Professional Trading Strategies
‘What REAL Traders Need To Succeed’
Presented By:
JARED WESLEY
Co-Founder, Live Traders
DISCLAIMER
All information provided is for education purposes only. Live Traders LLC is not an advisory service or a registered investment broker-dealer. We
may hold positions in stocks, options and other market instruments discussed, but this in no way constitutes investment advice.
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Trading the markets in any capacity involves substantial risk of loss. This activity may not be appropriate for everyone, and you should only risk
what you can afford to lose. Live Traders does not guarantee trading profits, nor do we guarantee freedom from risk. You must assess the risk
of any trade with your broker or financial professional and then make your own independent decisions regarding any trades taken. Live Traders
LLC is in no way responsible or liable for any trader losses whatsoever.
Past performance should not be considered an indication or guarantee of future performance, and no representation or warranty, express or
implied is made regarding future performance.
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consent of the company (Live Traders LLC). Copyright © 2018 by Live Traders LLC
2
TABLE OF CONTENTS
1. Introduction (Pg.5)
4. Pattern Boosters (Pg.114)
2. Candle Sticks & Trends (Pg.16)
5. Gaps (Pg.187)
3. Essential Patterns (Pg.56)
6. Super Plays (Pg.223)
The Truth About Trading
Why So Many People Struggle
Why Trading Is NOT Gambling
Timeframes & Styles
Basic Candle Stick Language
Market Cycles: Stages 1-4
3 Basic Trends: Up – Down – Sideways Trend
Buy & Sell Set-Ups
Breakouts, Breakdowns, Flags & Triangles
3 & 4 Bar Plays
Turnaround Play (Trend Confirming/Changing)
Parabolic Buy & Sell Set-Ups
Must Haves vs. Like To Haves
BT/TT, WRB/NRB, +/- VOLUME, EMA’s, SUPPORT,
COC, RS/RW, MT, 50/100
What Is A Gap?
Pro & Novice Gaps
Gap Ratings: Level 1, 2, 3
Gap Entries
Super 3BP & 4BP
Super Curl
3
TABLE OF CONTENTS
7. Order Entry (Pg.241)
Order Types & Basic Level II
Spreads
How To Get Filled
ECN Routes & The Costs Involved
8. Money Management (Pg.301)
Account Rules
Risk Level Considerations
9. Trade Management (Pg.316)
Why It’s Important
There’s a Million Way To Manage:
BBB, PIVOT, AON, MA, PYRAMIDING, SELL
INTO STRENGTH, COMBINATION
11. Psychology (Pg.402)
Why Traders Struggle
Considerations: Personality, Time, Money, Intangibles
12. Pre-Market & Early Charts (Pg.428)
Pre-Market Charts
Early Charts
When To Wait
13. Putting It All Together (Pg.451)
Trading Day Preparation: Morning Routine
Chart Examples: Putting It All Together
Closing Comments
10. The Business of Trading (Pg.353)
Having A Plan
Tracking Your Trades
Planning For Success
4
CHAPTER 1
Introduction
Professional Trading Strategies
5
CHAPTER 1: Introduction
The Truth About Trading
Why So Many People Struggle
Why Trading Is NOT Gambling
Our Goal
“The stock market is never obvious. It is designed to fool most people most of the time.”
– Jesse Livermore
www.LiveTraders.com
1-800-947-4027
6
The Truth About Trading
At its very core trading is simply a game of ‘statistical probability.’ No matter how perfect a setup is, it could fail.
No matter how poor a setup is, it could still work. The key to being a profitable trader is consistency.
Approaching each trading day and each individual trade the same way everyday. This gives us an edge. Then
through proper money and trade management we simply let this ‘edge’ make us money.
In order to do this we need a solid foundation in technical analysis, as well as reliable trade and money
management techniques. As you will see in the coming pages, there are many different trading strategies, as
well as many different ways to manage each trade. Your job is to choose 1-2 of these strategies/patterns, apply
a simple, straight forward management approach and then duplicate this process everyday. The simple,
organized, consistent trader makes money. The overcomplicated, unorganized, inconsistent trader generally
quits out of frustration.
Keep in mind, these comments are being made by profitable traders who have been through the ups and downs
this business presents and have learned the ‘secrets’ of trading success.
7
Why Do So Many People Struggle?
Trading is a challenging endeavor. It is not a get rich quick type of business and it usually takes time to learn
‘how to make money.’ Unfortunately most aspiring traders enter this industry thinking ‘it can’t be that hard’ and
they will immediately make a lot of money in a very short amount of time. This is extremely naïve.
From our experience, it generally takes traders 2-3 times longer than they ‘think’ to succeed. This isn’t to say
that some people don’t pick up on the business very quickly, but this is the exception not the rule. The problem
with this, is that most people think they will be the exception. By definition, this is impossible. So, one of the
main reasons so many people struggle and ultimately fail is their timeline for success is too near
sighted.
To be successful, you have to work hard, be tremendously objective with yourself and most importantly
choose a trading style that is conducive to your personality. Too many traders try to ‘copy’ someone
else’s style. While there are some things you can emulate, your main approach to trading has to come from
within your given personality, which you will only ‘truly’ learn in the trenches of the market, which comes from
the experience of taking many trades! This is the single biggest reason that traders struggle. They fail to realize
that successful trading is simply a matter of managing emotions and then letting the odds play out.
8
The Chart Is Your Guide
Don’t be fooled by your ego and what the news is pitching.
Facts To Consider:
❑
❑
❑
❑
❑
The news/media, and the so called pro’s on TV ARE NOT your friend, they are all pitching an AGENDA.
Your broker makes his/her living off of your FEES.
Most ‘professionals’ under perform the market.
YES, even Blue Chip stocks get CRUSHED sometimes.
Lesson? Don’t let your ego take over, stay objective.
You have to use COMMON SENSE and make sure you are not letting your ego write checks your bank account
can’t cash!
This is why CHARTS are so meaningful, because they are the actual flow of MONEY. They don’t lie, but people
sure do, because people have agendas!
9
Technical vs. Fundamental
Although the line has become slightly more blurred in recent years due to the overall access of information, the
main difference between a technical trader and a fundamental investor is the tools they use to meet their
objectives.
A technical trader only relies on candle stick charts to make accurate and informed decisions about what the future
price of a stock is likely to be. Generally speaking a technical trader does not care what the company internals look
like, what their credit risk is, sales figures, management team, P/E ratio etc. All of that is irrelevant, because the
chart tells us everything we need to know, which is the FLOW OF MONEY. Here’s the reason technicals are so
powerful: the charts don’t lie, but people do. CEO’s go on CNBC all the time to pitch how well their company is
doing regardless of the truth. Simply put, they have an agenda. Although extreme, think Enron.
A fundamental investor on the other hand cares very much about the inner workings of a company, in fact, this is
one of their main factors in choosing which stock to purchase. Why are stocks like TSLA worth more than GM?
Technical analysis is a far simpler approach, yet far more specific at the same time, and most importantly it’s as, or
even more accurate than fundamental analysis.
10
Yearly DJIA Chart
Prior pivot, where buyers
stepped up in the past
Breakout
1929 Crash: Fear
= Sellers In
Control
Sellers
Stepping Up
Climactic Move = Too Extended.
Also, prior pivot low, where
buyers stepped up in the past =
they’ll likely do it again.
11
Trading Is NOT Gambling
Every Good Technical Trade Has 3 Things:
1. ENTRY
2. STOP
3. TARGET
Without any one of these things, there is no trade. A good trader knows EXACTLY how much he/she is risking
BEFORE they ever take a position. This is called money management. It is imperative to success, yet many
fundamental investors don’t have these protections in their plan. They simply wait until the pain is so great that
they can longer hold onto the position any longer, and then they sell.
Think about the crash of 2008 when the market lost 40%-50%. Most average investors sold AT THE BOTTOM, only
to watch the markets go on a 9 year bullish run, nearly tripling in value. A technical trader would have never let a
position go 40%-50% against them. Technical trading is also known as ‘rule based’ trading because we have very
detailed/specific parameters that every trade must meet. This is why it is generally superior to the average
fundamental investor.
12
Entry, Stop, Target
BEFORE Taking a Trade, We Can Predetermine Our Potential
RISK and REWARD Using This Simple Approach
TARGET
Example:
(Use Limit Order)
Entry: $20.00
Stop: $19.80
REWARD
$200 Risk
Equal: 1000 Shares
ENTRY
(.20 x 1000 = $200)
(Use Stop Limit Order)
RISK
STOP
(Use Stop Market Order)
13
Charts = Statistical Edge
Let the charts tell you what to do. Don’t mess around with reading 100’s of pages of nonsense about upgrades or downgrades
or who the new CEO is doing. That’s like trying to choose the next LeBron James in the draft. It’s very difficult. Let the chart
be your guide:
The chart told us everything we needed to know about this stock.
ENTRY, STOP and TARGET. This trade lasted 5 days and moved
$11.50 or 62%! Most people are ‘happy’ to make 8% a YEAR!
Entry: $18.50
Stop: $17.75
14
Our Goal
Our goal at Live Traders is to help educate traders on the proper technical chart patterns as well as the proper
mental approach to the business. We understand that there are lots of different ways to succeed, and we will
examine many of those styles throughout this course, but we also understand that ours is not the only
approach to trading, so we try to stay open-minded and flexible because we are all always learning and
striving to be better.
We will also make it our main objective to show the importance of money management, trade management and
of course the role that psychology plays in being an effective trader. We have found that many trading
education firms place far too much emphasis on chart patterns alone. When in reality the chart patterns are
much LESS important than having proper psychology, money management and of course market experience,
which we believe is the single most important factor to success.
As we go through this course, please pay attention to not only the slides, but to what the instructor is saying,
as his words are coming from years of LIVE trading experience. This course is not being taught by an arm chair
warrior, it is being taught by a true professional that has earned his place in the markets. Though that might
sound conventional, in truth, it is very uncommon in the trading world.
15
CHAPTER 2
Candle Sticks & Trends
Professional Trading Strategies
16
CHAPTER 2: Candle Sticks & Trends
Timeframes & Styles
Basic Candle Sticks
Market Stages
❑
❑
❑
❑
Stage
Stage
Stage
Stage
3 Trends
1:
2:
3:
4:
Accumulation
Demand/Greed
Distribution
Supply/Fear
❑ Uptrend
❑ Downtrend
❑ Sideways Trend
“Today’s market behavior is significant only when it’s compared to what the market did yesterday, last week, last month,
even last year. There are no predetermined, never-fail levels where the market always changes. Everything the market
does today must be compared to what it did before.”
– Richard Wyckoff
www.LiveTraders.com
1-800-947-4027
17
Timeframes & Styles
There are numerous different timeframes that traders trade in, from 1’ charts that micro-traders use, all the way up to the
monthly charts that longer term swing and core traders use. Although every pattern we teach here at Live Traders is relevant
in ALL timeframes, there are some differences with regard to approach.
Shorter term traders, usually referred to as ‘Day-Traders’ or ‘Scalpers’ are looking to take advantage of short term moves within any given market day from 9:30am EST open to 4pm EST close. We generally refer to this style of trading as ‘income
producing.’
Longer term traders, usually referred to as ‘Swing-Traders’ or ‘Core Traders’ are looking to take advantage of long term moves
over the course of many days, weeks and even months. This type of trading is often referred to as ‘wealth building.’
Here at Live Traders we have added a third category to this equation that we feel is the best of both worlds and allows
traders to combine ‘income producing’ styles with ‘wealth building’ styles. We refer to this as: ‘Intra-day Swing Trading.’ The
basic premise is that we begin our position on a smaller timeframe to gain a more precise entry, then if the stock acts
correctly throughout the trading day, we will then sell a portion of our intra-day lot and then hold the remaining shares for a
longer term move. This allows us to book profits for income on the intra-day timeframe, but also leave a portion for wealth
building on the higher timeframes. It is extremely powerful and something that should not be overlooked.
18
Timeframes & Styles
A lot of trading companies divide the different trading timeframes into categories such as ‘long- term’, ‘medium-term’
and ‘short-term.’ Here at Live Traders we have refrained from doing this because this doesn’t account for the various
styles of trading. To a scalper, the 60’ chart would be consider LONG-TERM, whereas to a CORE TRADER, the 60’ chart
would be consider SHORT-TERM.
Here is our basic rule: Regardless of the timeframe in which you trade, you need to ALWAYS check at least 2 (3 is
better) timeframes above your projected entry timeframe, and also look at 1 timeframe below your projected entry
timeframe. This will give you a good ‘multiple-timeframe’ view of what the stock is doing. We always have a timeframe
of BIAS (higher TF) and a timeframe of ENTRY (where the pattern is, usually lower TF).
General Rules:
❑If you enter your trades on 1’, 2’, 5’ & 15’ charts you are an Intra-day Trader.
❑If you enter your trades on 60’ & Daily charts you are a Swing Trader.
❑If you enter your trades on the Weekly & Monthly charts you are a Core Trader.
❑Note: This doesn’t mean you can’t employ multiple styles!
19
Timeframes & Styles
Trading Characteristics:
Intra-Day Traders:
❑Looking to take advantage of short-term moves. (5 min. to 2 hours)
❑Protects profits as a stock moves higher, unwilling to give ‘too’ much back.
❑Looking for daily/weekly income to pay ‘everyday bills.’
Swing-Traders:
❑Looking to take advantage of longer-term moves. (1-15 days)
❑Gives more room when managing to allow for pullbacks and larger gains.
❑Looking to build their portfolio and gain wealth.
Core-Traders:
❑Looking to take advantage of very long-term moves. (weeks to months)
❑Gives A LOT of room when managing and only exits when the prevailing trend on the higher TF (weekly/monthly chart) is no longer in tact.
❑Looking to build their portfolio to gain wealth, freedom and retirement money.
Intra-Day Swing Traders:
❑Looking to take advantage of short-term and long term moves.
❑Protects partial profits intra-day, yet allows a portion to gain bigger profits.
❑Looking to pay every-day bills, and slowly build wealth using 1 account.
20
15’ Intra-Day
15’ Chart
Entry
1st Target
Stop
21
60’ Swing Chart
Stage 3
60’ Chart
2nd Target
ADD
1st Target
Initial Entry
Raise Stop
Initial Stop
Double Bottom Retest
22
Weekly Core Chart
Weekly Chart
3rd Target
As long as the stock stays above the r21ema and
doesn’t break any pivot lows, you STAY IN. You will
likely have to sit through some big pullbacks, but as
long as the trend is in tact, you hold and ADD on every
subsequent opportunity.
2nd Target
1st Target
Entry $27
Stop $26
23
‘Intra-Day Swings’
Daily Chart
r21ema
Target Area
The 2’ BO is in alignment with the daily
breakout in a transition period. This is
the most powerful type of trade you
can get. You get a tight stop from the
2’ BO and it closes the day up $4,
which gives you protection on your
swing trade. So you sell ½ of your
intra-day position EOD then hold it for
a longer term swing trade.
2’ Chart
Daily Breakout
Entry: $49.50
Stop $49.20
24
‘Intra-Day Swings’
Daily Chart
There is a nice 2’ BS after a nice L1
Gap that moves 8:1 on the 1st day
and then continues $10 higher on a
10 cent stop loss!! That’s 100:1!
Entry: $21.00
2’ Chart
Stop $20.90
25
‘Intra-Day Swings’
15’ Chart
Daily Chart
Entry:
$135.00
Stop $134.30
This trade starts with a perfect Level 1 Gap, then gives a nice 15’ BS that ends the day $4 higher,
and ultimately moves $20 on the daily chart on an initial 70c stop. 28:1 Reward to Risk.
26
Candle Sticks & Trends
The majority of technical traders use “Japanese Candlesticks” when looking at charts because they show the
difference between the open and the close of a bar during a given time period. Although there are also
“Western Style” bars, as well as HLC bars and OHLC bars among others, our focus is ONLY on Japanese Candle
Sticks.
It is important to understand that these Japanese candlesticks tell us just about everything we need to know to
make a firm, reliable technical chart decision about the direction of a stock. Every time someone places a trade,
that trade forms a tick, those ticks form bars, those bars form charts, and those charts form the 3 important
trends that we look for to exploit the markets.
Here at Live Traders we are big fans of Richard Wyckoff and Stan Weinstein as it relates to market cycles and
the different emotional states that are associated with the various market stages. Technical analysis is NOT
new. It wasn’t created in the 2000’s or the 1990’s or even the 1980’s! We are simply fine tuning strategies and
ideas that were put forth over 100 years ago and are still extremely relevant today! The patterns you will
learn in the following pages are relevant in ALL timeframes!
27
Chart Keys
There are 3 key things that are crucial to accurately reading a candlestick chart:
1.How did the bar (candlestick) form?
2.Where did the bar form (on the chart)?
3.How did it get to where it’s currently at?
In the next several pages we are going to take a look at each one of these “key” components. Individually they
don’t mean nearly as much as they do collectively. In other words, knowing all 3 ‘key’ components is a lot more
potent and reliable than just knowing 1 of them.
28
The Basic Candlestick
29
Different Candle Stick Bars
Buying pressure is increasing = BULLISH
Selling pressure is increasing = BEARISH
30
How Did The Bar Form?
It’s Important To “Look Inside” The Bars. We Do This By
Drilling Down To A Lower Timeframe.
How Would You Prefer The Bar To Form? Hint: Think Battle Tested.
31
Where Did The Bar Form?
TT Bar
Candle sticks are ONLY meaningful in
the context of the chart.
TT Bar
+WRB
TT Bar
NBB
Is This BT Bar
Significant?
-WRB
NBB
BT Bar
BT Bar
32
How Did It Get There?
TT Bar
Ending
-WRB
Igniting
+WRB
Same Bar, Same
Meaning?
Significant NBB?
Igniting
+WRB
Same Bar, Same
Meaning?
33
Putting It Together
What Can We Expect Here?
1.
2.
3.
4.
5.
6.
6 Bars Down
Wide Range Ending Bar
Volume Spike
At Pivot Support
Far From the EMA
Green Bar At The Bottom
How Did This Bar Form?
Where Is It Forming?
Level 1 Support
34
Understanding The 4 Market Stages
Most stocks move in harmony with the market, therefore understanding the 4 market stages (Stan Weinstein:
Secrets for Profiting in Bull and Bear Markets) is imperative to success in trading. It not only allows us to
recognize the emotions that are associated with each stage, but also the next likely market direction. Once you
understand the market stages you will rarely be on the wrong side of the market.
Stage 1: This is a sideways “Accumulation” period, associated with the fairly uneventful emotion of: Apathy or
Indifference. Stage 1 is usually (but not always) a narrow range, quiet stage with limited activity. Typically it has
lower volume and a general lack of interest.
Stage 2: This is an up-trending “Demand” period, associated with lots of buying from greedy traders and
investors. Stage 2 is usually a wide range move with increased volume and lots of activity. This is a stage where
many people make money and greed is dominant.
Stage 3: This is a sideways “Distribution” period, associated with a lot of back and forth action (tug-o-war)
between buyers and sellers. It is typically (but not always) a sloppy, wider range period where buyers finally
give up control to the sellers before the stock ultimately moves lower into a stage 4 downtrend. Think: Anxiety
and Uncertainty.
Stage 4: This is a down-trending “Supply” period, associated with lots of selling from fearful traders and
investors who want to exit the stock at all costs. This stage is usually the fastest moving, as fear is more
powerful than greed in the stock market.
35
The Basic Market Cycle
Stage 1: Accumulation/Apathy
Stage 2: Demand/Greed
Stage 3: Distribution/Anxiety
Stage 4: Supply/Fear
Stage 2
Stage 1
Stage 3
Stage 4
Stage 1
36
The Detailed Market Cycle
Sell Set-Up
Breakout
Buy Set-Up
Breakdown
Sell Set-Up
Breakout
Buy Set-Up
Stocks & Markets must and will go through all
4 stages (in order) in ANY/ALL timeframes. It
is the foundation of technical analysis trading,
and it’s all driven by human emotion.
Cycle Begins
Starts Over Again
37
4 Stages w/ W-Bottom
Stage 3:
Anxiety
60’ Chart
Stage 4:
Supply
Stage 2:
Demand
Stage 1: Accumulation
38
The Market Cycle
Stage 3:
Anxiety
60’ Chart
Stage 4:
Supply
Stage 2:
Demand
Stage 1: Accumulation
39
Macro Stages
Monthly Chart
Stage 1: Narrow Range: Quiet Vol.: Accumulation
Stage 2: Demand Increasing: Greed Took Control
Stage 3: V-Top w/TT: Buyers Exhausted
Stage 4: Supply Increasing: Fear Took Control
V-Top Stage 3
Stage 2:
Demand
Stage 4:
Supply
Stage 2:
Demand
Quiet Stage 1
What’s This?
40
The 4 Market Stages
M-Top Stage 3 Retest
Monthly Chart
Stage 2:
Demand
Quiet Stage 1
Stage 4:
Supply
Quiet Stage 1
41
Setting Tops & Bottoms
There are various ways that stocks can set tops and bottoms in stages 1 and stages 3. It is extremely important
to understand that HOW a stock arrives at these areas is crucial to whether or not we can take an entry. We
will discuss this in further detail later on, however it is often best to wait for extra-confirmation before
buying/shorting in these areas, or perhaps start your position with a partial lot and then add as we get more
confirmation.
The most common are listed below:
❑ V-Top & V-Bottom
❑ M-Top & W-Bottom
❑ Consolidation Bottoms
▪ Note: we typically don’t have ‘consolidation tops’ as stage 3’s are usually wild/whippy due to the tug-owar taking place.
42
Stage 3 Micro V-Top
1’ Chart
Stage 3
Stage 2
Supply Increasing =
Sellers Winning
Stage 4
Stage 1
+ Volume
43
Stage 1 Micro V-Bottom
5’ Chart
Stage 3
21ema
Stage 4
Stage 2
Entry
Stage 1
V-Bottom
Stop Loss
Massive
Volume
44
The M-Top Stage 3
Daily Chart
Stage 3
Stage 4
Stage 2
After an extended move up, the
$35 area was retested 2 times
and the failure to go higher
suggests supply is increasing.
Sellers are winning the battle.
Expect lower prices.
Stage 1
45
The W-Bottom Stage 1
Note: These are more reliable after very extended
moves with wide range ending bars on increased
ending volume, and preferably with a BT.
5’ Chart
Daily Chart
Excellent
Buying
Opportunity
Excellent
Buying
Opportunity
Stage 1
Stage 1
46
Consolidation Bottom
2’ Chart
Daily Chart
Buy Areas
Buy Area
Stage 1
Note: this is not
a buy area as
we need more
confirmation of
strength
Stage 1
Note: this is not
a buy area as
we need more
confirmation of
strength
47
3 Trends
In the stock market there are 3 different trends that we look to exploit:
❑ UPTREND: Multiple higher pivot highs and higher pivot lows
❑ DOWNTREND: Multiple lower pivot highs and lower pivot lows
❑ SIDEWAYS TREND: Equal pivot highs and equal pivot lows
Note: Smooth Uptrends and Downtrends are easier to make money from than Sideways trends,
as by definition they are generally ‘non-directional.’ It is always simpler to make money from clear
directional moves rather than non-directional ones. It’s generally better to let a stock breakout out
of a non-directional range and then buy the 1st pullback into the newly formed support area.
48
Macro Stage 2 Uptrend
Weekly Chart
This chart goes from a narrow range sideways
stage 1 into a stage 2 uptrend with multiple
higher pivot highs and higher pivot lows. Notice
it stays above the r21ema as well. These are
indications of a strong, smooth stage 2 uptrend
HPH
HPH
HPL
HPL
Stage 1
Wide Range Igniting Bar Breaks Out
of the Narrow Range Stage 1
49
Macro Stage 2 Uptrend
Weekly Chart
HPH
This chart goes from a narrow range sideways
stage 1 into a stage 2 uptrend with multiple
higher pivot highs and higher pivot lows. Notice
it stays above the r21ema as well. These are
indications of a strong, smooth stage 2 uptrend
HPH
HPL
HPH
HPL
r21ema
HPH
HPL
Stage 1
50
Micro Stage 2 Uptrend
5’ Chart
This stock breaks out of a micro stage 1 on the 5’ TF with a
wide range igniting bar that eventually turns into a nice
controlled consolidation with an eventual breakout over $53
and stays above the r21ema for the remainder of the day.
5’ BO Entry
Stage 2
+WRB
r21ema
Stage 1
51
Micro Stage 4 Downtrend
5’ Chart
Stage 3
LPH
LPL
LPL
This chart goes from a narrow range
sideways stage 3 into a micro stage 4
downtrend with multiple lower pivot
highs and lower pivot lows. Notice it
stays below the d21ema as well. These
are indications of a smooth weak stage
4 downtrend.
LPL
LPL
What’s This?
52
Stage 4 Downtrend
5’ Chart
LPH
LPL
LPH
LPL
53
Macro Sideways Trend
Daily Chart
Sideways Trend Defined:
Equal Pivot Highs and
Equal Pivot Lows.
EPH
EPH
EPH
EPL
54
Stage 1 Sideways Trend
Daily Chart
Sideways Trend Defined:
Equal Pivot Highs and
Equal Pivot Lows.
Note the retracement levels: 100%
EPH
EPL
55
CHAPTER 3
Essential Patterns
Professional Trading Strategies
56
CHAPTER 3: Essential Patterns
Buy & Sell Set-Ups
Breakouts & Breakdowns
Flags & Triangles
3 & 4 Bar Plays
Turnaround Plays (Trend Changing & Trend
Confirming)
Parabolic Buy & Sell Set-Ups
“The only opinion about your dream that really counts is yours. The negative comments of others merely reflects their
limitations, not yours.”
– Cynthia Kersey
www.LiveTraders.com
1-800-947-4027
57
Introduction To Essential Patterns
As technical traders we are always looking to find a higher timeframe trend where the big money is to gain a
BIAS and help us accurately choose the overall direction of a stock. However, a higher timeframe ‘trend’ alone
is not enough to profit from a stock. We still need to find a ‘reasonable’ entry that will provide us with a positive
reward to risk ratio. We accomplish this by entering our trades using “Essential Patterns.”
These are the vehicles that allow us to take advantage of the higher timeframe trends. Basically we are looking
for a higher time frame ‘bias’ (long or short), then we will drill down to a lower timeframe to get a defined
‘entry’ using these “Essential Patterns” which we will discuss in the following chapter.
NOTE: Though there are many patterns to choose from, here at Live Traders we highly recommend that you
select only 1-2 in the beginning and focus on those. Do not try to be a jack of all trades when you begin. Rather
master 1-2 of these powerful patterns.
58
Essential Pattern Guide: Longs
Buy Set-Up (BS)
Retest Buy Set-Up (RBS)
W-Bottom (WBS)
+3 Bar Play
+4 Bar Play
Breakout (BO)
Bull Flag/Wedge
Bull Triangle
+Turnaround Play
Parabolic Sell
59
Essential Pattern Guide: Shorts
Sell Set-Up (SS)
Retest Sell Set-Up (RSS)
M-Top (MSS)
-3 Bar Play
-4 Bar Play
Breakdown (BD)
Bear Flag/Wedge
Bear Triangle
-Turnaround Play
Parabolic Buy
60
Buy Set-Up (BS)
Main Requirements:
1) Must be in a stage 2 uptrend or coming from a double bottom retest/transition. (W pattern)
2) 2 or more lower highs (LH)
3) ‘Sequential’ pullback with less than a 50% overlap on any bar. (A 45° (degree) angle of retracement is
ideal. Don’t want it ‘too’ steep.)
LH
1st
BUY when the NEXT
bar breaks above this
bars high.
Target
Place Stop Loss Here
Entry
Stop Loss
61
5’ Buy Set-Up (BS)
5’ Chart
Buy Here
Prior Pivot
High = 1st
Target Area
r21ema
Stop Loss
1. Uptrend
2. 2+ LH’s
3. Smooth Pull Back
w/little overlap
62
5’ Buy Set-Up (BS)
5’ Chart
Buy Here
Prior Pivot High
=
1st Target Area
r21ema
Buy: $54.65
Stop: $54.40
Target: $55.50
R:R = 3:1 +
Stop Loss
1. Uptrend
2. 2+ LH’s
3. Smooth Pull Back
w/little overlap
63
2’ Re-Test Buy Set-Up (RBS)
2’ Chart
Buy Here
r21ema
Stop Loss
1. Uptrend
2. 2+ LH’s
3. Smooth Pull Back
w/little overlap
64
60’ W-Bottom Buy Set-Up (WBS)
60’ Chart
These are also known as
“Transitionary Buy Set-Ups. (TBS)”
1. W-Bottom
2. 2+ LH’s
3. Smooth Pull Back
w/little overlap
Target Area
r21ema
Buy Here
NOTE: these plays work best
when they come from an
extended move with increased
volume at the bottom.
Stop Loss
65
Sell Set-Up (SS)
Main Requirements:
1) Must be in a stage 4 downtrend or coming from a double top retest/transition. (M pattern)
2) 2 or more higher lows (HL)
3) ‘Sequential’ pullback with less than a 50% overlap on any bar. (A 45° (degree) angle of retracement is
ideal. Don’t want it ‘too’ steep.)
Place Stop Loss Here
Stop Loss
SHORT when the
NEXT bar breaks
below this bars low.
Short Entry
HL
1st Target
66
2’ Sell Set-Up (SS)
2’ Chart
1. Downtrend
2. 2+ HL’s
3. Smooth Pull Back
w/little overlap
Stop Loss
Short Here
d21ema
Prior Pivot Low
=
1st Target Area
67
5’ Sell Set-Up (SS)
5’ Chart
1. Downtrend
2. 2+ HL’s
3. Smooth Pull Back
w/little overlap
Stop Loss
Short Here
d21ema
Prior Pivot Low
=
1st Target Area
NOTE: Not all trades work or hit target. This is why we have protective stop losses.
68
15’ Sell Set-Up (SS)
15’ Chart
Stop Loss
d21ema
Short Here
1. Downtrend
2. 2+ HL’s
3. Smooth Pull Back
w/little overlap
Prior Pivot Low
=
1st Target Area
69
Breakouts (BO) & Breakdowns (BD)
Breakout/down: is the point in which a stock moves above or below a trading range, usually away from
support/resistance. It’s a fast rise in price through a resistance level or a drop below a level of support,
ALWAYS in the same direction of the existing move or trend.
Breakouts/downs can happen at ANY time during the day in any timeframe. There is not much difference
between and early morning breakout, a mid-day breakout or an afternoon breakout. Regardless of timing, we
will be looking for the exact same criteria for each of these plays. Despite this, occasionally we will see a lack of
follow through for lunchtime breakouts, therefore we try to be as stringent as possible with our entry criteria
and it is typical to move up a timeframe or two to ensure commitment on the higher timeframe.
NOTE: These can be more challenging to get filled on due to their tendency to pop hard without filling many
shares near the entry area. Therefore it is a good idea to have a basic understanding of Level II to help get
better fills on these types of trades.
70
Breakout & Breakdown Criteria
Main Considerations:
1.The consolidation should be ‘tight’ and clean NOT sloppy/erratic.
❑ Can you place a ‘ruler’ on the top/bottom of it? If so, it’s ‘tight/clean’
2. The stock should be consolidating back ‘towards’ the 9EMA or 21EMA.
❑ It doesn’t have to ‘touch’ the EMA, just ‘near’ the EMA (70%)
3. There should be decreased volume in the middle of the base.
4.The stock should be at or near the high or low of the day.
❑ Mid-level breakouts are fine, but HOD are best.
5. The stock should preferably be at or near a whole or ½ number.
❑ This is not a requirement, just a preference.
6.There should be big volume (3-5 times normal) at the entry price.
❑ This shows commitment from the buyers/sellers.
❑ Note: If you can overcome a large number of buyers/sellers, they won’t be there to sell into you
later.
7. A ‘shakeout’ bar, possibly leaving a BT/TT is preferable.
8. There should be VOID ABOVE/BELOW.
71
Breakouts
1.Tight Range & Clean Base
2.Near the r21ema
3.Decreased Volume In Base
4.At/Near the HOD
5.At a ½ Number ($131.50)
6.Big Volume (6x) at $131.50
7.Shakeout/Engulfing Bar
8.Void Above
Buy Here
r21ema
Shakeout
Stop Loss
Low Volume
72
2’ Breakout (BO)
1.
2.
3.
4.
5.
6.
Tight Range & Clean Base
Near the r21ema
Decreased Volume In Base
At a ½ Number ($67.50)
At HOD
Void Above
Note: There are 2 areas to potentially
place your stop loss. Generally it is best
to use the wider stop loss, however
more experienced traders and scalpers
can use the tighter stop.
2’ Chart
Buy Here
Stop Loss
r21ema
73
Daily Breakout
Daily Chart
1.
2.
3.
4.
5.
6.
Tight Range & Clean Base
Near the r21ema
Decreased Volume In Base
At a Whole Number ($20.00)
At HOD
Void Above
Buy Here
Stop Loss
r21ema
Volume drop in the base,
then volume spike on entry
74
5’ Breakdown (BD)
5’ Chart
Stop Loss
1.
2.
3.
4.
5.
6.
7.
Tight Range & Clean Base
Near the d21ema
Decreased Volume In Base
At Low of the Day (LOD)
At a ½ Number ($20.50)
Big Volume at $20.50
Void Below
d21ema
Short Here
Note: Getting filled on breakdowns
can be challenging because the
good ones ‘pop hard.’ It’s
generally a good idea to anticipate
½. We’ll discuss this later.
+ volume on
entry is good
75
1’ Breakout (BO) w/Level II
1’ Chart
$5 move in
3 minutes
Note: A trade can only
make money if you’re
actually in it. Do you
think you would’ve
gotten filled on this?
Entry: $122.00
Stop: $121.00
1.
2.
3.
4.
5.
6.
7.
8.
Narrow Range & Clean Base
Near the r21ema
Decreased Volume In Base
At High of the Day (HOD)
At a Whole Number ($122.00)
Big Volume at $122.00
Shakeout Bar
Void Above
76
5’ Breakout (BO)
5’ Chart
1.
2.
3.
4.
5.
6.
7.
Narrow Range & Clean Base
Near the r21ema
Decreased Volume In Base
At High of the Day (HOD)
Engulfing/Shakeout Bar
At a ½ Number ($33.50)
Void Above
Buy Here
What’s This?
r21ema
Stop Loss
Note: the wide range bar makes the stop loss very wide.
Experienced traders can use 50% of the bar for a tighter stop.
Volume Drop
Volume Spike = Buying
Commitment
77
5’ Breakout (BO)
2’ Chart
The higher timeframe (15’ &
Daily) were also breaking out =
even more POWERFUL.
Entry: $49.50
15’ Chart
Went To
$53.90
Stop Loss
+ Vol.
1.
2.
3.
4.
5.
6.
Narrow Range & Clean Base
Near the r21ema
Decreased Volume In Base
At High of the Day (HOD)
At a ½ Number ($49.50)
Void Above
78
Flags & Triangles
Bullish Flags typically have multiple (2 or more) lower highs in a smooth descending manner, with multiple (2
or more) higher lows as well. They typically look like a sideways letter “V” or a greater than sign “>” you would
see in mathematics; this is why they are also referred to as ‘wedges.’
❑ Bull Flag Entry = Buy the moment it breaks the prior pivot high, putting your stop loss at the most
recent pivot low.
Bullish Triangles on the other hand have flat tops but multiple higher lows beneath them. The top of bullish
triangles look very similar to bases.
❑ Bull Triangle Entry = Buy the moment it breaks above the base, putting your stop loss at the most
recent pivot low.
Both of these patterns are extremely potent and are good tools to keep in your trading tool box. (Criteria is
inverse for ‘bearish’ Flags and Triangles)
79
Flags & Triangles
Bull Flag (Wedge)
Bull Triangle
Entry
Entry
Stop Loss
Stop Loss
80
5’ Bull Flag (+BF)
5’ Chart
LPH
Entry
r21ema
Stop Loss
HPL
1.
2.
3.
4.
Lower Pivot Highs
Higher Pivot Lows
Looks Like a Sideways “V”
Void Above
81
2’ Bull Flag (+BF)
2’ Chart
1.
2.
3.
4.
Lower Highs
Higher Lows
Looks Like a Sideways “V”
Void Above
Entry
Stop Loss
82
Daily Bull Triangle (+BTR)
Daily Chart
Entry
r21ema
Stop Loss
1. Flat Top
2. Higher Pivot Lows
3. Void Above
83
60’ Bull Triangle (+BTR)
60’ Chart
Entry
Stop Loss
1. Flat Top
2. Higher Pivot Lows
3. Void Above
84
3 & 4 Bar Plays (3BP/4BP)
Main Considerations:
1. Bar #1 must be a WIDE RANGE BAR IGNITING A MOVE.
➢Igniting Bar means the 1st or 2nd bar of a move. This is very important!
➢WRB means double the size of an average bar.
➢This bar ‘should’ have increased volume, but NOT required.
2. Bar #2 & #3 must be in the upper 50% of Bar #1’s range AND have ‘relatively’ equals highs (Bar 1-2-3
should have similar highs).
3. Bar #3 or #4 is the trigger bar (entry & expansion bar), the stop loss goes under the lowest bar (Bar #2 or
Bar #3)
+3 Bar Play
+4 Bar Play
-3 Bar Play
-4 Bar Play
Note: the color of bar #2
or #3 does NOT matter.
85
15’ 3 Bar Play (+3BP)
15’ Chart
1. Bar 1 = Wide Range Bar
2. Bar 2 = Narrow Range Bar
in the upper 50% of Bar 1
3. Bar 1 & 2: Equal Highs
4. Void Above
5. At a ½ Number ($67.50)
Buy Here
Wide Range Bar Breaks Above Resistance
Stop Loss
r21ema
86
5’ 3 Bar Play (+3BP)
5’ Chart
1. Bar 1 = Wide Range Bar
2. Bar 2 = Narrow Range Bar
in the upper 50% of Bar 1
3. Bar 1 & 2: Equal Highs
4. Void Above
r21ema
Buy Here
Wide Range Bar Breaks Above Resistance
Stop Loss
87
Daily Swing Chart
Daily Chart
1. Bar 1 = Wide Range Bar
2. Bar 2 = Narrow Range Bar
in the upper 50% of Bar 1
3. Bar 1 & 2: Equal Highs
4. Void Above
5. At a ½ Number ($18.50)
Sell on this gap up!
$11.50 move on a 75c stop = 15:1
Entry: $18.50
Wide Range Bar Breaks Above Resistance
Stop: $17.75
What Type of Volume?
88
5’ 4 Bar Play (+4BP)
5’ Chart
Buy Here
r21ema
Stop Loss
1. Bar 1 = Wide Range Bar
2. Bar 1 = High Volume
3. Bars 2 & 3 = Narrow Range
Bar in the upper 50% of Bar 1
4. Bar 1-2-3: Equal Highs
5. Void Above
89
5’ 4 Bar Play (+4BP)
5’ Chart
1. Bar 1 = Wide Range Bar
2. Bars 2 & 3 = Narrow Range Bar in
the upper 50% of Bar 1
3. Bar 1-2-3: Equal Highs
4. At a Whole Number ($51.00)
5. Breaking Resistance = Void Above
Entry: $51.00
Stop: $50.75
90
15’ 3 Bar Play (-3BP)
15’ Chart
Stop: $106.20
d21ema
Broke Support
1. Bar 1 = Wide Range Bar
2. Bar 1 = Igniting Bar Breaking
below support.
3. Void Below
4. Bar 2 = Narrow Range Bar in
the lower 50% of Bar 1
5. Bar 1 & 2: Equal Lows
Short Entry:
$105.60
Volume spike after multiple
bars down = reversal. Get Out!
91
15’ 3 Bar Play (-3BP)
15’ Chart
d21ema
Stop: $312.40
1.Bar 1 = Wide Range Bar
2.Bar 1 Breaking below support
3.Bar 2 = Narrow Range Bar in
the lower 50% of Bar 1
4.Bar 1 & 2: Equal Lows
5.Void Below
Short Entry:
$310.40
Volume spike after multiple
bars down = reversal. Get Out!
92
5’ -4 Bar Play (-4BP)
5’ Chart
Stop: $107.25
Broke Support
d21ema
Short Entry:
$106.70
1.Bar 1 = Wide Range Bar
2.Bar 1 Breaking below support = Igniting
3.Bar 2 & 3 = Narrow Range Bar in the lower 50% of Bar 1
4.Bar 1-2-3: Equal Lows
5.Void Below
93
Turnaround Bars
Turnaround bars are also referred to as ‘engulfing bars’ and are very effective at helping to determine the next
likely direction of a stock. To be a ‘true’ turnaround bar, it must be a wide range bar. The term wide range can
vary depending on the price of a stock and how a particular stock trades as well. So, when determining if it’s
really a wide range bar, just look at the bars around it; if the turnaround bar is truly wide ranged then it will
likely be DOUBLE the size of the other bars on the chart or more.
There are two types of “Turnaround Bars”:
Trend Changing: this type of turnaround bar typically ends the current trend and pushes the stock in the
opposite direction. These are most effective after a multi-bar move (near support) with big volume coming in at
the end.
Trend Confirming: this type of turnaround bar re-confirms the strength or weakness of a stock, helping to
make the play more reliable.
94
Turnaround Bars
Trend Changing
Turnaround Bar
Trend Confirming
Turnaround Bar
Entry
Entry
The entry is typically above
the turnaround bars HIGH,
with the stop loss being at the
low. This generally makes for
a very wide stop loss.
Stop Loss
Stop Loss
Note: if there is a resting bar after the turnaround bar that doesn’t
break the high, you can use the resting bars low as the stop loss.
95
Bearish ‘Trend Confirming’ Turnaround Bar
Daily Chart
Stop
Entry
96
Bearish ‘Trend Confirming’ Turnaround Bar
5’ Chart
Stop Loss
Entry
97
Bullish ‘Trend Confirming’ Turnaround Bar
5’ Chart
Entry
Stop Loss
98
Bearish Turnaround Bar
5’ Chart
Stop Loss
Entry
What’s This?
99
Trend Changing Turnaround Bar
Weekly Chart
Initial Stop Loss
Lower Stop
Initial Entry
Add & Tighten Stop
This is a beautiful ‘combination’ play. This is a bearish turnaround bar
+ a bearish 3 bar play. These are EXTREMELY potent & profitable.
100
Trend Changing Turnaround Bar
2’ Chart
Mega gap down with an early puke out on big volume suggests
a reversal is likely. To confirm the reversal play is at hand, we
get a “turnaround” bar which helps to ignite a $17 move higher.
Entry
r21ema
Stop Loss
Volume Spike
101
Parabolic Buy & Sell Set-Up
Parabolic buy and sell set-ups are somewhat unique in that they go against the prevailing trend of the stock. In
most trades we are trying to go in the same direction as the overall trend, whereas with parabolic set-ups we
are trying to take advantage of a dis-equilibrium or an extreme move in one direction which causes a
capitulation and a likely move in the opposite direction.
It is because of this dis-equilibrium, which creates an excess of fear/greed that makes these plays so potent,
however, this also tends to make them very wild, spready and whippy. Thus, these types of plays can be
challenging to get filled on, and they have an increased likelihood of getting slippage if they stop out.
Though parabolic plays are extremely lucrative, it is not unusual to get shaken out of the initial entry, thus
needing a 2nd try to catch the full move. Therefore, to become a great parabolic trader one needs to be patient,
proficient with order entry, and able to psychologically handle violent swings.
102
Parabolic Buy & Sell Set-Up
Main Considerations:
1. 3 or more bars with at least 2 being SUPER Wide Range Bars
❑ Super Wide Range = Double to Triple the size of an average bar.
❑ They should be the biggest bars you’ve ever seen for that stock.
❑ The number of bars is FAR less important than the size of them.
2. HUGE Volume (not increased volume, massive volume)
❑ Minimum 5 times normal volume for that period (1’, 2’, 5’, 15’ etc.)
3. Far away from the 21EMA and still accelerating
❑ Ideally 3% to 5% or more away from the 21ema.
4. Bottoming Tail or Narrow Range Bar at the bottom
5. The Bar that sets the LOW should ideally have the MOST volume
❑ This suggests that everyone who wanted to get in/out, got in/out.
Other Comments:
Should look like a waterfall. (total collapse, think carnage)
❑ If you’re not saying “WOW” then it’s not parabolic!
Targets are typically 50% retracements or the 21ema.
❑ The R:R on these is usually ‘ok’ but not great. Typically 2:1.
These trades often take 2 entries due to their whippiness.
❑ DO NOT trade these unless you are prepared to re-enter!
103
Parabolic Buy & Sell Set-Ups
21ema
Stop Loss
Short Entry
2+ SWRB
2+ SWRB
Long Entry
Stop Loss
21ema
Huge Volume
104
5’ Parabolic Buy Set-Up (PBS)
5’ Chart
1.2 or more Super Wide Range Bars
2.Huge Volume
3.Far from the 21EMA
4.Biggest volume at the bottom
5.Looks like a waterfall
Daily Chart
Target Area
21ema
Huge
Volume
Entry: $10.80
Stop: $9.75
105
3’ Parabolic Buy Set-Up (PBS)
3’ Chart
1.
2.
3.
4.
5.
6.
21ema
2 or more Super Wide Range Bars
Huge Volume
Far from the 21EMA
Biggest volume at the bottom
Bottoming Tail (BT)
Looks like a waterfall
Target Area
BT
Entry: $30.85
Stop: $30.40
Massive Volume
106
2’ Parabolic Buy Set-Up w/Retest
2’ Chart
21ema
1.
2.
3.
4.
5.
6.
2 or more Super Wide Range Bars
Huge Volume
Far from the 21EMA
Biggest volume at the bottom
Bottoming Tail (BT)
Looks like a waterfall
Entry
Retest
Stop Loss
Massive Volume
107
5’ Parabolic Buy Set-Up (PBS)
5’ Chart
21ema
1.
2.
3.
4.
5.
6.
2 or more Super Wide Range Bars
Huge Volume
Far from the 21EMA
Biggest volume at the bottom
Bottoming Tail (BT)
Looks like a waterfall
Target Area
SWRB’s
Entry
Stop Loss
Massive Volume
108
15’ Parabolic Buy Set-Up Using PRE-MKT
15’ Chart
21ema
1.
2.
3.
4.
5.
6.
2 or more Super Wide Range Bars
Huge Volume
Far from the 21EMA
Biggest volume at the bottom
NRB at the bottom
Looks like a waterfall
Target Area
Entry
Stop Loss
Massive Volume
109
2’ Parabolic Buy Set-Up (PBS)
1’ Chart
1.
2.
3.
4.
5.
6.
2 or more Super Wide Range Bars
Huge Volume
Far from the 21EMA
Biggest volume at the bottom
Topping Tail (TT)
Looks like a waterfall
21ema
SWRB’s
Entry
Stop Loss
Massive Volume
110
2’ Parabolic Sell Set-Up (PSS)
1’ Chart
1.
2.
3.
4.
5.
Stop $54.72
2 or more Super Wide Range Bars
Huge Volume
Far from the 21EMA
Biggest volume at the bottom
Narrow Range Bar (NRB)
Entry $54.62
Target Area
21ema
Massive Volume
111
15’ Parabolic Sell Set-Up (PSS)
15’ Chart
1.
2.
3.
4.
5.
Stop Loss
2 or more Super Wide Range Bars
Huge Volume
Far from the 21EMA
Biggest volume at the bottom
Narrow Range Bar (NRB)
Entry
SWRB’s
Target Area
21ema
Massive Volume
112
1’ Parabolic Sell Set-Up (PSS)
1’ Chart
1.
2.
3.
4.
5.
Stop Loss
Entry
2 or more Super Wide Range Bars
Huge Volume
Far from the 21EMA
Biggest volume at the bottom
Narrow Range Bar (NRB)
SWRB’s
21ema
Massive Volume
113
CHAPTER 4
Pattern Boosters
Professional Trading Strategies
114
CHAPTER 4: Pattern Boosters
The Purpose of Pattern Boosters
Must Have vs. Like To Haves
Pattern Boosters
❑
❑
❑
❑
❑
❑
❑
❑
❑
❑
Bottoming Tails (BT) & Topping Tails (TT)
Narrow Range (NRB) & Narrow Body Bars (NBB)
Change of Color Bars (COC)
Volume: Ending (EV), Igniting (IV), Resting (RV)
Support Areas: ‘Level 1 & 2’ (1S), (1R), (2S), (2R)
Retracement Levels (50% & 100%)
Relative Strength (RS) & Relative Weakness (RW)
Moving Averages (9ema, 21ema, 200ema)
Multiple Timeframes in Alignment (MTFA)
Market Timing (MT)
“You either hold yourself accountable or you will be made accountable by your circumstances.”
– Unknown
www.LiveTraders.com
1-800-947-4027
115
Pattern Boosters
Not all trades are created equal. This isn’t to say that sometimes ‘great’ patterns fail or that sometimes ‘bad’
patterns work, however, we are ‘odds’ traders, which means we look to choose the highest quality patterns
when scanning for opportunity, because in theory, the more highly rated the pattern is, the more likely it will
work. The question is, how do we ‘rate’ patterns?
The answer: by the number of “Pattern Boosters” it has. Simply put pattern boosters are attributes that make a
trade more reliable. The more of these attributes that we can obtain, the higher the rating of the play and thus
the higher likelihood it will work.
With regard to ‘basic’ patterns, there are literally thousands of them everyday, but in order to improve the
quality of the set-up and to increase the odds of success we look to add as many pattern boosters to a trade as
possible. Think of it as narrowing your focus to only the best of the best. There are 10 pattern boosters in the
following pages that will help make your trades more accurate and reliable.
NOTE: We put ‘extra’ weight on the location items such as: Support, Retracement Levels and Moving Averages.
116
Bottoming (BT) & Topping Tails (TT)
Bottoming & Topping Tails:
A bottoming tail or topping tail is an indication that supply or demand is increasing, which
means a reversal is likely near.
❑ BT’s & TT’s are far more reliable and potent when they happen after multiple bars in one direction, with
increased volume and at an area of support.
❑ To be considered a ‘true’ BT or TT, the tail portion of the bar must be at least 50% of the size of the bar.
They can be WRB, ARB and NRB’s.
❑ BT’s & TT’s can happen on any/all patterns, and on any timeframe.
❑ Note: inside of a base BT/TT bars are often called ‘SHAKEOUT’ Bars.
Supply
Increasing
Demand
Increasing
117
Bottoming Tails (BT)
Note: where a BT occurs
is VERY important!
Daily Chart
TT
BT, but how come it
didn’t go higher?
BT
BT
BT set the low and pushed
the stock higher
118
Bottoming Tails (BT)
15’ Chart
15’ Buy Set-Up
2’ Chart
2’ Buy Set-Up
Entry
Stop
Buyers are stepping up
=
Confirmation of strength
Sellers tried to move the stock lower, but
failed = Demand Increasing
119
Topping Tails (TT)
1’ Chart
Multi-Bar
Move
Supply Increasing
=
Sellers Winners
Monthly Chart
Supply
Parabolic Sell
Set-Up
M-Top Sell
Set-Up
Note: BT’s & TT’s are more reliable when they
come after multi-bar moves on big volume.
Note: BT’s & TT’s are more reliable when they come
after multi-bar moves on big volume at resistance.
+ Volume
120
Narrow Range Bars (NRB) & Narrow Body Bars (NBB)
Narrow Range Bars & Narrow Body Bars:
A narrow range or narrow body bar is an indication that supply or demand is decreasing, which
means a reversal is likely near.
❑ NRB’s & NBB’s are far more reliable and potent when they happen after multiple bars in one direction, with
increased volume and at an area of support.
❑ To be considered a ‘true’ NRB it must be 50% or less than the size of an average range bar.
❑ To be considered a ‘true’ NBB the body of the bar must be 50% or less than the size of an average body bar.
❑ NRB’s & NBB’s can happen on any/all patterns and in any timeframe.
NBB & NRB
ARB
NBB but
ARB
NRB
WRB
NBB but
WRB
121
Narrow Range Bars (NRB)
5’ Chart
5’ Chart
NRB & NBB
NRB
Selling pressure is easing and buyers
are stepping up. Reversal is likely.
Note: When trading with NBB’s on spready
stocks, it’s best to give the stop loss more
room and account for possible slippage.
122
Narrow Body Bars (NBB)
5’ Chart
5’ Chart
WRB
Note: NBB’s are more
reliable when they
come after multi-bar
moves on big volume.
NBB
BT
NBB
BT
Note: NBB’s are more reliable when they come
after multi-bar moves and at support areas.
+volume
123
Change of Color Bars (+/- COC)
Changing of Color Bars:
A Change of Color bar is a bar that indicates a change of ownership BEFORE the pattern actually
triggers.
❑ +COC = indicates a reversal of control from sellers to buyers.
❑ -COC = indicates a reversal of control from buyers to sellers
❑ These are significant bars because they allow us to see who is taking control BEFORE we have to put our money into
the trade. Thus, the pattern becomes more accurate due to the early commitment.
❑ NOTE: COC bars are NOT ENTRY BARS!
-COC = Sellers
Beginning To Step Up
Stop Loss
Entry
Entry
Stop Loss
+COC = Buyers
Beginning To Step Up
124
Bullish Change of Color Bars (+COC)
5’ Chart
5’ Chart
Entry
Entry
Entry
21ema
+COC = Buyers Beginning
To Step Up, but we don’t
buy it until it breaks
$95.50 and then $96 on
the NEXT bar.
Entry
+COC = Buyers Beginning
To Step Up, but we don’t
buy it until it breaks the
high on the NEXT bar.
125
Bearish Change of Color Bars (-COC)
5’ Chart
-COC = Sellers Beginning To
Step Up, but we don’t short it
until NEXT bar.
5’ Chart
-COC = Sellers Beginning To
Step Up, but we don’t short it
until NEXT bar.
d21ema
Stop
Stop
Short Entry
Short Entry
126
Volume
Volume Considerations:
Volume is one of the single most important considerations we use when determining if we are
willing to put our hard earned money into a position. It also helps clarify entry and exit points!
Volume tells us the level of commitment in a stock, and can also help us determine the next
likely direction as well.
Important Note: Volume spikes after multi-bar (extended) moves indicate a likely change of
direction.
There are 3 types of Volume:
❑ Igniting Volume (IV) – Begins a move. (at least double avg. vol.)
❑ Ending Volume (EV) – Ends a move. (at least double avg. vol.)
❑ Resting Volume (RV) – Continues a move. (½ avg. vol.)
127
Volume Types
Volume Tells Us A LOT About The Next Likely Direction Of A Stock
Ended the current
extended move.
Igniting Volume
Started the new nonextended move.
Ending Volume
Resting Volume
Continued the current
resting period.
128
Igniting & Ending Volume
129
Igniting Volume (+IV)
Daily Chart
60’ Chart
What Pattern Is This?
What’s This?
Igniting Volume
Igniting Volume
130
Igniting Volume (+IV)
Daily Chart
Resistance = Sellers
Support = Buyers
Resistance = Sellers
Igniting Volume
131
Ending Volume (+EV)
5’ Chart
Daily Chart
Note: This could be
considered
Ending/Igniting in the
same bar.
d21ema
r21ema
1. Volume Spike
2. 13 Bars Up
3. Far From the r21ema
Ending Volume
1. Volume Spike
2. 4 Bars Down + Gap
3. WRB’s
4. Bottoming Tail
5. Far From the d21ema
Ending Volume
Retest = Great
Buy Opportunity
132
Ending Volume (+EV)
Daily Chart
Resistance = Sellers
1.
2.
3.
4.
5.
6.
7.
Volume Spike
9 Bars Up = Extended
Multiple WRB’s
Far From The r21ema
At Double Top Resistance
Topping Tail
= MOVE IS OVER!
r21ema
Ending Volume
133
Resting Volume (RV)
5’ Chart
5’ Chart
Ending Volume
Igniting Volume
Resting Volume
What’s This?
Resting Volume
134
Resting Volume (RV)
Daily Chart
The stock is stuck in a narrow
range stage 1, getting ready to
move higher.
Resting Volume
135
Ending & Igniting Volume
60’ Chart
d21ema
SWRB’s
1.
2.
3.
4.
5.
6.
Volume Spike
8 Bars Down = Extended
Multiple SWRB’s
Far From The d21ema
Bottoming Tail
= MOVE IS OVER!
BT
Igniting Volume
Ending Volume
136
Support & Resistance Levels
Support & Resistance Areas:
Knowing the areas in which a stock is likely to pivot or change direction is a very important
part of successful trading, not only for entries, but also for stop loss areas as well as targets for
trade management.
Pivot points are the areas where stocks typically change direction, and are also referred to as
“Support Areas” or “Support Levels.”
There are 2 main support/resistance levels at Live Traders:
❑ Level 1 (1S/1R) – These are the areas in which stocks typically transition from one stage to another stage and
are usually 100% retracement areas.
❑ Level 2 (2S/2R) – These are the areas we ‘prefer’ stocks to pull back to when they are trending (Stages 2 & 4).
These are typically 50% retracement areas.
137
Support & Resistance Levels
Support & Resistance Areas:
Technical Analysis is all about using past price action to predict future price movement. With
that in mind, IF buyers/sellers previously stepped up in a particular area in the past, the theory
is, they will likely step up again in the future, making that particular area a focal point to
expect an increase in supply/demand.
Important Points:
❑ Support once broken to the downside becomes resistance on the way back up. ‘The floor becomes the
ceiling.’
❑ Resistance once broken to the upside now becomes support. ‘The ceiling becomes the floor.’
❑ Level 1 Support/Resistance Needs at least ONE Retest To Be Considered “Level 1 Support/Resistance.”
138
Level 1 & 2 Support (1S, 2S)
Level 2 Support is typically when a stock
is in an UPTREND and pulls back to the
“prior pivot high” and bounces.
Level 2 Support
Once Broken = Level 2 Support
2S: Expect Buyers
To Step-Up Here
Level 1 Support
When this area is held the 2nd
time and bounces, it becomes a
very significant area of support
in the future.
139
Level 1 & 2 Resistance (1S, 2S)
Level 1: Because It was RETESTED and FAILED: Expect Sellers here
Level 2 Resistance
Once this support area is broken, expect
SELLERS on the way back up!
When Support is broken it becomes
Level 2 Resistance on the bounce
Level 2 Resistance is typically when a
stock is in a DOWNTREND and bounces
back to the “prior pivot LOW” and drops.
140
Level 1 Support & Resistance
Daily Chart
Level 1 Resistance: 100% Retracement
From The Prior Pivot LOW
Level 1 Support: 100% Retracement
From The Prior Pivot HIGH
141
Level 2 Resistance (2R)
2’ Chart
5’ Chart
Level 2 Resistance: 50%
Retracement To Prior Pivot LOW
Level 2 Resistance
NOTE: This was a Level 1 Support Area
That Was Broken, and On The Bounce
Back Up Became Level 2 Resistance!
The Floor Became The Ceiling!
142
Level 1 Support & Resistance
Daily Chart
Remember, once Level 1 Resistance is
broken to the upside, it becomes Level
2 SUPPORT on the pullback
Level 1 Resistance: 100%
Retracement To The Prior Pivot HIGH
Level 1 Support: 100% Retracement
To The Prior Pivot LOW
143
Level 1 Support (1S)
Daily Chart
Daily Chart
An extended move that ‘retested’ the prior
pivot LOW and bounced has created a Level
1 Support Area, and helped to transition
this stock back into an early uptrend.
This is Level 1
Support Because It
Was “Retested.”
1S
Level 1 Support: 100%
Retracement To Prior Pivot LOW
1S
Level 1 Support: 100%
Retracement To Prior Pivot LOW
144
Level 2 Support (2S)
5’ Chart
Pulled back to the prior pivot HIGH,
but more than a 50% retracement.
Pulled back to the prior pivot HIGH
on roughly a 50% retracement.
2S
2S
145
Level 2 Support (2S)
5’ Chart
Pulled back to the prior pivot HIGH on
roughly a 50% retracement.
2S
2S
NOTE: If this stock pulled back to
the $53.50 pivot LOW, that would
be considered Level 1 Support, or
a 100% retracement.
Buyers stepped up at the prior pivot high, leaving
a BT, a NBB, a Volume Spike and a 50%
retracement = a High Odds Buy Opportunity.
146
“Other” Support
5’ Chart
This engulfing bar creates a certain
level of support but it is neither Level
1 or 2. It’s ‘just’ Support.
1’ Chart
This retest creates a certain level
of support but it is neither Level 1
or 2. It’s ‘just’ Support.
147
Different Support Levels
Daily Chart
Name The Different Support Areas:
#1.__________________________
#2.__________________________
#3.__________________________
#3
#2
#1
148
Retracement Levels
Retracement Levels 50% & 100%:
How far a stock retraces in a particular direction is a good indication of whether that stock will
likely continue in that direction. This is where ‘retracement levels’ come into play.
As a general rule, the deeper a stock penetrates into an area of support or resistance, the more
likely that area will be overcome.
❑ Note: It’s also important ‘how’ the stock arrives at that area.
There are 2 main retracement levels at Live Traders:
❑ 50% – We typically look for 50% retracements on pullbacks in uptrends and downtrends as an indication that the
current trend will continue.
❑ 100% – This is an indication that the current trend is NOT as strong/weak as we initially thought, and will likely
move sideways for a while or change direction. As stated above, how stocks reach these areas is extremely
important.
149
Retracement Levels
When In An Uptrend or Down-Trend We PREFER To See 50% Retracements Back To 2S
or 2R Areas. Generally Speaking, As A Rule, WE DO NOT Want To See 100%
Retracements, UNLESS The Stock Is “Retesting” An Area After An Already Extended
Move On Increased Volume And Is Likely Transitioning.
Pivot High
50%
Pivot High
Pivot Low
100%
Pivot Low
Retesting Support = A Likely Bounce And A Move Higher
150
50% Retracement Levels (50)
5’ Chart
5’ Chart
$97
50% = $96
$95
$43.60
A pullback here is what we
want. A pullback here is
NOT what we want.
The pullback here is 50%, which is a
strong indication that the stock will
continue higher, as buyers stepped up
in the area they were supposed to.
50% = $43.15
$42.70
151
50% Retracement Levels (50)
2’ Chart
5’ Chart
$39.30
$32.40
50% = $32.20
50% = $39.10
$38.90
$32.00
NOTE: The 50% retracement is
also at 2R = More Reliable SS
NOTE: The 50% retracement is
also at 2R = More Reliable SS
152
100% Retracement Levels (100)
Daily Chart
NOTE: This stock was in a stage 4 downtrend and for
the 1st time it retraced 100% to the prior pivot low
and HELD, this is an indication that demand is
increasing and buyers are beginning to step up. This is
a strong sign of a likely change of trend.
What Is This?
100% Retracement To Pivot Low After An
Extended Stage 4 Downtrend
153
Retracement Levels
5’ Chart
NOTE: 50% is an AREA. It doesn’t have to be
exactly 50%, it can be slightly more or less
$81.15
50% = $80.32
From High To Low
$79.50
100% To Pivot Low. Retested This Area 3
Times And Didn’t Go Lower = Higher Prices
154
Relative Strength (RS) & Weakness (RW)
Relative Strength (RS) & Weakness (RW):
Relative Strength & Relative Weakness is simply a gauge of whether or not the
stock we are looking to trade is stronger than or weaker than the market. When we
refer to the ‘market’ we are referring to the SPY and/or the QQQ.
If a stock is moving higher and the market is in a sideways trend, we would refer to
that stock as having “Relative Strength” (RS).
If a stock is moving lower and the market is moving higher, then we would refer to
that stock as having “Relative Weakness” (RW).
NOTE: In technical analysis some people refer to “good” or “bad” RS or RW, but here at Live
Traders, if we see a stock that is truly showing extreme RS or RW to the market with a great pattern,
we will trade it regardless of the market.
155
Great Relative Strength
NOTE: The stock was basing at the HIGH OF THE DAY while the
market had a huge parabolic sell-off. As the market bounced at
2:35pm, the stock blasted higher with a pattern. This is GREAT RS.
5’ Stock Chart
Entry $30.00
Stop $29.80
5’ QQQ
156
Relative Strength
HOD Was $77.56
2’ Chart
Entry
Entry
Daily QQQ
Daily Stock
QQQ Gap Down
Level 1 Gap Up w/QQQ
Gap Down = RS
157
Relative Strength
Entry
Nice Gap Up w/SPY Showing
a MEGA-Gap Down = RS
Stop
SPY: Big Gap
Down to Support
158
Relative Weakness
5’ Chart
The purpose of this slide is to show that when a gap + a pattern
are truly excellent, we don’t care about the market. Though this is
RW, some people might be scared to take this trade because of the
market bounce. The market weakness could hurt our trade but it’s
‘so’ weak that we’ll usually still take a shot on this one.
Daily Stock
5’ QQQ
Stop
Entry
Level 1 Gap Down w/QQQ
Moving Up = RW
QQQ Moving Up
At Support
159
Relative Weakness
1’ Chart
5’ Spy
Daily Stock
Stop
Entry
Spy gap up, but falls
early on.
Level 1 Gap Down w/SPY
Dropping = RW
This stock had a great gap down with the market gapping up = RW, then
the market pulled back early on, helping to push the stock even lower.
160
Moving Averages
Moving Averages:
In general here at Live Traders we are not big proponents of ‘indicators’ as there are
literally 100’s of them and most are not helpful. Price and volume are the 2 main
focal points in our trading, however we do like to use moving averages as a guide,
particularly for management purposes.
It is important to note that EMA’s are NOT support or resistance, they are lagging
indicators, which means that price must happen before the indicator can form,
which means that price is much more highly regarded.
❑ Note: EMA’s are much more relevant and useful in Up/Down Trending Stocks.
There are 3 EMA’s that we focus on:
❑ 9ema – This is used on short term TF’s: 1’, 2’ and 5’ charts only.
❑ 21ema – This is used on ALL charts.
❑ 200ema – This is mainly used on higher TF charts such as 60’, Daily and Weekly Charts.
161
9EMA (d9ema)
2’ Chart
2’ Chart
Stop
d9ema
Stop
Entry
d9ema
Entry
Consolidated back to the d9ema. This EMA is
used on SHORTER TF’s like the 1’ and 2’ Charts.
Consolidated back to the d9ema. This EMA is used
on SHORTER TF’s like the 1’ and 2’ Charts.
162
21EMA (r21ema)
5’ Chart
Entry
r21ema
Stop
When a stock pulls back to the r21ema
and bounces in that area, we consider
that an indication of strength.
163
21EMA (d21ema)
2’ Chart
d21ema
When a stock bounces to the d21ema and
then drops in that area, we consider that
an indication of weakness.
If a stock holds the d21ema we consider
that to be a clean ‘smooth’ trend, which is
what we typically look for.
Entry
164
21EMA (r21ema)
15’ Chart
Entry
Daily
r21ema
Stop
✓ Bottoming Tail (BT)
✓ Change of Color (+COC)
✓ 50% Retracement (50)
✓ At the r21ema
✓ Level 2 Support (2S)
✓ Multiple TF (MTFA)
165
EMA’s As Target Areas
60’ Chart
d21ema
Entry
Stop
166
200 EMA (r200ema)
The 200ema is a longer term EMA used by many people
including Hedge Funds, MM’s, Portfolio Manager’s and
Financial TV Pundits as well. It is by far the most powerful of
the EMA’s. You will rarely see a 200ema broken without some
form of reaction.
For intra-day charts we don’t often concern ourselves with
the 200ema until we get to at least the 15’ chart or higher.
Longer term day traders and swing traders will look at the
200ema on higher TF’s such as the 60’, Daily and Weekly
Charts to see if it could be a potential concern for their
targets.
r200ema
NOTE: All EMA’s are more potent when they occur as areas of
actual support!
167
200EMA
r200ema
Gapping at or near the
200EMA, especially on the
daily chart, can often ‘act like’
a significant support area.
168
Moving Average Notes
❑ BY FAR the most potent moving average for Intra-Day Traders is the 200ema on the 60’ chart
and the daily chart. If you see a stock gapping up into the 200ema on the daily or down to the
200ema on the daily, it will usually struggle to get through that area. Often times never
breaking that area.
❑ Of all the moving average the ONLY one that I pay attention to is the 200ema on the 60’ chart
and the 200ema on the daily chart.
❑ In general moving averages are merely a guide for newer traders to help them see the trend of
the stock. More experienced traders should be able to mentally draw a moving average on their
chart without looking.
❑ I rarely put moving averages on my charts, UNLESS it’s a 200ema on a higher timeframe.
169
Multiple Timeframes
Multiple Timeframe Analysis (MTFA):
As a general rule we try to NEVER trade in a vacuum. What this means is we don’t like to look
at a pattern in ONLY 1 timeframe and trade it irrespective of what the higher timeframe is
doing.
It is important to check at least 2 to 3 timeframes before taking a trade. Example: If you are
looking to buy a 5’ breakout, make sure the 60’ and/or daily chart is not into resistance.
4 Main Reasons To Use MTFA:
❑ More reliable entries by using the higher TF as confirmation
❑ Drill down to a lower TF to hop on a trending stock (better entry)
❑ Keep us OUT of a bad trade due to issues with the higher TF
❑ To help determine target areas based on the higher TF
We like to sort our timeframes into 2 categories:
❑ Bias = Higher Timeframe (usually 60’ or daily for intra-day traders)
❑ Entry = Lower Timeframe where we find our pattern. (5’ BO etc.)
170
Why Use MFTA?
❑ To give us a look at patterns within a pattern, allowing us to refine entry points in a shorter
time frame, when a longer time frame provides the bias.
❑ To determine when a shorter time frame pattern may fail. This often occurs when the
shorter time frame is against the direction of the longer.
❑ To determine when a longer time frame pattern may fail. The shorter time frame forms a
pattern failure (i.e. Shakeout, BBF, M, or W).
❑ To determine when multiple times frames (Voids) are in alignment, which increases the
odds of follow through in their direction.
❑ Multiple time frames provide different “pictures,” which “communicate” the direction of
prices. At times, a different time frame can give that picture.
171
More Reliable Entry Due To Higher TF Strength
2’ Chart
ADD
Initial Entry
Daily Chart
Although this 2’ BO is very nice,
and ‘could’ work in a vacuum,
it’s ALWAYS best to check the
higher TF to see if it is in
alignment with the lower TF.
Target
Stop
High TF Bias = LONG. Our job
is to find a lower TF Entry!
172
More Reliable Entry Due To Higher TF Strength
15’ Chart
Higher TF Bias = LONG. Our job is
to find a lower TF Entry!
Daily Chart
Entry
Stop
Bias = LONG
173
Multiple Timeframes = $$
Stop: $152.25
Entry: $151.50
174
Drill Down To A Lower TF To Get A Better Entry
Daily Chart
2’ Chart
Stop
Entry
High TF Bias = SHORT. Our
job is to find a lower TF Entry!
175
MTFA Helps Determine Our Target
15’ Chart
Daily Chart
Stop
Short Entry
Target Area
176
MTFA Helps Determine Our Target
5’ Chart
Entry
60’ Chart
Target Area
VOID
Stop
177
Higher TF Keeps Us ‘Safe’
15’ Chart
2’ Chart
Entry
2’ SS
2’ SS Failure Signals
the 15’ BS Entry
Stop
Looking at the higher TF 15’ Chart keeps
us out of a potentially bad 2’ SS.
Note: As a rule, the failure of the lower TF
pattern will signal our entry on the higher TF.
178
Market Timing
Market Timing (MT):
Market Timing is important because in general most stocks (roughly 75%) move with the
market. Some may move more or less than the market, but generally speaking they move in
the same direction as the market.
Thus it is essential that we try to time our trades with the market as often as possible. This
isn’t to say that we won’t sometimes take stocks that are showing RS or RW to the market.
We look at the market in 5 categories:
❑ Extreme Strength (moving straight up) (NEVER GO AGAINST THIS)
❑ Minor Strength (moving up in a slow, grinding manner) (RW ok)
❑ Sideways or Choppy (flat and boring) (RS/RW both ok)
❑ Minor Weakness (moving down in a slow, grinding manner) (RS ok)
❑ Extreme Weakness (moving straight down) (NEVER GO AGAINST THIS)
▪ We can only go against “extreme” market moves when they are Parabolic.
179
Market Timing (MT)
5’ SPY
10’ Stock
Entry
Stop
180
Market Timing (MT)
5’ Stock
The Spy is basing bullishly on the 5’ TF and
the stock has a perfect 5’ consolidation!
This Is Great Market Timing!
Entry
Stop
181
MTFA + MT = Powerful Moves!
5’ Stock
Entry
5’ QQQ
Daily Stock
Stop
182
MTFA + MT = Powerful Moves!
2’ Stock
5’ QQQ
Daily Stock
Stop
Entry
183
Different Bars: ARB, NRB, WRB, NBB
Weekly Chart
Average
Range Bar
Narrow Body
Bar
Wide Range
Igniting Bar
Narrow Range
Resting Bars
Narrow Body
Bar w/BT
184
Combining The Pattern Boosters
5’ Stock
✓ Bottoming Tail (BT)
✓ Narrow Body Bar (NBB)
✓ Change of Color (+COC)
✓ 50% Retracement (50)
✓ At the 21ema (EMA)
✓ Multiple TF (MTFA)
✓ Market Timing (MT)
30’ Stock
$97
50% = $96
BT, +COC,
NBB, r21ema
$95
5’ QQQ
r21ema
185
Combining The Pattern Boosters
5’ Chart
✓ Bottoming Tail (BT)
✓ Narrow Body Bar (NBB)
✓ Change of Color (COC)
✓ Volume Spike (+vol.)
✓ Level 2 Support (2S)
✓ 50% Retracement (50)
✓ At the 21ema (ema)
✓ Multiple TF (MTFA)
✓ Market Timing (MT)
ADD
Initial Entry
Daily Stock
5’ SPY
Stop
186
CHAPTER 5
Gaps
Professional Trading Strategies
187
CHAPTER 5: Gaps
What Is A Gap?
Gap Types
❑ Pro Igniting
❑ Novice Ending
Evaluating & Rating Gaps (Level 1,2,3)
Gap Entries
“Trade with confidence NOT arrogance.”
– Unknown
www.LiveTraders.com
1-800-947-4027
188
What Is A Gap?
Gaps:
A gapping stock is simply a stock that has changed in price from yesterday’s close to
today’s open.
Most stocks gap in some manner every single day, even if only by a little.
However, not all gaps are “compelling” or “meaningful.” By compelling we mean
produces shock value or creates a void.
Gaps are important for intra-day traders to gain an edge in the markets because
gapping stocks are usually “on their own page.” (not highly correlated to the
market)
189
What Is A Gap?
There are various causes for a stock to gap, however the main reason for a gap to
occur is a some type of NEWS report. This could be earnings, buyout rumors, FDA
approval of a new drug, upgrade/downgrade, Warren Buffett opening a huge
position in the stock etc.
Typically we do not care WHY a stock is gapping. We only care that “it is” gapping.
The only main exception to this rule would be an all cash buyout. (even Ex-dividends
are usually tradable).
On a case by case basis we will also trade ADR’s (American Depository Receipts)
which are foreign stocks domiciled in the US.
190
Gap Types
Main Gap Categories:
Professional Igniting:
❑ These generally change the long term direction of the stock, usually by gapping
“against” the current trend. However, sometimes professional gaps can gap
“with” the current non-extended trend.
Novice Ending:
❑ These gaps also change the long term direction of the stock, however they do so
by gapping “with” the current extended trend, which typically ends the trend.
191
Professional Igniting Gap (PG)
This stock was looking parabolic, after being
extended on the daily, far from the EMA and
leaving a topping tail. A lot of traders looked to
short this stock, esp. after it broke the BT bars
low. The next morning, they got ‘squeezed.’
Lots of shorts got
squeezed here.
Increased Volume
Shows Commitment
192
Professional Igniting Gap (PG)
Daily Chart
This stock was looking strong and
trending higher until this significant
“pro” gap occurred and completely
changed the direction of the stock.
It gapped ‘against the trend and
formed a new trend lower.’
Big gap down will likely
set the high for a long
time to come.
Increased Volume
Shows Commitment
193
Professional Igniting Gap (PG)
Big gap up will likely set the
low for a long time to come.
This stock was looking weak and trending
lower until this significant “pro” gap
occurred and completely changed the
direction of the stock. It gapped ‘against
the trend and formed a new trend higher.’
Increased Volume Shows
Commitment and a Short Squeeze
194
Novice Ending Gap (NG)
This
stock
was looking weak and
trending lower until this large gap down
after multiple red bars occurred and
ended the down trend. It gapped ‘with
the trend, which ended the trend.’
Big gap down after many red bars
=
Likely change of direction.
Increased volume = all the people
who wanted to get out, got out.
195
Novice Ending Gap (NG)
Big gap down after many red bars
=
Likely change of direction.
This
stock
was looking weak and
trending lower until this large gap down
after multiple red bars occurred and
ended the down trend. It gapped ‘with
the trend, which ended the trend.’
196
Excessive (EG) + Ending Gap
This chart has 2 Gaps: An excessive
gap and a novice ending gap.
This gap is EXCESSIVE,
stay away.
Gapping up BIG after
6 prior days up =
PULL BACK.
197
Excessive Gap (EG): No Trade
Normally gapping over a wide
range red bar into void would be a
good thing, BUT, this gap was
EXCESSSIVE. In this case 22% on
a higher priced stock is too much.
22% is too much
for a $76 stock.
198
Evaluating Gaps
Questions To Ask On Each Gap:
1. Where is the stock gapping to?
2. Where is the stock gapping from?
3. Is there some type of “shock” value to the gap?
4. Is the stock gapping just enough to clear significant support/resistance or is it gapping
‘excessively’ so as to ruin the reward to risk?
5. Is the stock gapping into VOID or into RESISTANCE?
6. Is the gap showing relative strength/weakness to the market? (typically makes them more
potent)
199
Level 1 Gap
Attributes:
Gaps over 1 or more WIDE RANGE (3% to 5%+) red bars
Gaps over 2 or more pivots (or a consolidation)
Gaps “just enough” to clear the pivot/consolidation
Gaps into VOID with room to move
Has relative strength in the pre-market
❑ Example: stock gaps up with market gap down
Note: Sometimes we can use a “+” or “-” with these gaps if they are
very close to being Level 1, but perhaps something small is missing.
200
Level 1 Gap (L1G)
Key Points:
1. Gapping over a wide ranged red bar, (creating huge
shock and a lot of short covering.)
2. Gapping over multiple pivots (2 pivots.)
3. Just enough to clear the prior pivot high
4. Into Void with room to move higher
5. RS to the market (not shown)
Wide Range Red Bar
These Gaps Allow For Early Aggressive Entries
And Often Provide Above Average Moves!
Increased Volume
Shows Commitment
201
Level 1 Gap (L1G)
These Gaps Allow For Early Aggressive Entries
And Often Provide Above Average Moves!
Wide Range
Red Bar
Key Points:
1. Gapping over a wide ranged red bar, (creating
huge shock and a lot of short covering.)
2. Gapping over multiple pivots (2 pivots.)
3. Just enough to clear the prior pivot high
4. Into Void with room to move higher
5. RS to the market (not shown)
Increased Volume
Shows Commitment
202
Level 1 Gap (L1G)
Key Points:
1. Gapping over a wide ranged red bar, (creating
huge shock and a lot of short covering.)
2. Gapping over 2 pivots.
3. Just enough to clear the prior pivot high
4. Into Void with room to move higher
5. RS to the market (not shown)
Wide Range
Red Bar
Increased Volume
Shows Commitment
203
Level 1 Gap (L1G)
Wide Range
Green Bar
Key Points:
1. Gapping under a wide ranged green bar,
(creating huge shock and a lot of short covering)
2. Gapping under 3+ pivots
3. Just enough to clear the prior pivot low
4. Into Void with room to move lower
5. Relative Weakness to the market (not shown)
Increased Volume
Shows Commitment
204
Level 1- Gap (L1G)
Key Points:
1. Gapping over a red bar (not wide range)
2. Gapping over 1 pivot
3. Just enough to clear the prior pivot high
4. Into Void with room to move higher
5. Relative Strength to the market (not shown)
Wide Range
Red Bar
Increased Volume
Shows Commitment
205
Level 1 Gap (L1G)
Key Points:
1. Gapping over a wide ranged red bar, (creating
huge shock and a lot of short covering.)
2. Gapping over multiple pivots (2 pivots.)
3. Just enough to clear the prior pivot high
4. Into Void with room to move higher
5. RS to the market (not shown)
Aggressive
Entry = OK
Increased Volume
Shows Commitment
206
Level 2 Gap
Attributes:
Gaps over an “average” sized red bar or small green bar
Gaps over 1 or more pivots (or a consolidation)
Gaps enough to clear the pivot/consolidation, but possibly more than necessary
Gaps into VOID with room to move
Has relative strength in the pre-market
❑ Example: stock gaps up with market gap down
Note: Sometimes we can use a “+” or “-” with these gaps if they are very
close to being Level 1-2, but perhaps something small is missing.
207
Level 2 Gap (L2G)
Key Points:
1.Gapping over a green bar, NOT a red bar
2. Gapping above 2+ pivots
3.BUT more than “just enough” to clear the prior pivot low
4. Into Void with room to move higher
5. Relative Strength to the market (not shown)
Gapped From A
Green Bar
Increased Volume
Shows Commitment
208
Level 2+ Gap (L2G)
Key Points:
1.Gapping over an ‘avg.’ sized red bar. (not a WIDE bar)
2. Gapping above 2+ pivots
3.BUT more than “just enough” to clear the prior pivot low
4. Into Void with room to move higher
5. Relative Strength to the market (not shown)
Gapped a little more than
necessary and not from a
wide range red bar.
This is an excellent gap, but
because of a couple ‘small’
concerns, it will likely be a
Level 1- or a Level 2+
Increased Volume
Shows Commitment
209
Level 3 Gap
Attributes:
Gaps from a green bar (but not a wide range green bar)
Gaps over only 1 pivot or a consolidation
Gaps more than necessary (affecting the reward to risk)
Gaps into a small amount of void
Does NOT have relative strength to the market
Note: Sometimes we can use a “+” or “-” with these gaps if they are
very close to being Level 2, but perhaps something small is missing.
210
Level 3+ Gap (L3G)
Extra Confirmation Is Needed, But
Still Worth Keeping On Your Gap List.
Key Points:
1.Gapping over an ‘avg.’ sized GREEN bar. (not a RED bar)
2.Gapping above 1 pivot (not 2 pivots)
3. Just enough to clear the prior pivot high
4. Into Void with room to move higher
5.No Relative Strength to the market (not shown)
Volume Is Not Much
Higher Than Normal
211
Level 3 Gap (L3G)
These Gaps Require Patience For Entry,
Because There Is NO Clear Edge.
Key Points:
1.Gapping over an ‘avg.’ sized GREEN bar. (not a RED bar)
2.Not Gapping over any pivots
3. Just enough to clear the prior pivot high
4. Into Void with room to move higher
5.No Relative Strength to the market (not shown)
212
Gap Entries
The quality of the gap will determine the entry.
❑ The better the gap, the more aggressive the entry.
❑ The poorer the gap, the less aggressive the entry.
Level 1 Gap Entries:
❑ Immediate entry at market open (assuming a nice pre-market chart)
❑ 1’ Hi/Lo Entry – careful here, it’s easy to get whipped out.
❑ 1’ 3BP, BS, Turnaround Bar
Level 2 Gap Entries:
❑ Typically wait 2-5 minutes before entering.
❑ 2’ or 5’ 3BP, 2’ or 5’ BS, 2’ or 5’ Turnaround Bar
❑ Despite timeframe, prefer at least 2 bars have formed before entry.
Level 3 Gap Entries:
❑ Typically do not play these before 9:45am because extra confirmation is needed before entry.
❑ Prefer 5’ charts, but a high quality 2’ chart can be used.
❑ Retest or secondary sign of strength is highly recommended.
❑ If after 9:45am and on a 5’ chart, any “quality” set-up is fine.
213
Level 1 Entry
2’ Chart
Key Points:
1. Gapping under a wide ranged green bar,
(creating shock and a lot of selling)
2. Gapping under multiple pivots (2 pivots.)
3. Just enough to clear the prior pivot lows
4. Into Void with room to move lower
5. RW to the market (not shown)
Daily Chart
Stop Loss: $34.80
d21ema
2’ Short Entry: $34.50
214
Level 1- Gap Entry
1’ Chart
r21ema
1’ BO Entry: $79.00
Daily Chart
Stop Loss: $78.50
Key Points:
1. Gapping over a wide ranged red bar,
(creating shock and a lot of covering)
2. Gapping over multiple pivots.
3. Just enough to clear the prior pivot highs
4. Into Void with room to move higher
5. RS to the market (not shown)
215
1’ HI or ORB w/ L1 Gap
1’ HI Entry: $50.00
Key Points:
1. Gapping over a wide ranged red bar, (creating
shock and a lot of covering)
2. Gapping over multiple pivots.
3. Just enough to clear the prior pivot highs
4. Into Void with room to move higher
5. RS to the market (not shown)
$928 in
50 seconds
Stop: $49.60
216
1’ HI or ORB w/ L1 Gap
1’ HI Entry: $32.00
$1019 in
37 seconds
Stop: $31.80
Key Points:
1. Gapping over a wide ranged red bar, (creating
shock and a lot of covering)
2. Gapping over multiple pivots.
3. Just enough to clear the prior pivot highs
4. Into Void with room to move higher
5. RS to the market (not shown)
217
Level 2 Gap Entry
2’ Chart
ADD Shares?
Although a nice gap, it
gapped from a green bar
making it level 2. So we
can be aggressive, but not
‘overly’ aggressive. In this
case a 2’ 3BP formed.
r21ema
Daily Chart
Stop Loss
218
Level 3 Gap Entry
2’ Chart
This gap doesn’t meet most of the criteria to
make it very “compelling.” So, we have to wait
at least 15’ to trade it, and preferably get some
form of a retest or secondary sign of strength.
Ultimately it gave us a 2’ BS with a retest. NICE!
Daily Chart
Entry
r21ema
Stop Loss
219
Level 3 Gap Entry
60’ Chart
Not a ‘great’ gap so we have to wait
for more confirmation. In this case
the 60’ double bottom (W pattern)
helps make the decision easier.
5’ Chart
5’ BS Entry
Daily Chart
Stop Loss
220
General Comments
Positive news does not necessarily mean a stock will gap up, and negative news
does not necessarily mean a stock will gap down.
Not all stocks gapping up are bullish and not all stocks gapping down are
bearish.
Just because a stock gaps up ‘a lot’ (15%-20%+) does not automatically make
it “extended or excessive.”
As a percentage smaller priced stocks typically handle larger gaps better than
higher priced stocks. I.E.: a $60 stock gapping up $10 (or 16%+) is less likely to
move higher than a $6 stock gapping up $1, which is roughly the same
percentage gap.
221
General Comments
Although Level 1 gaps are highly potent, we must still account for the natural spreadiness and
whippiness that comes with trading in the first 5 minutes of the day.
❑ Tip: When trading ‘aggressively’ at the open, ONLY do so with Level 1 gaps AND always account for,
and share size appropriately for slippage and shake outs. I.E. – give them more wiggle room or start
them with ‘partial positions.’ After all, if you are correct the stock will likely move significantly in your
direction with areas to add.
The goal is not always to be aggressive, but rather match the proper entry with the appropriate
gap to improve accuracy.
Things happen quickly at the open, so make sure you have a clear plan of action for EACH gap
before the market opens. Do this by rating each gap and placing it in the order of importance.
Organization and Focus are Key
222
CHAPTER 6
Super Plays
Professional Trading Strategies
223
CHAPTER 6: Super Plays
Super 3BP & 4BP
Super Curl
“You can only do your best and the market does the rest. Trust the process.”
– Jared Wesley
www.LiveTraders.com
1-800-947-4027
224
Super Plays
Super plays are the pinnacle of trading. They are the elite, best of the best patterns that are offered here at Live
Traders. In essence a ‘Super Play’ is two separate essential patterns that come together to form a combination trading
pattern that is extremely potent and highly profitable. Not only are we looking for multiple patterns converging in an
area, we are also looking to add as many pattern boosters as possible, with a great gap and of course RS/RW. We
don’t necessarily need all of these things to consider a trade a ‘Super Play’ but we prefer to have as many of these
attributes as possible. These patterns are so effective at making money, and so highly accurate that when you
absolutely cannot pass it up. These are the absolute ‘best of the best.’
Super plays are exactly how they sound, 2 separate patterns that could otherwise stand on their own, however they
come together to form a ‘super pattern.’ These don’t happen all the time, but when they do, they provide the highest
opportunity odds that we know of. They truly represent the pinnacle of trading, as long as they are management
properly.
NOTE: No matter how outstanding a pattern might be, we must still follow our strict money and trade management
approach. This means allowing them to reach full target, as per our plan, as well as standing down and NOT taking
the trade IF we have reached our maximum daily loss limit.
225
Super Plays
Trades that can be taken at or near the market open regardless of what the market is doing. These are pure
momentum plays that are often completely on their own page or exhibiting such RS/RW that the market becomes
‘almost’ irrelevant. They tend to be slightly more aggressive, but only due to the increased spreadiness and whippiness
that is common during the market open. Despite this, these trades are just as successful as any trade we teach here
at Live Traders.
NOTE: In order to maximize the potential of these trades you must be adept at order entry and reading level II, as
they tend to happen very quickly during the first 1-3 minutes of the market open. They do tend to hit target much
quicker as well.
❑ Turnaround Bar + 3 Bar Play = Super 3BP
▪ Variation: Breakout + Turnaround Bar
❑ Gap + Buy Set-Up + Breakout = Super Curl
▪ Variation: ‘Pullback Breakout’
226
Turnaround Bar + 3 Bar Play
=
+
Turnaround
Bar
3 Bar
Play
TB + 3 Bar
Play
Note: Adding ‘pattern boosters’ increases the odds of the play. + Volume,
+RS/RW, Support/Resistance, Whole/1/2 Number, BT/TT etc.
227
Bullish Super 3BP
Entry: $157.65
Stop: $157.35
Entry: $145.00
Stop: $144.75
228
Super 4BP w/ Gap
Entry
Stop Loss
229
Super Play: TB + 3BP
5’ Chart
Stop Loss
Entry
This stock broke below support and sold off, however an
unexpected bounce occurred that tried to ‘shake’ the sellers out.
This bounce was quickly engulfed by a bearish turnaround bar,
setting the stage for a significant continuation of the move lower.
230
Super Play: TB + 3BP
5’ Chart
Entry
r21ema
Stop Loss
This is a beautiful ‘combination’ play. This is a bullish turnaround bar +
a bullish 3 bar play. These are EXTREMELY potent & profitable.
231
Super 3BP w/ADD
2’ Chart
Although a nice gap, it gapped from a green bar making it level 2. So we
can be aggressive, but not ‘overly’ aggressive. In this case a 2’ 3BP formed.
ADD Shares?
r21ema
Entry: $51.00
If You ADDED…
Avg. Price: $51.50
Raised Stop: $51.60
Exit: $54.30
You Do The Math?!
Daily Chart
Stop: $50.50
232
Perfection: L1 Gap + Super Play
Stop: $152.25
Entry: $151.50
233
Trend Changing Super 4BP
2’ Chart
Entry: $370.00
The mega gap down, and subsequent
puke out to $350.00 makes this
pattern even more potent.
Stop: $367.00
234
Gap + Buy Set-Up + Breakout = Super Curl
+
Buy Set-Up
=
Breakout
Super Curl
Note: Adding ‘pattern boosters’ increases the odds of the play. + Volume,
+RS/RW, Support/Resistance, Whole/1/2 Number, BT/TT etc.
235
Super Curl Breakout
Criteria:
A gap up/down that pulls back and consolidates in a narrow range. Ideally it will
pull back and consolidate near support with a shake out or double bottom retest.
❑
❑
❑
❑
Trending stock that pulls back and consolidates.
Retraces roughly 50% into support.
Ideally has as shakeout or retest.
Entry on the breakout above the consolidation
Gap Up That Sells Off (not necessary
but can make it more potent)
Best Ways To Manage:
1)1st Target HOD, 2nd Target next whole or half
number over the HOD
2)When the stock curls and the 9ema is below it.
Trail it out on the timeframe of your choice
3)2-3R AON
Entry
If VWAP is under the curl as the pullback occurs OR if
its right above the trigger price, the Breakout will be
more potent
236
2’ Super Breakout
2’ CONN
Entry: $30.25
Stop: $29.90
Daily CONN
237
Super Curl Breakout
5’ Chart
Entry
238
Super Curl Breakout
Daily 4BP
Entry
Stop
239
Alternate Curl: Retest
5’ Chart
Entry
Daily Chart
240
CHAPTER 7
Order Entry
Professional Trading Strategies
241
CHAPTER 7: Order Entry
Order Types
Spreads
How To Get Filled
ECN Routes & Fees
“Experienced traders control risk, inexperienced traders chase gains.”
– Alan Farley
www.LiveTraders.com
1-800-947-4027
242
Different Order Types
There Are Various Types Of Orders Available To Traders When Entering And Exiting
Stocks. Knowing Which One To Use Is Imperative To Trading Success. (the most
common order types are listed below)
❑ Market Order – an order which executes at the best “current” price available (BBO –
Best bid or offer)
❑ Limit Order – An order to buy or sell at a traders specified price or better. A limit to buy
can only be executed at your price or LOWER. A limit to sell can only be executed at your
price or HIGHER.
❑ Stop (market) Order – A market order to buy or sell a stock if a specified price (the
stop price) is reached or passed.
❑ Stop Limit Order – An order to buy or sell at a specific price or better, but only after a
specified price has been reached (the stop price).
243
When To Use Each
Knowing Which One To Use Is Imperative To Trading Success:
❑ Market Order – ONLY use when you absolutely MUST get in or out of a position. Your
fill is guaranteed (virtually immediately) HOWEVER, your price is NOT guaranteed. You
are at the mercy of the market!
❑ Limit Order – Used to exit a position when a TARGET is reached. Also can be used to
buy on a pullback (bidding to buy), or to short a bounce (offering to sell)
❑ Stop (market) Order – Should ALWAYS be used as protection to limit losses when a
position is going against you (PROTECTIVE STOP LOSS).
❑ Stop Limit Order – Should be used for ALL entries. A fill is NOT guaranteed as it will be
subjected to how much room the trader gives the limit. (It will ONLY be executed within
the range specified, or better)
244
Buy Order Types
Used To Enter A LONG Position
Stop Limit Range
Share Size
Route
Order Type
Used To Enter A LONG Position
To be used with discretion, this order will
trigger at $28.29, BUT there is NO
guarantee at what price you will actually
be filled!
STOP LIMIT ORDERS ARE THE PREFERRED TYPE OF ORDER ENTRY FOR NEWER TRADERS.
245
Sell Order Types
Used To Exit A Position At TARGET
Stop Limit Price
Share Size
Route
Order Type
Used For Protective STOP LOSS
To be used at ALL TIME for protective
STOP LOSS. DO NOT mess around with
this. Take your stop and MOVE ON
LIMIT ORDERS ARE FOR TARGETS & STOP MARKET ORDERS ARE FOR STOP LOSSES!
246
Market Orders
Used To Enter & Exit A Positions
Share Size
Used To Enter & Exit Positions
Share Size
Route
Order Type
Order Type
Route
These are to be used with extreme CAUTION! These order types give the trader no control
over where they get filled, AND they cost more to use as well! Use Carefully!
247
The Advantages of Level II
Why Understanding Level II Is Important?
❑ Helps us understand where the buyers and sellers are.
❑ Shows us the spread of a stock.
❑ Shows us how “whippy” a stock is.
❑ Helps us get better fills on entry and not get skipped.
❑ Helps us gauge our exit strategy – assuming a large block order in a possible
target area.
❑ By understanding where our competition is, it generally makes our trading
more efficient and profitable.
248
Level II & ECN’s
Ask Yourself…
Do you enjoy getting partial fills, no fills and late fills?
Do you enjoy slippage?
Do you enjoy missing targets, especially by a few cents?
Do you enjoy paying fees & commissions?
What if you could get MUCH better fills & substantially lower your fees?
Is that appealing?
LET’S TALK ABOUT HOW WE CAN MINIMIZE THESE ISSUES!
249
Basic Level II
Shares Showing @ Each Level = Depth
&
Difference in Bid Levels = Thinness
Level I
Level II
ECN/FIRM
BID
ASK
Time & Sales
ASK – BID = SPREAD
250
Alternate Style – Basic Level II
Level I: Basic Info: Symbol,
Bid/Ask, Open/Close, Vol
Level II: Detailed volume
info. with regard to bid/ask
and level depth
ECN/Route, Share Quantity,
Order Type and Direction
(Long vs. Short)
251
Level II Considerations
Things to consider when trying to get your order filled:
❑ Volume of the stock
❑ Price of the stock
❑ Spread/whip of the stock
❑ Size of your stop loss/risk to reward
❑ How many shares you need to get filled
❑ How badly you want to get filled
252
Volume Considerations
Volume of the Stock:
❑ Common Attributes of Highly Liquid Stocks (5-10 million shares +):
▪ Tight Spread (bids/asks are close together; 1-2 cents)
▪ Not As Whippy and Volatile
▪ Generally Tighter Stops
❑ Common Attributes of Highly Illiquid Stocks (less than 1 million shares)
▪ Wide Spread (bids/asks are far apart; 5-30 cents+)
▪ Typically Very Whippy and Volatile
▪ Generally Wider Stops
253
Price Considerations
Price of the Stock:
❑ High Priced Stocks ($75 +):
▪ Wider Spread (bids/asks are far apart; 5-30 cents)
▪ Usually Very Whippy and Volatile (erratic price action)
▪ Generally Wider Stops (30 to 50 cents +)
❑ Lower Priced Stocks ($1 to $30)
▪ Tighter Spread (bids/asks are close together; 1-5 cents)
▪ Usually Not as Whippy and Volatile (smoother price action)
▪ Generally Tighter Stops (10-30 cents)
254
Deciding Your Stop Limit Size
ALL Trades Should Be Entered Using A STOP LIMIT ORDER.
❑ How Do You Decide How Much Room To Give Your Stop Limit Orders?
❑ Take Your Stop Loss and Divide by 5, then add a couple cents.
Entry:
Stop Loss:
=
STOP LIMIT:
SHARE SIZE:
ABC $50.00
ABC $59.50
50 cents
10-15 cents
58 cents
Entry:
Stop Loss:
=
STOP LIMIT:
SHARE SIZE:
XYZ $14.15
XYZ $13.99
16 cents
3-5 cents
19 cents
❑ Always “Err” on the wider stop limit size.
❑ Share size for the MIDDLE of the STOP LIMIT range.
❑ This is only a GUIDE, as there are other considerations to factor in.
Note: Most traders don’t give their entries enough room. When in doubt, give it more room!
255
Entering With A Stop Limit Order
How Wide Of A Stop Limit Is Required?
❑ Highly Liquid Stock
❑ Tight Stop Loss
Offer = Sellers
❑ Tight Spread (not whippy, wild)
❑ Risk To Reward Is 3:1
Example:
❑ $55.00 Stock
Bid = Buyers
❑ 15c Stop Loss
❑ Highly Liquid
❑ Tight Spread
❑ 3-5 Cent Limit Will Usually Be
Enough
256
Entering With A Stop Limit Order
How Wide Of A Stop Limit Is Required?
❑ Liquid Stock, But Not ‘that’ Liquid
❑ Wider Stop Loss
❑ Bigger Spread (little whippy)
❑ Risk To Reward Is 3:1
Offer = Sellers
Bid = Buyers
Example:
❑ $72.00 Stock
❑ 35c Stop Loss
❑ Liquid
❑ Bigger Spread (5c +)
❑ 7-10 Cent Limit Will ‘Usually’ Be Enough
257
Benefits of Anticipating Entry
Benefits of Anticipating:
❑ Virtually Guaranteed Fill Within Your Price Range
▪ Better Fill Than Starting Your Order at .01 +
o No Slippage or Very Little Slippage On Entry
▪ No More Getting Skipped; Eliminates “No Fills”
▪ Easier To Know Your “Exact” Share Size
▪ Targets Become Closer Due to Better Fill
▪ Can place target orders before it breaks
258
What Is Anticipating?
Anticipating Your Entry:
❑ To place an order for a stock that has
NOT actually it’s technical entry yet.
Normal Entry
Anticipation Entry
Example:
❑ Proper Entry = $66.01
❑ Anticipation Entry = $66.00
259
Benefits of Anticipating?
Anticipating Your Entry:
❑ 168,442 Shares Printed at $51.00
= You get filled at $51.00
Normal Entry @
$51.01 to $51.05
Anticipation
Entry @ $51.00
NOT Anticipating Your Entry:
❑ 3,400 Shares Printed BETWEEN $51.01
and $51.05 = Likely NO FILL or A Very
Poor Fill.
260
If You Don’t Anticipate
Intended Entry
All the sellers
are at $50.00.
What happens
after that?
261
What’s The Difference?
Risk To Reward Advantages:
❑ Example:
▪ “Intended” Entry = $51.01
▪ “Intended” Stop Loss = $50.80 (21 cents)
▪ “Intended” Target = $51.64 (3R AON)
▪ “Intended” Risk = $105 = @ 500 shares
▪ Actual Entry = $51.06
▪ Actual Stop Loss = 26 cents
▪ Actual Target = $51.84 (+20 cents)
▪ Actual Risk = $130 (+25%)
This Assumes You Don’t Get SKIPPED!
262
Fill or No Fill?
25,706 shares printed here
900 Total Shares Printed In a
32c range. How Many Do you
Think You Would’ve Gotten?
What’s The Lesson Here:
Trader/Patterns Are Only As
Good As The Fill You Get!
263
Isn’t That Pretty…
Entry: Over $150.00
Stop: $149.65
264
Easy Fill ‘Over’ $150.00?
Entry: Over $150.00
How Many Shares Were
Available Over $150.00?
Did You Get Any?
Stop: $149.65
265
Good Fill Under $16.65?
How Many Shares Were
Available Under $16.65?
Stop: $16.95
Entry: Under $16.65
266
Easy Fill ‘Over’ $120.00?
Entry: Over $120.00
How Many Shares Were
Available Over $120.00?
Did You Get Any?
Stop: $119.40
267
Dangers of Anticipating
The Danger of Anticipating:
❑ “Anticipation Stop Out”
▪ Stock Fills You, But Never “Technically” Triggers it’s Proper Entry.
❑ Example:
▪ Proper Entry = $51.01 + (with a Stop Loss at $50.80)
▪ Your Order Is at $51.00.
▪ Stock Prints $51.00 and Fills Your Order
▪ BUT, after Filling Your Order It Never Breaks $51.00.
▪ It Then Pulls Back and Hits The Stop Loss at $50.80.
▪ You Lose 1R, Yet The “Proper Entry” Never Triggered.
268
Dangers of Anticipating
You put your order at $40.00 and get
filled, however the stock never breaks
higher, and eventually stops you out
at $39.75 without ever triggering it’s
“technically” correct entry.
Anticipation Entry @ $40.00
Stop Loss @ $39.75
269
Dangers of Anticipating
You put your order at $29.95 to $30.00
and get filled, however the stock never
breaks higher, and eventually stops you
out at $29.80 without ever triggering
it’s “technically” correct entry.
Anticipation Entry @ $30.00
Stop Loss @ $29.80
270
Dangers of Anticipating
You put your order at $22.00 and get filled, however the
stock never breaks lower, and eventually stops you out at
$22.10 without ever triggering it’s “technically” correct entry.
Stop Loss @ $22.10
Anticipation Entry @ $22.00
271
Various Ways of Anticipating
Possible Variations:
❑ Start Your FULL Order 1-2 Cents Before = Anticipating
▪ Positives: Great Fill, Exact Risk & Closer Targets
▪ Negatives: It Might Never “Trigger” The Proper Entry
o I.E. – Anticipation Stop Out.
❑ Start ½ Lot 1-2 Cents Before & ½ Lot Using Proper Entry and Limit
▪ Positives: 100% Fill For At Least ½ Lot, Good Avg. Position Cost
▪ Negatives: Your 2nd ½ Might Not Get Filled or ½ Lot Antic. Stop
❑ Time The Level II (i.e. try to hit the buy button just before breaking):
▪ Positives: Good Fill and Unlikely To Get An Anticipation Stop
▪ Negatives: Very Difficult; If You Are Too Late You’ll Get No Fill, and it takes your attention
away from scanning other ideas.
272
Reading Level II
What To Look For:
❑ The Bid Strength vs. The Ask Strength. “Balance of Power”
▪ Large Ask & Small Bid = Not Ready To “Pop”
▪ Large Bid & Small Ask = Ready To “Pop”
❑ The Size Of The Spread:
▪ This Determines If You Need To Start Your Order Sooner
o I.E. - $50.99 in stead of $51.00
o Typical on Higher $ Stocks: GOOG, AAPL, AMZN etc.
❑ The Total Shares You See at $51.00 and Your Share Size
▪ If You Need A lot of Shares and You Don’t See Many Shares at $51.00, Then You Need To Start
Your Order Sooner.
➢ I.E. – If You Need 5000 Shares and You Only See 10,000 at $51.00.
273
Sellers Dominate
Strong Ask
Weak Bid
Not
Ready
Stronger Bid
Buyers Are
Stepping Up
274
Balance of Power Shifting
Weaker Ask
Strong Bid
Getting
Closer
Stronger Bid
It’s READY
275
How Wide Should Your Limit Be?
➢Stock = GE
➢Stop Loss = 10c
❑Limit Size?
❑Anticipate = Y/N
➢Stock = GILD
➢Stop Loss = 25c
❑Limit Size?
❑Anticipate = Y/N
276
If You Don’t Anticipate
❑ Despite using a
‘proper’ sized limit
order…
❑ Would you have
gotten filled?
❑ If So, Where?
❑ Would that affect
your R:R?
Entry
277
Level II Prints: Time & Sales
1’ Chart
Great trade over $64.00, RIGHT??
ONLY IF YOU GOT FILLED!
TSCO Daily
278
Level II Prints: Time & Sales
When TSCO broke $64.00, it popped 65 cents in less than 1 minute, filling almost NOTHING for 1520cents, yet from $63.98 to $64.00 there were over 350,000 to be had.
279
Level 2 Gap w/Early 4 Bar Play
Daily Chart
5’ Chart
Great trade over $56.00,
RIGHT??
ONLY IF YOU GOT FILLED!
280
Decreasing Spread & Offer Size
➢ 11c Spread
➢ Weak Bid
➢ NOT READY
➢
➢
➢
➢
➢
1c Spread
Volume Coming
Stronger Bid
Weak ASK
NOT READY
281
Breaks Out Without Filling Shares
If You Didn’t Get Some Shares
At $55.99 or $56.00 Then You
Probably Didn’t Get Filled.
Perhaps You Were Fortunate
And Got a Partial Fill, Which
Would Have Likely Been Around
The $56.10 Area Or Worse.
282
Level 2 Gap w/Early 3 Bar Play
Daily Chart
2’ Chart
Great trade over $51.00,
RIGHT??
ONLY IF YOU GOT FILLED!
283
Decreasing Spread
➢
➢
➢
➢
10c Spread
This Stock
Weak Bid
NOT READY!!
➢
➢
➢
➢
➢
2c Spread
Thick Stock
Stronger Bid
Weak ASK
READY!!
284
Target Considerations
2’ Chart
$40 Target Area
Entry
15’ Chart
As we approach our target, we
need to keep an eye on Level II
285
Level II Shows A Big Sell @ Target
The Level II shows a big seller at $40.00, this gives a
reason to slightly lower our target a few cents to avoid
the possibility of not getting through this area. Actual
prints prove this seller was ‘for real.’
286
Commissions & ECN Routes
One of the common axioms heard in various trading circles is; “I was
profitable before fees, but I barely broke even (or was slightly negative)
after fees.”
Needless to say, in trading there are a multitude of “FEES” that are
incurred, and are generally referred to as the “cost of doing business.”
Therefore it is imperative to the trader to understand what these fees are
and how they can potentially be reduced in an effort to increase their
bottom line.
287
Commissions & ECN Routes
Platform/Brokerage Fees
❑ Range from $0 to $500+ per month
❑ Costs Include: Data Feed (Level I & II), Management Fees etc.
Commissions
❑ Two Types:
▪ Flat Fees: $3 to $10 per trade.
▪ Per Share Fees ($0.0005 to $1 per 100 shares)
❑ Vary significantly depending on volume of shares traded and account size etc.
ECN Fees
❑ ARCA, BATS, EDGX, NASDAQ, NYSE, TRIM and many more.
❑ Fees range from paying $3 per 1k to receiving $2.10 credits per 1k.
SEC Section 31
❑ Section 31 of the Securities Exchange Act of 1934
❑ Fee: Currently $13.00 per million dollars ($0.000013 per share)
288
Commissions & ECN Routes
ECN: ELECTRONIC COMMUNICATION NETWORK
❑ An automated system that matches buy and sell orders for securities. An ECN
connects major brokerages and individual traders so that they can trade directly
between themselves without going through a middle man. The ECN makes money
by charging a fee for each transaction. ECN’s make it possible for investors in
different geographic locations to quickly and easily trade with each other. The SEC
requires ECN’s to register as broker-dealers. (www.investopedia.com)
❑ Note – Not all ECN’s are the same. Some are more/less liquid than others, some
charge higher/lower fees than others. It is important to understand which ECN
you are using and why you are using it. Failure to do so can cause poor fills as well
as unnecessarily increase the cost of doing business for the retail trader.
289
ECN Routes
Most Actively Traded ECN’s: ARCA, BATS, Direct Edge (EDGX), NASDAQ
290
ECN Fee Schedule
Venue
Add Liquidity
Remove Liquidity
ARCA
-0.0021
0.003
BATS
-0.0020
0.003
EDGX
-0.0020
0.0029
BUZZ
0.0015
0.0015
CRES
0.0012
0.0012
NYSE
-0.0014
0.0030
TRIM
0.0015
0.0015
These ECN Fee Schedules Are Subject To Change
291
ECN Fee Schedule
BUY w/TRIM Stop Limit
SELL w/ARCA Limit
Pay $0.0015 Per Share
Receive $0.0021 Per Share
Pay $1.50 to Enter, Receive $2.10 When Target Is Reached:
NET ECN FEE = Credit of $0.60
292
Example ECN: ARCA
ARCA (previously ArcaEx or Archipelago Exchange):
❑ General Info:
▪ 2nd Largest ECN (in terms of shares traded)
▪ 10% of NYSE Listed Securities
▪ 20% of NASDAQ Listed Securities
▪ Provide 0.0021 cents CREDIT for providing liquidity
▪ Charge 0.003 cents for removing liquidity
❑ Positives:
▪ Extremely liquid, which usually means a relatively good fill compared to other ECN’s.
▪ Provides the largest rebate when adding liquidity.
❑ Negatives:
▪ One of the more expensive ECN’s when removing liquidity.
293
Example ECN: ARCA
EXAMPLE: BUY 1000 shares XYZ @ $40.00 using ARCA
❑ Stop Limit Order for Entry & Offer Out Using a Limit Order @ $40.50 (tgt)
▪ We pay $3.00 for our 1000 shares (we REMOVED liquidity.)
▪ We sell 1000 shares at our target of $40.50 using a LIMIT order. (We are CREDITED $2.10 for ADDING
liquidity.)
▪ Entry Cost: $3 (plus commissions).
▪ Exit Cost: -$2.10 (CREDIT, plus commissions).
▪ Total Cost: 90 cents (plus commissions).
❑ What if we “hit market” to exit @ our target of $40.50?
▪ We would then incur a fee of $3.00 for taking liquidity.
▪ Entry Cost: $3 (plus commissions)
▪ Exit Cost: $3 (plus commissions)
▪ Total Cost: $6 (plus commissions)
▪ That’s a $5.10 difference on only ONE TRADE! Lesson: Fees add up.
❑ NOTE: these fees DO NOT include brokerage commissions and are subject to change.
294
Example Using TRIM & ARCA
EXAMPLE: BUY 1000 shares XYZ (Stop Limit) @ $40.00 using TRIM
❑ Stop Limit Order for Entry (TRIM) and Offer Out @ $40.50 (target) (ARCA)
▪ We pay $1.50 for our 1000 shares (we REMOVED liquidity.)
▪ We sell 1000 shares at our target of $40.50 using an ARCA LIMIT order. (We are CREDITED $2.10
for ADDING liquidity.)
▪ Entry Cost: $1.50 (plus commissions).
▪ Exit Cost: -$2.10 (CREDIT, plus commissions).
▪ Total Cost: CREDIT of 60 cents (plus commissions).
❑ What if we “hit market” to exit @ $40.50?
▪ We would then incur a fee of $3.00 for taking liquidity.
▪ Entry Cost: $1.50 (plus commissions)
▪ Exit Cost: $3 (plus commissions)
▪ Total Cost: $4.50 (plus commissions)
▪ That’s a $5.10 difference on only ONE TRADE! Lesson: Fees add up.
295
Summary: 3 Possible Scenario’s
Scenario #1:
❑ ENTER STOP LIMIT USING ARCA, EXIT MARKET USING ARCA (1000 shares)
❑ Entry = Pay $3.00, Exit = Pay $3.00
❑ Total ECN Fees: $6.00
Scenario #2:
❑ ENTER STOP LIMIT USING ARCA, EXIT LIMIT USING ARCA (1000 shares)
❑ Entry = Pay $3.00, Exit = Credit $2.10
❑ Total ECN Fees: $0.90
Scenario #3:
❑ ENTER STOP LIMIT USING TRIM, EXIT LIMIT USING ARCA (1000 shares)
❑ Entry = Pay $1.50, Exit = Credit $2.10
❑ Total ECN Fees: CREDIT $0.60
296
ECN Savings Chart
# of Shares Traded
(year)
240,000
(100/trade)
1,200,000
(500/trade)
2,400,000
(1k/trade)
4,800,000
(2k/trade)
12,000,000
(5k/trade)
TRIM Entry,
ARCA Exit
$234.00
ARCA Entry and
Exit
$414.00
ARCA Entry &
Market Exit
$720.00
YEARLY SAVINGS
$180.00 & $486.00
$1170.00
$2070.00
$3600.00
$900.00 & $2430.00
$2340.00
$4140.00
$7200.00
$1800.00 & $4860.00
$4680.00
$8280.00
$14,400.00
$3600.00 & $9720.00
$11,700.00
$20,700.00
$36,000.00
$9,000.00 & $24,300.00
That’s a SAVINGS of 43% and 67% respectively.
Chart is based on 1200 trades per year (100 per month), using Stop Limit Orders
for ENTRY and Limit Orders for EXIT. It assumes 50% hit target and 50% stop out.
297
Important ECN Notes
There is a lot of variation between platforms/brokerages as it relates to ECN fee structures.
As business owners, traders need to determine which brokerage is right for them.
OTCBB/Pink Sheet Stocks typically have higher fees, as do stocks under $1.00.
“Transaction Fee” Rate per SEC Section 31: $13.00 per million dollars sold.
(http://www.sec.gov/divisions/marketreg/sec31info.htm)
❑ Higher priced stocks have a higher transaction fee.
❑ Example: 100 Shares of GOOG @ $1000 = $100,000
❑ $100,000 x 0.000013 = $1.30 per 100 shares of GOOG
Most Actively Traded ECN’s: ARCA, BATS, DIRECT EDGE (EDGX), NASDAQ
Trading is a business and needs to be treated as such. There are many areas in which you
can save money, or cost yourself money if you are not aware of certain rules and fee
structures.
298
ECN Conclusions
Choosing the wrong broker can cost thousands of dollars per year.
Choosing an expensive ECN Route can cost thousands of dollars per year.
Exiting positions at target areas using MARKET orders instead of LIMIT orders can cost
thousands of dollars per year.
Trading higher priced stocks (such as GOOG, AMZN, BRK.A) can incur higher SEC Section 31
fees, ‘potentially’ increasing overall costs.
Not all ECN’s are liquid, so if you are trading large shares it’s generally best to stick with the
larger ECN’s such as ARCA, BATS, EDGX etc.
DO NOT make saving a dime on an ECN your sole priority, rather getting a good fill should
be your top priority, but do keep ECN fee structures in mind when trading as they can save
you thousands of dollars.
Note: Some platforms DO NOT offer ECN credits/rebates. Also, ECN’s continually update
their fee structures so please check with your broker to determine what the most recent fee
structure is.
299
Level II Conclusions
Understanding Level II price action is an important part of efficient intra-day trading, particularly at
the market open when stocks tend to be ‘spreadier’ and whippier. Knowing how ‘thick’ or ‘thin’ the
levels are allows the trader to better judge where their order needs to start, how much room to give
their limit orders, as well as when to possibly take a target slightly early due to a potentially large
block order that could stall prices in a particular area.
Understanding this information will also help the trader know if share sizing must be adjusted to
compensate for possible slippage. In getting better fills, our target areas effectively become closer
by making those areas more profitable when reached, due to the better fill on entry. Lastly, traders
that adeptly understand level II should not be uttering the words, “I got skipped!” All of these
concepts help traders be more efficient and ultimately more profitable due to better fills, fewer
instances of getting skipped and better overall accountability for slippage due to more appropriate
share sizing.
300
CHAPTER 8
Money Management
Professional Trading Strategies
301
CHAPTER 8: Money Management
Account Rules
Risk Level Considerations
Why We Take Our Stop Losses
“Trading is about making MONEY. It’s NOT about being right.”
– Modern Rock
www.LiveTraders.com
1-800-947-4027
302
Money Management
There is a lot of talk about the importance of technical charts, as well as trade management in most
courses, however one of (if not the most) important topic to your trading success will be MONEY
MANAGEMENT.
If you are unable to manage your account, and keep your losing days ‘reasonable’ you will never be
around long enough to enjoy the freedom, flexibility and financial rewards that trading has to offer. Sadly
we have seen many traders through the years blow up multiple accounts and ultimately give up on the
business because they failed to appreciate just how important money management was. By the time most
traders appreciate the importance of money management it’s too late! Don’t make the same mistake.
The following pages will give you a better understanding of what proper money management looks like.
We Have 2 Simple Rules At Live Traders:
1.
2.
Be Objective & Use Common Sense!
Respect & Protect Your Account = Trade Small, Until You Are Consistent
YOU EARN THE RIGHT TO RAISE YOUR RISK!
303
Money Management
New traders have NO business risking significant amounts of money in the beginning. In fact, ALL new traders
should start out by risking LESS THAN $50 per trade, and more realistically $10-$30 per trade. This is
irrespective of your account size or financial well-being. Doing anything other than the suggestion above is akin
to throwing away money.
Let your results be your guide. Let your results determine whether or not you should raise your risk. One of the
single biggest mistakes that new traders make is raising their risk too soon. The market doesn’t care about your
mortgage payment or that baby needs new shoes. Simply put:
YOU EARN THE RIGHT TO RAISE RISK!!
304
“Risk” Units
What is “Risk” Level? (“R”)
Risk level is simply the amount of money you are willing to lose on a given trade if you are
wrong.
This is not something to take lightly because it will ultimately have a drastic impact on your
trading success or failure.
Most traders risk too much too soon.
❑ Entry – Stop / Risk = Share Size
▪
▪
▪
▪
▪
▪
Entry Price: $50.00
Stop Price: $49.50
Risk: $500
Shares Size = 1000
If the trade stops you LOSE $500
If the trade goes $1.25, you make $1250 or 2.5R
o (make sure to factor in slippage and fees as well)
305
“Risk” Units
Benefits of a Fixed ‘RISK’ Unit…
Consistent Losses
❑ Most traders who have trouble can generally look back on just a few really bad
trades or really bad days.
Money Management Can Be Planned
❑ You can PLAN to withstand ‘X’ number of losses in a day and not be shut down after
1-2 trades.
Peace of Mind
❑ All trades are equal, let your batting average and sharpe ratio make you money.
No Trade is ‘Worth’ More
❑ Letting your ‘idiot’ bet more money on a single trade always causes bad
management and undesirable results. Keep your risk consistent on every trade.
306
“Risk” Units
It’s Usually Best To Be FLEXIBLE!
Most trades have ‘areas’ in which you can place your stop loss
If you choose the ‘tightest’ area, that gives you the least flexibility, but it’s also the greatest
Reward to Risk (R:R)
If you choose the ‘widest’ area that gives you the most flexibility, but it’s also the worst Reward
to Risk (R:R)
Risk Level
10 Cents
20 Cents
40 Cents
=
=
=
=
$100
1000 Shares
500 Shares
250 Shares
There is no ‘right’ or ‘wrong’ answer, it really comes down to EXPECTATION, which
is a topic we will discuss in the Trade Management Chapter.
307
Money Management
Money Management Considerations…
Use Common Sense
❑ Respect the market and understand you can’t change the market.
❑ Determine your RISK level based on RESULTS, not subjectivity.
▪ New traders should not risk more than $10-$25 per trade.
▪ Experienced traders should not risk more than 1% of their account per trade.
o Intra-Day Traders = ½% will likely be your realistic max. BP concerns.
o Swing Traders = 1% is ok, if you have proven results over time.
▪ Raise risk based on RESULTS, not feeling or “need.”
o EARN THE RIGHT TO RAISE YOUR RISK!!
▪ Have specific criteria for RAISING and LOWERING your risk level.
❑ Preservation of Capital is key, especially in the beginning.
▪ No more capital = No more trading!
❑ Create a trading plan to lay out specific rules to manage your money.
308
Money Management
Money Management Considerations…
Monitor Risk Exposure
❑ Maximum Loss of 4-5R per trading day.
▪
▪
▪
▪
Cannot have more than 4-5 trades open at one time, if stops haven’t been raised or targets met.
If down 4-5R in one day, SHUT IT DOWN. No exceptions.
Another possibility: If you lose 3 consecutive trades, shut it down.
MUST HAVE these rules for daily, weekly and monthly draw downs.
❑ Be mindful of buying power limitations.
▪ Make sure your risk level will allow for AT LEAST 3 open positions at one time.
▪ If you hit buying power limits you could miss a good trade.
❑ Control RISK by ALWAYS placing a technical stop loss.
▪ Use stop market orders for your stop losses. It guarantees you will get filled.
▪ Be mindful of wide spreads and whippy stocks.
▪ Be mindful of low volume stocks that could cause significant losses if you stop out.
❑ Swing Traders: Limit Capital Exposure.
▪ Avoid Regulation T margin calls.
▪ Prevents overexposure to GAPS against one trade.
309
Risk Management
As a general money management rule, I am NEVER allowed to give back more than 2R on any OPEN position, or go below
BREAKEVEN after a 2R gain becomes REALIZED. Risk/Money Management is always my most important job.
Daily Loss Limit & Risk Per Trade:
Although the maximum daily loss limit is 3R, I must limit my open trade exposure to 2R at a time. Thus, if 2 positions are
open for a total of ‘2R risk exposure,’ then I cannot enter a third trade unless or until the stop has been moved to b/e or
higher on the other trade(s), so as not to become overly aggressive. This will also make sure I am very cautious and specific
with the trades I am choosing.
Maximum Loss Limits: (daily, weekly, monthly)
If Cumulative Loss =
3R at ANYTIME during the DAY, stop take the rest of the day off and re-assess.
9R at ANYTIME during the WEEK, stop, take the rest of the week off and re-assess.
12R at ANYTIME during the MONTH, stop, take the rest of the month off trading real money and re-assess. Also,
trade only ½ lots for the 1st week of the following month. If 5R or more is earned, then go back to normal risk.
If more money is lost, then enroll in 1 hour of coaching with a professional from Live Traders.
310
Profit Management
Money Management Considerations…
Profit Management
❑ Daily Dollar Goals – be realistic
▪
▪
▪
▪
▪
Should be the same or larger than your maximum loss day.
Example: Hit daily goal of $500. Shut it down.
Alternate Example: Hit daily goal, continue trading until you lose 1 trade.
Alternate Example: Hit daily goal, continue trading using a ½ risk until you lose 2 trades.
HAVE THE DISCIPLINE TO WALK AWAY WHEN GOALS ARE REACHED!
❑ Weekly Dollar Goals
▪ Example: Weekly goal met on Wednesday. Take a long weekend.
▪ Alternate Example: Continue to trade with ½ or full lots until consecutive losers.
❑ Monthly Dollar Goals
▪ Percentage of profits works best.
▪ If the goal is $10,000, then DON’T let your profits go below $8,000, regardless of the time of the month.
The Goal Is To NOT Give Back Hard Earned Profits!
311
Why We Take Our Stops
Raised Stop
Swing/Core Entry
Original
Stop
Why We Take Our Stops
This Isn’t Trading.
This is GAMBLING.
313
Why We Take Our Stops
Stop Loss
Short Entry
Considerations
Money Management Considerations…
Summary
❑
❑
❑
❑
❑
❑
❑
❑
❑
❑
Use Common Sense – Be Realistic.
Risk small amounts in the beginning.
Preservation of capital is very important.
Earn the right to raise risk: P-L/results decide when you are ready.
Have rules for raising and lowering your risk level.
Control risk by placing a technical stop loss.
Define maximum losses for daily, weekly, monthly periods.
Define dollar goals for daily, weekly, monthly periods.
Have rules for when daily, weekly, monthly targets are reached.
Have a WRITTEN plan that defines all of these rules.
Even The Best Technical Trading System Will Not Take You
Far Without The Help Of Solid Money Management Rules!
315
CHAPTER 9
Trade Management
Professional Trading Strategies
316
CHAPTER 9: Trade Management
Why It’s Important
There’s A Million Ways To Manage
❑
❑
❑
❑
❑
❑
❑
AON
BBB
PIVOT
MOVING AVERAGE
ADD & REDUCE
SELL INTO STRENGTH
COMBINATION/HYBRID
Which Is Best For You?
“The best way to learn how to trade, is to trade! Practice makes perfect.”
– Jared Wesley
www.LiveTraders.com
1-800-947-4027
317
Why It’s Important
Trade management is one of the single biggest reasons that traders struggle to succeed in this
business. They fail to appreciate the idea that not every trade will work, therefore when they get into
a trade that does work, they need to make money from it, but most of the time they scalp out of it
just happy to make a small profit. The average trader typically allows their losers to have a big
impact on their P-L and their winners to have a small impact on their P-L. This is where the
importance of trade management comes in.
As we will discuss later, not only are there a multitude of ways to manage trades, there is no ‘holy
grail’ or perfect management approach. When it comes to trading, we are all different. We are all
individuals with varying personalities. It is in this area where most traders fail. More simply put, they
fail to understand who is really trading. We all have emotional issues to overcome as traders. The
people who are best at objectively identifying these issues and then choosing a management style
that compliments their personality are generally the most successful traders. It’s the traders who
allow their ego to trade for them who typically blow up multiple times and ultimately fail.
318
It’s All About Expectation
Trade Management Considerations…
It’s all about EXPECTATION
❑ What are you expecting from each trade?
❑ Are those expectations in line with your trading style and strategy?
❑ Know yourself:
▪ Are you jittery or relaxed?
▪ Can you handle giving back profits while shooting for larger targets?
▪ Can you handle taking profits earlier, then watch the stock move higher?
❑ Create a trading plan to lay out your rules and strategies.
Everything is a give and take
❑ You can’t maximize profits yet completely protect against losses.
❑ You can’t completely protect profits and expect to maximize gains.
❑ Don’t force a system on yourself.
❑ Use a system that is conducive to your personality and trading style.
The most profitable method is not always the best method!
319
There’s A Million Ways To Manage
Main Types of Trade Management:
AON = All or Nothing
BBB = Bar By Bar
PIVOT = Waiting for a pivot to form and trailing below it.
MOVING AVERAGE = Trailing a specific MA
PYRAMIDING = Adding to a winning position while reducing risk exposure.
SELL INTO STRENGTH = The stocks goes parabolic, sell at market.
COMBINATION/HYBRID = Choosing 2 or more management methods and combining them.
320
Management Strategies
Goal Attaining vs. Profit Protecting
The ‘tighter’ you manage the more profit you are protecting, but
you also have a greater chance of being stopped out at that
particular level.
The ‘looser’ you manage the larger the targets you will reach,
however you will protect less and potentially give back some
gains.
Hence, management is always a give and take, and management is
always about EXPECTATION.
321
Management Strategies
Profit Protecting:
1 Minute BBB
1 Minute 9EMA
2 Minute BBB
2 Minute 9EMA
1 Minute Pivot
5 Minute BBB
5 Minute 9EMA
2 Minute Pivot
15 Minute BBB
15 Minute 9EMA
5 Minute Pivot
60 Minute BBB
60 Minute 9EMA
15 Minute Pivot
Wider = Goal Attaining
Tighter = Profit Protecting
PROFIT PROTECTING vs. GOAL ATTAINING
❑ Low TF BBB (1’, 2’ etc.)
❑ SMALL TARGET AON (1R,1.5R)
❑ MICRO TIMEFRAME PIVOTS (1’ etc.)
Goal Attaining:
❑ Higher TF PIVOTS (5’, 15’, 60’)
❑ 5’, 15’ MOVING AVERAGES
❑ LARGE TARGET AON (3R+)
Profit Protecting & Goal Attaining:
❑ COMBINATION/HYBRID
❑ PYRAMIDING
NOTE: Each Trader Must Decide Which Approach Is
Best For Them, As There Is NO Holy Grail In Trading!!
322
AON: All Or Nothing
AON: ALL OR NOTHING MANAGEMENT
Simply put, this means ‘set it and forget it.’
You choose what type of target you are looking for:
❑ 2R Target
❑ Specific Chart Target
❑ Time Target
Once You have chosen your target you put the stop loss in the system, then you put your target
price in the system, and walk away. Period. 1 of 3 things will happen:
❑ You will stop out
❑ You will reach your target
❑ You will exit the position at 3:55pm EST before market close
This is an EXTREMELY simple approach to management, which works well for people who
struggle to choose targets or who typically sell too soon. However, it can also be challenging to
watch a stock go 90% of the way to target and then come back and stop out.
Note: most traders cannot ‘beat’ AON.
323
BBB: Bar By Bar
BBB: BAR BY BAR MANAGEMENT
Simply put, this means ‘trail the stock under the prior bars low.’
You choose what timeframe is relevant (based on expectation)
Most traders will only begin to BBB trail once the stock has moved in their direction by at least
1/2R to 1R. However this is entirely up to the trader and again is based on expectation.
This is also a very simple approach to trade management, as finding the prior bars low is an
exact science.
Note: most traders usually give ‘some room’ when BBB trailing. Perhaps 5-10 cents below the
prior bars low depending on the stock. Obviously you would give “GOOG” more ‘room’ than
“BAC” etc.
On lower TF’s this management approach typically does NOT provide large gains, but rather
protects profits. This is often a good approach if you are close to a target area.
324
BBB: The “10% ER”
5’ Chart
5’ Chart
Raise Stop
Lower Stop
➢Entry: $117.75
➢Stop: $118.00
➢Risk: $250 (1000 sh. x 25c)
➢Continually Lower Stop
➢Cover @ $116.40
➢TOTAL GAIN: $1350 or 5.4R
➢Left 25 cents On The Table
➢
➢
➢
➢
➢
➢
➢
Entry: $9.00
Stop: $8.75
Risk: $250 (1000 sh. x 25c)
Continually Raise Stop
Sell @ $9.90
TOTAL GAIN: $900 or 3.6R
Left 60 cents On The Table
325
BBB: The “90% ER”
5’ Chart
5’ Chart
Raise Stop
Raise Stop
➢
➢
➢
➢
➢
➢
➢
➢
Entry: $1.85
Stop: $1.60
Risk: $250 (1000 sh. x 25c)
Raise Stop To: $2.00
Raise Stop To: $2.30
Sell @ $2.30
TOTAL GAIN: $450 or 1.8R
Left $2+ On The Table
➢
➢
➢
➢
➢
➢
➢
➢
Entry: $23.50
Stop: $23.25
Risk: $250 (1000 sh. x 25c)
Raise Stop To: $23.75
Raise Stop To: $24.05
Sell @ $24.05
TOTAL GAIN: $550 or 2.2R
Left $2 On The Table
326
Pivot Management
PIVOT MANAGEMENT
Pivot management can be a very effective way to reach larger targets and is generally best used by
disciplined and patient traders who are comfortable in occasionally giving back some profits. As you
can see in some of the examples below, there are times when you might be up 2-3-4R with very
little, if any profits protected.
As discussed earlier, everything in trading is a give and take. So although pivot management can hit
some really phenomenal targets, there will be times when you give back sizeable gains. With this
type of management you have to be willing to give up a little to gain a lot. Though this isn’t true of
every situation, it will happen, and this is why this particular management approach is best suited for
disciplined, patient traders.
The key to pivot management is to NOT move the stop too soon. This means, make sure it is a
genuine pivot, not just a small 1 bar reversal. Most traders raise their stop too early and get tagged.
Let the stock pivot AND move back up at least 1-2 bars before raising the stop under the pivot low.
327
Pivot Management
➢
➢
➢
➢
➢
➢
➢
➢
5’ Chart
Entry: $86.00
Stop: $85.84
Risk: $240 (1500 shares x 16c)
Raise Stop To: $86.35
Raise Stop To: $86.90
Raise Stop To: $87.49
Sell EOD @ $88.00
TOTAL GAIN: $3000 or 12.5R
Entry: $86.00
Raise Stop
Stop: $85.84
328
Pivot Management
5’ Chart
Stop: $20.75
Lower Stop
Entry: $20.50
➢
➢
➢
➢
➢
➢
➢
➢
➢
Entry: $20.50
Stop: $20.75
Risk: $250 (1000 sh. x 25c)
Lower Stop To: $20.01
Lower Stop To: $19.75
Lower Stop To: $19.30
Lower Stop To: $19.18
Cover EOD @ $18.50
TOTAL GAIN: $2000 or 8R
329
Moving Average Management
MOVING AVERAGE MANAGEMENT
Trailing a specific moving average can also be a successful way to manage trades, however it is more ‘hands
on.’ You will likely be raising your stop loss for every new time period that forms. Although it is a better than
BBB for attaining targets, it typically is NOT as good as pivot management. Here at Live Traders we prefer to
use the 9EMA when trailing our stocks. The timeframe will depend on our expectation.
Note: Sometimes stocks move up quickly after putting in wide range bars. This is particularly common on
BO’s/BD’s and 3-Bar Plays. When this occurs the EMA usually lags quite a bit. If we strictly follow EMA
management there are times when we could give back gains in the case of a fast moving stock. (This is also
true for BBB management with WRB’s.)
Note: When using 9EMA management make sure to trail at least 15% behind the 9EMA. If your stop
loss is 50 cents, then trail at least 8 cents behind the EMA.
As we continue to discuss various types of management, you are beginning to see how each one is very unique
and offers both pro’s and con’s. This is what makes finding a great management approach so challenging and
why many traders struggle with it!!
330
9EMA: 5 Minute Chart
5’ Chart
5’ Chart
Entry $99.00
➢
➢
➢
➢
➢
➢
➢
Entry: $20.50
Stop: $20.75
Risk: $250 (1000 sh. x 25c)
Lower Stop To: $20.00
Cover @ $19.60
TOTAL GAIN: $900 or 3.6R
Left $1 On The Table
Lower Stop
Raise Stop
➢
➢
➢
➢
➢
➢
➢
➢
➢
Entry: $99.00
Stop: $98.75
Risk: $250 (1000 sh. x 25c)
Raise Stop To: $99.25
Raise Stop To: $99.50
Raise Stop To: $99.75
Sell @ $100.05
TOTAL GAIN: $1000 or 4R
Left $1 On The Table
Entry $20.50
331
9EMA: 5 Minute Chart
5’ Chart
How do we
handle this WRB?
5’ Chart
Entry $49.50
Exit $50.40
Entry $28.45
Entry $28.70
Stop: $28.20
➢
➢
➢
➢
➢
➢
➢
➢
Entry: $28.45
Stop: $28.20
Risk: $250 (1000 sh. x 25c)
Raise Stop To: $28.60
Raise Stop To: $28.70
Sell @ $28.70
TOTAL GAIN: $350 or 1.4R
Left 80 cents On The Table
Stop: $49.25
➢
➢
➢
➢
➢
➢
➢
➢
➢
Entry: $49.50
Stop: $49.25
Risk: $250 (1000 sh. x 25c)
Raise Stop To: $49.60
Raise Stop To: $49.90
Raise Stop To: $50.20
Sell @ $50.40
TOTAL GAIN: $900 or 3.6R
Left 20 cents On The Table
332
ADD & REDUCE
ADD & REDUCE
ADD & REDUCE: adding to a winning position to accelerate profits without increasing
risk.
This can be a very effective way to increase profits, however there are several things to
think about:
You have to be a good enough trader to find and ‘be in’ stocks that move.
You have to be willing to re-invest some of your profits to make this work.
❑ I.E. – Psychologically disciplined and patient.
You should only be adding on ‘recognizable’ patterns.
It is up to the trader how much and how often they want to “add” to the trade.
❑ Most trades give you a choice:
➢
➢
➢
➢
Add enough to be at ZERO risk
Add enough to be at ½ risk
Add enough to be at full risk
Add enough to re-use ALL profits
333
Adding To Accelerate Profits
➢
➢
➢
➢
➢
➢
➢
➢
➢
5’ Chart
Initial Entry: $1.87
Initial Stop: $1.62
Initial Risk: $250 (1000 shares x 25c)
Add 1000 @ $2.11 (5’ BS)
Raise Stop To: $1.99
New Average Price: $1.99
New Risk: 0c x 2000 shares = $0
BEFORE add, $2.50 move = 10R or $2500
AFTER add, $2.50 move = 20R or $5000
Raise Stop
Add @ $2.11
Initial Entry $1.87
Raise Stop To: $1.99
Initial Stop: $1.62
334
Adding To Accelerate Profits
5’ Chart
Add @ $49.80
Exit
Initial Entry $49.50
Raise Stop
Raise Stop To: $49.60
Initial Stop: $49.25
➢
➢
➢
➢
➢
➢
➢
➢
➢
Initial Entry: $49.50
Initial Stop: $49.25
Initial Risk: $250 (1000 shares x 25c)
Add 1000 @ $49.80 (Breakout)
Raise Stop To: $49.60
New Average Price: $49.65
New Risk: 5c x 2000 shares = $100
BEFORE add, $1 move = 4R or $1000
AFTER add, $1 move = 8R or $2000
335
A&R = 9R on FIS
➢
➢
➢
➢
➢
➢
➢
➢
➢
Initial Entry: $64.75
Initial Stop: $65.00
Initial Risk: $250 (1000 shares x 25c)
Add 1000 @ $64.50 (3 bar play)
Lower Stop To: $64.65
New Average Price: $64.62
New Risk: 3c x 2000 shares = $60
BEFORE add, $1 move = 4R or $1000
AFTER add, $1 move = 8R or $2000
2’ FIS
Initial Stop: $65.00
Lower Stop
Initial Entry $64.75
Add Here
336
ADD & REDUCE Exercise
There are 3 separate trades on this chart.
Assume a $500 Risk Per Trade and a FULL LOT
ADD For Each New Trade.
5’ Chart
Entry: $43.55
$44.10
Entry: $43.40
How Much Would You have Made On This
Trade If You Employed a 5’ BBB Management?
5’ Buy Set-Up: Entry $43.15, Stop $43.05
5’ Breakout: Entry $43.40, Stop $43.30
5’ 3 Bar Play: Entry $43.55, Stop $43.45
Entry: $43.15
Stop: $43.45
Stop: $43.30
Stop: $43.05
If You Had Bought 5000 Shares At $43.15,
with a 10 cent Stop Loss, and Sold at $44.10,
You Would Have Made $4750 or 9.5R, Which
Is VERY Impressive.
BUT…How Much COULD You Have Made By
Adding?
Do The Math…The Correct Answer Is
‘Somewhere’ In The Back Of The Manual.
Good Luck!
337
Sell Into Strength
SELL INTO STRENGTH
Selling into strength basically
no reasonable pivot areas or
lock in profits without giving
goes parabolic or breaks-outs
means the stock has moved very nicely in our direction and there are
lower timeframe BBB approaches that would allow us to ‘adequately’
back significant gains. This situation typically happens when a stock
of a range with extreme enthusiasm.
This situation does not happen everyday and selling into strength should be used sparingly as there
is usually a 1’ chart or some other form of lower TF that will allow us to trail it out.
Note: We do not have to sell ‘all’ of our position at this point. Case by case, depending upon overall
expectations.
The key things to look for in terms of deciding when it is prudent to sell into strength are:
❑ An extreme volume spike (well above normal)
❑ An unusually large or wide range bar (2x to 3x normal range)
❑ A wide range bar that forms after many other bars (extended)
338
Sell Into Strength
Being realistic it would be tough to hold this
stock using ANY management approach other
than a lower timeframe BBB on a 15’ or 5’
chart after such a tremendous move. Most
traders would likely sell into strength after
this parabolic move. Remember, hindsight is
20/20, things are different in real time!
Daily Chart
Extremely Large Bar
Daily Breakout
Extreme Volume Spike
339
Sell Into Strength
There are decisions to be made on this. Entering
at $18.50 with a 75c stop loss gives a
potentially great R:R. On the 1st day it puts in a
huge WRB and ends at $23…this would be a
good time to sell ½ into strength and then BBB
on the daily or even 60’ chart. Ideally we would
sell on the novice mega gap up to $30, and
pocket a handsome bundle of $$!
Daily Chart
Novice Mega Gap
Extremely Large Bar
Daily 3BP
Extreme Volume Spike
340
Sell Into Strength
10’ Chart
5’ Chart
WRB
Entry
WRB
Entry
Big Volume Spike
Big Volume Spike
341
Combination/Hybrid Management
COMBINATION/HYBRID MANAGEMENT
Although there is no such thing as “perfect” management because markets are constantly changing,
as well as the fact that we all have different time constraints, expectations and of course
psychological demons to deal with. Despite this, the closest and most ‘balanced’ management is
usually a ‘combination or hybrid’ approach.
This type of management allows us to be somewhat flexible by taking our trades and dividing them
into multiple lots. Example: ½ lots or 1/3rd lots. This way we can be scalpy with a portion of our
position, but also let the back portion run for a bigger target. This type of management also allows
us to give stocks a lot of room (pivots for example) but also tighten the trail stop when we approach
a target so as not to give back everything we’ve gained.
There are infinite ways to use combination/hybrid management, which largely depends on individual
expectations and constraints. The following pages provide a sample of some combination
management methods.
342
Pivot & BBB Management
5’ Chart
2nd Target Area
ADD
1st Target Area
Entry
Begin 5’
BBB
Raise Stop
Initial Management: 5’ Pivot
75% To Target: Change To 5’ BBB.
Initial Stop Here
343
60’ Pivot Until 75% TGT Then BBB
60’ Chart
These are also known as
“Transitionary Buy Set-Ups. (TBS)”
Target Area $34
21ema
Buy Here
The intention was to use PIVOT
Management to get up to $34.00,
however at 75% of target, we go
to a 60’ BBB. At 90% of target
then go to a 15’ BBB
Begin BBB at
75%: $33.25
Stop Here
344
Pivot & BBB
5’ Chart
Buy Here
60’ Chart
Target Area
Stop Here
The intention was to use
PIVOT & BBB Management to
get up to $11.40, but it moved
so smoothly, it’s probably best
just to take target.
345
Start w/BBB, End w/Pivot
5’ Chart
Entry $90.00, Stop $89.90. After a
60c pop (6R), it’s likely best to
either sell ½ there, or go to a 5’
BBB for the front ½ shares, then
trail the back ½ on 5’ Pivots. Here
is an example, of starting a trade
with BBB and then going to Pivots.
No Target:
What To Do?
Buy Here
Raise Stop
Stop Here
346
Trade Management
Factors That Affect Targets:
❑ Basic Trade Management:
▪ AON: All or Nothing
▪ Bar by Bar
▪ Pivot
❑ Proximity of support or resistance areas.
❑ Overall quality of the trend, which includes the current location relative to support/resistance, distance between pivots
areas, extendedness of the trend
❑ Market Environment
❑ RS/RW of the stock
❑ Whether or not the trade is WITH the trend or COUNTER TREND.
❑ NOTE: ‘with the trend’ trades tend to have larger potential targets.
347
Re-Entering Full Stop Outs
Re-entering a stock that has completely stopped you out and has come all the way
back to the original entry will work 84% of the time from my personal experience.
Thus, it is usually a good idea to re-enter ANY/ALL stocks that have given you a FULL
stop out and then come back up/down to the original entry point.
Don’t worry if the new entry doesn’t have a ‘pattern’ just re-enter with the same
parameters as the ORIGINAL trade. Same entry price, same stop area and same target.
You will likely find out the second entry works far more often than the first entry.
Please don’t take my word for this, simply back-test it for yourself. If you do so, please
back-test at least 100-200 trades before implementing this strategy, as you might find
your statistics differ from mine.
348
Management Conclusions
So, Which is the best Management Strategy?
NONE of them and ALL of them = It depends.
Which one could you REALISTICALLY follow 99% of the time?
Only you can decide.
Advice – Be realistic and objective.
❑
❑
❑
❑
❑
Don’t choose a method that goes directly against your given personality style.
Don’t choose a method that relies on a high BA, if you are not a good stock picker.
Don’t choose a method that relies on a high SHARPE, if you are not a patient trader.
Don’t choose a method that won’t fit into your schedule or time constraints.
Choose a method that maximizes your strengths and minimizes your weaknesses!!
349
Management Conclusions
Different Strokes For Different Folks:
Every Trader Is Different
❑ No One Single Style Is “Perfect”
❑ Find A Management Strategy That Compliments Your Personality Style, Yet Still Makes $$.
Trade Management Is A “Give & Take”
❑ It’s Very Tough To Have A Super High Batting Average and a Super High Sharpe Ratio.
❑ Focus On A Style YOU Can Actually Follow.
A Hybrid Approach Is Often Best
❑ Example: Sell 1/3rd at 1-2R For Protection, Sell 1/3rd On A Bar By Bar Trail Stop, Last 1/3rd On A
Pivot Trail Stop.
❑ Holy Grail = Find What Works Best For You!
WHATEVER STYLE YOU CHOOSE – CONSISTENTLY FOLLOW IT!!
350
Trade Management Summary
Trade Management is NOT just about which method produces the most money or the
highest “R” value. Rather, trade management is ALL about which style you can ACTUALLY
follow for the majority of the time. Too many traders have lofty management ideas/goals
they never follow. So, do not waste your time searching for the most profitable method.
Your time will be better spent figuring out which style best suits your personality. Keep in
mind, trading timeframes, resources and expectations will all play a role in these
decisions. The Holy Grail is the method you can follow consistently. Nothing more, and
nothing less. Once you have found a system you can truly follow, then you have a
foundation from which to build. This will eventually lead to larger profits and less
frustration.
351
General Management Summary
Without all 3 of these systems: Self-Management, Money Management and Trade
Management you will struggle to succeed as a trader. Realize that self-management is the
key to a proper trade and money management system, because without the ability to
manage ones self you will never be able to consistently follow a plan.
Everything else in trading is a by-product of your self-management and discipline. This is
why very few traders actually succeed, because overcoming deep, ingrained emotional
issues is challenging. Let your focus be on consistency. Once consistent, you can build on
your success.
352
CHAPTER 10
The Business of Trading
Professional Trading Strategies
353
CHAPTER 10: The Business of Trading
Having A Plan
Tracking Your Trades
❑ Journaling
❑ Analyzing
❑ Back-Testing
Planning For Success: The Real Cost Of Trading
Size Doesn’t Matter
Basic Office & Platform Considerations
“Losers average losers”
– Paul Tudor Jones
www.LiveTraders.com
1-800-947-4027
354
The Truth About Trading
At its very core trading is simply a game of ‘statistical probability.’ No matter how perfect a setup is, it
could fail. No matter how poor a setup is, it could still work. The key to being a profitable trader is
consistency. Approaching each trading day and each individual trade the same way everyday. This gives
us an edge. Then through proper money and trade management we simply let this ‘edge’ make us money.
The above paragraph is the same one at the beginning of the manual. It’s very simple, elegant and
generally true, however without a business plan that includes a realistic approach you will likely struggle
to succeed.
Lack of preparation is one of the biggest reasons for failure in this industry, thus this chapter is critically
important to your success. Due to perceived intelligence or success in other aspects of life DO NOT think
you are different or better and these rules don’t apply to you. This business has taught just about
every type of person imaginable a lesson in humility at some point. Don’t let your ego cost you
your trading career. Work hard, be objective and most of all, stay humble. This chapter is designed to give
you a practical understanding of what is required to succeed in the trading business.
355
Planning Cycle of Success
IMPROVE
PLAN
ASSESS
IMPLEMENT
MEASURE
356
Trading Plan Considerations
A trading plan is a written set of rules that defines how and when you will place trades and includes the
following sections:
Markets That Will Be Traded
❑ NASDAQ, NYSE, AMEX, FOREX, EMINI etc.
Charts/Indicators That Will Be Used
❑ Weekly, Daily, 60, 15, 5 ,2 ,1
❑ Trend-lines & Moving Average (MA): ema or sma
Account & Position Sizing Rules
❑ Risk Level
❑ Maximum Daily/Weekly/Monthly Drawdown
Entry Rules
❑ Trade Filters: Time, Pattern, Environment, Liquidity, Spread etc.
Exit Rules
❑ Trade Management Considerations:
▪ Profit Targets
▪ Stop Loss Levels
▪ Time Exits (EOD etc.)
Continuing Education
❑ Journaling & Tracking Trades
❑ Reading Books, Talking To Traders, Reviewing Manuals, Relaxing When Needed
357
Sample Plan: Objectives
Objectives:
Possible Outcome:
▪ Batting Average: 50%
▪ Sharpe Ratio: 1.75 to 2.0
▪ Reward to Risk: 2:1
▪ Never Risk More Than 1% of My Account on a
Single Trade (1/2% is preferable)
▪ Maximum Number of Trades Per Day: 6
▪ Maximum Loss Limit Per Day: 1R per trade, 3R’s
per day, 9R’s per week, 12R’s per month = STOP
TRADING immediately if these criteria are met.
358
Sample Trading Plan
Mission Statement
Page 1
❑ What are my intentions?
❑ What is my timeline?
Goals (BA, Sharpe Ratio)
❑ Long-term
❑ Intermediate-term
❑ Short-term
Money Management
❑
❑
❑
❑
❑
❑
Maximum Loss Rules (daily/weekly/monthly)
Target Rules (daily/weekly/monthly)
Risk Amount Per Trade (% of acct.)
Rules For Increasing/Decreasing Risk Level
Buying Power Rules/Needs
Financial Needs/Expenses
Execution Rules/Order Types
❑ Entry Order Types
❑ Exit Order Types (stop losses and targets)
❑ Proper Routes/ECN’s
Strategies
❑ +/- 3 Bar Play, 4 Bar Play
❑ Buy Set-Up (BS), Sell Set-Up (SS)
359
Sample Trading Plan: ENTRY TACTICS - CHECKLIST
3 & 4 BP MUST HAVES:
❑
❑
❑
❑
❑
❑
❑
❑
❑
Wide Range Igniting Bar over a significant pivot (1st or 2nd bar of the non-extended move).
Bar #2 must be a narrow ranged in the upper 30%-50% of bar #1.
Bar #2 cannot move above the high of bar #1 (several pennies is fine).
No reports coming out that could adversely affect the trade (Example: oil report while trading XOM).
Must have 2:1 reward to risk/void.
Must be in the direction of the overall trend or breaking out into a new non-extended trend.
IF MID-DAY (12 noon to 2pm), cannot be on a 1’ or 2’ timeframe. 5’ or higher.
Daily chart must not be more than 3 to 4 days up or down, unless narrow range days.
The spread must not represent more than 30% of the size of the stop loss.
Page 2
3 & 4 BP LIKE TO HAVE:
❑
❑
❑
❑
❑
❑
Preferably increased volume (double avg.) on the wide range igniting bar
Showing RS/RW to the market
At a whole or ½ number
Showing HUGE volume at the whole or ½ number entry point
Bar #2 = red bar on lower, resting volume
Time with a market bounce/drop, while it exhibits RS/RW.
A pattern must have AT LEAST 7 ‘must have’ qualities and AT LEAST 3 ‘like to have’ qualities in order to place the trade.
360
3 & 4 Bar Play Example
361
Sample Trading Plan
Daily Routine:
Page 3
Pre-Market
❑
❑
❑
❑
❑
❑
❑
❑
❑
❑
❑
❑
❑
Arrive At Office By 8:45am
Put Together a Gap List
Cross Reference Gap List With Jared
Rank Gap List – Level 1/2/3 using Market Bias As Our Guide
Add Favorite Gaps To Thumbnail Charts
Share Favorite Gaps With LTCR
Check Carry Over List (stocks from yesterday that are still appealing)
Double Check Important Economic Reports
Double Check Earnings Calendar For Gaps
Determine Market Bias – market off support/resistance points
Review Goals and Trading Plan Rules (Entry Criteria and Perfect Pattern Pictures)
Take A Moment BEFORE The Market Opens To Positively Visualize Your Day
SWING TRADING – Update/Double Check Positions For GAPS and Potential Earnings
362
Sample Trading Plan
Daily Routine Continued:
Page 4
Intra-Day
❑ ABS – Always Be Scanning!
❑ Continue To Update FAVORITES List As Necessary
❑ Change The Timeframe Of Your Watch Lists
❑ (Re-)Assess Market Bias/Overall Environment At Each
▪ i.e. – Potentially Change Market Bias Due To NEW Information
▪ i.e. – Potentially Be MORE/LESS Aggressive Due To Current Environment
❑ Monitor Open Positions So As To NOT Conflict With Money Management Rules
❑ Rules For Each Phase Of The Day: Morning-Lunch Time-Afternoon
▪ Morning: Maximum 4 Trades: Focus Is On Gap List Favorites
▪ Lunch-Time: Max 1 Trade, Move Up To 15’ Charts With RS/RW and +Volume
▪ Afternoon: 5’-15’ Charts, 2 Trade Maximum
❑ SWING TRADING: Set Alerts For Stocks Nearing Entry
Post-Market
❑ See Follow-Up Routine
363
Sample Trading Plan
Trade Management:
Page 5
❑ AON – Choose 2-3R Targets and Let The Stock Hit The Target OR Stop Out. DONE.
❑ Bar By Bar On The Time Frame You Entered.
▪ Must Add Additional Rules: Ending Bars/Volume, Climactic Moves Etc.
❑ Pivots
❑ Hybrid Approach – Combination of BBB, Pivots, AON for a portion etc.
Follow Up/Education/Record Keeping:
❑
❑
❑
❑
❑
❑
❑
❑
❑
❑
❑
❑
❑
Double Check To Make Sure We Have Exited All Intra-Day Positions (be flat)
Enter All Trades Into Tracking Spreadsheet
Review Trades and Enter Into Journal
List Strengths/Weaknesses To Be Improved Upon Tomorrow
Scan Daily Ideas For Tomorrow + Carryover List – Put On A Watch list
Spend 1-2 Hours Every Night Improving Your Trading
Reading A Trading Book
Talking To A Trading Buddy About Relevant Trading Topics
Back-testing New Ideas
Reviewing A Course Manual
Attending A Lecture
Going Golfing/Playing Tennis/Enjoying Yourself
SWING TRADING: Make Sure To Have The Proper Order Type In Place
364
Daily Trading Journal
Daily Trading Journal:
This is mainly to capture the ‘thought process’ of the trader during a trade:
❑ Helps to explain the emotional state of mind during a trade
❑ Allows the trader to look back and assess psychological strengths and weaknesses
given certain circumstances
Can Use: Notebook, Binder, PC File:
❑ 3 Sections:
▪ Winning Trades
▪ Losing Trades
▪ All ‘other’ trades:
o Example: trades you wanted to take but chickened out, skipped trades, missed
trades etc.
365
Trading Journal Entry
❑
❑
❑
❑
❑
❑
Entry: $79.01
Stop: $78.85
TGT 1: $79.25 (1.5R)
TGT 2: 5’ Pivots
Shares : 3100
Risk: $500
❑ Comments:
❑ Beautiful pattern made possible by the
nice daily gap and timed with the market.
Proper entry, proper share size.
Anticipated to get filled.
❑ Sold back ½ at $80, or 6R, before my
plan says to because I’ve never been up
$3k on an intra-day trade before, and the
wide range red bar scared me. I was very
nervous about giving any $$ back.
5’ Chart
Buy Here
Raise Stop
Stop Here
Daily
❑ Not following your plan cost 3R or $1500.
Need to add a rule in my plan about 5R+
moves. Perhaps go to a 5’ BBB at 5R. Still
adjusting to the new risk level.
366
Trade Tracking Spreadsheet
Trade Tracking Spreadsheet:
Numerical record of all trades. (Winning, Losing, Good, Bad etc.) This
includes a detailed list of parameters that are calculated to help the trader
better assess their performance.
❑ Helpful to see what is working and what isn’t working.
❑ Helpful for making meaningful and necessary adjustments.
❑ Basically a detailed statistical analysis of all trades, including an equity curve, back
test modelling and other important measurements.
367
Sample Tracking Spreadsheet
Note: It’s important to track the parameters that you feel are most important to your
trading success. It is also a good idea to add a column for comments about your trades.
368
Sample Tracking Spreadsheet
369
Sample Tracking Spreadsheet
370
Sample Tracking Spreadsheet
371
Tracking Your Equity Curve
Note: You can track your equity curve on a
daily, weekly, monthly and even a yearly
basis. This can help you see trends in your
trading, such as seasonality and so forth.
372
Analyzing Performance
How Can These Stats Help You Improve?
Adjusting Your Plan – Possibly A Change In Emphasis:
❑ Trade Types/Patterns: BO vs. 3-Bar Play, BS, CRB etc.
❑ A Shift From Long to Short Plays, Vice Versa
❑ Looking At Success Rates Given A Certain Time of Day
▪Morning BA vs. Afternoon BA etc.
❑ General stock parameters
Could also lead to trade/money management enhancements:
❑ Changing from BBB trailing to Pivot Trailing due to a change in market environment. Stage 2 vs.
Stage 3 etc.
❑ Perhaps ‘set it and forget it’ order type to avoid over-management.
Basically it tells us what is working and what isn’t!
❑ Gives us a better understanding of our trading, particularly in certain market conditions.
❑ Overall it lets us know what we need to change to improve our trading and ultimately make more
money.
373
Back Testing Trade Performance
What is Back-Testing?
Taking Past Trades To Help Predict Future Trading Performance:
❑ Example: 9ema trailing vs. Pivot trailing
❑ Example: BBB trailing vs. Hybrid approach
❑ Example: 2R targets vs. 3R targets
Why is Back-Testing important?
To improve your trading performance:
❑ Let’s us see our “actual” results versus other strategies.
❑ Back-testing is simply a ‘simulation’ or assumptive projection of potential future results.
❑ Keep in mind, market environments change and the past is not always an indication of the future.
Despite this, it is a valuable tool.
374
Back Testing: What Can We Learn?
375
Actual Back Test
Actual Back-Test From Jared W. of Live Traders:
❑
❑
❑
❑
8 Methods Were Tested
1 Month Period Of Time
80 Trades Taken
ACTUAL RESULTS: 23.45R (using 1.5R AON, 1R B/E)
What can we learn from this back-test?
376
Journal & Tracking Summary
The Truth Is: BOTH Are Crucial To Success!
Your Trading Journal Will Let You Know Your Psychological Pitfalls.
❑
❑
❑
❑
❑
Your journal will give you an honest look at your thought process each and everyday.
Did you get nervous and sell too soon for fear of giving it back?
Did you pass on a good trade trying to protect small gains?
Did you overtrade on a losing day or give back profits on a good day?
It will show who you REALLY are!
Your Trade Tracking Spreadsheet Will Let You Know Every Statistical Detail of Your
Trading.
❑ The trade tracking sheet will show if the “real you” is profitable.
❑ It will show where you are doing well and where improvement is needed
❑ Selling too soon? Not taking stops? Poor patterns? Etc.
Your JOURNAL & TRACKING SHEET go hand in hand. One without the other is less meaningful.
377
Planning For Success
A Sensible Approach:
Assumptions & Expectations
❑ What are your beliefs when entering the trading business?
▪ How long do/did you think it would take to succeed?
▪ It typically takes 2-3 times longer than most traders expect.
o If you planned for 12 months, it’ll probably take 24-36 months
o That is being REALISTIC!
❑ Consider how long it took you in your prior profession to reach a high level of success.
▪ Don’t forget to include college, training, apprenticeship etc.
▪ More than likely it took you 5 years or more to succeed
▪ What level of education did you need before they would even hire you?
o Did you earn more the longer you were there? If So, Why?
❑ Thus, IF it took 5 years or more to make ‘good’ money, why should trading success come so much
quicker?
Being realistic with your approach is absolutely crucial to success.
378
Planning For Success
Considerations:
The realistic time it will take to success is likely between 12-36 months, plan for the higher
side.
❑ Do Not think you are ‘better’ or more prepared because of prior success in a different field or even a
similar profession.
❑ Profitability will come slowly, and at a small level in the beginning.
❑ Therefore, have a secondary source of income:
▪ Part-Time/Full-Time Job, Large Savings Account etc.
▪ Do Not depend on trading for income during this 12-36 months period.
❑ Expect ups and downs and many frustrations along the way.
▪ Inconsistency will be normal in the beginning.
▪ Feeling extreme high’s and low’s will also be normal.
❑ Understand what is required:
▪ Hard work, Dedication, Persistence and Continual Education combined with Market Experience.
Anything less won’t be good enough.
379
Understanding The Costs
What Are The Costs?
Initial Account Capital
❑ $5,000 to $250,000 – Depending on your account type and expectations.
Office Equipment: Computer, Monitors, Desk, Chair, Printer etc.
❑ $1,000 to $5,000 +; Varies greatly depending on your wants and needs.
Education
❑ $1,500 to $5,000 +; Depending on your commitment.
❑ Education and market experience are necessary.
Other Fees
❑ Platform Fees = $0 per month to $300 per month +
❑ Trade Fees = $200 per month to $5,000 + per month; Depends on risk level, commission rates, SEC Section 31 fees,
your style of trading etc.
Living Expenses
❑ Difficult to define: $2,000 per month to $30,000 + per month
Lost Income Costs and/or Depletion of Savings Account
❑ Difficult to define: Your lost salary for however long it takes to replace it.
380
Understanding The Costs
Sample Cost Analysis:
Beginning Account Capital: $50,000
Basic Necessities: Computer, Monitors, Desk, Chair, Printer = $2500
Education = $2000
INITIAL START UP COSTS = $50K + $2500 + $2K = $54,500
Sample Platform Fee: $250/mo. (3000/yr.)
Trade Fees/Commissions: $500/mo. (6000/yr.)
LTCR (Chat Room): $147 ($1524/yr.)
Living Expenses = $5000/mo. ($60,000/yr.)
Lost Income Costs and/or Depletion of Savings Account = $5000/mo.
1 Year Total = $70,524 (not including your lost income)
TOTAL = $54,500 + $70,524 for 1 year of trading = $125,024. (not including lost income)
Costs will vary, potentially higher or lower depending on your lifestyle. This is a basic idea of what it
‘might’ cost to start a career in trading.
381
Understanding The Costs
Trader Stages Of Success:
Trainee:
❑ Simulator or Paper Trading: 1 – 4 weeks.
Beginner:
❑ Real Money, but small risk
❑ $10-$25 Risk: Small Enough Not To Get Hurt.
Intermediate:
❑ $50-$100 Risk: Until Consistency Is Achieved Over Multiple Months.
Professional:
❑ You’ve earned the right to risk as much as you’d like.
❑ 1% of capital for retail accounts and up to 2% for Prop accounts.
Note: In the beginning of your trading career do not base your risk level per
trade on ‘percentage of account,’ this is something only experienced traders
have earned the right to do.
382
Understanding Risk
Risk and Money Management Is One of The Single Most Important Considerations For A Trader:
Consistency is King
❑ Do Not raise your risk without statistical evidence back it up. Such as 3-4 months of steady results.
Account Size & Leverage
❑ Retail Leveraged 4:1 or Prop Style w/Higher Leverage?
Frequency & Style
❑ Hold Positions All Day OR In and Out Quickly?
Example:
❑ $50K Retail Account = $200K Intra-Day Buying Power
❑ ½% Risk Per Trade = $250 Risk
▪ Average $60 Stock With A 25c Stop Loss.
▪ How Many Shares Do You Need? 1000 Shares. (25c x 1000 = $250)
▪ Cost Of Buying 1000 Shares = $60,000.
▪ How Many Trades Can You Have Open At A Time Using This Example? Answer = 3.3
❑ Your Risk Is Highly Dependent On Your Style.
▪
Scalper = 1% Risk Is Possible. Day Trader = ½% Risk Is Realistic. Swing Trader = 1%.
383
Share Sizing
Size Trades So That Predefined Financial Risk Is Assigned To Each Trade:
❑Define It Based On YOUR Comfort Level
❑Other Considerations:
▪
▪
▪
▪
Experience Level
Frequency & Monthly Goals
Type Of Trade/Timeframe (Scalp vs. Core etc.)
Percentage Of Capital Base
Example:
❑View Different Styles Of Trading As Separate
▪ CORE
▪ SWING
▪ INTRA-DAY
–
–
–
1.5% Of Cash Account
1.0% Of Cash Account
0.5% Of Cash Account
Note: General rule for active intra-day traders: Your buying power divided by 1000 is
usually a good guide for your maximum risk level per trade. $150,000 BP = $150 risk.
384
Goals
Determine Total Revenue Based On A $50,000 Account:
Style
Core
Swing
Intra-Day
Risk Level
1.5%
1.0%
0.5%
# of Trades
5 (2/3)
10 (4/6)
60 (33/27)
Batting Avg.
40%
40%
55%
Win/Loss Ratio
5
3
1.5
❑ What Is Your Total Revenue At Months End?
❑ What Other Considerations Need To Be Made?
❑ Which Style Was Most “Efficient”?
385
Goals
Results:
Style
Core
Swing
Intra-Day
Risk Level
1.5% ($750)
1.0% ($500)
0.5% ($250)
# of Trades
5 (2/3)
10 (4/6)
60 (33/27)
Batting Avg.
40%
40%
55%
Win/Loss Ratio
5
3
1.5
Style
Core
Swing
Intra-Day
Winners Make
10R
12R
49.5R
Losers Lose
-3R
-6R
-27R
Gross Total
+7R
+6R
+22.5R
Gross Profit
$5,250
$3,000
$5,625
Which Style Is Best?
386
Realistic Expectations
What Is Realistic For My RETAIL Account?
Sample Account:
❑
❑
❑
❑
$50,000 Retail Account ($200K Buying Power)
Flat Fee Commissions = $5 (no ECN Fees)
Frequency = 5 Trades Per Day = 100 Trades Per Month.
Style = Intra-day Trader (2-3R Targets)
Basic Expectations:
❑
❑
❑
❑
❑
❑
50% BA
1.6 Sharpe Ratio (Win Loss Ratio)
½% Risk Per Trade = $250 Risk.
3 Trade Fees on Winners = $15 (1 Entry and 2 Exits)
2 Trade Fees on Losers = $10 (1 Entry and 1 Exit)
Platform Fee = $100
387
Realistic Expectations
What Is The Outcome?
Sample Scenario:
❑
❑
❑
❑
❑
❑
❑
❑
100 Trades Per Month x 50% Winners = 50 Winners, 50 Losers.
1.6 Sharpe = 50 Winners x 1.6 = 80R – 50R = 30R GROSS.
$5 Fees: 50 Winners = $750, 50 Losers = $500. Total: ($1250).
30R x $250 Risk = $7500 GROSS
$1250 in Trade Fees (5R).
Platform Fee: $100
$7500 - $1250 - 100 = $6150 NET PROFIT.
Gross “R” = 30. Net “R” = 24.6.
Summary:
❑ $50K Account; $7500 Gross Profits = 15% Gain/MO.
❑ $50K Account; $6150 Net Profits = 12.3% Gain/MO.
388
Prop vs. Retail
Retail Account:
❑
❑
❑
❑
❑
❑
❑
Initial Account Capital (for PDT): $30,000 +
Leverage/Buying Power: maximum 4:1
‘Good’ Return = 10% to 20% per month or 100% to 200% per year
No Limit To Your Possible Drawdown or Account Loss.
Generally no commission rebates
Platform fee is usually waived for active traders
Can hold overnight
Prop Style Account:
❑
❑
❑
❑
❑
❑
❑
Initial Investment: as little as $3,000.
Leverage/Buying Power: 20:1 ++
‘Good’ Return 50% per month (assuming 2% risk)
Daily drawdown is controlled
Commission Rebates
Slightly more expensive platform fee
Generally cannot hold overnight
389
Size Doesn’t Matter
Many new traders are concerned about not
having enough capital to make a living in the
trading business. Let me be the first to dispel
that notion right now. It doesn’t take a lot of
money to make a lot of money, but it DOES take
patience and consistently good trading to turn a
small account into a large account.
The key to staying solvent and ultimately making
money in the trading business is intelligent
MONEY MANAGEMENT. Sadly most traders lack
this skill, mainly because they allow their ego to
trade for them. The purpose of this subject
however is not to delve into the important topic
of money management, but rather to SHOW YOU
that it is in fact possible to turn a small account
into a reasonably nice income.
Below you will see an account that I opened with
$2165 and ultimately turned into over $51,000 in
12 months!! I’ve chosen to take ‘quarterly’ snaps
shots to save space, but you can clearly see the
progression as each month passes.
390
Size Doesn’t Matter
As you can see, this was no ‘fluke’ as it took
many trades to accomplish this. If you are one
of the many traders who doesn’t have a fat
bankroll, don’t worry, you can still achieve your
dreams of trading for a living, HOWEVER, it will
take patience and discipline to build your
account and risk level up! This will not happen
overnight. Rather it will take lots of patience,
discipline and consistency. Slow and steady
(consistent) results are what you are after. Don’t
make excuses, just work hard to get REAL
results. Happy Trading!
391
Summary
Closing Comments:
Realistic Expectations Are Key To Success:
❑ You are NOT different, assuming so is very dangerous.
❑ It will likely take 12-36 months to succeed.
❑ Be conservative when planning. I.E.: plan for the long haul, this is not a get rich quick
scheme.
Statistically less than 8% Of People In The US Make $100K Per Year or more.
❑ The numbers are even lower in trading.
Compared to other businesses, the start up costs in trading are cheap.
Be Smart/Reasonable With Your Risk Level.
❑ Use Common Sense!
❑ 10% - 20% Monthly Returns Are Very Good
Do Not Let Your Expectations Exceed Your Experience!
392
Basic Office & Platform Set-Up
General Thoughts:
This is a BUSINESS. Treat it like one.
Do NOT go cheap on the necessities.
❑
❑
❑
❑
❑
❑
Computer.
Monitors.
Internet.
Desk.
Trading Platform.
Overall office environment.
You’re only as good as the reliability of your trading platform,
computer and internet connection.
393
Monitor Set-Up
Trading Screen Layout Suggestions:
Main Screen
❑ Order Entry/Level II, Time & Sales
❑ Several Charts – Entry timeframes – 2’, 5’, 15’
❑ Watch Lists
Auxiliary Monitors – side monitors
❑ Scanning charts – 2’, 5’, 15’, 60’, Daily, Weekly Time frames
▪
2’ = ½ day data, 5’ = full day, 15’ = 2-3 days, 60’ = 7-10 days, Daily = 3 months +, Weekly = 1 year +
❑ Watch Lists – Favorites Lists
▪
Daily, Weekly, Gap Lists, Sector Lists – All linked to charts
❑ Early morning thumbnail watch list charts – 2’ and 5’ timeframes
▪
Track as many as you can reasonably follow – usually 10-20.
❑ Market Internals – all timeframes
▪
▪
QQQ or SPY – either is fine.
Optional: TICK, TRIN, VIX etc.
❑ Scanning Software
▪
$ Gainers/$ Losers, % Gainers/% Losers, ESP, NASDAQ Heat Map etc.
Suggestion: KEEP IT SIMPLE!!!
394
Main Screen
395
Alternate Main Screen
396
Scanning Monitor
397
Scanning Monitor
398
Thumbnail Watch-list
399
Sample Trading Office
400
Sample Trading Office
401
CHAPTER 11
Psychology
Professional Trading Strategies
402
CHAPTER 11: Psychology
Understanding The Truth About Trading
Considerations:
❑
❑
❑
❑
Personality
Time
Money
Intangibles
Adapting Your Trading Style To Your Personality
“It’s hard to beat someone who never gives up.”
– Babe Ruth
www.LiveTraders.com
1-800-947-4027
403
The Truth About Trading
Let’s not sugar coat anything here; trading is a very challenging business. One of the main reasons that people
struggle to succeed is that this business requires a level of self discipline and objectivity that simply isn’t
necessary in any other profession.
Whether you work for someone or own your own business you are constantly being overseen by your
manager/boss or clients. These people constantly critique your efforts and results and generally give specific
guidelines in which you must operate. In essence they are your ‘personal police’ force in the business world,
making sure you tow the line, otherwise you’ll be fired, or perhaps your business will fail. What happens in a
lawless society? Chaos. The truth is, most people have no experience managing themselves with no one looking
over their shoulder. That is what makes trading so tough and why most people prefer a standard 9-5 job that
requires little creative thinking. No responsibility.
You won’t know exactly how you will react to something until you are faced with it. Thus, despite what you will
learn in this chapter, you still have to put in the time and effort to overcome bad habits. This begins by being
objective and honest with yourself. Frankly, that’s where most traders fail. It’s over before it ever starts, and
they don’t even know it! Your job is to always be objective and never make excuses. Don’t be a victim.
404
Why Do Traders Fail?
You don’t believe in yourself – Poor self image and Negative attitude.
❑ If you don’t think you can do it, how can you build confidence to compete against other professional traders and large
hedge funds/corporations?
❑ Must approach everyday the same way, with a positive attitude!!
Poor Planning /No Planning. Don’t treat it like a business.
❑
❑
❑
❑
❑
Don’t’ give your business the proper tools to succeed.
Lack proper education.
Lack proper charting software, fast internet connection, use an old slow computer etc.
Have no one to coach you and guide you.
Failure to define short, intermediate and long term goals.
o Otherwise how do you know what you are working towards and how can you measure it?
Lack of Discipline. (i.e. failure to control your emotions)
❑ Win or lose, you must stay in control.
❑ Perhaps the single biggest reason for trader failure.
Lack of Capital (extension of poor planning).
❑ Not enough operating capital. Not enough buying power. Not enough money to get an education. Not enough money
set aside to pay your bills while you are learning how to trade. You will not become an instant success. So, you need to
plan for this.
405
Why Do Traders Fail?
Poor Money Management Rules.
❑ Exceed max daily losses.
❑ Can’t accept a loss.
▪ The market doesn’t care about you, your family or the fact that there won’t be x-mas this year because you lost
money by not adhering to your rules.
❑ Don’t adhere to a strict system that keeps your trading account from dwindling.
Poor Trade Management Rules.
❑ Sell too soon, before your target objective.
❑ Use a trade management system you can’t follow.
Lack Objectivity – Ego is too big.
❑ Emotionally irrational, ignore basic common sense. In denial about your shortcomings.
❑ Cannot cope with change. The markets change everyday, you must adapt.
❑ Thought: If you’re not honest with yourself, how can you build on your weaknesses?
Lack Persistence. Laziness. Simply Don’t Work Hard Enough.
❑ Lacking in self-motivation. You must be eager to learn, regardless of experience level.
Expectations Exceed Experience = GREEDY & NAIVE
❑ Demand too much too soon; unrealistic. Time line is too short.
❑ Improper focus. Thinking about money instead of proper trading/following your plan.
406
Why Do Traders Fail?
The Blame Game – the most damaging of all.
❑ Failure to accept responsibility for ALL of your actions.
❑ The market has NO IDEA who you are and doesn’t care. So how can it be out to get YOU?
❑ Thought: If consistency in your approach and execution are the goals then money just happens to be the byproduct of executing your plan consistently.
Consistently INCONSISTENT.
❑ The first step in learning is REPETITION. This is your only chance at consistency.
❑ Thought: If you are consistently INCONSISTENT, what are you actually teaching yourself?
You’re a hot air balloon – Arm chair warrior – Big Talker
❑ All talk and no action. Find good trades, suggest good trades, then don’t take them or manage them differently
than you advise others to.
❑ Make people think you are doing better than you really are because of your incessant need to be right in front of
others, but in actuality you are a break even trader.
❑ Basically, YOU CAN’T HANDLE THE TRUTH!
Have any of these “excuses” or “reasons” plagued your trading?
407
Why Do Traders Succeed?
They Prepared Properly BEFORE They Began. (sought advice from others)
They Have Realistic Expectations. (used common sense and advice)
They Have a Clearly Defined Set of Rules.
They Rarely, If Ever, Break Those Rules. (keep emotions in check)
When Opportunity Is Found, They Take Action.
Once The Trade Is Initiated, They Let Their Plan Guide Them To Profits.
If They Cannot Find Quality Opportunity, They SOH (sit on hands; do nothing).
They ALWAYS Look At The Bigger Picture. (not daily, but monthly results)
They DO NOT Change Their Rules “On The Fly.”
They Are Completely Unwavering In Their Confidence and Attitude.
THEY ARE CONSISTENT & HONEST IN THEIR APPROACH.
408
Traits Of An Average Trader
Are You An Average Trader?
No trading plan or business plan
❑ No Direction
❑ No money management rules
▪
▪
▪
▪
▪
▪
Sell too soon
Regularly give back profits
Desperate to recoup losses
Over trade
Don’t take stop losses
Make excuses why you aren’t making money.
Emotionally Undisciplined and generally naïve/unrealistic
Glued to the monitor, watch every tick
Uncertain – Lack confidence – Don’t listen to the advice of others
Nervous and worried most of the time
This Path Leads To Frustration and Failure!
409
Traits Of A Professional Trader
Are You A Professional Trader?
Realistic Expectations; a detailed trading plan that produces results
❑ Very specific daily routine and approach to the market
❑ Clearly defined trade and money management rules ▪ Let winners run to target(s) & faithfully take stop outs.
▪ Consistent risk level on every trade.
▪ Quit when your rules/plan suggest to do so.
▪ Looks at the bigger picture (not daily or even weekly, but a monthly focus).
▪ Calm, relaxed and focused; with no excuses.
Emotionally Unflappable
❑ Not desperate to trade when losses occur.
❑ Knows when to SOH (sit on hands).
Confident, Energetic and OBJECTIVE ❑ Back-tests new strategies and tracks trades in detail.
❑ Knows when to walk away and recharge!
This Path Leads To Success!
410
Why Traders Struggle
Technically Proficient & Psychologically A Mess…
Most traders achieve technical proficiency
❑ Skilled at recognizing chart patterns
❑ Able to pick market direction with good accuracy
❑ Capable of determining Entry, Stop and Target
Under estimating psychology – Becoming your own worst enemy
❑ 95% of trading is psychological
❑ The “Idiot” inside us
❑ Overcoming demons
▪ Know “What To Do” – but still don’t do it
❑ Do as I say, not as I do…
▪ Excellent at telling others “how to trade”
▪ But…can’t heed their own advice.
“I trust everyone. It’s the devil inside them I don’t trust!”
411
Trading Misconceptions
You can’t go broke taking profits.
Affecting real change happens quickly.
Profitable trading is only for the “lucky.”
Can copy your way to success; without putting in the time.
Success comes quickly.
Will learn from the markets, so I don’t need an education.
❑ Education is too expensive.
Past success in another field gives you an advantage in trading.
This management makes the most “R” or “$” so it’s the one I should be using.
Susie Q makes a ton as a scalp trader, so I’ll use her approach to the mkt.
▪
I.E. – I can force myself to learn a style than is directly opposite of my personality.
Trading is the great equalizer. A High School drop out or a Fortune 500 CEO, the market doesn’t
care. We are ALL the same to the market. Your ego and experience does not give you an
advantage.
412
Things You Must Accept
You are NOT perfect. (ah ha moment?)
You will lose money sometimes.
You will make money sometimes.
You have limitations. (you are not a robot)
You have strengths and weaknesses, even if you choose to deny them.
EGO has NO place in this business, unless failure is your goal.
Past Success in another field has NO bearing on future success in trading.
Whatever it is, you MUST admit you have a problem.
▪
Recognition of the specific problem. (selling too soon, not taking stops etc.)
Must make a conscious decision that you TRULY want to work on correcting the
issue.
Must have a plan of action to resolve the problem.
Must accept that if you truly don’t enjoy this, success will elude you.
Must Be Realistic, Objective and Patient
413
Understanding Yourself
Mindfulness: the capacity to be aware of your thoughts, beliefs and biases in real-time.
❑ Your thoughts and state of mind follow your emotion.
❑ Emotion DOES NOT follow thought.
Emotions are triggered when there is a disruption of a familiar or established pattern. This
often leads to stress, which leads to fear, which leads to bad decision making, which leads to
improper trading, which leads to lost money.
“We create our understanding of our world from our adaptations to our deepest fears and
desires.” - Rande Howell
We must develop “mindfulness” as a tool to examine our thoughts in the middle of a trade,
before we take a trade and after we’ve exited a trade. Otherwise we lose objective perspective
and begin the fear based process all over again. Which ensures the same thing will happen the
next time we are confronted with a similar situation. Hence, it will likely happen on the very
next trade!
414
Changing Our Beliefs
How long will you hold onto a belief before either consciously changing it or having it forcibly
changed?
❑ Remember, you become what you think about most.
❑ Therefore; You will manifest your most dominant thoughts.
▪ Hence, the more you think about “not losing” the more you will lose.
▪ The more you think about winning the more you will win.
Changing ones EMOTIONAL belief system is much more difficult than we think.
❑ This is why most traders are very predictable.
Change requires a lot of inner reflection and objectivity.
❑ We must examine what caused our prior actions and reactions.
▪ Why am I doing what I’m doing?
▪ Am I defending my irrational actions? If so, why?
We must reinvent ourselves.
❑ This can only happen when we really understand how our beliefs are hurting us.
❑ Most people never truly accept this. They live in a state of defense and denial.
415
Decisions
Everything has a CAUSE & EFFECT
❑ You must determine why you do what you do.
▪
▪
▪
If you sell too soon; Is it because you are scared to give back profits?
If you are scared to give back profits; Is it because you “need” the money?
If you need the money; How can you overcome this issue?
oPossibilities: Get a part-time job, cut back on living expenses, sell something of value etc.
This is the process you MUST go through to determine what the cause and effect is in your
trading business.
Sometimes the answer is not what you want to hear.
❑ Example: Poor preparation, perhaps lack of operating capital will lead to a total re-evaluation of your
trading business.
❑ You might have to re-project your timeline and with this, re-project the savings/income required to
succeed.
❑ From that, you might have to make some difficult decisions.
▪ Cut back, get a job, sell something etc.
416
Focusing On Success
Attributes Of Successful Traders
❑
❑
❑
❑
❑
❑
❑
❑
❑
❑
❑
Possess objectivity and discipline
Have a sincere desire to succeed, a singular focus
Truly enjoy what they do
Have a positive attitude
Do not have self-limiting beliefs
Have a plan outlining their step by step routine and goals
Regularly visualize their goals, and rehearse them daily
Are accountable for all their actions – don’t make excuses
Have consequences and repercussions when they break their plan
Have realistic expectations given their experience
Never give up
You Either Want It Bad Enough Or You Don’t!
417
Considerations: Who Are You?
What type of trader do you want to be?
What considerations do you need to make?
❑ Personality Traits
❑ Time Constraints
❑ Capital Restraints
❑ Intangibles
418
Defining Yourself
Personality traits:
❑ Nervous and Jittery =
▪
▪
▪
▪
▪
▪
Shorter term approach; scalp or micro scalp.
Smaller targets, higher BA, lower sharpe ratio.
Excellent order entry and multi-tasking. (every penny counts)
Comfortable with larger shares and tighter stops.
Generally a higher frequency, but fewer open trades at the same time.
Can handle higher levels of stress without losing focus.
❑ Patient and Relaxed =
▪
▪
▪
▪
▪
▪
Longer term approach; full day trading or swing/core trading.
Larger targets, lower BA, higher sharpe ratio.
Slower order entry and more flexible with entry prices.
Fewer shares and wider stops.
Generally a lower frequency, but more open trades at the same time.
More adverse to and less tolerant of stress.
419
Defining Yourself
Time constraints:
❑ All day =
▪ 5’ & 15’ charts. (Pivots for larger moves, EOD hold)
▪ Longer term full day trading approach. (3R-5R moves)
❑ ½ day =
▪ 5’ charts (15’ charts, if they set up early) (AON or Smaller TF Pivots)
▪ Medium term scalp approach. (2R-4R moves)
❑ 1-2 hours =
▪ 2’ & 5’ charts. (Small Target AON or Bar By Bar, 9EMA Trail)
▪ Short term micro scalp approach. (1R-3R moves)
❑ Scattered Hours =
▪ Daily & Weekly Charts (Swing & Core Trader) (5R+ moves)
▪ Scan in the evening, then place trades and check the following day.
▪ OR, micro scalper using very short timeframes.
420
Defining Yourself
Capital Restraints:
❑ Over $25,000 = PDT = Pattern Day Trading Account
▪ Unlimited trades.
▪ 4:1 buying power intra-day. ($50k account controls $200k)
▪ 2:1 buying power over night. ($50k account controls $100k)
o Positives: Keep all profits, can hold positions over night, withdrawal money anytime, total control
over your account.
o Negatives: Requires more capital, gives less leverage and higher fees.
❑ Under $25,000 Retail = Limited Account
▪ Maximum 4 trades in any 5 day period (rolling basis)
▪ 4:1 buying power intra-day.
▪ 2:1 buying power over night.
o Positives: Open a basic account for little money ($2k-$5k)
o Negatives: Trade frequency restrictions, less leverage and higher fees.
Continued...
421
Defining Yourself
Capital Restraints:
❑ Hedge Fund & Proprietary Trading Account = Firm Capital
▪
▪
▪
Inexpensive capital requirements. ($3K-$10K)
Unlimited trades.
Incredible leverage. (the amount depends on your progression/level)
o Positives: Forced discipline, account restrictions (maximum daily loss limits and risk limits),
incredible leverage, lower fees.
o Negatives: Must use specific trading platforms, can’t hold overnight.
422
Defining Yourself
Intangibles:
❑What is your skill set?
▪
▪
▪
▪
▪
Technical proficiency – order entry speed, platform etc.
Multi-tasking ability – easily flustered or distracted?
Scanning ability – scalping will require more frequency.
Prior trading experience, no prior experience etc.
Individual qualities – dedication, persistence, risk tolerance, ability to deal with
and accept change, objectivity etc.
423
Who Are You?
The more objectively/accurately you define yourself as an individual, and
build your trading style around it, the more successful you will be as a
trader!
Remember, ‘Outcome’ Goals without ‘Process’ Goals are just pipe dreams!
Key Points: Available Time, Personality Style, Financial Resources,
Personal Preferences.
424
Belief Systems
Belief Systems: What You Believe Has A Dramatic Effect On Your Outlook
In Trading and In Life.
425
Trading Psychology Summary
❑ I know that following support and resistance provides me an advantage, thus buying at support and shorting at resistance gives me an
edge. Though sometimes these plays fail, they do represent higher odds trades.
❑ Losing fear means trusting in the odds/statistics and living the present.
❑ Being consistent is the single most important part of being a successful trader. Being consistent allows you to reliably track your trades
and make meaningful adjustments.
❑ “What good is there in being ‘right’ if you DON’T get paid for it?” Thus make it a point to lose small and win big, especially when trades
are moving in your direction.
❑ I trade the markets to make money, NOT to be right, to be a hero or to get ‘a fix.’ This is a serious business, not a game for gamblers.
❑ Listening to what the market is telling you is one of your most important jobs. Then adjust your risk based on that information. DO
NOT impose your own beliefs to the market. The market IS. It is neither right nor wrong. You must adapt to it, not the other way
around.
❑ There are no secrets to trading. No holy grail. The only truth in trading is that understanding and mastering emotions is the key to
success. In fact, simply understanding your reaction to certain situations and understanding them is the trick to achieving prosperity.
426
Trading Psychology Summary
❑ Are you willing to lose money on this trade? If not, then don’t take it. Period.
❑ Learn properly from the start, as it’s much harder to correct deeply ingrained bad habits than it is to freshly develop new ones in the beginning.
❑ You will only win IF you aren’t afraid to lose. So lose the fear as well as the need to be right.
❑ Trading is simply “having the knowledge to know when the odds are in your favor, the patience to wait for that moment, and then the discipline to
handle the trade properly, when it goes in your favor, and properly even if it goes against you.”
❑ Your Job:
▪ Identify Your Edge
▪ Assess Risk vs Reward
▪ Monitor Emotions
❑ Succeeding in the stock market means controlling natural impulses, and reversing unwanted emotions. I.E. – Do not fear losses, rather hope for
gains. Wins AND Losses are part of trading, the question is simply: Are your wins larger than your losses? If the answer is YES, then you will
succeed. If the answer is NO, then you will have to adjust or fail.
❑ Good trades usually jump out at you. It’s not rocket science, so don’t overcomplicate the process. If it’s immediately obvious, it’s likely a good
idea, if not, it’s probably not.
❑ Discipline is the key to success and discipline is simply doing the right thing at the right time.
❑ Trading is 99% waiting for entries and targets and 1% activity. The 99% should be spent scanning and looking for opportunity.
427
CHAPTER 12
Pre-Market & Early Charts
Professional Trading Strategies
428
CHAPTER 12: Pre-Market & Early Charts
Pre-Market Charts
Early Charts
When To Wait
“If it’s important to you, you will find a way. If not you’ll find an excuse.”
– Anonymous
www.LiveTraders.com
1-800-947-4027
429
Pre-Market Charts: The Benefits
Benefits of Using Pre-Market Charts:
❑ Helps traders stay out of stocks that will likely pullback at the open.
❑ Helps traders get into stocks earlier than normal.
❑ By getting in early we can take better advantage of the “entire” move, not just the already extended
pullbacks or consolidations.
▪
Treat pre-market charts like regular charts
o Extended Move = WAIT (pull back or a consolidation)
o Non-Extended Move = Enter Immediately (assuming nice daily)
▪
Only Trade Quality Patterns
o Use the same criteria you would to trade any other time of day.
NOTE: Sometimes traders get “enamored” by a particular GAP and want to enter immediately at all
costs…however this can be a dangerous game if they have not considered the pre-market chart!
430
Pre-Market Charts: The Drawbacks
Drawbacks of Using Pre-Market Charts:
❑ Pre-market trading is “sometimes” not an indication of exactly where a stock will eventually open.
❑ Entering a trade within the first 1-2 minutes of the day is more challenging due to larger spreads
and sometimes lighter volume.
❑ The first several minutes of the trading day are usually “whippier” than other times of the day.
▪ This means that it is easier to stop out quickly at times, and incur slightly more slippage than normal.
❑ DESPITE this, the advantages far outweigh the drawbacks.
▪ Remember, we are not “randomly” trading stocks, we are methodically/systematically trading stocks.
▪ This means that specific patterns, volume and other criteria must be met before entry. NO EXCEPTIONS.
431
Excitement Turns Into Frustration
Nice gap over a double top into VOID
above. This is a TOP WATCHLIST IDEA.
By 9:32am, you’ve already missed the
move and it was the ONLY move of the
entire day! = FRUSTRATION!
432
CREE Pops At The Open: No Entry
5’ CREE at Market Open
Immediate $2.00 Pop
15’ Chart
Another nice gap that shoots
higher as soon as the market
open at 9:30am leaving traders
frustrated! $7 move!
433
The Value Of Pre-Market Charts
CREE 2’ w/PRE-MARKET
Entry: $63.00 @
Market Open
If you didn’t take the 1’ HI entry
over $63.00 there weren’t any
other entries. Went to $70.09!
Stop Loss: $62.75
Done by 9:32am!! If you held to 10am, it went to $65++
434
No Entries After 9:31am!
2’ TASR w/PRE-MARKET
Entry: $23.00 @
Market Open
Stop Loss: $22.75
This Trade Took 4 Minutes!
435
With & Without Pre-Market Data
15’ Chart
15’ Chart
WITHOUT PRE-MARKET DATA
WITH PRE-MARKET DATA
Now Look At It
Looks like a totally different
stock with no possible entry.
436
15’ Parabolic Using Pre-Market Data
15’ W/Pre-Market
Daily Chart
Using pre-market charts
allowed us to see the 15’
PB more clearly.
Excessive Gap = Fade
437
5’ BD Using Pre-Market Info + Nice Daily Gap
Stop Loss: $150.00 Above
PRE-MARKET BASE
Daily Chart
Entry: $148.50 at
MARKET OPEN
438
5’ OCLR Pre-Market With a Great Gap
Entry: $9.00 at
MARKET OPEN
Stop Loss: $8.85 Below
PRE-MARKET BASE
439
Pre-Market Data
5’ Chart w/Pre-Market
Daily Chart
Entry Over $82.50
at MARKET OPEN
Stop Loss: $82.00 Below
PRE-MARKET BASE
440
Pre-Market Breakout w/Nice Gap
Entry: Over $30.00
at MARKET OPEN
Stop Loss: $29.50 Below
PRE-MARKET BASE
441
Pre-Market Buy Set-Up
Entry $246.00
At Market Open
$20 Move on a $2 stop =
10:1 Reward to Risk
Pops At
Market Open
Stop Loss
$245.00
442
Off The Open Breakdown
Stop Loss: $432.00 Above
PRE-MARKET BASE
Entry: $430.00 at
MARKET OPEN
443
444
When To Wait
Not All Pre-Market Charts Lead To 1’ & 2’ HI Entries
When Should We Wait?
❑ If there is no edge to the pre-market chart
❑ If the gap is not “great” and requires more time (Think Level 3 Gaps)
❑ If the stock is too illiquid to trade early on
❑ If the spread isn’t manageable (excessive) early on
❑ If the pre-market pattern never triggers an early entry
What Are We Waiting For?
❑ More confirmation
❑ More volume
❑ Slightly higher odds play, potentially on a higher timeframe (2’ or 5’)
❑ 3 & 4 Bar Plays are ideal for early morning momentum trades
445
The Gap Is King: Bad Gap = No Trade
Daily Chart
Excessive Gap =
Stay Away
Normally a nice pre-market chart and
a potentially good entry over
$32.00…But the gap is too excessive.
Have to for later on this one.
If this gaps to $29.00 with the same pre-market
pattern then we would likely take this.
446
When To Wait
Daily Chart
TOUGH GAP =
TOUGH CHOICE
Entry Over $56.00
at MARKET OPEN
Stop Loss at $55.25
Below PRE-MARKET BASE
Realistically this has to be treated in the same way you would treat
an extended intra-day breakout: SCALP ONLY or NOT AT ALL
447
No Pre-MKT Info/Edge = Wait!
Daily Chart
2’ BMY
Entry: $50.84
Stop: $50.73
448
Focus on Favs!
Focus on your FAVORITES LIST off the
open, or you’ll get flustered/scattered
and miss the best ideas.
Stop: $88.50
Entry: $87.50
449
OSTK: Nice Turnaround Bar After a Daily Buy Set-Up
Entry: $49.50
Stop: $48.50
CHAPTER 13
Putting It All Together
Professional Trading Strategies
451
CHAPTER 13: Putting It All Together
Trading Day Preparation
Chart Examples: Putting It All Together
Repetition: Practice Makes Perfect
Closing Comments
“Experienced traders control risk, inexperienced traders chase gains.”
– Alan Farley
www.LiveTraders.com
1-800-947-4027
452
Morning Routine
Morning Routine:
❑ Proper Mindset and Morning Rituals.
❑ Formulate A Market Bias.
▪
Review QQQ or SPY and Locate Areas Of Support/Resistance.
❑ Create/Scan For Compelling Gap Patterns From:
▪
▪
▪
▪
❑
❑
❑
❑
❑
Platform Scanner: $ Gainers/$Losers or % Gainers/%Losers
Daily Watch List & Carry Over List From Your Nightly Scans
Strong/Weak Sectors
NASDAQ Heat Map
Rank Gaps Into Levels (per PTS rules)
Put Favorite Gaps/Stocks On Thumbnail Charts In Order Of Priority.
Develop A Strategy To Trade Your Favorites (level 1 gaps/plays).
Check The Time of Relevant News Reports (Natural Gas Etc.)
Focus and ONLY Trade What’s On Your Watch-list.
453
Market Bias: What To Focus On
1. Market Gaps Up in an extended manner or into resistance:
❑ HEAVY FOCUS ON RELATIVE WEAKNESS GAPS & EXTENDED GAP UPS.
2. Market Gaps Up in a non-extended manner with room to move higher into the
void above:
❑ HEAVY FOCUS ON TOP LONG WATCHES. (Level 1 & 2 gaps)
3. Market Gaps Neutral (Uptrend, slight bullish bias. Down trend slight bearish
bias)
❑ HEAVY FOCUS ON LEVEL 1 GAPS, RS/RW & FAVORITE DAILY WATCHES!
4. Market Gaps Down in a non-extended manner with room to move lower into
the void below:
❑ HEAVY FOCUS ON TOP SHORT WATCHES. (Level 1 & 2 Gaps)
5. Market Gaps Down in an extended manner or into support:
❑ HEAVY FOCUS ON RELATIVE STRENGTH GAPS & EXTENDED GAP DOWNS.
454
Daily Market Bias
Daily QQQ
Gap Down: Bias
Gap Up: Bias?
Flat Open: Bias?
Note: Due to the nature of trading the open using gaps, our market bias become
‘less’ important than it normally would be later in the day. Remember, we are
riding early momentum due to the gap and the pre-market chart.
455
Daily Market Bias
Daily SPY
Bias?
Bias?
Bias?
Note: Some gaps are more obvious than others and provide a higher likelihood of moving
in the intended direction. When the market is tough to read, focus on RS and RW stocks.
456
General Comments
Treat ‘market gaps’ in a similar manner as you would a gap on a stock.
❑ I.E.: ask the same questions about extendedness, void, shock value etc.
Some market gaps are well-defined and precise, while others are vague and
don’t offer us a clear view of what to do.
❑ In this case we must rely on solid Level 1 & RS/RW gaps combined with a good premarket chart to give us the necessary ‘odds’ we need to justify an early morning entry.
❑ Remember, no matter what time of the day it is, we must always demand quality in our
trades. We are not gamblers, we are pattern traders who use charts to sway the odds in
our favor. This is especially important at the open!
Our Market Bias & Pre-Market Preparation Can Have a Powerful Impact On
How Successful Our Trading Day Is!
457
Weekly Economic Calendar
Note: Most economic data will not significantly effect the first 30
minutes of trading, but it can affect trading after 10am.
458
Keys To Gap Scanning
Proper Scanning Is The Key To Early Morning Success
If you are not a good scanner, you will likely never be a good trader.
Know what you are looking for.
❑ You cannot find something if you don’t know what it looks like.
Scanning Options:
❑ $ Gainers & $ Losers
❑ %Gainers & % Losers. Note: these will generally find lower priced stocks
❑ NASDAQ HEAT MAP
❑ Carry Over-List: Stocks from yesterday that still look good
❑ Daily Watch List
❑ Live Traders Chat Room Ideas & Live Traders Newsletter Ideas
Benefits of VOLUME When Pre-Market Scanning:
❑ Volume = Commitment, or lack thereof
❑ Stocks with big pre-market volume tend to move more than ones that don’t.
❑ This doesn’t mean we shouldn’t look at gaps with lower pre-market volume.
459
Evaluating Gaps
Questions To Ask On Each Gap:
❑ Where is the stock gapping to?
❑ Where is the stock gapping from?
❑ Is there some type of “shock” value to the gap?
❑ Is the stock gapping just enough to clear significant support/resistance or is it gapping
‘excessively’ so as to ruin the reward to risk?
❑ Is the stock gapping into VOID or into RESISTANCE?
❑ Is the gap showing relative strength/weakness to the market? (typically makes them more
potent)
460
Pre-Market: $Gainers & $Losers
Pre-Market Gaps With Increased Volume
Usually Exceed Avg. Daily Trading Ranges
461
Thumbnail Charts
#1 Favorite
#2 Favorite
#1 Favorite
#2 Favorite
462
Focus on Your Favs!
Focus on your FAVORITES LIST off the
open, or you’ll get flustered/scattered
and miss the best ideas.
Stop: $88.50
Entry: $87.50
463
Scan, Watch, Wait, Execute
2’ Chart
Entry: $21.00
Daily Chart
Scanning Pays Off!
Stop: $20.90
464
Scan, Watch, Wait, Execute
15’ Chart
Entry: $135.00
Daily Chart
Scanning Pays Off!
Stop: $134.30
465
Putting It All Together: AGAIN!
Repetition: Practice Makes Perfect
Let’s Review The Routine AGAIN.
466
Putting It All Together
Start With A Nice GAP
❑ Level 1 – shock value, gapping over pivots, void, not too excessive etc.
❑ Relative Strength & Relative Weakness
❑ Preferably Heavy Pre-Market Volume
Nice Pre-Market Chart
❑ Clean consolidation - BS – 3 Bar Play - Parabolic
Watch The Level II (pre-market & at the open)
❑ Preferably BIG volume at the intended entry price
❑ Watch the balance of power and be mindful of spreads & whippiness
Enter At Pre-Determined Price
❑ Manage in-between per your plan
467
Daily Market Bias
Daily QQQ
Gap Down: Bias
Gap Up: Bias?
Flat Open: Bias?
468
Check Relevant News Reports
Note: Most economic data will not significantly effect the first 30
minutes of trading, but it can affect trading after 10am.
469
Scan Pre-Market Gaps
POWR +13.4…
8.95
8.87
8.9 67,572
470
Add To Thumbnail Watch-list
1’ POWER
Look At Pre-Market Chart
& Pre-Market Level II
#1 Favorite
POWER 2’ Pre-Market Prints
#1 Favorite
POWER 2’ Pre-Market Chart
471
Strike At The Open
5’ w/PRE-MARKET
POWR Daily
Entry Over $9.00
@ MARKET OPEN!
Stop Loss @ $8.80, Below
PRE-MARKET BASE
If you didn’t take the 1’ HI entry over $9.00, there
were no other entries. Ultimately went to $9.84!
472
Putting It All Together: AGAIN!
Repetition: Practice Makes Perfect
Let’s Review The Routine AGAIN.
473
Daily Market Bias
Daily SPY
Bias?
Bias?
Bias?
474
Check Relevant News Reports
Note: Most economic data will not significantly effect the first 30
minutes of trading, but it can affect trading after 10am.
475
Scanning For Morning Watch-List
476
Add To Thumbnail Watch-list
Top Watch Idea = Don’t Miss It!
477
Take The Trade & Make $$$
VBLT 2’ Buy Set-Up
478
Chart Examples
Chart Examples with Live Traders P-L’s
479
MFTA: CF 2’ & Daily
CF 2’ Chart
CF Daily Chart
Entry: $230.00
Stop: $229.00
This trade lasted 2 minutes! If you had patience
it eventually went $7 or 7:1 reward to risk!
480
1’ HI or ORB w/ L1 Gap
1’ HI Entry: $50.00
Key Points:
1. Gapping over a wide ranged red bar, (creating
shock and a lot of covering)
2. Gapping over multiple pivots.
3. Just enough to clear the prior pivot highs
4. Into Void with room to move higher
5. RS to the market (not shown)
$928 in
50 seconds
Stop: $49.60
481
Nice Daily, Nice 3 Bar Play = Nice Result
WFM Daily Chart
WFM 2’ Chart
Exit: $47.13
Entry: $46.21
Stop: $46.09
This trade netted close to 8:1! That’s a $4000
gain on only a $500 risk in less than 1 hour!
482
Nice Early Intra-Day Buy Set-Up
TSLA 1’ Chart
75c Stop, 800 shares: $600 Risk = 2.61 Return 5 Minutes
A nice 1’ BS that went $5.50 on a 65c stop
loss, which is an 8:1 return in 30 minutes.
Entry: $242.40
Stop: $241.65
483
Nice Daily, Nice 5’ BO = Nice Result
Target
Entry: $23.50
Stop: $23.25
484
Early 1’ Breakout
VRX 1’ Chart
A nice 1’ BO that went $6 on a $1 stop
loss, which is a 6:1 return in 3 minutes.
$500 Risk: I Took 2:1 or $1033 from it.
Entry: $122.00
Stop: $121.05
485
Nice Daily, Nice 2’ Super Curl
Entry: $30.35
Daily CONN
Stop: $29.90
486
Morning Satisfaction
1 Trade Using Pre-Market Data & 1 Trade Being Patient and Waiting For
Confirmation, 2’ 4 Bar Play. RESULT: Still Done By 10am with $2374!
HPQ 5’ w/Pre-Market
CF 2’ w/ NO Pre-Market EDGE
Entry: $230.00
Entry: $28.05
Stop: $229.00
Stop: $27.85
487
Things To Think About
The Keys To Success…
Psychological Aspects Account For 99% of Trading Success
❑ If You Are Unable To Manage Yourself, You Will Not Succeed
❑ Never Underestimate The Power Of OBJECTIVITY
The Main Key To Controlling These Issues Is DISCIPLINE
❑ In Trading This Can Be Defined As – “The Ability To Follow One’s Plan.”
The Key To Obtaining Discipline Can Be Found In Creating
And Using a Trading Plan That Fits Your Personality Style!
488
Final Thoughts
You have learned a lot of information over the past couple days, perhaps even too much considering the
short time period. Take several days off to ‘re-charge’ and ‘refresh’ before delving back into the book and
reviewing.
When you are ready to review the manual, try to think about the trader you would like to become given
your personality, time constraints, financial constraints and other issues you might have. Once you have
done that, then choose the style of trading and timeframes that you think are most conducive to success.
Then begin to build your trading plan by starting with 2 basic patterns, and a simple daily routine with
simple trade and money management. After you have done this, go out and start paper trading for several
weeks, then begin using SMALL amounts of real money.
Here at Live Traders we are FIRM believers in market experience. In fact we think it’s the single most
important factor to success. You must learn IN THE MARKETS. Only then can you appreciate and feel the
emotions as you go through your daily routine!
Best of luck and please don’t hesitate to contact us with questions, as we genuinely care about your
success! Thank You!
489
About The Author
Jared R. Wesley is co-founder of Live Traders and a professional trader with more than 13
years of experience. After graduating from Boston College he was drawn to the technical
side of the markets upon becoming frustrated after spending time on a buy side
institutional trading desk at a large Wall Street bank. He felt that many of Wall Street’s
‘elite’ had no real understanding of how the markets actually worked. Most seemed to
only be interested in FEES, which is why the majority of professionals typically
underperform the markets in the long run and is also a reason why many technical
traders struggle to succeed as well. Frustrated by this approach Jared took it upon himself
to learn as much as he possibly could about what makes the markets move and how that
could be taken advantage of.
Mr. Wesley has mentored and privately consulted thousands of traders and fund
managers over the course of his career. He currently specializes in shorter term timeframes such as the 1’, 2’ and ‘5 charts, and prefers to focus mainly on the first hour of the
trading day to produce income, when not core trading for wealth. He is a true master at
trading the market open. Jared has also been featured in many ‘Money Show’ live trading
exhibitions, Trading Pub live trading webinars and written articles for various publications
such as Reuters and Bloomberg. Jared is a staunch believer in proper trade and money
management and feels strongly that we all control our own destiny in this industry.
Simplicity, while also controlling fees is the best approach to trading and investing
successfully and having a purpose beyond just ‘the money.’ When he is not trading and
investing Jared spends the majority of his time with his wonderful wife Haruyo and three
beautiful children Kaiya, Emmi and Ty.
Email: jared@livetraders.com
490
SOCIAL MEDIA
https://facebook.com/DeltaNinety
https://stocktwits.com/Scalpmaster
https://twitter.com/Scalpmaster1
https://youtube.com/channel/UCy1_GzyOzjhB-vk1J6PLMdw
https://instagram.com/Scalpmaster1
www.info@livetraders.com
491
THANK YOU FOR LISTENING
A
LiveTraders.com - 1-800-947-4027 – Info@LiveTraders.com
492
APPENDIX
493
494
Reading List
We feel it’s important to always be learning, and part of that process is ‘continuing
education.’ Thus, we have included a list of our favorite trading and trading related books.
Psycho-Cybernetics – Maxwell Maltz
The Psychology Of Winning – Dennis Wately
Trade Your Way To Financial Freedom – Van Tharp
Trading In The Zone – Mark Douglas
Trade Like a Casino – Richard Weissman
Secrets For Profiting In Bull and Bear Markets – Sam Weinstein
Market Wizards – Jack Schwager
Think and Grow Rich – Napoleon Hill
The Disciplined Trader – Mark Douglas
How I Trade and Invest In Stocks and Bonds (etc) – R. Wyckoff
Jesse Livermore’s Methods of Trading In Stocks – R. Wyckoff
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Keys To Success
Personal Awareness:
Know Yourself.
Learn your strengths and weaknesses.
Build a Psychology for success. (Work on re-programming your psychology to facilitate success.)
Learn from your losses; hardships are tests/blessings! Remember, NO ONE wins every-time!!
Work hard, but smart, take time off to recharge.
Mental rehearsal, visualize your day, visualize what you want out of life.
Don’t compare yourself to others.
Details are what separate the great ones from the average.
Take Responsibility for ALL of your actions and results. No exceptions.
Take control of your trading life.
NEVER, EVER resort to a “victim” mentality.
You’re never as far away from your goal as you think, don’t get discouraged!
Though the $$ may seem far away, the change in attitude to achieve your goal is not far away.
Read, immerse yourself in knowledge, immerse yourself in your dreams/goals; learn, learn, learn.
You can’t fail, you can achieve anything you believe and conceive.
There are NO LIMITS except those you place upon yourself.
Enjoy the “little” things, but be grateful for all things.
No matter what, NEVER, EVER, EVER give up! If you never give up, you will never fail!
No matter what, NEVER, EVER, EVER give up! If you never give up, you will never fail!
Love what you do = Enjoy the journey.
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Keys To Success
Trading Awareness:
Construct an objective, measurable trading plan.
Be flexible and open to change.
Track all of your trades, everyday. Including time, AM/PM/Doldrums etc
Do a post daily, weekly etc analysis on all trades, both winners and losers.
NEVER, EVER revenge trade. “Elmer Fudd” Syndrome loses $$…take a walk, step away…
Each trade is a new trade, independent of the last.
Always look for high quality set-ups.
Don’t over-trade, there will ALWAYS be another set-up.
Don’t force yourself to see something that isn’t there.
Most successful traders earn the majority of their profits in 2-3 days each week.
It’s managing the “other” days that will determine your success.
It’s not the winning days that will determine your success; it’s how you manage the losing days!
When a high odds set-up is found, have the confidence to pull the trigger without hesitation.
Be PATIENT with both set-ups and management.
A stop is a stop, ALWAYS take your stops. Always.
MANAGE THE CHART, NOT THE P/L!!! Let your trades play out.
Act the same way on ALL trades, eventually the odds will be in your favor. Robotic indifference.
Remember, selling too soon costs you more $$ than holding…it’s proven, so believe it!
Never get too up, or down, always stay positive and keep perspective!
Relax, be calm, stay patient, trust yourself and enjoy the trading day. Success will come.
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Major Sectors
Basic Materials – GT, SLGN, GRM, CSL, TUP, SHLM, BLL, GPK, PKG, BMS, GEF
Capital Goods – ERJ, ETN, COL, BGC, GWW, KMT, TYC, CSTR, NVMI, FLS, PCP, SAI, SHFL, PLL…
Communications – PHI, GLW, TLAB, EQIX, T, INFN, TMRK, TSP, VZ, ZOOM, CIEN, CMTL, WSTL…
Consumer Cyclical – ETH, PII, LOW, ZLC, PHG, STLY, IRBT, THO, TIF, SIG, FBN, LII…
Energy – HEP, BPZ, NGLS, HAL, MMLP, NOA, PDS, CRR, AREX, NBL, NFX, EPL, EPM, CXPO…
Financial – FITB, CFR, WBCO, WFC, GS, FFKY, ECBE, BAC, BSRR, JPM…
Health Care – MDT, NUVA, PDCO, THOR, CELG, QSII, CPSI, SERN, MDRX, LAKE, SURG, COO…
Technology – VSEA, JASO, TER, NVDA, MXIM, WZCH, MIPS, OVTI, MEAS, IIVI, OIIM, ALOG…
Transportation – KMX, CSX, USAK, BWA, ALK, NSC, CPRT, FRPT, ABFS, SAIA, KAR, UHAL, PBY…
Note: There are many more stocks in these sectors.
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Major Sectors
Agriculture
Basic Materials
Chemicals
Communications
Construction
Consumer Non-Durables
Drugs
Energy
Food and Beverage
Healthcare
Insurance
IT Services
Medical Facilities
N/A
Services
Technology
Utilities
Banking
Capital Goods
Clothing
Conglomerates
Consumer Durables
Credit
Electronics
Entertainment
Hardware
Information Technology
(IT)
Investing
Media
Metals and Mining
Real Estate
Software
Transportation
www.quotelinks.com/industries/industrylist.html, Investorguide.com, nasdaq.com, ashkon.com
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Trade Log Sheet
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Lot Size ‘Cheat Sheet’
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Lot Size ‘Cheat Sheet’
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Additional Practice
Educational Charts
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Clean Buy Set-Up
▪ What is the entry
price and stop loss?
▪ What is the first
target area?
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2 Great Gaps
Increased Volume
Increased Volume
1. Where is the stock gapping to?
2. Where is the stock gapping from?
3. Is there some type of “shock” value to the gap?
4. Is the stock gapping just enough to clear significant support/resistance or is it gapping ‘excessively’ so as to ruin the reward to risk?
5. Is the stock gapping into VOID or into RESISTANCE?
6. Is the gap showing relative strength/weakness to the market? (typically makes them more potent)
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2’ Breakout or 5’ 3BP w/Gap
Entry: $17.00
$1.80 move on a 25c
stop loss = over 7:1
reward to risk. All about
the GAP!
Stop: $16.75
Entry: $17.00
Stop: $16.75
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Afternoon Buy Set-Up
This is what ‘multiple concepts’
converging in an area looks like.
Price, Volume and Moving Average.
60c Move = 6:1
Entry: $37.50
Price Support
Stop: $37.40
Igniting Volume
21ema
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ADD & REDUCE Exercise
There are 3 separate trades on this chart.
Assume a $500 Risk Per Trade and a FULL LOT
ADD For Each New Trade.
5’ Chart
Entry: $43.55
$44.10
Entry: $43.40
How Much Would You have Made On This
Trade If You Employed a 5’ BBB Management?
5’ Buy Set-Up: Entry $43.15, Stop $43.05
5’ Breakout: Entry $43.40, Stop $43.40
5’ 3 Bar Play: Entry $43.55, Stop $43.45
Entry: $43.15
Stop: $43.45
Stop: $43.30
Stop: $43.05
If You Had Bought 5000 Shares At $43.15,
with a 10 cent Stop Loss, and Sold at $44.10,
You Would Have Made $4750 or 9.5R, Which
Is VERY Impressive.
BUT…How Much COULD You Have Made By
Adding?
Average Entry: $43.366
New Raised Stop: $43.45
15,000 Shares
Sell at $44.10 for a 73c Gain or $11,000!!
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Pro & Novice Volume
The novice volume ended the move down and
the pro volume ignited the move back up.
Here is a very extended move lower with
much higher than normal volume and
multiple large bars. Once the acceleration in
PRICE and VOLUME happens you know the
bottom is near = ENDING VOLUME.
Now the buyers step up
IGNITING the move higher on
increased volume.
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Pick Out The Patterns
5’ Chart
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Educational Charts
5’ Chart
5’ Chart
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Detailed Market Cycle
Daily Chart
Stage 3
Stage 2
Stage 1
Stage 4
Stage 1
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Size Doesn’t Matter
Stop Making Excuses and Start Making Money! You Don’t
Need A lot Of Money To Make Money. BUT, You Do Need To
Be Very Consistent And Disciplined.
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Educational Charts
5’ Chart
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Educational Charts
5’ Chart
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Educational Charts
5’ Chart
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Educational Charts
5’ Chart
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Educational Charts
15’ Chart
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Educational Charts
Daily Chart
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Educational Charts
60’ Chart
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Principals Of Trading
Principal #1: Money Management supersedes EVERYTHING. Period. It is nearly impossible to fail if you strictly
abide by the money management rules that are laid out in this trading plan. Everything else is secondary.
Account protection is the number rule in trading.
Principal #2: The majority of stocks tend to move WITH the market. This means that 75% of stocks will also
move in the same direction as the color of the most recently completed bar in the SPY or QQQ. Trade with the
trend when possible. In choppy or unbiased markets look for relative strength or weakness, or ‘anytime trades.’
Principal #3: In normal market conditions it is extremely rare for stocks to have a sustained rally or decline
that lasts longer than 6-8 bars without some sort of correction. Yes, this will occasionally happen during an
unusual news report, however, in ‘normal’ market conditions it is very abnormal for stocks to move more than
6-8 bars in one direction. Most cycles are 3-6 bars, and then a reversal is likely. Knowing how to take advantage
of this will not only save you a lot of money, it will also help earn you even more money!
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Principals Of Trading
Principal #4: The first failed attempt to make a new low in a well-established downtrend is the first sign that
the balance of power has shifted from the sellers back to the buyers. The trend has likely changed and the first
low in the new trend has been identified. This is also true in an uptrend. The first failed attempt to make a new
high in a well-established uptrend in the first sign that the balance of power has shifted from the buyers back to
the sellers. The trend has likely changed and the first high in a new trend has been identified.
Principal #5: Without control over your emotions (on some level) it will be nearly impossible to make money
as a trader. This means that finding your own niche is extremely important. There are many ways to earn an
income as a trader, but the easiest and longest lasting way is to figure out what your dominant personality traits
are and then trade within them, otherwise you will always be fighting yourself, which is a very difficult way to
succeed in the long run.
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General Trading Rules
▪ Every trade must have an ENTRY, STOP and TARGET before
entry.
▪ I will strictly adhere to my money management rules laid
forth in this trading plan.
▪ Every trade has a PRE-DEFINED risk level that must remain
consistent.
▪ I will not take a trade that has less than a 2:1 reward to risk.
▪ I will always be objective, if I feel myself becoming emotional
I will walk away from my computer.
▪ I will not take a trade unless it has a clearly defined strategy
as outlined in this plan.
▪ When a trade is clear and meets my plans requirements, I
will take it without hesitation. (assuming my money
management threshold has not been met)
▪ I will first master the strategies in this trading plan before
experimenting with new tactics.
▪ I will not trade after 3:30pm EST.
▪ I will SOH (sit on hands) when the odds are against me and
there is nothing to trade.
▪ I will faithfully track all of my trades and learn from my
mistakes.
▪ I will never make excuses for my short-comings, rather I will
embrace them and learn from them.
▪ I will NEVER violate my trading plan rules.
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What Is Required
Goals: My goal is to trade ‘properly,’ which means always controlling risk, never trading on emotion and strictly
following the rules laid out in the following pages of this plan. To achieve these goals I understand it is
imperative that I do not cut corners, or allow poor judgement to creep into my psyche, which would undermine
the effectiveness of the rules set forth in this trading plan.
I also understand that trading will challenge my core belief system and there will be times when I will want to
break these rules in order to ‘feel good’ or ‘be right’, however, in doing so I will only be hurting myself and the
long term viability of my personal trading business. I do realize that I will, on occasion, make mistakes, which
could include but are not limited to: missing great opportunities, not adhering 100% to my management rules
and possibly even over trading. I will do my very best to correct these mistakes as they happen, learn from
them and continue to grow as a trader. IF, I find myself not learning from these mistakes, I will either seek help
from a professional immediately or I will cease all trading activities, as this business is not friendly to people
who break rules. Breaking rules = breaking my account.
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THANK YOU
A
LiveTraders.com - 1-800-947-4027 – Info@LiveTraders.com
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