“Trade for Life™” an introduction to trading for a living Written by: Oliver L. Velez, CEO Velez Capital Management, LLC a complete guide to trading for a living Trade for Life™ Table of Contents Chapter 1: Who is Oliver L. Velez Chapter 2: Velez Capital Management, LLC (“VCM”) Chapter 3: Moving Averages and How to Harness their Power Chapter 4: Reading the Language of the Market through its Bars Chapter 5: Oliver Velez’s Market Law #1 Chapter 6: VCM’s Three Main Time Frames Chapter 7: VCM’s Three Minor Tome Frames Chapter 8: Putting it all Together Chapter 9: VCM Trading Examples Chapter 10: Trade as a Pro with VCM Chapter: 11: Your Next Step Disclaimer Copyright© 2007 by Oliver L. Velez Published by Oliver L. Velez All rights covered Reproduction or translation of any part of this work beyond that permitted by section 107 or 108 of the 1976 United States Copyright Act without the permission of the copyright owner is unlawful. Requests for permission or further information should be addressed to the Permissions Department at O.L. Velez Trading, Inc. Neither Oliver L. Velez nor Velez Capital Management, LLC is advising anyone to trade or use any system illustrated in this course. These are educational examples of science of system testing and development that Mr. Velez and Velez Capital Management, LLC want to share with you. None of the information illustrated in these examples is to be construed as offers to buy or sell commodities, stocks, or any other financial instrument. None of the information presented purports to be a complete statement of all material facts related to trading. Also, simulated performance results have certain inherent limitations; the results do not represent actual trading. Since many of the trades in this series have not been executed, the results may have under or over compensated for the impact, if any, of certain market factors, such as lack of liquidity. No representation is being made that the systems, methods or ideas shown in this course will produce the results that are described or illustrated. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers. Active trading is an activity that possesses a high level of risk and may not be suitable for everyone. a private equity trading firm Velez Capital, LLC Who is Oliver L. Velez? • Founder & CEO of Velez Capital Management, LLC. (“VCM”) • Co-Founder of Pristine Capital Holdings, Inc.; Served as Chairman & CEO for 12 years • One of the industry’s most sought after speakers on the subject of trading the markets for a living • Author of the new best-selling book, “Strategies for Profiting on Every Trade” • Co-author of “Tools and Tactics of the Master Day Trader” The Industry’s #1 trading book • 20-year professional Trading History • Instructor for some of the country’s top Wall Street firms over the past 14 years • Personal Mentor and teacher to some of the country’s biggest, most profitable traders a complete guide to trading for a living Trade for Life™ Oliver L. Velez’s Best Sellers An accessible, reliable course for the trader looking for profits in the competitive, dynamic world of trading. Each section of the book offers clear examples, concise and useful definitions of important terms, over 90 charts used to illustrate the challenges and opportunities of the market; and how you can take advantage of patterns. Written in the parlance of the day trader’s world, you’ll enjoy the experience of being taught trading skills by the best of the best. Tools & Tactics for the Master Day Trader is designed to help active self-directed traders gain the knowledge and acquire the tools necessary to approach the markets with intelligence and a well thought out trading plan. This no-nonsense, easy read is meant to be referenced by traders every trading day and covers everything from battle-tested trading strategies to intuitive insights on psychology and discipline. Proving once again that the best teacher is experience, Tools and Tactics for the Master Day Trader will help any trader with the technical skills, market knowledge, and confidence needed to increase the odds of achieving more winning trades and capturing profits. a complete guide to trading for a living Trade for Life™ Accolades for Oliver L. Velez Oliver L. Velez has been favorably mentioned and/or ranked #1 by virtually every key medium in the industry. Dow Jones called Mr. Velez, “the messiah of day trading.” “VCM” An Introduction to Velez Capital Management, LLC Trade For Life™ a complete guide to trading for a living Velez Capital Management, LLC a complete guide to trading for a living Trade for Life™ www.vcmtrading.com a private equity trading group Velez Capital, LLC Who is VCM? • VCM is a New York City based private equity trading group which currently employs 120 traders to trade its account. • VCM trains (breeds) its own traders via several training programs and recruits existing traders with a proven track record and several years of experience. • VCM is looking to become a major force in the equity trading markets by building its trading team to 500 worldwide over the next 3 years. • VCM currently has four offices around the globe, with two more coming soon: Moscow and Bogotá, Columbia. • Our profits and trading volume increased 700% last year, and we were a top 10 NYSE liquidity provider for NASDAQ. • Our firm traded half a BILLION shares in February of 2006, a record for a firm our size, and currently averages each month close to 300 million shares. “VCM” The Bars & What They Mean VCM Quote: “Profits always take care of themselves, but losers never do.” - Jessie Livermore a complete guide to trading for a living Trade for Life™ The Bar by Bar Battle High High Low Bulls Win Close = 42 Open = 40 Open = 40 Close = 38 Low Bears Win Every individual bar represents a battle that was fought by two groups, the bulls and bears, the buyers and sellers. When the close is above the open, the bulls win, producing the color green. When the close is below the open, the bears win, producing the color red. How much each side wins is determined by how much green or red they produce. In other words, the wider the distance between the open and close, the greater the win. Quite naturally, the group winning the most bars is dominating the stock. Trading Tip: Most successful trades are usually in sync with the winning side. “VCM” Market Law #1” 3 to 5 Bar Rule VCM Quote: “If you believe it likely to have a definite bullish or bearish effect marketwise, don’t back your judgment until the action of the market itself confirms your opinion.” - Jessie Livermore a complete guide to trading for a living Trade for Life™ VCM Market Law #1 Market Law # 1: During normal market environments, stocks and other tradable items cannot move in the same direction more than 3 to 5 bars in a row. Different ways to communicate the law: 1) After a 3 to 5 bar run (up or down) the market/stock tends to sharply reverse, creating a nice trading opportunity. 2) Neither the bulls nor the bears can win more than 5 battles (bars) in a row. After a 3 to 5 bar rally, the bears usually quickly regain control. After a 3 to 5 bar decline, the bulls usually quickly regain control. 3) Lastly, this law can be said this way: “After 3 to 5 green bars in a row, the VCM Trader should look to take advantage of an upcoming series of red bars. After 3 to 5 red bars in a row, the VCM Trader should look to take advantage of an upcoming series of green bars.” a complete guide to trading for a living Trade for Life™ VCM’s 3 to 5 Bar Buy Rule 1) 3-5 Bar Decline – Stocks in strong up trends, as well as clearly defined sideways trends tend to rebound after a 3 to 5 bar decline. This tendency often sets up nice trading opportunities. Buy Buy r20ma Buy r20ma 3-Bar Dip 4-Bar Dip r20ma 5-Bar Dip Trading Notes In each of the scenarios above, the VCM Trader would be looking for a tradable rebound to the upside, once the high of a prior bar has been taken out. How much of a rebound would depend on the answers to several key questions such as: a) is the 3-5 bar dip occurring in an up trend, down trend or sideways trend; b) are any of the most powerful reversal signs present; c) how far away is the nearest area of resistance; d) was there a volume surge that took place toward the end of the decline; e) where is the dip in relation to the 20ma; and f) is the current decline potentially bottoming at or around one of the key reversal times? The answers to all these questions are covered in the many trading concepts taught in future chapters and throughout our 5-day live trading labs. a complete guide to trading for a living Trade for Life™ VCM’s 3 to 5 Bar Buy Rule 2) 3-5 Bar Rally – Stocks in strong down trends, as well as clearly defined sideways trends tend to back off after a 3 to 5 bar advance. This tendency often sets up nice trading opportunities. d20ma d20ma d20ma Short Short Short 3-Bar Rally 4-Bar Rally 5-Bar Rally Trading Notes In each of the scenarios above, the VCM Trader would be looking for a tradable pullback to the downside, once the low of a prior bar has been taken out. How much of a pullback would depend on the answers to several key questions such as: a) is the 3-5 bar rally occurring in an up trend, down trend or sideways trend; b) are any of the most powerful reversal signs present; c) how far away is the nearest area of resistance; d) was there a volume surge that took place toward the end of the rally; e) where is the rally in relation to the 20ma; and f) is the current rally potentially topping at or around one of the key reversal times? The answers to all these questions are covered in the many trading concepts taught in future chapters and throughout our live 5-day trading labs. “VCM” The Three Major Charting Windows VCM Quote: “Wall Street never changes. The pockets change. The stocks change. But Wall Street never changes, because human nature never changes.” - Jessie Livermore a complete guide to trading for a living Trade for Life™ Three Trading Time Frames 1) 15-minute Chart – This time frame will be used primarily for trend analysis and support and resistance reference points. While VCM Traders do takes trades on it from time, its use as a gauge of the stock’s power and its overbought-ness or oversold-ness is unrivaled. With that being said, trades on the 15-minute chart do tend to be the cleanest and the truest. In a sense, for the professional trader earning a living via the markets, this time frame would be considered the “core” one, for longer term trades. 2) 5-minute Chart – This time is the VCM Trader’s number one staple. If there was only one time frame with which to make a living, it would be this one. It perfectly sits between the 15-minute, which can be a bit to long, and the 2minute, which can be a bit too noisy at times. The patterns we trade at VCM appear frequently enough in the 5-minute window to keep us active, yet infrequently enough to prevent us from over trading. This is “the” one, “the” time frame to master. 3) 2-minute Chart – This fast moving chart is a god-send when the market is not producing clear signals on the other two time frames. It’s also useful if and when the entry and/or exit points dictated by the 5-minute or 15-minute chart are too far away or unclear. Dropping down to the 2-minute chart for a finer entry or exit will usually provide the alternative. We call this taking an x-ray, or looking inside the stock. a complete guide to trading for a living Trade for Life™ 15-minute Chart The 15-minute Chart should always have the s20ma and the and s200ma displayed. Trading Tip: VCM Traders look to go long, when the r20m is above the 200ma. They look to go short when the d20ma is below the 200ma. VCM Traders would look to go long in the are of the circles. You’ll understand each one soon enough. 20ma Gap Reversal MPS 200ma GBR on MPS This time frame can really deliver some very healthy profits. The only caveat is that plays taken on it tend to last for 30-minutes to 1-hour. The more active traders will find it hard to be patient unless multiple plays are being managed simultaneously. This time frame is great for S&R analysis. a complete guide to trading for a living Trade for Life™ The 5-Minute Chart The 5-minute Chart should always have the s20ma and the and s200ma displayed. Trading Tip: VCM Traders look to go long, when the r20m is above the 200ma. They look to go short when the d20ma is below the 200ma. 20ma VCM Traders would look to go long at or near the r20ma. See Circles. 200ma The 5-minute Chart is by far the most traded time for VCM Traders. It sits nicely between the 15minute, which can be a bit slow, and the 2-minute, which can at times be a bit too noisy. Charts Courtesy of Realtick®. a complete guide to trading for a living Trade for Life™ The 2-Minute Chart 200ma Circles = Shorting Opportunities Last two are Buying Opportunities 20ma The 2-minute Chart should always have the s20ma and the s200ma displayed. Trading Tip: VCM Traders look to go long, when the r20m is above the 200ma. They look to go short when the d20ma is below the 200ma. The 2-minute chart is actively used to refine entry and exit points. It offers the deepest insight and smallest risk of the three time frames we actively trade. Stop outs can be frequent in this time frame, but scalper traders will always be well served here. “VCM” A Minor Charting Window VCM Quote: “Wall Street never changes. The pockets change. The stocks change. But Wall Street never changes, because human nature never changes.” - Jessie Livermore a complete guide to trading for a living Trade for Life™ The 1-minute Chart 200ma serves as resistance 200ma During flat markets, VCM Traders drop down to the 1-minute chart to play the bidding and offering game. They buy in a range below the 20ma and sell in a range above the 20ma. Break Offer/Sell Zone 20ma Bid/ Buy Zone 20ma checks the price here Trading Tip: Once the 20ma halts the price decline, resistance is often broken. Charts Courtesy of VCM Trader Pro™ “VCM” Moving Average Power VCM Quote: “From my viewpoint, the investors are the big gamblers. They make a bet, stay with it, and if it goes wrong, they lose it all.” - Jessie Livermore a complete guide to trading for a living Trade for Life™ The Powerful 20 MA 1) 20 Period Simple Moving Average (20ma) – The 20ma is so important to VCM Traders that no chart is ever studied or viewed without it. That’s because its power and reliability is unrivaled. No chart is a chart unless it is accompanied by this all-important technical indicator. We use it on every time frame or chart we look at. Here are the most important things to know about the 20ma and its proper use: a) Trade with the 20ma - Most of your trades should be in sync with the 20ma. If the 20ma is rising in a smooth fashion, your focus should almost always be long. Conversely, if the 20ma is declining in a smooth fashion, your focus should almost always be short. If the 20ma is flat (f20ma), your focus should be to scalp with the VCM “bid and offer” approach. b) Use as support & Resistance – If and when the 20ma is rising, it will serve as strong support. If the 20ma is declining, it will serve as strong overhead resistance. Look for buys at or near a r20ma. Look for sells/shorts at or near a d20ma. c) Use as a median line – When a stock is consolidating in a sideways pattern, the 20ma will be flat and usually positioned right in the middle of the sideways trend. If and when this is the case, bidding for stock in a range below the f20ma and offering/shorting stock in a range above the f20ma is the game to play. d) Use as a magnet – Stocks cannot remain extended too far above or below the 20ma. If and when stocks get too far, a violent snap back is eminent. This is when the VCM Trader can intelligently look to take advantage of a counter trend move . Trading Tip: Literally, a VCM Trader can use the 20ma to earn his entire livelihood in the market. a complete guide to trading for a living Trade for Life™ The Power of the 20ma The picture of power is made up of the following: 1 – Rising Stock, making higher highs and lows; 2 – Smooth Rising 20ma 3 – Smooth Rising 40ma 4 – Even Space between 20ma & 40ma 20ma 40ma The 20ma begins to contain the price here. = Successful retests of the 20ma Stock breaks above the 20ma Charts Courtesy of Realtick®. a complete guide to trading for a living Trade for Life™ The Power of the 20ma The Picture of Power 1-Rising Stock 2-Rising 20ma 3-Rising 40ma 4-Even Space 4 5 3 2 1 A 20ma 40ma VCM Trading Tactics A- Red Bar Ignored (RBI) 1- Green Bar Reversal (GBR) 2- Green Bar Reversal (GBR) 3- Bullish Pause Play (BPP) 4- Red Bar Ignored (RBI) 5- Green Bar Reversal (GBR) Trading Tip: Make sure all VCM Trading Tactics occur at strong support locations Charts Courtesy of Realtick®. a complete guide to trading for a living Trade for Life™ Riding the 20ma Long CA puts in top Trading Tip: Holding on to all or part of your trade as long as the stock remains above the 20ma is a very effective way of maximizing your gains. What VCM Traders do is sell part on momentum rallies, and add on RBIs, GBRs and BOPs. See circles. Stock is ignoring 20ma 20ma 20ma begins to capture the price here. Charts Courtesy of Realtick®. Low Odds BS Note: VCM Traders usually don’t carry micro trades over night. a complete guide to trading for a living Trade for Life™ Riding the 20ma Short SS at d20ma Breakdown 20ma Trading Tip: Holding on to all or part of your trade as long as the stock remains below the 20ma is a very effective way to maximize your gains. However, once bases start to form toward the end of the day, its time to go home. What VCM Traders do is cover part on momentum drops, and add on GBIs, BDPs and RBRs. See lines. Charts Courtesy of Realtick®. Cover all a complete guide to trading for a living Trade for Life™ Riding the 20ma Short Stage 3 BDP off the 20ma Short Here 20ma SS Trading Tip: Holding on to all or part of your trade as long as the stock remains below the 20ma is a very effective way to maximize your gains. However, once larger than normal green bars begin to form, the party is over. Cover all here What VCM Traders do is cover part on momentum drops, and add on GBIs, BDPs and RBRs. See lines. Charts Courtesy of Realtick®. a complete guide to trading for a living Trade for Life™ 5-Min Downtrend 1 2 3 40ma 20ma Circles show VCM Trade Opportunities Climactic Drop ends/slows down the game 4 Volume Surge test Chart Courtesy of Realtick® a complete guide to trading for a living Trade for Life™ 2-min Downtrend 200ma 20ma Come back sometime after the course to name these VCM trades Chart Courtesy of Realtick® a complete guide to trading for a living Trade for Life™ The Mighty 200 MA 2) 200 Period Simple Moving Average (200ma) – The 200ma is so universally watched, in all time frames, that for all practical purposes, it has become a self-fulfilling prophesy. So rarely do stocks fail to obey (get halted by) the 200ma that we’ve given it the highest nick-name of all, God. It’s power, force, and reliability are so great, that it truly is god-like. We use the 200ma on all micro time frames (1-, 2-, 5-, and 15minute charts). Here are a few things that you must keep in mind regarding this mighty moving average: a) Flatness is king: - While the 20ma is most powerful when it is rising and declining (trending), the 200ma is most powerful when it is flat (trend-less). b) Use as support – Whenever a stock declines to a flat 200ma, it will almost always experience some form of rebound. If the rare cases in which it does not rebound, the stock is almost certain to at least stop (halt its decent) for a while. c) Use as resistance – Whenever a stock rallies to a flat, overhead 200ma, it will almost always experience some form of retracement back down. If the rare cases in which it does not experience a reversal back down, the stock is almost certain to at least stop (halt its rally) for a while. d) Use as a magnet – If a stock and its 20ma get too far above or below the 200ma, a major reversal is usually at hand. This is when the VCM Trader can look to take advantage of a counter trend move. In other words, it’s this scenario that allows for intelligently going against the prevailing trend. Trading Tip: VCM Traders know that 200ma plays call for bigger positions a complete guide to trading for a living Trade for Life™ The Flat Mighty 200ma 2 GBI Buy RBI BO 6 3 4 1 5 200ma Note rising lows Trading Notes 1- 200ma serves as major support near a prior low and a prior high. 2- Climactic advance begins its decline with a GBI Set-up. 3- GBI at the 50% retracement level, signals another leg to the down side. 4- GBR w/ a BT right at major 200ma and price support 5- VCM Buy Set-up on major price and 200ma support 6- 123 BO really gets going on a RBI Set-up. Note volume surge on breakout Charts Courtesy of Realtick®. a complete guide to trading for a living Trade for Life™ Buying Below the 20ma @ the 200ma Trading Criteria Far above 20ma 1 – 20ma and 200ma are far apart 2 – Stock is far below the 20ma 3 – Stock is at or near the 200ma 4 – Buy set-up occurs near a Reversal Time Sell Area 3 20ma 2 h 1 Buy 200ma *Target is always the 20ma The above chart offers the OLV Trader multiple buy opportunities: 1) Gap Plus (gap on the 200ma and major price support); 2) Buy Set-up at the r20ma; 3) RBI (Red Bar Ignored). Charts Courtesy of Realtick®. a complete guide to trading for a living Trade for Life™ The Flat Mighty 200MA 200ma 20ma is being ignored here 20ma What is the next likely direction in this stock? Why? A flat overhead 200-period MA often serves as major resistance. Note how the stock started ignoring its 20-period MA around mid-day. What do you notice now? Charts Courtesy of Realtick®. a complete guide to trading for a living Trade for Life™ The Flat Mighty 200MA 200ma 3GBs 20ma Prior Day’s Close (PDC) BT after 3 Red Bars A flat overhead 200-period MA often serves as major resistance. Note how the stock started obeying the 20ma mid morning. What do you suspect is the next move? Charts Courtesy of VCM Trader Pro. “VCM” Trading Tactics Putting It all Together Trade For Life™ a complete guide to trading for a living Velez Capital Management, L.L.C. a complete guide to trading for a living Trade for Life™ The Trading Strategy The Buy Methods: 1) Buy Green Bar Reversals (GBR) or Bottoming Tails (BTs) at or near the rising 20ma. – This is only to be done if the underlying stock is demonstrating the “picture of power” to the upside (rising stock; rising 20ma above 200ma). The GBR must occur at or near the rising 20ma, otherwise its occurrence is not all that important. Tip: Breakouts can also be played at or near the r20ma. 2) Buy Green Bar Reversals (GBR) at or near the flat 200ma. – This is only done if the stock has fallen back to the 200ma from a rather far distance. Gradual erosion back to the 200ma is not what we are looking for. A sudden drop or collapse back to a flat 200ma is what is preferred. The Sell/Short Methods: 1) Sell/Short Red Bar Reversals (RBR) and/or Topping Tails (TTs) at or near the declining 20ma. – This is only to be done if the underlying stock is demonstrating the “picture of power” to the downside (declining stock; declining 20ma below 200ma). The RBR must occur at or near the d20ma, otherwise its occurrence is not all that important. Tip: Breakdowns can also be played at or near the d20ma. 2) Sell/Short Red Bar Reversals (RBR) at or the flat 200ma. – This is only done if the stock has rallied back to the flat overhead 200ma from a rather far distance. A slow, gradual rise back to the 200ma is not what we are looking for. A sharp move back to a flat 200ma is what is preferred. Intra-day Buy Criteria 1. r20ma 2. r20ma > 200ma Buy all PBSs & PBOs Trading Tip: Use stops at red lines or use a trailing stop based on the r20ma Buy Buy Stock ignores the 20ma 20ma Buy 20ma captures the price Wide Distance* a complete guide to trading for a living Trade for Life™ 2-minute Micro Trading 200ma *Wide distance between 20ma & 200ma calls for caution! Charts Courtesy of Sterling Software, Inc. VCM Trading Examples Oliver L. Velez, CEO www.velezcapitalmanagement.com Velez Capital Management, LLC a private equity trading group VCM One Trading Day 3/09/2007 1-Day Gross Profit of: $22,124.76 Velez Capital Management, LLC a private equity trading group VCM 16 Symbols Traded on 3/9/2007 Velez Capital Management, LLC a private equity trading group VCM 3/9/07 & 3/12/07 Two Trading Days 2-Day Gross Profit of: $43,724 Velez Capital Management, LLC a private equity trading group Jan 03 – March 12, 2007 Gross Profit of: $412,196 a private equity trading group Velez Capital, LLC NY Prop Group NY Prop Group Profit = $107,628.49 NY Prop Group Monthly Profit a private equity trading group Velez Capital, LLC Starting Capital: $1,174.27 Profit of $43,865.05 made on $1,174.27 VCM Trader’s Monthly Profit a private equity trading group Velez Capital, LLC Starting Equity = $53,365.79 70% Return in 20 days Ending Equity = $90,702.74 a private equity trading group Velez Capital, LLC a private equity trading group Velez Capital, LLC Your Next Step to Becoming a VCM Trader Oliver L. Velez, CEO Velez Capital Management, L.L.C. a complete guide to trading for a living Trade for Life™ “Trade for Life™ a complete guide to trading for a living How to trade morning gaps at the open for near instantaneous profits; How to make the first 30-minutes of the day your most profitable period; How to make the last 90-minutes of the day your second most profitable period; How to turn the mid-day doldrums into your most consistent period of the day; How to determine which gaps to fade (trade against) and which ones to run with; How to make the biggest profits from stocks that are declining; How to make your profits and your consistency soar in flat markets; How to trade against the trend, professionally How to profit from the fact that 72% of all breakouts fail; How to determine which breakouts are likely fail versus those that are likely to explode; How to profit from the fact that the second move in a stock is always its biggest; How Market Makers and NYSE Specialists profit from retail traders each day; How to turn 65% of your losing trades into winners with one simple strategy; How and when to send the right orders for the fastest fills; And much, much more You will also learn: How to become eligible to trade Oliver Velez’s money, while you learn his trading methods; How Oliver will absorb all your trading losses while you learn his trading method; Why professional traders will always have an edge on retail traders; How to trade at institutional rates as low as $0.05 (five cents) per every 100 shares. How you can join Oliver’s professional trading team by becoming employed by Velez Capital Management, LLC, one of the country’s fastest growing private equity trading firms. a complete guide to trading for a living Trade for Life™ a complete guide to trading for a living Trade for Life™