Stock Trading

Trading stocks, futures or the Forex is an intrepid endeavor. The rate of failure for traders is very high, so high that, I decided to embark on a mission to create a system that would greatly enhance a trader’s chances of success. There is no magic bullet, of course, and therefore, a tool by itself is not enough.

A trader also needs to have a fundamental knowledge of trading and the financial markets. Trained professionals have this knowledge, combined with a passion and commitment to succeed. The average non-professional on the other hand, is busy trying to succeed in their chosen profession – lawyer, doctor, accountant, engineer, etc – and then tries to take the money they’ve managed to earn through hard work and grow their wealth in the various financial markets.

In the recent past, growing ones nest egg seemed quite simple, but that bubble has burst and the realities of prevailing in a volatile market have returned. These realities insist that a trader take the game very seriously. The game starts with attitude. Make the decision to approach the financial markets and the management of your money like a professional, and you will attain the desired results. However, I must caution that if you adhere to the mindset, which believes someone can take a seminar, or listen to an “expert” on TV or use a software tool alone – without the requisite knowledge – the results may leave you reeling.

The purpose of this manual is to provide you with the knowledge that I believe is imperative to realizing success trading financial markets. You will learn methods that will generate confidence in what you’re doing, thus producing consistent results that can be directly linked to your decisions and actions. You will no longer be riding the roller coaster of seemingly unpredictable profits and losses with your trades. Will you make money on every trade? No. There is no Holy Grail of trading but if you have the knowledge and you use this knowledge, then you can succeed. Cash Flow Ventures system helps you use your knowledge by providing you with the information you need to make well-conceived decisions.

Developing a professional attitude is where I would like you to start the process of becoming a successful trader. Part of that is realizing that there is no perfect method. Losing money on a trade is simply the cost of the game. No matter what business you pursue, there will be losses and accepting this reality is the first step to becoming a professional – a trader that trades on knowledge and information, rather than emotion and prayer.

Next, I would like to further extend your professionalism by suggesting to you that trading is mostly about managing your money and knowing how to exit a trade. Most “experts” preach a strategy of how to enter a trade, rather than how to exit a trade. In my opinion, this is the opposite of how a professional sees the market. I will teach you to make trades that are based on facts instead of prophecies, conjecture and beliefs.

You will learn not to waste your time and effort on useless rat races like picking the top and bottom of a market. I will show you how to make the right trades at the right times. You will go short when you should go short and long when you should go long.

Trading will attack your emotions, so it is important that you be prepared to fight the good fight and make the correct decisions. This is a simple formula; discipline, patience, trading on facts, not opinion and learning how to lose by cutting losses short.

Or to quote Sun Tzu’s “Art of War”:

“The good fighters of old first put themselves beyond the possibility of defeat and then waited for an opportunity of defeating the enemy. To secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy

is provided by the enemy himself.”

Now that you have begun building a professional attitude we can start discussing the many pitfalls common to the art of trading. Most traders have the propensity of scalping rather than trading. Scalping is when a trader realizes a quick profit and immediately pulls the trigger and exits the trade. This practice is more acute when the prior trade lost the trader money and it ignores the environment of the market. A good trader starts with a plan and sticks to the plan. This can be very difficult, but you’ll find that if you have the right knowledge and a tool to help execute this knowledge, the task becomes more manageable.

Another pitfall is using tight Stops, which pulls the plug on a trade right when the market is about to accelerate in a direction beneficial to the trade. This may sound like good money management, but it ignores the current state of the market and leaves profits on the table. A trading plan will discipline you to react to the realities of the market and therefore, execute exits based on sound decision making logic that increases your potential to profit.

This course will help you understand how to interpret the market, which will allow you to create a trading plan that is conducive to who you are and what you wish to achieve in the market. Every new day brings a new market and therefore, you must be prepared to read each market individually and execute with conceived Stop and Profit goals. There are no hard and fast rules when it comes to trading and my course will not expound such boundaries, rather, it will enable you to use your knowledge combined with a trading software to effectively manage your trading objectives.

I will teach you how to read Price and determine S/R levels, what to do when key levels are broken, how to chart patterns/setups/gaps, money management, how to place orders and how to define a trend.

The first step is to teach you the best methods for making profitable trades. This is key to building confidence in your capabilities. Next, I will show you why you should take all of the setups you identify. This takes discipline but it is imperative to success. Finally, I will show you how to manage trades after they have been executed. Combined, these steps constitute your path to success as a trader and they must be taken seriously. There really are no shortcuts. It will take a good work ethic and adherence to sound trading methods to ensure that your trading goals are met.

The last element of a successful trader is psychological fortitude. You have to be able to make a trading plan and stick to it, no matter what. I can give you the knowledge you need and provide an excellent tool to exercise this knowledge, but I need for you to put your faith in the methods you will learn and leave your emotions, greed, fear and opinion behind.

With that, lets get started with the first lesson; How to Read Price Action. This fundamental will provide the foundation for all that you will learn about trading. For you to develop a trading plan, you must learn how to identify the Stop for a trade and the Profit Objectives for each trade. Without these two components, you are no better off than the average person trying to decipher the market based on broad speculation and myth. And, the only way to learn these components is to be able to read Price Action.

This course was developed independent of any trading software. Therefore you will come across techniques that require manual effort, such as drawing lines on charts, and the like. In many cases, a trading software has features that eliminate the need for any manual effort, but no trading software was developed to match the techniques in this course verbatim, rather, this course is meant to provide the student with information that is extremely useful with or without a trading software. The intent of this course is to give the student baseline knowledge to take forward when using a trading software.

Lesson One

To begin with, I must emphasize how critical it is to look at the financial markets in the proper context:

“The highs and lows of the past are constantly being retested”

As a trader, understanding how the market works starts with the understanding of “Price”. The markets, for all their apparent randomness, actually cover the same ground over and over by revisiting former pivot points – both high and low. An analogy would be the Monarch butterflies who every year at mating time travel thousands of miles back to Mexico, their home base. The market also has home bases and continually travels back and forth between them. The S/R (support/resistance) points I will teach you follow this model and we will cover this in detail in the next lesson.

The concept seems simple but it is often ignored or misunderstood and it is imperative to trading profitably on a consistent basis. A good trader understands how price moves, so we will focus on this in the first chapter, thus providing you with a firm foundation to trade upon. It starts with being able to recognize the current type of market. A “normal” market, which I will help you identify, is where things are acting in a way conducive to trading. A “slop and chop” market, is where volatility makes the market overly risky. By the time you finish this course, you will be able to easily identify both markets and save yourself a lot of anxiety and heartache by picking the market that is right for you. You will be in control and only trade when it suits your goals.

That said, where trading is concerned, nothing is perfect. However, once you examine the market and see how it tests and retests previous highs and lows, you will see how this simple concept can greatly enhance your ability to profit as a trader. There are many other ways of determining S/R points, such as MA’s (moving averages). However complex and worthy they may seem, I strongly recommend ignoring MA’s and calculated numbers for S/R with one exception.

If you are told that “it just bounced off the 20 period EMA” or something alike, I can show you a correlating S/R point to which the market responded. I don’t believe the market is driven by calculated numbers and have demonstrated this by plotting a 20 period MA, which revealed how rarely they impact a pivot point.

MA’s and Keltner Bands can be very effective at determining price or to follow a trend. The Keltner Band middle band is a 20-period EMA, which is very helpful in identifying a market’s equilibrium point. I’ve used this for charting myself, but I never pursue a trade simply because a price is moving above or below the middle band or because an MA has moved across another. Every trade I make is confirmed by the tools you will learn in this course and is always based on price.

I am going to share some basic Technical Fundamentals with you in this lesson that I think is very important. All of the lessons you read in this manual will also be explained in my Trading Academy Live.

The chart below is a 5-minute candlestick chart of the Dow Mini Contract. That simply means that each black and white bar that you see on the cart below

represents a time frame of 5 minutes. If you’re going to be day trading you will be using shorter time framed charts, but if you can’t sit in front of your computer screen for a couple of hours everyday and you are looking to improve your financial portfolio, then you will be looking at charts with a longer time frame such as hourly or daily charts. No trading software is running on this chart, this is just a candlestick chart with some horizontal lines drawn on the chart. All I want you to learn from the chart below is how to read support and resistance on any financial instrument that you decide to buy or sell. Let’s get started!

I’ve drawn 3 lines on this chart, a blue line at 10568, which is resistance, a red line at 10526, which is support, and a white line at 10547, which is the median or in the middle of support and resistance. I only use three lines when I manually place them on a chart and I move them up or down depending on which way the price is moving. One of the chart formations that I watch closely is when there is a trading range as is seen on the first chart marked by the red and blue horizontal lines. The price will bounce off either support or resistance and go to the median line and then bounce off the mid point, reverse direction once again and make a big move through the red or blue line (support or resistance).

The other thing that happens occasionally is the price reverses at resistance level (blue line) and then penetrates the median line, but will not go all the way to the support line (red line). The price will pause before hitting the red line, stop and reverse back up to the median line, stop and reverse again back down and through support or the red line into a big move (illustrated in the second chart). All markets are always testing previous support and resistance. The first chart is an example of what happens almost daily on the Dow Mini and most other stocks and futures. If you don’t know what a futures contract is just look at the back of the manual in the glossary.

What we are looking at on this chart is what we call a breakdown of support levels. The price goes from #1 up to # 2 and then reverses at the # 2 level (resistance) and then heads back down to the support level of 10526 or # 3 previously # 2. The Price Action then pauses at the # 3 level and then proceeds to break through # 3 into what would be a great place to sell some contracts. You can clearly see that this was a fantastic trade if you took it. The reason I drew the median or white line is that stocks and futures will very often use the median as support or resistance right before it goes and breaks through key support and resistance levels as seen in this chart.

The Third chart is a copy of the first chart except I’ve applied my trading software to it. I‘m not going to cover how to use my trading software in this lesson, that will come later, but I think you can clearly see how it broke the support pivot bar in red with the red arrow and the word breakdown next to it. Pretty cool huh! You don’t need to be an expert trader to have seen that trade.

The next 3 charts are examples of support and resistance. I want to back up for just a moment, sometimes I get so excited when doing a training that I get ahead of myself. I mentioned the word pivot or pivot bar when talking about the software. On the chart labeled pivots, I’ve put numbers next to all the pivot points to clearly illustrate how to identify a pivot. To put it quite simply a pivot is when the price moves in an up or down line and then reverses.

LESSON TWO

The next step for us is to start off with Support/Resistance points, which is the logical progression after the first lesson. Support/Resistance points or “Pivot Points” are an easy concept to get after some practice. Occasionally, Pivot Points are straightforward to see on a chart and other times they manifest themselves as an “area” or “shelf”. To get the idea of what I’m describing, look at the market as if it were going up or down a flight of stairs. The market moves one step or support/resistance number at a time, which is easy to determine when the market is trending, but much more difficult when it sticks in a trading range. This logic is paramount to understanding why the market moves the way it moves.

In a moment we’ll start looking at how to find pivot points but first, I’d want to give you some insight on the S&P 500. The S&P 500 moves in 3-4 point increments. Therefore, I look to have my S/R points follow the same increments; 3-4 points. Most people agree that the market finds support where it found support in the past and the same is true for resistance and while this is very useful for finding secondary S/R numbers, I recommend against using this method to find primary S/R numbers.

High Surge/Pivot High Low Dip/Pivot Low

I find the primary S/R numbers by reviewing high surges and low dips from the past. What I’m looking for are pivot highs below the close for support numbers and pivot lows above the close for resistance numbers. I prefer to use a 10 or 15-minute chart for this exercise.

Something to keep in mind:

Previous Support penetrated becomes Resistance = SUP:RES

Previous Resistance penetrated becomes Support = RES:SUP

My experience is that having S/R numbers going up and down at the points laid out above best serves the model. Typically, I will venture 25-30 points each way, as I’ve found that this will cover the S&P 95% of the time. As important, the more recent pivot points should be a priority. These can normally be found in the past few days but at times, you may have to search back weeks or even months. For example purposes, take a look at the 30-60 minute chart to find because smart traders never trade off the 5-minute charts, rather they check hourly or even daily charts when deciding what trades to make. A good trading software makes this entire process simple, so that you can effectively assess the markets.

I further advise keeping a log of unfilled gaps, as the market fills these gaps at some time in the future, most often on the same day but sometimes weeks or months down the road.

In this regard, here are some words to live by?

“UNFILLED GAPS ARE HIGH PRIORITY SUPPORT/RESISTANCE POINTS”

Lets use the following chart to show the support and resistance points in a day of trading. On this chart, the red arrows are support points and the blue arrows are resistance points. I suggest identifying these numbers concurrently until the concept becomes second nature. As shown on the chart, I’ve made some guesses about resistance points above 1373, as anything beyond is record territory. So, we want to find gaps of 3-5 points, using the most recent numbers, because they are the most reliable.

So the S/R numbers I came up with for that day are:

Resistance

Support

1365

1369

1373

1377

1382

1386

1391

1353

1349

1344

1340

1336

1330

1327

Note: Typically, I idenitify 6-7 resistance points above yesterday’s close and 6-7 support points below yesterday’s close.

Finding Key Support and Resistance Areas

A critical skill in trading is being able to identify key S/R areas that develop in the market. Over the course of time, these key areas become markers for big moves and therefore, an opportunity to make a trade that is advantageous to you. Here’s the concept; if the market finds support or resistance at one level, over and over, these levels give us a view into the market’s long term trends and, if we can see this trend, we have an advantage because the market generally moves a long way in one direction or the other once these levels are broken.

Vision is critical to making advantageous trades. For instance, if we’ve been tracking the market and identify 1313 as a key level of resistance, and we are long on our trade, this information would indicate that we should stay in the trade once 1313 is broken because time has shown that the market will keep moving in that direction for another 4-8 points. Think about all the times you’ve exited a trade and then the market makes a big move. If you had known about the key levels of resistance, you might have been able to see the big move coming and you wouldn’t have left money on the table.

Such levels can occur during one trading day or over the course of time. You can use the 30 or 60-minute charts to find these levels and then use them on the next day of trading. As you become more proficient at reading price action on a chart, these key levels will be very obvious. Just remember to use horizontal lines on your charts.

The next chart identifies several of these key areas. From the previous day, we know that 1313 is a key level. As the day progressed, 1306 and 1310 materialized as key levels.

Air Pockets

Air pockets are another good indicator of key support levels that develop subsequent to the market turning sharply up or down. Once the market has retraced itself with a sharp move, it leaves in its wake a pocket or zone. The following chart demonstrates this phenomenon.

As you can see, on the 16th there was an abrupt rally from the 1325 level. On the following day, the market gapped up but then experienced a rapid sell-off, which ended in support around the 1333 level. Then, on the 18th, the market turned down and stayed range bound for most of the day with a late sell off, closing at the 1335 level. It should be clear that the 1333 level or area is a key support level and that if the market breaks through this point, it should keep heading south to about 1325. My name for this is “Air Pockets” but feel free to apply your own nomenclature.

Now, let’s follow this market and see what happened on the 19th:

As you can see, the market turned down sharply, opening a couple of ticks south of the 1325 level at 1324.80. If you had traded the Globex session, you would have caught the early movement.

Here’s another example from 8/26 with two occurrences.

This chart shows the reaction low of 1355 after some news from the Federal Reserve. It then rallied, retracing up to 1362, where it rallied with gusto up to 1387, which formed the 1362-1355 Air Pocket. On the next day the market turned down before finding support at 1377, where another Air Pocket formed without sufficient key support until it hit 1362. When the market went through 1377 it dove for 1368, then sunk to 1365 before closing back at 1368.

Hopefully, you can see how the same numbers keep popping up. What you should be able to harvest from that days activities is that on the following day, if the market went through 1365, you could bet that it would sink to 1362 and, if it busted through that point, 1355 would be very likely.

The following chart shows us how the market played out on the next trading day:

The market opened where it had closed in the previous session and began selling off. It plowed through the low of the day before, 1365, and went to 1362. Then, after a quick rally, it dove to 1355. This was somewhat surprising because typically the market would have found support at 1362. Having found no support there indicates that there was still a downside, which finally found support at 1354.60.

Then, the market climbed to 1365, or, the previous sessions low: support broken becomes resistance. Next, the days lows were tested and when they didn’t hold, a new low of 1350.60 was established, which became the support number for the next trading day.

In the next two examples something very interesting occurred:

This chart shows a steep slide in the market and an eventual upturn on 9/3.

Then, look what happened on 9/7 (the market was closed 9/6 for a holiday):

Here is another example, which gives some insight into the following week:

I would suggest that in the next week the key levels of 1429 on the long side and 1403 on the short. If things go really south, 1387 is likely. So, lets see what happened.

Let’s see what happened on Tuesday of that week:

First, the 1403 level was tested before a rally. It then vacillated back and forth before breaking through 1403 and landing on 1390.

But, later in the week, the market took off.

On this particular morning, the Labor Department released news that was market friendly. Then, the futures took off in the Globex session and the market jumped up 17 points to 1429. From there, the market kept going, finally hitting a high of 1452.

Here’s another example:

In this chart, there was a preceding down trend going into 3/3. A countertrend rally pushed up to 1415 and then failed, which is key resistance. Also, look at the gap between 1385 and 1400. So, had the rally continued through 1415, it would have had a nice run.

Here’s what happened the next day:

On March 3, the market slid down and then jumped back up, filling the gap. Then, it stayed in a downtrend the remainder of the day. Early on, 1405 was broken, but it recovered back to 1410, before dropping and trying to stay at 1405. From there is dropped to 1399, bounced to 1405 and then everything broke loose, closing at 1385.

Hopefully, you’re starting to see the importance of understanding price action. It doesn’t matter what market you’re in, price action works the same and if you can read it well, which takes some time, so be patient, you will be able to see opportunities and make advantageous trades.

OBJECTIVES

As we discussed earlier, to be successful you have to have a plan – objectives. Your plan will contain both stop loss and profit objectives that will be determined by the support and resistance points you identify. Here is a chart that starts to explain how to plan for profit objectives:

As you can see, the market is simply climbing up and down a staircase. And, each stair is a prior support or resistance level established by the market. Mathematical wizardry does not come into play, nor does opinion or luck. The market is only concerned with where it was and what happened while it was there.

Price is the only thing you need to concern yourself with. If you can read price, you’re ready to trade.

LESSON THREE

Thus far, in Lesson 1 we’ve covered Price Movement and how Market Price Action is not arbitrary and in Lesson 2 we learned Support and Resistance and how to identify these important levels on a chart. In Lesson 3 we will go deeper into charts and learn how certain formations can help us with market timings, so that we can make advantageous trades.

CHART PATTERNS

Chart patterns can be important indicators for when to enter a market. In this chapter I will cover various formations, such as Flag/Continuation Patterns, ABC (or 123) setups, Triangles/Range Contractions, Stair Steps, Ranges and Head and Shoulders Tops/Bottoms. Along with these concepts, I will interlace some strategies that will help you take advantage of these formations within a variety of market conditions. These are powerful concepts, which could provide you with a healthy income.

FLAGS

The majority of the aforementioned formations can be used within any time scenario but because continuation patterns, such as Flags and ABC, take advantage of a known trend, they provide the greatest opportunity to profit. Once you have these concepts down I will share some of my techniques for how to setup trades and how to get the timing right. However, first you need to become adept at identifying these formations.

Bear Flags Bull Flags

Flags are quite a simple concept and can be found after the market makes a move in one direction or the other. Typically, they are horizontal moves or even a bit opposite of the preceding move. I’ve found that they are easier to see in down trends but you will see them often in up trends as well. In the case of up trends, the low point in the Flag most often remains higher than the Resistance level that was just broken, however, this scenario can develop slowly, perhaps over an hour, so patience is imperative. The key is whether or not the Support/Resistance holds, not the duration of time. I prefer to look for a high quality Retracement/Flag, which is illustrated in the above charts, where the market pauses or moves semi-sideways. Such pauses, which lack the look of a typical Retracement, are excellent indicators of a bullish or bearish market, with a strong move likely to follow.

The best method I’ve found for analyzing a Profit Objective once a Flag has formed is to review the length of the preceding move. Prior moves, which are sometimes called “Poles’, very often indicate the length of the following move. Of course, this method, like all the concepts I will share with you, is not carved in stone, but if you include the support and resistance numbers you will become highly consistent at judging the markets next move.

I’ve found the following two methods to be the most successful when trading Flags. The first one is to place a Stop above/below the high/low of the formation, which is a bet that the trend will continue or resume. The second way is to attempt to time the point where the Flag ends and where the resumption of the trend continues. The first method is conservative, wherein you make the market prove itself by coming to you. The second method allows you to enter earlier but may result in you having to chase a move should the market turn unexpectedly. Use whatever approach you feel most comfortable with but you may want to place protective Stops above the high/low of the Flag.

“One of the tenets for identifying a Flag is that it be preceded by a very sharp and strong move (Pole), preferably breaking a previous Support or Resistance area”

Here are a few more examples:

ABC SETUP

The ABC Setup formation arises frequently and can be used with any timeframe. In my opinion, this is the most advantageous formation. It acts something like a launch pad, forming alone or even within other formations. You can also call these 1-2-3 Setups, as they consist of 3 points, as shown below:

In both of these charts, point “A” is the high or low of the formation. The next step is for it to be followed by a higher or lower point at “B”. The final point is the key point “C”, which must be a higher high or a lower low. One strategy to trade this formation is to place a Buy Stop directly above the “B” or a Sell Stop directly below the “B”, depending on the setup and then watch the market trade back through “B” again. To cover yourself, place a Stop Loss below or above “C”. You will often see this setup happen over and over within a trading day and nearly all major moves start with an ABC Setup.

Here are more examples:

You can also look at ABC formations as a “W” or an “M” pattern, as this helps to identify them.

The chart below illustrates this concept:

For best results, find ABC Setups that happen over a longer term, such as a 4-6 minute chart. The 2-minute charts can be helpful in determining an entry point but they are less effective at finding ABC Setups. The shorter-term charts contain too much clatter and could lead you to making bad trades.

With ABC formations, we are letting the market setup a position, “B”, and then following a “higher low” or “lower high” back through it again. This is in line with everything I’ve stated thus far about how the market retraces itself. In the ABC Setup, the market makes a low/high and goes back through it again to “B”. The bulls/bears then try to propel the market up or down but because the market finds support/resistance at a higher high or lower low, they don’t prevail. Our trade is solid because we’ve followed either strength or weakness via the ABC Setup and we have an advantage.

You want to keep on the correct side of the momentum by following the higher lows or lower highs. The ABC formation allows us to simply trade with the momentum swings that happen throughout the day. They give us a view that the average trader doesn’t have and therefore, we see which way the market will move in advance.

Here’s an example of recent Price Action:

The Bond Market represents a very good environment for trading because it is so liquid. However, the Bond Market is not as volatile as the indexes and therefore presents fewer trading opportunities each week. The next two charts are examples from the Bond market:

TRIANGLES / RANGE CONTRACTION

Triangles are another formation that provide insight into the markets destination. We will discuss 3 types of triangles: Symmetrical, Ascending and Descending. Symmetrical triangles are exactly that, with nearly identical lines coming together; one descending along the Pivot Highs and another ascending along the Pivot Lows. Descending triangles have more of a horizontal line on the bottom and a descending line coming down the trend line. Ascending triangles characteristically have a rising lower trend line that meets a horizontal upper line.

I suggest looking at these triangles in the following way: Symmetrical triangles are a continuing pattern from the previous trend. Ascending triangles are more bullish, typically following an upward trend and Descending triangles are bearish. Trying to predict which way the market will turn out of one of these triangles can be quite hazardous, so we will use a strategy that yields a more consistent result.

From my perspective, these triangles are really no more than a resting spot where the range continues contracting. We know that the market will bust through this range, so I wait for the range to drop roughly 3 points before bracketing the range with a Buy Stop above and a Sell Stop below. Many times you will see this scenario produce an ABC Setup.

Below is a chart that shows a Symmetrical triangle in action. On the chart, I’ve selected two points to place stops, above, a Buy Stop at 1329.20 and below at 1326.50. If you play a triangle this way, all you have to do is wait for the market to initiate your trade.

You will find that this strategy is much more conducive to profit than trying to foresee which way the market will turn out of a triangle. In most cases, if you’re trading the S&P 500, Symmetrical triangles will turn in the direction of the trend that led into the formation, however, Ascending and Descending triangles are much less consistent. By employing this strategy, you will place yourself into a trade that’s headed in the right direction, with your Stop Loss covering any potential downside. After the trade is in motion, you can move the Stop Loss to protect your upside. The more you practice examining charts and identifying triangles the better your chances of seeing them when the market is live.

If you’re trading the S&P 500 or NASDAQ, keep a keen eye open for a false breakout, wherein the market first breaks in one direction, stops, and then turns the other direction. If this occurs, simply be prepared to reverse your direction with the market and although you may miss the first section of the break, you will still have an opportunity to recoup any loss you may have incurred, plus turn a tidy profit.

HEAD & SHOULDERS

Another reliable formation is Head and Shoulder patterns. These happen most often after an ABC Setup and can occur at both top and bottom. Look for a trend that precedes the pattern and the formation will be much more reliable. Below, you’ll find what a Head and Shoulders formation looks like when it sets up definitively. In the real world, however, you will not always find these formations with such clarity, so be prepared to invoke a little imagination.

Like the other formations, you can either trade Head and Shoulders patterns aggressively or conservatively. The Aggressive approach is to enter the trade after the right shoulder forms. The conservative method is to place a Sell Stop below the neckline. In order for either trade to work, the neckline must be broken.

RETESTS & FAILURES

Retests occur when the market tests a prior high or low. They are part of a continuing process that stretches across all timeframes. Failures happen after a retest, when the Market is incapable of piercing a former high or low. This is how double or even triple tops/bottoms materialize.

When the Market is testing a prior high or low pay close attention to Price Action. See if it pauses or hesitates or, is there a clear and concise rejection where the price moves up or down rapidly. Here are some good pointers to keep in mind when watching the Price Action and you’re Long: If the Market is Retesting a prior high or low and pauses, then the chances are good that it will proceed through the prior high. However, if Price is rejected soundly, then either exit on the next up bar or tighten up your Stops.

Failures fall into one of three categories. Let’s get familiar with these and then I’ll discuss how to analyze the strength or weakness of each Retest.

Marginal – This type of Failure is characterized by a condition when the Market pierces a new High or Low, but only slightly. Be suspicious of misleading conditions, when the High or Low is only exceeded by a half point to a 1 point. Sometimes, the Market will reverse itself quite rapidly in such cases.

Matching – A matching Failure is literally that; when the Market matches a prior high or low exactly. This occurs very often and is typically Bearish when a high is tested and Bullish when a low is tested.

Failures to reach the High/Low – This Failure occurs when a previous High is tested but it falls short by 1-2 ticks. They are frequent in nature and may also apply to situations where the Market previously exceeded a high or low by 1-2 ticks. As a rule of thumb, these Failures are Bearish on the High side and Bullish on the Low side.

Here’s what you should look for after a Retest and Failure. When the Market tests a high or low, and it fails, then its natural retreat should be to the prior Support/Resistance level. Therefore, if the Market were to test a high of 1680 and the previous low was 1665, having failed to pierce that high, the Market should run home to 1665. At least, that is what happens in most cases.

On particularly robust trending days the Market may test a High or Low several times before finally surpassing that level. In each case, it may look like a Failure but the Market is really only teasing the level, backing off, teasing again, and so on. This can be very hard to decipher but as you gain more experience, the picture will become clearer and clearer.

Learn to track these Pivot Highs and Lows and you’ll develop insight into where the Market is heading. The following chart demonstrates this activity:

STAIR-STEP PATTERN

As you recall, we spoke previously about Support and Resistance and how the Market continuously test prior Highs and Lows. You may also note that this whole process often looks very much like the Market is climbing or descending a flight of stairs. If you can recognize a Stair-Step pattern while it materializes, there are some excellent trades that can be made. The next few charts show how this can work:

Very often the Market will “test” prior levels right down to the tick, as you can see in the chart above. I’ve found that such tests, that go exactly to the tick of previous highs or lows, are excellent entry opportunities. Here are a few ways you can trade in these situations. As demonstrated at Point 1 above, you could enter on a Stop at the last Pivot High (or low). Or, as shown in Point 2, you could find a miniature Pivot within the continuation pattern and enter on a Stop above that level. Finally, you could enter the Market just after a strong bar that is rising/dropping off the level being tested, as seen in Point 3.

The Market, of course, has a mind of its own and we can’t anticipate that levels will match to the tick each time. If a prior move was too strong, the Market may not be able to return to that level. Still, keep in mind the prior major Support/Resistance level that was broken, because there may be opportunities for entries via retraces back to that level.

The best advice I can give you as a trader is to be patient, especially about learning and perfecting these setups. Look for a trending Market, as this is where the best opportunities will lie. Make trades when the conditions are in your favor – don’t force a trade.

RANGES

Perhaps you’ve noticed that the S&P tends to fall into an extended lull within a range now and then, particularly after a large move. There is nothing uncommon about this phenomenon, as the Market, like everything, occasionally requires a bit of rest. This happens quite often during the New York lunch hour, as well as into the early afternoon. Beware, that these ranges, more often than not, result in big losses for most traders, especially those using indicator/systems strategies.

Becoming proficient as a trader requires the ability to read the Price Action but it also insists that you have a feel for the current Market’s environment. You have to be able to modify your game plan on a moments notice, based on a variety of conditions, and take advantage of situations. Be prepared to adjust your expectations based on the type of Market you’re facing. If the Market is in a range, you will trade differently than if the Market is trending.

You will find that certain ranges have a flow or rhythm, which makes them excellent for trading, while other ranges seem to constantly be changing, back and forth. Stay away from Markets that are entirely unpredictable. Everything you learn in this course is built upon the foundation of predicting future conditions based on former or current conditions. If the Market is in a range, first find the outside borders of the range. Using a horizontal line will help. Then, you need to determine if the range is wide enough to trade.

Next, you want to find the center of point in the range. I suggest using a horizontal line. The Market will typically be hovering around a common price point, which will correspond to the Support/Resistance point, or at least be fairly close. Now that you have the extreme parts of the range identified (the boundaries) you can trade through the center to the extremes.

Here’s an example of such a range:

In this chart, there is an easy to find 5-point range; 1373-1368. Because of this rhythm, moving from one extreme to the other, there is plenty of room for finding a Profit Objective. This may look a little pedestrian, but I would preach that taking advantage of even a small point range like this, 1.5 – 2/5 per trade, is still very much worthwhile. Don’t get caught swinging hard for a home run and missing, when a single is being handed to you on a silver platter. The way to play this is to place Stops above/below the outside of the range and above/below the last lower High/Higher Low, if one exists. This is what I meant by trading “through the center”.

As the potential for profit on each trade is fairly small, keep your finger on the trigger and be prepared to cancel trades that aren’t working and take quick profits on the ones that do work. If the Market is trending, you will manage your trades much differently. In the situation above, try to discover if one side is stronger than the other. This can often be found by looking at the Market prior to the range. If there was a strong trend up, then perhaps you can bet more on long trades.

Here’s another example:

In this chart, the Market goes short early, having been setup by an ABC. Then, during the lunch hour, the Market fell into a lull or range, with 1379.50 as the center. The strategy is to trade through 1379.50 to the extremes of 1382 and 1377. The motive is profit and the profits are fairly low, so you need to move quick.

Many of the formations I’ve discussed in this lesson are merely continuation patterns or resting periods for the Market that result in a big move. The patterns serve to help you discover Price Action as much as to provide opportunities to trade. Be patient, make a plan, look at the Market, find a pattern and decide if it fits your conditions for a trade.

You may have read or heard about other patterns but I think you’ll find that all you need are a few logical setups to find advantages. It will take some time to get these setups down, but once you do, and once you are patient enough to let things develop to your advantage, you will start to reap the rewards.

As we move through these lessons, I will share with you other tools that will help you fine tune entries into the formations we’ve covered in this lesson. For homework though, start looking through your own charts and try to identify different patterns. In time, you will be able to recognize how a day will go just by tracking the prior sessions. Then, you’ll be ready to apply the correct pattern to the right Market. You may want to work hardest on the ABC Setup, Flags and Stair-Step patterns. I’ve found these to yield the best results over time.

LESSON FOUR

Gaps

Learning how to play gaps can be very tricky and is really more art than science. Markets tend to fill gaps, sometimes that day and sometimes over extended periods. It will take time for you to develop enough confidence to trade them comfortably. I prefer to follow the early range very closely after a large Gap Open to see how the market reacts. On many occasions, the market will not head towards the Gap, which can be taken as a sign that the market will try to fill the Gap. Typically, if you see these conditions, a small ABC pattern will form, which gives you an opportunity to enter at the “B” point, once it is broken.

Also, check to see if the Gap is headed in the same direction of the prevailing trend. It may turn and both close and trade back through the Gap. The public tends to jump on the early Gap up, but then many times, the market continues lower, stopping them out.

I also suggest looking for which is made first on the Gap; the High or the Low. In the case where the Gap is down but the high is made first, you may want to look for a sell in the direction of the Gap. Conversely, if the Low is made first, look to Buy into the Gap.

There are no hard and fast rules to follow for success when trading Gaps but, one set of circumstances does grant you a very high percentage trade. This occurs regularly in most markets, except the S&P 500, which typically has a large range. Here’s the scenario to look for; when the Market opens above/below the previous day’s range, then heads back across the previous day’s High/Low, trying to fill the Gap.

The next few charts demonstrate this scenario:

I suggest using a bit of common sense with this setup. Look for the Gap to be only marginally above/below the previous day’s High/Low. A large Gap, of perhaps 8-10 points lower than the previous day’s Low, is not conducive to going Long. The Market has already made good progress and will likely fail at that point. This setup works best with a distance of only a few points. Be patient.

Here’s the strategy for making these trades. When the market Gaps above the previous day’s high, go short once it trades below it. For situations where the Gap is below the prior days Low, do the reverse. In most cases, the Market will test the High/Low initially, then retrace itself, which sets up a clear ABC to enter the next time through. However, if the Market trades straight through the High/Low, keep your eyes open for a Retracement and Failure back to that level. This would be an ideal point to enter. Look at 1-2 minute charts to get a clearer picture, then place Stops above the early highs or below the early lows. In most cases, you will want to reverse at these points.

It may be a good idea to keep a lookout for a setup in the direction of the Gap before the previous day’s High/Low is pierced. When this happens, the previous day’s High/Low becomes a Profit Objective for that trade. If that High/Low is penetrated, you will typically see a very nice profit.

As stated before, you will have to be patient as you gain experience and become more familiar with trading Gaps. I’ve put together a few more examples of Gap trades, which you’ll note have a white horizontal line across the prior days’ Close and the current day’s Open. Also, there’s a blue horizontal line on the first hour’s high and a red horizontal line on the first hour’s Low. This should help you to better identify the Price Action.

MORAL OF THE STORY

Management of a trade is key to success. You have to allow the Market to develop, which means riding Retracements and having Trailing Stops properly positioned. Place them too tight and you’ll get stopped out. Find the Support and Resistance points and then place your Stops above/below those levels.

I have 4 rules about trade placement that you may want to follow: 1) Don’t place a 1-lot trade in any market. Multiple contracts is the best policy. 2) As Objectives are met, scale out part of your position. This allows you to yield a profit and at least partially stay in the trade, thus giving you the opportunity to further exploit a move.

3) Never let a winning trade turn into a loss. Always try to manage the net to be positive. 4) Losing is part of the game, but keep your losses small. Once a trade isn’t working, don’t hang on, just pull the trigger and get out. The moment you start hoping and praying for a trade to work, you’re heading for trouble! Just get out of that trade and wait for a better opportunity.

Being a successful trader is about identifying setups and keeping your emotions out of the game. A retracement may blow a trade for you but then minutes later, if you’re not focused on the trade that failed or worrying about it, another setup will occur and you have to be ready to take full advantage.

I think it’s generally a good idea that when you put on a trade, it should be

so small that it seems almost a waste of your time. Always trade a level that

seems too small...Mark Ritchie

Nothing in the world can take the place of persistence. Talent will not: nothing is more common than un-rewarded talent. Education will not: the world is full of

educated failures. Persistence is omnipotent...Calvin Coolidge

What the superior man seeks is in himself. What the inferior man seeks is in

others...Confucius

A good trader has to have three things; a chronic inability to accept things

at face value, to feel continuously unsettled, and to have

humility...Michael Steinhardt

Your strategy has to be flexible enough to change when the environment

changes. The mistake most people make is they keep the same strategy

all the time...Mark Weinstein

Win or lose, everybody gets what they want out of the market. Some people

like to lose, so they win by losing money...Ed Seykota

The one area that I am constantly trying to improve on is to let my gains

run. I'm not able to do that well. I am always working on it. To my dying

day, I'll probably still be working on it...Marty Schwartz

It is totally counterproductive to get wrapped up in results. Trading

decisions should be made as unemotionally as possible...Richard Dennis

I did precisely the wrong thing. The cotton showed me a loss and I kept it.

The wheat showed me a profit and I sold it out...Larry Livingston

The lesson for me was that if you break discipline once, the next

transgression becomes much easier...Gil Blake

One of the most helpful things that anybody can learn is to give up trying to

catch the last eighth - or the first. These are two most expensive eighths in the world...Larry Livingston

Look Left To Trade Right…Robert J. Heisler

To sum up: A word to the wise is enough!

1

LESSON 5

TRADING RANGES

In this lesson we’ll cover Ranges and Range Breaks, as well as some of the psychology of trading. Range Breaks are quite common and it is imperative that you can identify them and know how to trade within these conditions. I encourage you to spend adequate time learning Range Breaks as they are responsible for many major moves within the market.

In Lesson 3 we went over Range Breaks but now its time to delve deeper into what to look for when they occur. To start with, you need to divide the range on the chart so that the upper and lower boundaries are clearly visible. Next, draw a line across the middle of the Range, as an equilibrium point. From here, keep your eyes open for short setups above the line and long setups below the line. Horizontal lines are critical for this exercise because they provide such a clear visual of the Range. In a trending market, you’ll see ranges repeatedly break into one another until the momentum expires.

To ensure profitability, look for a range that is 5 or more points wide, as anything smaller will be insufficient to create an acceptable profit. Also, I suggest pursuing trades that fall in the direction of the prior or current trend if they were/are strong. Odds are that a breakout will head in that direction. Trading more contracts on long trades is a good idea if the trend was up and vice versa. I prefer the E-mini because you can get in and out fast with very little slippage.

Your vantage point should be that of a scalper on such trades. If a trade isn’t working the way you expect, get out and take a small profit. As you get more experienced you’ll be able to recognize trades that are falling flat and you’ll pull the trigger while you can still realize a profit. You’ll also be able to see when a trade is breaking in your favor and then you can manage it for a larger profit. As a rule, you’ll find that the better trades, if they are going to work, develop quickly.

The goal is not 100% success, as this would be impossible. Rather, I consider a 70% success rate to be all one needs to consistently make money as a trader. Don’t focus on the trades that didn’t work, just get out of them quick and start looking for a winner. If you manage your trades right, which means you’re managing your money right, a 70% success rate will make you an overall winner. Keep in mind, Babe Ruth’s lifetime batting average wasn’t even half of 70%.

Trading in ranges can be very perilous, so it’s worth spending sufficient time learning and understanding how they work. They can happen at anytime of day but are common at the Open and over the New York lunch hour.

RANGE BREAKOUTS

Range Breakouts happen quite often and always after a strong move up or down, as the market takes a rest before the next move. The Market goes into a continuation/consolidation phase characterized by a tight range and a sideways drifting price. While this is in play, the market will keep testing previous Resistance and current Support levels and then establish a Higher Low or Lower High just before breaking out in the direction of the previous swing.

Here’s an excellent example:

Typcially, a small ABC setup will appear within this congestion range and very often the “C” point will align with the center of the range. This means that the Center of the range becomes Support or Resistance, as the Market establishes a Higher Low or Lower High before exiting the range. By using this entry, you place your trade before the extremes, thus you’re in the move before the break. You will find quite often that you benefit from having Stops that are above these levels.

Trades like these typically break hard and move on and the broken extreme needs to hold either support or resistance. If this doesn’t happen, it may be a fake out.

Let’s look at a perfect example:

We Opened and went straight down and found a bottom at 3785. We then formed

an ABC off this low and proceeded to trade back to 3854. From here the market

went back to test the 3785 lows but stopped just shy of them at 3790. It then

bounced back to 3825 which was the level it just broke down from = SUP:RES. Then

it settled into a 3825/3785 trading range with 3805 as the Center. It tried to hold

3805 as Support but failed to make it back through 3825 and broke back down

through 3805. It paused and retraced back to 3805 and failed, and then went right

out the bottom of the range to the lows of the day at 3715.

These range breakout patterns occur quite frequently, and if you go back and review

the charts you have been using you will notice numerous examples of

this setup. It really pays dividends to get to know these formations and get

accustomed to viewing ranges or congestion/compression periods in this manner.

Not every setup/break will form as perfectly as this one did, but you will be surprised

how often they do.

We’ve discussed trading through the Center to the extremes of a range, so lets look at the same chart and follow the trade:

As you can see, the Market was in a range and kept bouncing back and forth between the extremes. Finally, the Center (1379.50) held Resistance – the Lower High – and the Market then broke through Support at 1377. At times this effect will be quite subtle, as shown in the above chart, but it can also be very well defined.

Place your Stop for Range Breaks above or below the center that held support or resistance, which is the same as an ABC setup.

Here’s another example:

This day was characterized by a flat Dow and a runaway NASDAQ that shot up 300 points. The Market gapped down 15 points to 1437 and then rallied back up to 1448, where it remained somewhat stationary. Finally, after testing both extremes a few times, the Market broke through 1448.50 and settled at 1445.50. Can you see the ABC setup?

FAILED RANGE BREAKS

Now and then the market will trick you by appearing to be ready to break out of a range and then turn around, only to ruin your trade. Don’t be overly concerned about this because you will make more on your winning trades than you will lose on the bad trades. Also, there is a way to trade a Market that is tricking or faking you out.

It takes a lot of guts to make this trade because you will be doing so on the heals of a losing trade but that’s why you have to keep your emotions in check. A failed range break very often results in a strong move that will reimburse your losses many times over. Let me share a bit of industry insight with you regarding this situation. The “floor” understands traders tendencies and therefore, they know most traders will not take this chance. So, they push it in one direction, stop you out and then the market takes off, and you’re left wondering what happened.

The strategy is simple; reverse your original trade. Also, you may want to cut back on the number of contracts. The following graphic demonstrates this concept:

This reversal trade generally works right off the bat and very often will be a strong move back through the opposite range extreme. If you see any hesitation, scratch the trade and move on to the next.

RANGES

The key to trading ranges is humility. Take what the Market is willing to give, even if it’s in small increments. Don’t get caught up in the vicious cycle of waiting too long, only to have the Market reverse and stomp on your trade. These opportunities can develop very quickly and they require you to be equally quick to take advantage. If the Market offers you a small profit, take it, rather than waiting for a killer move that yields a huge profit all at once.

Too often, traders, and yes, even myself, get caught watching, thinking a big move is on the horizon, and the whole time we watch as several perfect opportunities pass us by. Finally, we recognize that sequence and progression have taken hold and that the trade keeps breaking and it moves along more and more, forcing position traders to take a Stop or reverse. So, you jump in and of course, the Market reverses and kills your trade. At that point, all you remember is the loss, not all the opportunities you let slip by because you were greedy and wouldn’t take the easy money. The easy money comes in small doses.

This scenario played out on me many times before I learned to develop a sensitivity to the price action combined with a sensitivity to the current environment. I further learned that I had to be willing to alter my game plan – trade size, profit objectives, Stops – based on what I was seeing. More important, I learned that my opinion was not of much use and that trading on ego and opinion is a sure-fire way to empty out your bank account.

If you learn the setup’s I’ve shared in this course you can avoid all the headaches I had to endure. You must be disciplined enough to stay focused on the only factors that matter. Here’s a rule I live by:

See it – Believe it – Trade it

A successful trader must be capable of reading the price action, adapt to the current environment by recognizing the slope/progression of a swing/trend and then trade based on what they see, not feel.

If you’re in a flat or congested Market then be on the lookout for small size trades that will yield small profits. The objective being to take a setup that is high percentage, give it a shot, while looking for the Market to test one of the range extremes and before it hits the other extreme and stops you for a loss. This also can position you for a break out of the range.

Conversely, Trends are traded in larger chunks, where you are seeking larger profits, while being aware of how the trade could retrace without affecting the integrity of the swing/move. With an upswing, you should be looking for higher highs and lower lows. In a downswing, look for the opposite.

Whatever it takes, you must train yourself to allow trades time to develop, so that you can take a profit. Several people have asked me, “if I reach my daily profit goal, why not just stop?” As an example, suppose your goal is to make $500 per day and you reach it, but the Market is ripe for profit. You have to take advantage of a Market that is giving you profit and stay away from a market that is made for losses.

Rigidity will kill a trader. Allow yourself to be flexible, take small “humble” profits when they’re practically being handed to you and remember that you will take losses, you will have to pay commissions, there will be slippage and therefore, you have to jump all over an advantageous market and take the day off when conditions are not favorable.

Try to think about the losing trades as a cost of doing business, like paying your phone or electric bill. If you setup your trades correctly and have your stops in the right positions, you will be ready to catch the big wave when it hits and all your small losses will be quickly reversed.

Lesson 6

Trends and Trend Days

Trend days are very difficult to master, but if you have patience, keep your opinion in check, I can show you some methods that will lead to successful trading.

Essentially, the earmark of a Trend day is when the Open and Close are at opposite extremes. Also, you’ll see very little in the way of intraday retracements and very often, they take place following a large gap. Later in the day, you’ll see Price action gain momentum and this is when you would typically see the high and low for the day. On Trend days, you’ll see the Stair Step pattern reveal itself, over and over. Here’s what’s happening on a Trend day:

The Price/Range expansion typically caused contraction/compression, which then results in another expansion. The process cycles several times.

In a moment, we will examine some examples of Trend days and the methods that will help you succeed at trading within this environment, but first we need to address the number one cause of failure for traders on Trend days; Opinion. Here are some examples of how NOT to think:

OPINION – “I’ve missed the move, so there’s no sense buying”. Or, “I think its gonna sell off because it’s up too high already, so buying would be a mistake”

OPINION - “I sat idle and watched the move roar by. It seemed too high for me to purchase and I lost 4 points on 2 shorts. I didn’t go long because I was certain I would be buying at the top”

Such thought processes will be your doom. You must take your opinion out of the formula and trade based on what you’re seeing, not what you’re feeling. It’s fine to recognize that moves can reverse themselves but to expect it, is ignoring the information before you. High’s can go higher and Low’s can go lower. Momentum is what causes this to happen and Price Action is how you determine how to trade.

WHAT IS A TREND?

A Trend is when a trade is progressing. If you’re long, then look for Higher Lows and Higher/equal Highs. If you’re short, look for Lower Highs and Lower/equal Lows. In other words, look for the Stair Step pattern. The Market should bust through Resistance and hold that level as Support.

A Trend can last anywhere from 30 minutes to a day or more. This is why you have to look at broader charts so that you can get a longer-term picture of the Market. If you watch 1-2 minute charts you won’t be able to get this critical perspective. When you’re looking to make an entry, you should be identifying S/R levels that, once the Market breaks through, will keep running. These S/R levels typically follow a Higher Low/Lower High that was the setup. The following graph demonstrates this process:

Just remember that each Step taken on the stairs can take longer than what will make you comfortable. Don’t let the pressure get to you. If the trade is holding S/R then stick with it.

Here are some NASDAQ futures:

Let me take you through how this day went. The Trend was up and the scenario quite typical. The day started with a big gap up that led into about a one-hour rally. Then it retraced and found support at 3342, where it held temporarily. When that level broke, you can see the market stepping down the stairs all the way to 3318, with a few retraces back up, before starting down again. At 3318 the buyers kicked-in and it shot back up to 3342. When 3318 was rejected, this was a clue that buyers had overcome the sellers. The Market failed to crack 3342 twice and then dropped back to 3325 before setting a Higher low of 3326. At this point there was a nice setup for a short, even though it would have produced a small loss. The point is, there was a good setup – that doesn’t mean they’ll always work. When you’re looking at this occurring in real-time, you want to see if the 3326 holds, because if it does, then the next shot up would probably break 3342, which it did. The Market went all the way to 3375 and produced some very nice setups along the way. Each time it dropped back to find a Higher Low was an indication that the Market was bullish and that it wanted to go higher. It did eventually close well off the high but by then, you would have executed some very nice trades.

When trying to size-up a possible Trend day look at the Opening Price and the range that follows over the first couple of minutes. Quite often the Opening Price is the Low price in the opening range on an up Trend day. On a Trend up day and using the reverse on Trend down days, if the Market breaks out of this Opening range it will probably keep on going. If you look at 2-3 minute charts you will be able to see the Market pausing within a 2-4 point range. Typically, this means that a Trend is about to occur.

After the Market shoots out of the Opening range you’ll see a clear Stair Step pattern materialize. From there, you will have retraces that find Higher Lows or Lower Highs over and over before shooting up/down again. Place your stops just below the previous high/low and be patient, because these trades are usually good for 3+ points.

You can look for the rally to last until noon or so, before settling down over the NY lunch hour. In the afternoon, you will often see a shakeout move between 2 and 3, so be prepared to buy the higher low that forms after the shakeout. It’ll be tough to do because the Market has just plummeted 6+ points but it’s a high percentage trade and very worthwhile.

Trend days may not always be exciting but if you wait patiently for the setups, the trades are very high percentage. You can try other strategies, such as, if you see the Trend coming early on, you should find a position and trail a Stop. You may want to hold your first positions until noon and then get started again in the afternoon.

A good indicator to watch is TRIN, which is the ratio of advancing/declining issues to Up/Down volume. This will show you whether there’s more volume in rising or declining stocks. If the TRIN is lower than .65, then most likely you’re in a Trend up day. But, if the TRIN is above 1.00, then it’s most likely a down Trend. On Trend up days the TRIN will typically flatline. My suggestion is to NOT short the market on such days.

Tape components are also worth watching, to see how they synchronize. When trading the S&P, watch the NASDAQ futures. Look to see if the NASDAQ/DOW

confirms the new highs in the S&P. If the ND fails to create a new high with the S&P this may be an indication that momentum is waning. I’ve found that typically, when the ND is leading, the best trends take place.

The preceding chart shows a progression of higher lows with the Marketing busting through resistance and holding support, while the Market keeps trending up. This type of Market represents an excellent opportunity to yield a profit. In fact, if you can identify this day early on and know where things are headed, you can meet your monthly profit objective all in one day.

The following chart would be one such day:

How Do We Know When a Trend is Over?

The end of a Trend is best characterized by a lack of enthusiasm when the Market retraces back to a high/low just made. Instead of continuing directly up the staircase, the Market tends to stall or rest a bit. This is almost impossible to describe using charts but if you watch the Market enough, you’ll become an expert at identifying the end of a Trend.

Price Rejection is one way of seeing the end coming. When the market reacts to an S/R level, the move is decisive, because the bulls/bears are essentially saying, “no more”. This looks quite different on a chart than the typical Trend retraces, which are slow and shallow, before the Market takes off again – Stair Steps. Price Rejection is very abrupt and goes straight up or down. Here’s an example:

This chart shows a textbook ABC setup for going short at about 1507. From there, the market slipped down to 1504.80 and then retraced to 1506.50, at which point it failed. Then, it went back down through 1504.80 to 1498 before resting. The retrace back to 1500.30 was too weak to consider the end of the move and sure enough, it wasn’t. 1498 was unable to hold support and the market dropped to 1494.50. But, from here, we get a decisive bounce upward that shoots to 1499. Look at the 3 bars that open at the lows and close at or approaching the highs, as this move plays out. This is a sign that the Market is rejecting 1494.50 and that the move is coming to an end and slip more into a range.

AFTERNOON BREAKOUTS

Afternoon Breakouts occur quite frequently and are a result of the Market trying to test/break the day’s high or low, which can result in one of three scenarios:

􀂃

The Market can break through and keep going

􀂃

The Market can break through and fail immediately

􀂃

The Market can break through, stall temporarily and then continue the move

Here are some charts to help demonstrate these scenarios. (We’ll skip the first scenario as this is fairly straight-forward).

CHANNELS

Channels are simply a combination of many of the concepts we’ve already discussed, viewed in a different way. They were developed to help with add-ons but are also very good for entries. To be effective with Channels you’ll need to have a keen understanding of S/R methods along with trends and an awareness of various environments.

In my opinion, the best time to trade is when the Market is Trending. Trending has been covered at length in this course and now we’re going to expand that knowledge to discover a new way of identifying opportunities that provide traders with a low risk advantage. If nothing else, this method will provide a level of visual clarity that should be very useful when setting up trades and, as important, keep you in those trades when you should.

Very often you’ll find that the Market stays within a Channel when it’s Trending. A Channel is essentially two parallel trend lines, with one being drawn below the higher lows and one drawn above the higher highs in an up trend and exactly the opposite for a down trend.

Here’s a great example:

Here are some general rules on Channels:

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Most of the price activity should remain between the upper and lower trend lines. You may see the price activity go slightly beyond these borders from time to time.

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The best Channels are at or about 45-degrees up or down across the chart. With steep Channels a sustainable move is less likely. The example above shows a perfectly formed downtrend and an up trend that is a bit steep.

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Generally speaking, 2 touches create a Channel and a third touch confirms a Channel.

Channels, like other trading methods, will not always setup perfectly. They may form too late or have swings that make them too unstable for safe entry. Just keep in mind that you’re always looking for a setup that feels right for you.

We’re going to cover how some of the other setup methods we’ve discussed can combine with Channels. Let’s start with locating entry points and then move on to techniques used for entering a trade.

As previously discussed, Trends tend to Stair-Step and when the Market is advancing higher, it breaks through resistance and then holds that level as support. This progression continues until the move is over. We’ve also determined that the most favorable Trends fit into a 45-degree Channel.

Here’s an example that shows a downtrend and there are two requirements for determining entry points:

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First, the market needs to retrace back to (or near) the top of the channel

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Secondly, the top of the channel should coincide with an S/R point.

The chart above shows a downtrend with several touches on the bottom side of the Channel. The red arrow shows the first point of entry, which met both criteria for making the trade. The Market failed at the top Channel and it also lined up with the S/R level - 1242.50.

Besides the ABC pattern, this setup is as good as it gets. For starters, we are selling resistance in a downtrend and secondly, our entry point coincides with a level where the Market should be finding resistance. Also, the point of entry lines up with the top of the Channel and the risk is quite small.

The next chart shows an uptrend:

This example is not picture perfect, as it was a bit steep and the retracements a little quick but still, the Market is setting up a nice Stair-Step pattern and the trend is quite obvious. You can also see a very nice ABC long that setup just before the Market turned north.

Channels are also very useful for determining when a Trend is running out of steam. In a strong Market, you will see continuous Higher Highs and Lower Lows, but when the momentum slows, a progression of equal Lower Highs and Higher Lows. This happened in the above example when the Market turned to an up trend.

FINAL THOUGHTS

I wouldn’t view the two different methods as an “either or” decision, nor are they applicable to down moves only. Both these entry techniques can be mixed and matched depending upon how the market is moving that day. But like everything else in trading these can be “acquired tastes” which require a little time to develop a feel for when/how to use them.

But in the end it all boils down to PRICE and our ability to read a chart. I also think that it demonstrates clearly that the use of Horizontal lines and Trend lines can be invaluable since they draw your attention to exactly where it needs to be.

I hope you have found this Lesson both helpful and informative. It’s really important that we take full advantage when the market trends because those times present us with the best risk/reward scenario.

Now let’s move onto Lesson 7 and Money Management.

LESSON 7

Money/Trade Management

The first rule of Money/Trade Management should be “cut your losses short and let your profits run”. This may sound like an over-simplification, but if you create a plan and live by this rule, you will become a successful trader. On the other hand, if you listen to your opinion and live by your emotions, you will ignore this simple rule and most likely, suffer the consequences.

Here are a few questions that reveal what motivates the average person:

Question #1:

Which would you prefer: (1) a sure loss of $9,000 or (2) a 5% chance of

no loss at all, plus a 95% chance of a $10,000 loss?

What would you have picked? A survey showed that 80% of those surveyed picked option 2, which is nothing more than chasing a win on a 5% chance, which of course, leads to an even greater loss. You have to trade when the market has favorable conditions. Don’t violate the rule.

Question #2:

Which would you choose: (1) a sure gain of $9,000 or (2) a 95% chance of

a $10,000 gain plus a 5% chance of no gain at all?

Seems like the sure gain is logical, right? But, a 95% chance should fit your trading plan. Wouldn’t you place a trade where you know you have a 95% chance of success? Of course you would. So, stick with the rule. Don’t exit a trade just because it made you some money, let it make you all the money it can. Entries are not as important as how you manage the trade and how you exit. Focus on proper trade management. If the trade isn’t working, then exit. If it is working, don’t exit prematurely.

Here are two tactical rules for trading:

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Always use Multiple Contracts When Trading

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Always have a Plan that Incorporates Stop Loss and Profit Objectives

If you trade in single contracts or shares you will place yourself in a situation where you have no options, which will make it impossible to manage your trades effectively. If you just accept this rule from the start, you’ll save yourself substantial amounts of money and headaches.

It is equally important to have a plan that incorporates your strengths and personality, along with the environment you’ll be trading. Figure out what you like or dislike and then stick to conditions that fit your personality. If you’re better at reading up trends than down trends, then go with it and don’t let your ego take over. If you can see the market trending downward, just call it a day, go out and play tennis or golf.

Also, gauge the size of your trade based on the current conditions. If the setup looks “so-so”, then be conservative. If the setup looks great and you feel really

strong about the current conditions, don’t be afraid to make a big trade. The key is to not get in the habit of always trading the same amount. Trade what makes sense with the environment before you.

I suggest looking at market conditions as Tiers:

Tier 1 – You have a clear setup but the conditions are not great. Trade smaller size.

Tier 2 – The setup and environment both look good. Trade small to medium.

Tier 3 – Conditions are optimal and the setup looks textbook perfect. Go for it.

In all cases, you should trade at your comfort level. I use the above numbers only as estimates. It will take time for you to develop a keen understanding of how your comfort level fits the Market. Soon, you will be making larger trades when the market fits your comfort level and smaller trades when you are less certain. In the end, you’ll be keeping the math on your side by taking advantage of the good days and reducing losses on the bad days.

LOSERS

I didn't write the following, but I couldn't agree more:

Learn to appreciate losses...

“Sounds almost morbid doesn't it? But the truth is, I've never known a good trader that didn't readily accept losses as a normal part of trading. You see, it's your ability to take losses and handle the pain that ultimately determines your success. Think over the alternative. If you let your losses interfere with your next trade, you're never in position to recover losses and to make a profit. Said another way, if losses make you alter your approach, you're doomed to failure. If you followed your method, a losing trade is a good trade. Losing trades put you one step closer to having a winning trade. In this way, we must all learn to like our losses and handle them gracefully, realizing they are a normal part of trading. I aggressively disagree with the notion that you can always learn something from a losing trade. It is this false belief that causes traders' undue stress. If you followed your rules, then there's nothing to figure out. Take the loss in stride with your head up and move along to your next trade”.

Accepting risk is a critical component of becoming a successful trader, if not being successful period. When you look at all the things humans have accomplished over the centuries, risk is the one constant thread between them. Indeed, the USA is the result of a monumental risk. At that time, the British had the most powerful military on the planet and we, at least in their eyes, were nothing more than a reckless mob. Still, in the face of ridiculous odds, we managed to prevail. You should look at your trading enterprises in the very same light. There will be risk and you will have losses, but you must not allow yourself the privilege of crying over your losses. Just pickup and move on to the next trade.

Don’t waste your time searching for the perfect trading plan that will yield only profits. There is no perfect system, but there are perfect traders. A perfect trader takes losses in stride and instead of sulking, immediately refocuses and finds another setup that will yield a profit. Trading is more about thinking clearly than having a positive attitude. Stay focused on your plan, set your emotions and opinion aside and accept losses as a part of doing business.

Don’t let trading make you stupid.

I’ll leave you with one last favorite:

The Trader

The symbol of all relationships among such men, the moral symbol of respect for human beings, is the trader.

We, who live by values, not by loot, are traders, both in manner and in

spirit.

A trader is a person who earns what he gets and does not give or take

undeserved.

A trader does not ask to be paid for his failure, he does not ask to be loved

for his flaws.

A trader does not squander his/her body as fodder, or his/her soul as alms.

Just as he/she does not give his work except in trade for material values, so he/she

does not give the values of his spirit –- his/her love, his/her friendship, his/her esteem-

– except in payment and in trade for human virtue, in payment for his/her own

selfish pleasures, which he/she receives from people he can respect.

The mystic parasites who have, throughout the ages, reviled the trader and

held him in contempt, while honoring beggars and looters, have known the

secret motive of their sneers:

A Trader is an entity they dread –- a man of justice.

-- Ayn Rand