  control  it.  I  get  very  angry  at  myself when  I  allow  aprofit