Published in St Augustine, FL, USA
Email: thor@pivotmasters.org
Twitter: @ThorYoung
First published in 2022
All rights reserved. No part of this publication may be reproduced, stored in a
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Young, Thor
A Complete Day Trading System
ASIN – B0BLTBP9T1
ISBN-13 – 9798888625460
Cover design by Leigh Jeffery
Book typesetting by Nelly Murariu at PixBeeDesign.com
Foreword by Dr Andrew Aziz
Book Edited by Darren, BC & Hamish Arnold, UK
ePUB re-created and re-structured by Vibhatsu, 2023
DISCLAIMER
The author and PivotMasters,LLC (“the Company”), including
its employees, contractors, shareholders, and affiliates, are NOT
an investment advisory service, a registered investment advisor
or a broker-dealer and do not undertake to advise clients on
which securities they should buy or sell for themselves. It must
be understood that a very high degree of risk is involved in
trading securities. The Company, the authors, the publisher, and
the affiliates of the Company assume no responsibility or
liability for trading and investment results. Statements on the
Company’s website and in its publications are made as of the
date stated and are subject to change without notice. It should
not be assumed that the methods, techniques, or indicators
presented in these products will be profitable nor that they will
not result in losses. In addition, the indicators, strategies, rules,
and all other features of the Company’s products (collectively,
“the Information”) are provided for information and education
purposes only and should not be construed as investment
advice. Examples presented are for education purposes only.
Accordingly, readers should not rely solely on the Information
in making any trades or investments. Rather, they should use
the Information only as a starting point for doing additional
independent research in order to allow them to form their own
opinions regarding trading and investments. Investors and
traders must always consult with their own licensed financial
advisors and tax advisors to determine the suitability of any
investment.
My tattoo is a tribute to the Bear Bull Traders community, who I
trade with every day, and the opposing forces in the stock
market.
PREFACE
In a market full of fake gurus (known as FURUs) and people
trying to sell you a “special” strategy that will enable you to
make easy money, it can be almost impossible to put a solid and
consistently performing day trading1 system together. Most of
the trading systems that are out there are based on lagging
indicators.2
They are antiquated and intended for a slow market that
moves in large time frames. And you know what? That doesn’t
come close to reflecting the reality of the stock market today.
These systems give zero consideration to what is “actually”
occurring in the market. Quite simply, patterns3 fail all the
time, and this book will teach you why.
As an aside, since you have just finished reading the first
paragraph of my book, I want to draw your attention to the back
section of the book. I have included, in the back pages, a handy
glossary of all of the terms used in this book that I thought a
novice trader, in particular might not be familiar with. If, as you
are studying this book, you come across a term that you do not
understand, such as perhaps the reference to “lagging
indicators” in this previous paragraph, please go take a look at
the glossary.
As well, on the website of my trading community,
BearBullTraders.com, you will find a file of all of the images that
appear in this book in addition to a copy of my glossary. I
encourage you to download that file, at no cost, in order to
review and study the images, screenshots, and charts I have
included. This file will be especially useful if you purchased the
audiobook, paperback, or hardcover editions of my book.
Having the charts in color will be much easier to follow and
learn from than the black-and-white images that appear in the
paper versions of this book. I also wanted to be able to provide a
copy of the glossary to those people who purchased the
audiobook edition.
It’s a true saying: to trade the market, you must first recognize
what is going on in the market. But with that understanding,
you need a system that is designed specifically to work for day
traders. My goal for this book is that by the time you have
finished studying it, you will have a deeper knowledge of how
the stock market works and you will have a detailed system in
place that you can use to successfully trade in it. The system
explained in this book works, where others don’t, because it’s
based not on what has happened in the past, but on what is
happening in the present, at the very moment when you are
preparing to enter your trade.
As a day trader, you are restricted by something that swing
traders4 and investors5 are not. That restriction is time. As a day
trader, the intention is to always be liquid6 by the closing bell.7
This means that there is only a small window of time for you
to make a profit. You don’t have days or weeks for a trade to
work out. Bag holding8 is not an option. You need the trade you
enter to move, and you need it to move soon. By focusing on the
Market Makers’ process,9 volume and price analysis (VPA),10 the
tape,11 and value-based analysis,12 you can isolate US market
stocks and exchange-traded funds13 in extended price ranges
with a high probability of a pending quick movement in price.
Then, with tape reading and a very detailed predictive pivot14
system, you can take and manage your trades with minimal
loss and maximum profits.
To begin any system, you must know “Where” to look for
potentially profitable trade setups. Part I of this book gives you
that information and so much more.
WHERE, WHEN, AND HOW
“Every trading system needs three things. Where to look for a
trade. When to take the trade. How to manage the trade. Taking
a trade with anything less is, at best, gambling.”
1 When you day trade, all of your trading is done during one trading day.
You do not hold any stocks overnight. Any stocks you purchase during
the day must be sold by the end of the trading day.
2 Lagging indicators are indicators that provide you with information on
the activity taking place on a stock after the trade happens. An indicator
is a mathematical calculation based on a stock’s price or number of
shares being traded or both. Almost all of the indicators you choose to
track will be automatically calculated and plotted by the trading
software you use. Always remember though that indicators indicate; they
do not dictate.
3 A pattern is lines or shapes drawn onto price charts to help predict
future price action
4 Swing trading is the trading of stocks that you hold for a period of time,
generally from one day to a few weeks. Swing trading is a completely
different business than day trading is.
5 Although some people believe investing and trading are similar,
investing is in fact very different from trading. Investing is taking your
money, placing it somewhere, and expecting it to grow in the short term
or the long term.
6 Being liquid means to have closed out all your positions, with your
portfolio entirely in cash, by the end of the trading day.
7 The New York Stock Exchange, for example, closes for trading at 4pm ET,
Monday through Friday.
8 Bag holding means holding on to a stock or other instrument that is not
doing well, in the hope that it will bounce back, even when there is no
indication that it will indeed bounce back.
9 Market Makers are the big players on Wall Street. They are brokerdealers that offer shares for sale or purchase on the exchange. These
firms hold a certain number of shares of a particular stock in order to
facilitate the trading of that stock at the exchange. (A broker is the
company that buys and sells stocks for you at the exchange.)
10 Volume and price analysis is a system of reading market effort and
result using the amount of participation as the price moves.
11 The tape refers to watching orders on the time & sale and orderbook to
see what decisions various participants are making.
12 Value-based analysis is the analysis of price action based upon
transactional volume at various price levels.
13 An exchange-traded fund, often abbreviated as an ETF, is a tradable
investment fund composed of assets such as stocks and bonds.
14 This book is all about pivots, and especially the Camarilla pivot. In very
basic terms, a pivot is a critical price level on your charts. A chart tracks
the price action (and more!) of a stock in various time frames.
FOREWORD BY DR ANDREW AZIZ
I have known Thor Young for over 4 years now, and we have
been trading together for over 3 years. After reading one of my
books, Thor subsequently joined our community (Bear Bull
Traders) and became a student of mine. Very soon after he
graduated our training course, he began trading live, and he
immediately demonstrated to me and everyone else in the
community that he is an exceptional trader. He is patient in
trading, and he is continually looking outside of the box in
order to discern the current balance between the buyers and the
sellers.
Thor has been one of the few traders in our community to
initiate a new system into our trading style. By introducing his
form of pivot trading, something that I had not come across
before, he opened the window to a fresh, simple, and effective
trading style that many of our traders have adopted.
Our members were excited, and I have personally found that
by incorporating his system into my own trading, I have created
a new avenue to profit from the volatile markets of 2021 and
2022.
At present, Thor is a great mentor to both novice and
experienced traders at Bear Bull Traders, and he also teaches his
advanced courses to our prop traders at Peak Capital Trading.
Thor’s teaching style is clear, uncomplicated, and to the point.
He is a gifted teacher and a natural-born educator.
When Thor shared with the community that he was planning
to write a book about his trading method, everyone, including
myself were super excited. We all were waiting anxiously for his
book to be published, and now that I am writing this foreword,
that time has arrived.
I am honored that Thor asked me to write this foreword to his
book, and I am delighted that so many new (and not so new)
traders will have the opportunity to learn from Thor and
integrate his trading style into their own successful trading.
Andrew Aziz
October 2022
Vancouver, Canada
CONTENTS
Foreword by Dr Andrew Aziz
Introduction
PART I: THE “WHERE”
Chapter 1: Camarilla Pivots
Chapter 2: Pivot Relationships
Chapter 3: Pivot Strategies
PART II: THE “WHEN”
Chapter 4: Market Auction Theory
Chapter 5: Volume and Price Analysis
Chapter 6: Price-Based Analysis
Chapter 7: Tape Reading
PART III: THE “HOW”
Chapter 8: Preparation
Chapter 9: Risk Management
Chapter 10: Trader Psychology
CONCLUSION
Acknowledgments
Appendix
Glossary
About the Author
INTRODUCTION
I remember being 8 years old and walking the auction yards
with my family. You see, I grew up in the country, a little
outside of Dallas, Texas. One of our favorite things was to go to
the fairgrounds and watch the rodeo and the auctions. I loved
the melodic sounds of the auctioneers as they sold everything
from lumber to livestock. What I could never have known then
though was that this experience would give me a unique view
of the stock market. While we walked the yard, we would listen
for the crowd. It was always easy to find the action. All we
needed to do was follow the noise. Growing up, I found it
fascinating to watch the process of an auction unfold. I was
mesmerized by it, and now, as an adult, I find myself often
reflecting back on the lessons that were ingrained in me many
years ago in those dusty auction yards.
What I have come to realize from my pondering is that
auctions, no matter the type, are theoretically the same because
each and every one is based on the two fundamental principles
of participation and value.15
It really doesn’t matter if it’s the stock market, a cattle
auction, or the real estate market, the theories that drive
participation are, in fact, identical. Since a market is made up of
participants, and those participants will always overreact to
value, the price will ebb and flow back and forth from its value
over and over again until, for whatever reason, it doesn’t
anymore.
Although this concept is the first step to understanding what
drives the market, it only scratches the surface. There is an
amazing and complex system out there, comprised of a literal
plethora of algorithms driven by supercomputers and Market
Makers, and they are all trying to figure out what you, the
trader, think a stock is worth, what you are willing to pay for it,
and when you are willing to sell it. As they are busy processing,
calculating, and quantifying their data, your job is to figure out
what they are trying to do and where they are trying to do it. To
succeed, you need to have your own system in place. You need a
way to turn this battle to find value into a money-making
opportunity.
The quote below is from the great American investor and
stock market educator, Richard Wyckoff. Although he wrote
these words many, many decades ago in various versions, his
insight and wisdom into the market still resonates clearly
today.
Anyone who buys or sells a stock, a bond, or a commodity for
profit is speculating if he employs intelligent foresight. If he
does not, he is gambling. Your purpose should be to become [an]
intelligent, scientific, and successful investor and trader. —
Wyckoff
So often we, as traders, do not put in the time to understand
the stock market and the reasoning behind whatever is
unfolding on the charts in front of us. Instead, we merely react
to momentary price fluctuations. We roll the proverbial dice, so
to speak, and occasionally it even works. However, this method
is more akin to gambling than it is to speculating. If this is your
trading style, your risk management system needs to factor in
that you will lose often. It takes an incredible amount of
conviction to succeed with this kind of trading and ensure that
your winnings balance out your losses. To be honest, most fail
in the attempt.
Nevertheless, I’m just pointing out the connection between
the two. There are definitely some very successful gamblers in
the world of trading but, in my opinion, if you are using a basic
pattern, and you haven’t taken the time to understand why the
stock is moving or where the price is heading, you will not
know where, when, or how to properly leverage that pattern.
As a day trader, you suffer from one major restriction that
other types of traders don’t have to be concerned about: TIME.
Because of this restriction, you cannot afford to waste your time
trading underperforming stocks. You need to implement a
system that lets you find and execute stock trades quickly with
meticulous risk management.
THE SYSTEM I DEVELOPED, USE, AND RECOMMEND
To meet this need, I have developed a system that expressly
works for day traders. Most of the books and resources available
were not written for you, the day trader. They were co-opted
from books aimed at long-term investors and swing traders.
The information presented in those books for the most part is
sound, but it lacks the degree of subtlety that is required for day
trading. Disappointingly, even many recently published day
trading books focus on outdated market tactics that were
intended for the slower moving markets of years past. The pivot
system explained in this book works in every market, ranging
from a Bear market16 or a Bull market17 to the newly coined
kangaroo market.18
As a modern day trader, it is vital that you trade with a system
that has it all. It must show you where to look for trades, when to
take a trade, and how to manage the trade once you are in it.
For the “Where”, this book will teach you how to utilize
Camarilla pivots. Camarilla pivots were specifically designed for
predicting the price movement of S&P19 futures.20 Given that,
they have an amazingly accurate track record for projecting
where market sentiment will change for a particular stock or
ETF. I will show you how to deploy them to judge value and
range as you look for points of transition, extension, and
rejection (which will be explained in subsequent chapters). No
matter how choppy21 the trading day, you can successfully use
extreme price ranges to help you predict large price movements.
For the “When”, I will dive deep into the market auction
theory,22 volume and price analysis, price-based analysis, Level
2,23 and tape reading. To trade the market, you need to be able to
read the market. Reading the market is the most undersold skill
these days because it is a very difficult aptitude to develop, and
the vast majority of resources don’t want to take that challenge
on. However, a person who can tape read will have an edge over
almost any chart trader.24 If you doubt me, I urge you to go take
a look at Investopedia and read a few of their postings regarding
the massive advantage tape readers have over chartists. You
can’t tell where a ship is going by looking at its wake. Likewise,
you can’t tell where the market is going by where it has been.
You need to be able to understand what is happening in real
time, right when you are getting ready to enter a trade. You
need to know how to read the current participants, the current
supply, and the current demand. In this book, you will learn all
about the market making process and what motivates the “big”
traders to make the moves they do.
For the “How”, the Camarilla pivot system uses some very
controlled risk management techniques that focus on a fixed
risk and precise profit taking. I will teach you how to cut your
losers and let your winners run. The “How” section of this book
also zeros in on trading psychology. No system will work if you
can’t actually implement the system yourself. That sounds
simple enough, but this is where the gurus get it wrong. The
systems they sell are the ones they can utilize and profit from.
There is an arrogant assumption built into their messaging
though: that you will also be able to successfully profit from
implementing their system. To assist you to trade well, I am
going to emphasize the various psychological elements of
trading so that you don’t unintentionally become a destructive
variable in the system you are using. Most trading systems fail
not because they are inherently poor; they fail because they
don’t help traders to develop the requisite abilities to properly
implement them.
By the end of this book, you will have all the tools you need to
implement a consistently profitable pivot-based trading system.
But beyond the pivots, this book will help open you up to a
different type of stock market than even the most astute of
traders could have imagined 10 or 20 years ago. In this new
market, due to the widespread availability of high-speed
internet, there are more participants than ever before.
Advances in technology have resulted in almost anyone being
able to trade from virtually anywhere in the world. In addition,
at the speed of lightning, an earnings report, the rumor of a
merger, or a breaking news story will trigger the unleashing
into the marketplace of Wall Street’s powerful supercomputer
algorithms. With so much participation, and with so much
volatility,25 the opportunity to make money in the modern
stock market has never been greater.
Nonetheless, in order to seize that opportunity, you need to
know “Where” to find a trade. And for that endeavor, you can
turn to your pivots.
15 Value, as we use it, refers to the area where participation between
sellers and buyers shows an agreement on price.
16 Bears are sellers or short sellers of stock. If you hear the market is bear,
it means the entire stock market is losing value because the sellers or
short sellers are selling their stocks. In other words, the sellers are in
control. Short selling occurs when you borrow shares from your broker
and sell them, and then expect the price goes even lower so you can buy
them back at the lower price, return the shares to your broker, and keep
the profit for yourself.
17 Bulls are buyers of stock. If you hear the market is bull, it means the
entire stock market is gaining value because the buyers are purchasing
stocks. In other words, the buyers are in control.
18 A kangaroo market acts just like the marsupial. It’s a market where
stocks are bouncing up and down, increasing in price, decreasing in
price, over and over again.
19 S&P is the abbreviation for S&P Global Inc., a company formerly known
as Standard & Poor’s.
20 Futures trading is when you trade a contract for an asset or a
commodity (such as oil, lumber, wheat, currencies, interest rates) with a
price set today but for the product to not be delivered and purchased
until a future date. You can earn a profit if you can correctly predict the
direction the price of a certain item will be at on a future date. Day
traders do not trade in futures.
21 Choppy price action refers to stocks trading with very high frequency
and small movements of price. Day traders avoid stocks with choppy
price action as they are being controlled by the big players on Wall
Street.
22 The market auction theory is a philosophy for observing and trading
markets. The theory is based on observing value and the overreaction of
the markets participants as that value is accepted or rejected.
23 Level 2, also known as L2 or the Order Book, is a data feed provided by
the various stock exchanges. It gives you a ranked list of the best bid
prices (what traders are willing to pay for shares of a particular
company) and ask prices (the price sellers are asking for shares of a
particular company) from each of the different Market Makers and
participants. When orders are placed, they are listed here, giving you
detailed insight into the price action of a stock before your trade unfolds.
24 A chart trader, or chartist, focuses their analysis on the past trends of
a stock as a way to predict future price movements.
25 A stock is considered to be trading in a volatile fashion when its price
is fluctuating significantly – hitting extreme highs and extreme lows.
Volatility can impact not just a single stock but also the entire stock
market or a specific sector of it (e.g., the tech sector).
PART I: The “Where”
CHAPTER 1: CAMARILLA PIVOTS
The “Where” is exactly what you think. Where are you going to
look to find trades? The stock market can be very confusing. I
know from personal experience that it can become
overwhelming trying to make use of all of the many various
indicators and price levels. Novice traders in particular end up
requiring an unrealistic amount of prep time before the
opening bell rings each morning.26 To solve this problem, you
need a consistent way to find potentially winning trades, and
with so many stocks to choose from, this method needs to be
both quick and reliable. Accordingly, the trading system you
utilize must incorporate an exceptional method to track down
quality trades.
I want to stress as well that a system is more than a strategy. A
strategy helps you decide how to take a single trade. A system
helps you plan, take, and manage trades during the course of
your entire trading day.
You should be aware that the pivot-based system I have
developed is not a static system. I have invested considerable
time into researching and studying pivot- and volume-based27
trading strategies and I continue to refine my system as other
credible and complementary approaches to trading come to the
forefront.
In this book, you will learn how to avoid choppy price action.
The system I have developed will permit you to accurately
gauge breakout28 days versus days that are apt to be range
bound. With this knowledge at hand, you can confirm the
current directional bias of the market (bullish, bearish, or
neutral) and then target the ideal locations to take trades. Once
you have selected your ideal trade locations, you don’t have to
be concerned about getting stuck in any choppy price action.
Rather, you will be waiting (hopefully patiently!) for the
appropriate signals at your targets, and then those signals will
guide you in entering and exiting trades. As an aside, it’s okay if
you don’t understand all of the lingo and steps outlined in this
paragraph. They will be explained in detail as you proceed
through the book.
To get going, let’s start by looking at a common concept in a
whole new way. And what is that common concept? It is the
fundamental principle of how to perceive value.
REDEFINING VALUE
What exactly is value as it pertains to the market? The easiest
answer is that when a transaction occurs, value is established.
Value equals price. However, that value doesn’t last long. As
soon as another transaction occurs, the value confirms or
changes. The value itself is in fact nothing but perception.
What does a participant think something is worth and what are
they willing to buy or sell it for? Do they think it’s worth more
and so they will keep it? Or do they think it’s worth less and so
they will sell it?
A stock is viewed in this precise fashion by the market’s
participants. Is it priced under or over its value? The perception
of that by the market’s participants will have a massive impact
on which direction the stock price moves.
Thanks to modern technology, the stock market can provide
you with some very unique information about a stock. Not only
can you see where its value is, tick29 by tick, but you can also
chart where those ticks congregate. Each tick at a specific price
adds up and over time these individual transactions will clump
together, so to speak, and be clearly visible on your chart, letting
you identify where the value for a stock is being perceived by
the overall market for whatever time frame your chart is
covering. Never forget though that it is the buying and selling
of the larger participants that usually influences and often sets
the value for a stock. Further, it is the transactions of these
larger participants that invariably define the daily highs and
lows of a stock’s price.
This discussion surrounding value leads to the principal
theory that drives the Camarilla pivot system, namely that
because the market is made up of participants, and participants
are either people or systems programmed by people, the market
will inherently overreact to value. Human beings, by design,
overreact too almost everything. It’s a psychological reality.
Have you noticed that certain stocks appear to have their own
distinct personalities? You can trade them repeatedly and it
seems like they always behave in a similar way. That is because
the psychological makeup of the market’s participants carries
over to a stock’s price action. Even when the price of a stock
makes some extreme moves, it normally will return back to an
average price level multiple times (until it doesn’t!). This
expectation is what propels the market auction theory, which I
will be expounding upon in detail in Chapter 4.
To be frank, you will have no idea which way the price of a
stock is heading until you can figure out where the broader
market is establishing value. There are some good strategies out
there for taking advantage of the quick auction periods,30 but
those often get you stuck in choppy price action as larger
participants make decisions. In addition, auction periods are
very volatile and can be very difficult to manage risk in. Waiting
for a value to be accepted and then rejected gives you the ability
to sit back and plan detailed and conditionally-based31 trades
that have a great risk versus reward potential.32 To illustrate
this, consider what unfolds in the first minutes after the
opening bell rings. The charts on your computer screens seem
to wake up and spring into action and everything starts moving
very quickly. No value has been established yet and although
you may make money on a trade, your entry and exit are
definitely little more than a gamble, in essence just a shot in the
dark. The market always takes a few minutes to shake out the
weak participants before the real auction begins.
As the market tries to establish value, the larger participants
will have the biggest impact. As they set value, other
participants will make decisions based upon that price action.
Traders will habitually overreact to the value being set by the
larger participants and the price of the stock will therefore
swing up and down as the mass of traders constantly accept
and reject whatever the perception of value is. This ebb and
flow is what Camarilla pivots attempt to quantify.
Since value is based on perception, it can be very difficult to
find. There are many technical ways to find value including
VPOC,33 support and resistance levels, and Level 2.
Value is accepted by the market over time. You will observe
larger participants with their substantial orders trying to set
the value but, until the market as a whole comes to an
agreement on the value, nothing is written in stone. You will
frequently see the market rally34 after large orders on lower
volume. This is because the retail traders35 have not accepted
the new value and are continuing to try to push the price
higher. Eventually the price will settle, and that then will
establish the value. Once the value is set, you will find your
Level 2 will often lack large bids36 and asks37 that are too far
removed from the price that has been established. In the market
auction cycle,38 this is what we call balance39 (which I will
expand upon in Chapter 4). During this period, the volume will
ordinarily drop and a consolidation40 of some sort will
commence.
Once value is accepted, you will usually notice on your chart a
consolidation followed by a trend continuation or trend
reversal,41 and all with light volume. This is an attempt to reject
the value. A rejection of value does not result though in the
price strictly moving either up or down. It means the price will
start to move away from the established value in both
directions. The price will go under the value, over the value,
under the value, over the value, etc. The price of the stock will
continue to do that repeatedly, until it no longer does. After all,
that is what the Camarilla pivot system is based on. You will see
in Figure 1.1, a 1-minute chart42 of Roblox Corporation (RBLX),
how this up and down price movement will present on your
chart (in this example, between about 10:20am and 11am).
Figure 1.1 – 1-minute chart of Roblox Corporation (RBLX)
illustrating how the process of rejecting the established value
will unfold on your chart (in this example, between about
10:20am and 11am) (chart courtesy of DasTrader.com).
As I noted earlier, on the website of my trading community,
BearBullTraders.com, you will find a file of all of the figures that
appear in this book (as well as a copy of the glossary). If you
have not yet, I encourage you to download that file, at no cost,
in order to review and study the images, screenshots, and
charts I have included. This file will be particularly useful if you
purchased the audiobook, paperback, or hardcover editions of
my book. Having the charts in color will be much easier to
follow along with and learn from than the black-and-white
images that appear in the paper versions of the book.
Trading with pivots is anything but new and the specific
Camarilla pivot system that I advocate is certainly not a new
trading system. In fact, like so many systems used by traders, it
was initially developed quite some time ago (in 1990 to be
exact). Nevertheless, more recently, a newer method of
calculation has emerged that adds the usage of premarket data.
Firstly, what does the word “Camarilla” mean? Many internet
dictionaries define [cam·a·ril·la] as a group of confidential, often
scheming advisers; a cabal.
A simple internet search will reveal that there are many
claims and stories circulating about who invented the Camarilla
pivot calculations. At one point, a bond trader named Nick Scott
(and who some resources refer to as Nick Stott) took credit for
its creation. As well, a secret Wall Street hedge fund was once
rumored to be the primary developer. The true creator though
was M.B. (Mitchell) Kurzencwyg, a brilliant student from
Montreal, Canada. In 1990, after an intense study of the futures
market, M.B. discovered the calculations that he subsequently
called Camarilla. He tried to keep his system relatively
confidential and sold only a few select copies of the strategy
several years later, but his research was so groundbreaking that
it could not remain hidden for long. Since the 1990s, many
traders like myself have embraced and adapted his findings for
the markets we trade in. As for M.B., almost 30 years following
his initial discovery, he turned the strategy into a “black box”
system43 that many large funds pay top dollar to utilize.
The basic thesis for this strategy is that price tends to revert
to its mean (its value) multiple times, right up until the point
that it doesn’t. Camarilla pivot point calculations are a rather
straightforward way to anticipate that reversion or break. They
split your chart into different buying and selling zones, where
participants will make decisions. The pivots themselves are not
overly complicated, but they have amazing accuracy in both
trending and sideways44 markets. They can be used with stocks,
options, ETFs, and futures.
Camarilla pivot points vary in two major ways from classic
pivots. One is that they don’t make use of a single central pivot
and second is in their 3rd and 4th level calculations (which I will
be explaining in the paragraphs to come). These value (price)
levels will be the levels you will zero in on the most with your
Camarilla pivot strategies. Each price level is color coded to help
you not get different levels confused as you look at them on
your chart.
In addition, Camarilla pivots provide a significant benefit in
terms of what they help you not to do. Because the pivot points
are specific areas, they force you to wait, and let me tell you, the
hardest thing for a trader to do is nothing. Patience is a virtue
when trading and having a strategy with key areas to focus
toward is extremely helpful. It takes some of the anxiety out of
trading and it gives you the ability to be able to expeditiously
scan stocks for any price action that is approaching your key
areas. Once you absorb the strategies I teach in this book, you
should be able to quickly identify potential setups, evaluate the
signals, and assess the risk.
Calculating Camarilla pivots is quite easy. Please trust me!
Most platforms will do it for you but if needed here is the
manual way to calculate them. To start, you need the previous
trading day’s high,45 low,46 open,47 and close48 prices for the
stock in question. You then just need to insert these figures into
set formulas in order to compute your price levels. I have listed
these formulas below. The main levels you will use are the R4
through S4 ones. R stands for resistance and S stands for
support. You’ll recall from earlier in this chapter that resistance
is the level that the price of a particular stock usually does not
go higher than and support is the level that the price usually
does not go lower than. Stocks often bounce and change the
direction of their price when they reach a support or resistance
level. As well, if the price breaks out at the R4 or S4 level, the
stock may trend. In those instances, it helps to use the 5th and
6th Camarilla pivots.
Camarilla Pivot Calculations Using Previous Day:
R6 = (High / Low) * Close
R5 = R4 + 1.168 * (R4 - R3)
R4 = CLOSE + (HIGH - LOW) * 1.1/2
R3 = CLOSE + (HIGH - LOW) * 1.1/4
R2 = CLOSE + (HIGH - LOW) * 1.1/6
R1 = CLOSE + (HIGH - LOW) * 1.1/12
S1 = CLOSE - (HIGH - LOW) * 1.1/12
S2 = CLOSE - (HIGH - LOW) * 1.1/6
S3 = CLOSE - (HIGH - LOW) * 1.1/4
S4 = CLOSE - (HIGH - LOW) * 1.1/2
S5 = S4 - 1.168 * (S3 - S4)
S6 = Close - (R6 - Close)
Much more complex than traditional pivots, Camarilla pivots
cover six levels, and a heavy emphasis is placed on where the
price for the previous day closes.
CONFIGURING CAMARILLA PIVOTS IN DAS
I trade with the DAS Trader Pro platform.49 It’s an incredibly fast
execution program that is perfect for day trading. As of writing,
it has, hands down, the best tape available to retail traders.
I am now going to walk you through the steps you should
follow in order to set up Camarilla pivots in DAS Trader Pro. If
you are using a different platform for trading, you should not
hesitate to reach out to that company’s help desk if you
encounter any difficulties in setting up pivots in its system.
As shown in Figure 1.2 on the next page, the first step is to
right click on your chart and select ‘Study Config’.
You next need to add the PivotPoint study to your chart. Find
it in the studies column to the left and hit the “Select—>”
button to move it over to the Studies in Chart. Before
configuring, go ahead and click on the ConfigEx button and
uncheck all the values in the General Config box then click
“Commit”. This will help the screen fit. Next click “Config” to
open the PivotPoint configuration box.
Figure 1.3 – Screenshot of how to configure PivotPoint General
Config in DAS Trader Pro (screenshot courtesy of
DasTrader.com).
The screenshot in Figure 1.4 shows you how I configure my
Camarilla pivot points. You will notice that I have them color
coded in a very specific way. The S1, S2, R1, and R2 pivots are
coded gray because they represent the “gray” area. You should
not execute any trades in this area. The Grey area is a Kill Zone.50
We are always much likely to return to value so better to wait
for the price to move to a better location. Do remember as well
to select the Camarilla Pivot Points option near the top of your
screen.
If you are reading the paper edition of this book rather than
the e-book edition, the colors will of course not be displayed in
your version. For Figure 1.4, the boxes to the right of S1, S2, S5,
S6, R1, R2, R5, and R6 are colored gray. The boxes to the right of
S3 and R4 are colored green. The boxes to the right of S4 and R3
are colored red. The box to the right of PivotPointLine(P)51 is
colored yellow.
I want to also note that as of writing, DAS Trader Pro
automatically draws all 12 levels from S6 to R6. It is important
to configure them correctly. If not, you’ll end up with your chart
being over cluttered with lines. In the next Figure 1.4, I show
you the config but will explain the area highlighted in the
yellow box and its significance on page 91 in Chapter 3.
Figure 1.4 – Screenshot of how I configure and color code my
Camarilla pivot points in DAS Trader Pro (screenshot courtesy
of DasTrader.com).
The green pivots are buying levels. S3 will act as our principal
buying area for the S3 to R3 traverse. R4 will act as a location for
breakouts and extreme reversals. An example of an S3 to R3
traverse is shown in Figure 1.5, a 1-minute chart of the SPDR®
S&P 500 ETF (SPY). I have circled at the bottom of the chart
where the price of SPY in the opening minutes of trading that
day was at (the S3 level). Over the course of the trading day, the
price then moved (traversed) upward to the R3 level (what I
have circled at the top of the chart).
One aspect of stock trading that is difficult to comprehend is
that the old adage of Buy Low – Sell High is the worst financial
advice that has ever been given to anyone. Because this is a
participation-based market there are times when those who
bought before will sell at a loss. Or those who shorted before
will cover at a loss. At the same time, others will buy into
strength or short into weakness. This means that there are, in
fact, times you will Buy High – Sell Higher or Sell Low – Buy
Lower. We buy above R4 because that is where Bears52 will begin
to cover for a loss. We buy above S3 because that is where Bears
are most likely to cover for a profit. Both actions will entice
Bulls53 to buy as a response and help raise the price.
Figure 1.5 – 1-minute chart of the SPDR® S&P 500 Exchange
Traded Fund (SPY) illustrating an S3 to R3 traverse (chart
courtesy of DasTrader.com).
Always remember – and I am going to stress this often – pivots
are a “where” and not a “when”. These are areas where you will
look for potential setups but, by no means, are they meant to be
areas where you will just take a trade.
The red pivots are areas for shorting and extreme reversals.
R3 will be your principal shorting location for a traverse down
to S3. S4 will act as a location for very powerful extreme
reversals in addition to breakdowns.54 An example of an R3 to
S3 traverse is shown in Figure 1.6, a 1-minute chart of the
company now known as META Platforms, INC. (META)
(formerly known as Facebook Inc. (FB)). I have circled at the top
of the chart where the price of META in the opening minutes of
trading that day was at the R3 level. Within a couple hours, the
price had moved (traversed) downward to the S3 level (what I
have circled at the bottom of the chart).
Figure 1.6 - 1-minute chart of the company now known as META
Platforms, INC. (META) (formerly known as Facebook Inc. (FB))
illustrating an R3 to S3 traverse (chart courtesy of
DasTrader.com).
Here we sell at R3 because that is where Bulls are likely to take
profit and we buy back at S3 because this is where Bears are
likely to cover for a profit. Bulls selling at R3 will entice Bears to
Sell Short55 driving the price action back to prior value. Both
parties agreeing on direction makes this move very fast.
CHAPTER 2: PIVOT RELATIONSHIPS
HOW TO DETERMINE DIRECTIONAL BIAS BASED ON PIVOT
RELATIONSHIPS
One of the most powerful aspects of the Camarilla equation is
its ability to apprise you of the directional bias of the market
(bullish, bearish, or neutral) based on the relationship between
pivots. This information has been used to build some of the
most influential algorithms driving the market today and,
because of that, it has amazing accuracy.
The central pivot range, or CPR, is comprised of the 1st and 2nd
level pivots (S2, S1, R1, and R2). Since these pivot areas form
around high value areas (HVAs)56 with lots of chop, they are
colored gray or removed and you should not trade them.
However, the relationship between the calculations you make
on the day you are trading, and the previous day’s value is
extremely beneficial information. As the price of the stock tests
HVAs from the prior day(s), the acceptance or rejection of these
areas will serve as a confirmation of the market’s bias and
direction it is trending.57
Discerning the market’s bias is the first step in putting your
trade together. If, for example, there is a bullish bias, you will
focus first on looking for long positions,58 which means you will
only be trading the green pivots (S3 and R4) to start. This allows
you to quickly isolate which strategies you will be using and
which levels you will be evaluating at the open.
The diagrams in the sections that follow will demonstrate
these relationships.
BULLISH PIVOT RELATIONSHIP
Let’s begin with a bullish bias. The simplest way to determine if
there is a bullish bias in the market is through the relationship
between your pivots. As illustrated in Figure 2.1, if the pivots
are above the pivots from the previous trading day, you will
know immediately that you are facing a generally more bullish
trend. This doesn’t mean though that it is time for you to go
long. It just means that the overall trend for this particular
stock’s price seems to be on the rise from day to day.
Before you can confirm the bias, you need to see where the
price opens. If the stock is in play,59 this is a great time to form
some contingency ideas. For instance, if the stock price opens
near R4, I’m going to let it sell off60 for a bit. If it reclaims R4, I
will go long. However, if it opens under R4 and then struggles to
increase in price, I will look to short it down to wherever the
market has established value. R4, as discussed earlier, plays
both directions as it is a principal inflection point61 where the
largest number of participants will make decisions.
Remember, you are playing pivots, and pivots are basically a
decision point. You can either go up or down, but you are going
somewhere, and a choice needs to be made. For example, if
there is an R4 breakout and you decide to take the ride up, so to
speak, as long as the volume stays consistent, and you don’t hit
any of the larger sellers, the price of the stock will likely
continue to run. But if the stock loses its momentum, its price
will come right back down.
A downloadable pivot relationship graphic is available at
www.bearbulltraders.com/pivotbook
BULLISH BIAS
Let’s imagine that on the day you are planning to execute a
trade, the central pivot relationship is higher than it was on the
previous trading day, giving you a bullish bias. This often puts
your S3 near the previous day’s breakout range above R4. A
retest of that range and hold62 on the day you are preparing to
make your trade will confirm the previous day’s trend. As the
trend confirms any Bearish participants short selling will stop
out along with Bullish participants buying into the trend. With
that sort of finding, you can usually expect there to be more
participants and thus more volume. This is due to the Bears’
stops being triggered and the Bulls buying the breakout.
Figure 2.1 – Diagram showing how the relationship between
your pivots will illustrate a bullish bias (chart illustrated by Thor
Young).
BEARISH PIVOT RELATIONSHIP
A bearish bias is formed in the same way as a bullish bias, but in
reverse. In these circumstances, as you will see in Figure 2.2,
your central pivot range will open lower than the previous day’s
since there will be a trend down on the larger time frame. The
larger time frame is best represented with a daily chart. Again,
this does not mean that you should immediately go short. Quite
the opposite in fact. You should never enter into any sort of
trade without a confirmation, and the only way to receive that
confirmation is to wait for the opening bell and see where the
value begins to be established. Nonetheless, as you prepare for
your trading day, the stock you are monitoring can certainly
present with a bearish bias.
The reason you need to know the opening price is because the
overall trend gives you very little information. The price may
have moved down from the previous day, but what happens if it
is near the bottom of a buying range. You therefore need to
factor in other variables, such as significant levels and value
across the broader time frame. You cannot play the rejection of
value if you don’t know where it is. While the Camarilla pivot
points will give you some data about ranges and where the price
may go, it is up to you to decide which direction the price will
actually pivot to and how to trade it.
In many instances, you will see a strong upward move on a
bearish trend. This doesn’t mean, however, that you cannot
trade it. It just means that you need to have the proper
expectation for the trade. Since the stock is in an overall bearish
trend, it is likely that you are going to run into resistance faster.
Accordingly, a traverse will often be a great tool in order to play
the bottom of the range back up to center of the range and
perhaps even the top. I will discuss these types of strategies
further along in the book.
BEARISH BIAS
When the stock you are considering to trade is in a bearish
trend, your central pivot range will be lower than your previous
day’s central pivot range, and you will therefore be biased short.
A rejection at the R3 price level, which I will explain shortly, is a
rejection of the previous day’s central pivot range. You should
consider this to be a very powerful value rejection.
Figure 2.2 – Diagram showing how the relationship between
your pivots will illustrate a bearish bias (chart illustrated by
Thor Young).
NEUTRAL PIVOT RELATIONSHIP
If, as you contemplate executing a trade on a specific stock, you
see that its central pivot range is closed in by the previous day’s
CPR,63 you will be unable to form a bias on the overall trend.
This is not much of an issue though because breakouts can
definitely unfold from a tight central pivot range (a tight central
pivot range is illustrated in Figure 2.3). Because of the tighter
range, the candles on your charts tracking larger time frames
will most likely demonstrate compression.64 This means that
the stock’s price is near a breaking point that will cause it to
move in one direction or another. Should the stock have a viable
catalyst, these tight pivots, combined with an outside day,65 can
produce some very explosive moves in one direction or another.
You next can use the stock’s opening price to confirm its
neutral bias. Where the price opens is critical. If the price opens
too high in the central pivot range and doesn’t have the correct
momentum, then you can expect the price will come down and
establish a value more within the pivots. Breakouts take a lot of
effort on the part of the market and the signals you need to be
looking for are often quite clear. Sometimes the lack of volume
can be all the information you require in order to confidently
take a short as the stock breaks its trend and heads in the
opposite direction.
NEUTRAL BIAS
Because the central pivot range is closed in (inside) the previous
trading day’s CPR, there is no bias in direction. However, a tight
range is a perfect environment for a breakout, and I will provide
some commentary on that shortly. Considerable chop will likely
occur at the open, but once the stock makes a firm move in one
direction or the other, it should run.
Figure 2.3 – Diagram showing how the relationship between
your pivots will illustrate a neutral bias (chart illustrated by Thor
Young).
HOW TO CONFIRM DIRECTIONAL BIAS BASED ON WHERE THE
PRICE OPENS
Once you have established your initial directional bias for the
overall trend (bullish, bearish, or neutral), you have to sit back
and wait. The Camarilla pivot system is not designed for premarket trading. Although the pivots work during the premarket, there is no way to confirm your directional bias until
you firstly know the previous day’s closing price and where the
price opened on the day you are making your trade, and then,
secondly, the auctions66 have commenced and the price of the
stock has made a solid directional move.
One of the best things this system brings to you is control. In
many trading systems, you are left looking for a pattern. This to
me has always been like trying to find a picture in a cloud or
taking one of those fancy inkblot tests. Where is the pattern
going to set up? When do I enter the trade? How do I manage
the trade? Pivots will give you so much crucial information that
is missing in the pattern-seeking approach to trading. Being
forced to wait for the pivots to set up and properly mature is an
important edge. Too many traders get chopped67 in the opening
auction period and burn through the funds they have allocated
for that day of trading. In this section of the book, I will teach
you how to use Camarilla pivots to let you know when to get in
fast and when to wait it out.
BULLISH BREAKOUT
1. In the example set out in Figure 2.4, the left-hand side
represents the previous day’s closing price for a stock
(which was above its CPR and (ideally for a bullish
breakout) in a breakout area above R4).
2. On the right-hand side, which represents the pivots on the
day you are planning to make your trade, you will see that
the price appears to be ready to open above R4. If the price
is too far away from R4, don’t chase it. You want your long
entry to be as close to R4 as possible.
3. In addition, if the price is above R5, you are too extended
in price. You will likely get chopped or sell off back to
VWAP68 or R4 before the breakout.
Figure 2.4 – Diagram showing how your pivots for the previous
trading day and then the current trading day will illustrate the
possibility for a bullish breakout (chart illustrated by Thor
Young).
BULLISH FAILURE
1. In the example set out in Figure 2.5, the left-hand side
represents the previous day’s closing price for a stock
(which was above its CPR and in a breakout area above
R4).
2. On the right-hand side, which represents the pivots on the
day you are planning to make your trade, you will see that
during pre-market trading the price moved above R4 and
then failed. It appears the price is set to open under R4. If
it does, you will look to short at R3.
3. It is not unusual for even the most bullish of stocks to
experience a bit of a rest day or a pull back.69 After a
strong rally on an inside day,70 this strategy will be your
bread and butter for a return to value.
Figure 2.5 – Diagram showing how your pivots for the previous
trading day and then the current trading day will illustrate the
possibility for a bullish failure (chart illustrated by Thor Young).
BULLISH BOUNCE
1. In the example set out in Figure 2.6, the left-hand side
represents the previous day’s closing price for a stock
(which was within its CPR and in a value area above S3).
2. On the right-hand side, which represents the pivots on the
day you are planning to make your trade, you will see that
in pre-market trading the price moved back up into the
higher range of the pivots.
3. If the price opens under R4, you should wait for it to sell
and bounce off the gray value area at or below R2. You can
then go long at R4 if the VPA71 and Level 272 support a
bullish advance.
Figure 2.6 – Diagram showing how your pivots for the previous
trading day and then the current trading day will illustrate the
possibility for a bullish bounce (chart illustrated by Thor
Young).
BULLISH TRAP
1. In the example set out in Figure 2.7, the left-hand side
represents the previous day’s closing price for a stock
(which was within its CPR and in a value area above S3).
2. On the right-hand side, which represents the pivots on the
day you are planning to make your trade, you will see that
in pre-market trading the price moved back up into the
higher range of the pivots.
3. If the price opens under or over R4, you should wait for it
to sell and bounce off the gray value area at R2. You can
then short near R3 if the VPA and Level 273 support a
selloff74 that will trap the Bulls.
Figure 2.7 – Diagram showing how your pivots for the previous
trading day and then the current trading day will illustrate the
possibility for a bullish trap (chart illustrated by Thor Young).
BEARISH BREAKOUT
1. In the example set out in Figure 2.8, the left-hand side
represents the previous day’s closing price for a stock
(which was below its CPR and (ideally for a bearish
breakout) in a breakout area below S4).
2. On the right-hand side, which represents the pivots on the
day you are planning to make your trade, you will see that
the price appears to be ready to open below S4. If the price
is too far away from S4, don’t chase it. You want your
entry to be as close to S4 as possible.
3. In addition, if the price is below S5, you are too extended
in price. You will likely get chopped or squeezed75 back to
VWAP or S4.
Figure 2.8 – Diagram showing how your pivots for the previous
trading day and then the current trading day will illustrate the
possibility for a bearish breakout (chart illustrated by Thor
Young).
BEARISH COVER
1. In the example set out in Figure 2.9 on the following page,
the left-hand side represents the previous day’s closing
price for a stock (which was below its CPR and in a
breakout area below S4).
2. On the right-hand side, which represents the pivots on the
day you are planning to make your trade, you will see that
during pre-market trading the price went below S4 but
the selloff then stalled and the price accordingly looks to
open above S4. You should aim to go long at around S3.
3. It is not unusual for even the most bearish of stocks to
have a bit of a rest day or experience a squeeze. On an
inside day, after a strong sell off, this strategy will prove to
be very useful.
Figure 2.9 – Diagram showing how your pivots for the previous
trading day and then the current trading day will illustrate the
possibility for a bearish cover (chart illustrated by Thor Young).
BEARISH SELL OFF
1. In the next example set out in Figure 2.10, the left-hand
side represents the previous day’s closing price for a stock
(which was within its CPR and in a value area below R3).
2. On the right-hand side, which represents the pivots on the
day you are planning to make your trade, you will see that
during pre-market trading the price moved back down
into the lower range of the pivots.
3. If the price opens above S4, you should wait for it to
squeeze and fade76 off the gray value area at or above S2.
You can then short at S4 if the VPA and Level 2 support a
bearish advance.
Figure 2.10 – Diagram showing how your pivots for the previous
trading day and then the current trading day will illustrate the
possibility for a bearish sell off (chart illustrated by Thor Young).
BEARISH SQUEEZE
1. In the example set out in Figure 2.11, on the next page, the
left-hand side represents the previous day’s closing price
for a stock (which was within its CPR and in a value area
above S3).
2. On the right-hand side, which represents the pivots on the
day you are planning to make your trade, you will see that
during pre-market trading the price moved back down
into the lower range of the pivots.
3. If the price opens either under or over S4, you should wait
for it to squeeze and bounce off the gray value area at or
above S2. You can then go long at S3 if the VPA and Level 2
support a cover rally. 77
Figure 2.11 – Diagram showing how your pivots for the previous
trading day and then the current trading day will illustrate the
possibility for a bearish squeeze (chart illustrated by Thor
Young).
INSIDE DAY OR OUTSIDE DAY
One of the most important decisions to make is whether you
will have the potential to play outside the range or inside the
range. This is what is referred to as an “outside day” or an
“inside day”. While either way you will have an opportunity to
make money, you don’t want to, for example, be going long near
R4 when the stock you are trading has a wide central pivot
range78 (which represents an inside day). In this instance, the
reality is that you are already extended, and the probability lies
much greater to the downside at that point.
On an outside day, you will have an extremely narrow central
pivot range.79 Since the tight central pivot range will result in a
lot of chop, you must avoid the gray area entirely. You should
wait for the extreme price ranges to be rejected by the market
participants and then play either a breakout or an extreme
reversal at the R4 and S4 levels.
On an inside day, you will have a wide central pivot range.
This range will often result in a lot of chop near the extreme
price ranges. When you have a wide central pivot range, you
will play traverses from and to the R3 and S3 levels. Because this
range is wide, there will be plenty of space here for you to take
profit. Nevertheless, do be patient as these trades can take some
time to move since you are just simply ebbing up and down off
of previously established value zones.
I have provided a downloadable graphic that illustrates this at
www.bearbulltraders.com/pivotbook
OUTSIDE DAY
Whenever you have a narrow CPR, it will be accompanied by
choppy price action, but it will also provide excellent
opportunities for breakouts. In this setup, you will look to trade
outside the central pivot range. Do not overtrade80 though, be
patient, as it may take some time for the market participants to
settle on a firm direction for the price of the stock. As illustrated
in the following example, Figure 2.12, once a direction is picked.
You will make your play at the breakaway from value and there
will be no limit to how far a breakout will go if there is a
sufficiently solid catalyst.
Figure 2.12 – Diagram showing how your pivots can line up for a
breakout on an outside day (chart illustrated by Thor Young).
INSIDE DAY
A wide CPR means you are more apt to be bound to a range or
stuck inside of it. As illustrated in Figure 2.13 on the next page,
in this setup, your trade can go long, and as low in the CPR as
possible, or it can go short, and as high in the CPR as possible.
With the wide CPR, you are not expecting a breakout, so you
likely will not catch any big trends, but there is still significant
opportunity for profit by playing inside the CPR as you react to
value.
Figure 2.13 – Diagram showing how your pivots can line up for a
long or short trade on an inside day (chart illustrated by Thor
Young).
CHAPTER 3: PIVOT STRATEGIES
In the following chapter, I am going to outline each of the
individual pivot strategies in precise detail. Each strategy has a
time when it shines the best. I’m not just tossing the same
pattern at the market every time expecting it to work in every
scenario. I am playing value and range. Inside day or outside
day. Depending on where the price opens, and what type of
range is established. I am expecting the impact on the LTF and
STF participants to vary in dramatically different ways. That is
why we have so many plays in the system. Bull, Bear, and
Kangaroo “choppy” price action. You never know what kind
you’ll get from day to day. So, we need to be prepared for it all.
In the beginning, I recommend focusing on one strategy at a
time. There is a fair amount of nuance to these and there’s no
need to overwhelm yourself. In time, once mastered, you will be
prepared to trade any reasonable price action.
Let’s begin with one of my favorite strategies, the traverse. It
performs amazingly on days of choppy price action. Which had
been very handy in the indecisive markets of 2022 when this
publication was written.
R3 TO S3 TRAVERSE (INSIDE DAY) BEARISH SELL
Since this strategy uses R3 as your entry location, you know
right off the bat that you will be shorting (you will recall from
Chapter 1 that the red pivots, such as R3, are areas for shorting).
An R3 to S3 traverse is a bearish play that takes advantage of
attempts by the market participants to move the price away
from the pivot area R3. As a stock fails to break away, you can
play traverses between the 3rd levels. Since your Camarilla pivot
points will be wide, there should be plenty of space here to
manage risk as you ebb up and down around value. This is,
hands down, the best pivot strategy for choppy markets.
The yellow dotted area in Figure 3.1 highlights the kill zone
for this strategy. A kill zone is an area inside your pivot range
where the stock or ETF will likely get caught up in choppy price
action. You should never trade inside a kill zone. For this
strategy, the instrument you are trading can go over R3, under
R3, or precisely hit it and turn. All are acceptable, however, if its
price goes above R4, a breakout may be triggered. You want to
ensure you are shorting in the correct range. With this strategy,
no trades should ever be taken in the kill zone area between R3
and R4.
The main requirements for this setup are:
1. Bearish pivot relationship to the previous day.
2. Wide central pivot range, signaling an inside day setup.
3. Price opening below R3.
4. Stock has a bearish Level 2.
Figure 3.1 – Diagram showing how your pivots can present for
an R3 to S3 traverse (Inside Day) (chart illustrated by Thor
Young).
S3 TO R3 TRAVERSE (INSIDE DAY) BULLISH SQUEEZE
On an inside day, you will have a wide central pivot
relationship. Because of this, you are going to be looking to
traverse the inside range. (As an aside, it is called an inside day
because you are trading inside of the range.) Remember, with
pivots you are looking for an extreme and so trading at value
will not do. You need the stock you are monitoring to sell down
to an area where it is a value to buy and then play the move back
into and hopefully through the central pivot range. In most
instances, a stock in this situation will be opening somewhere
in the value range between S2 and R2. Your task is to allow the
stock to open and then, depending on its opening movement,
perhaps take a trade. Again, patience is key. If it is trading above
S3, then you will need a test of S3 to go long. If it opens below
S3, do not make any trade until the price gets back above S3. In
addition, since S3 to S4 is the kill zone for this strategy, lots of
chop can be expected. With practice, you will find that this
specific inside day traverse, as illustrated in Figure 3.2, is one of
the best choppy market strategies you can utilize.
The main requirements for this setup are:
1. Bullish pivot relationship to the previous day.
2. Wide central pivot range, signaling an inside day setup.
3. Price opening above S3.
4. Stock has a bullish Level 2
Figure 3.2 – Diagram showing how your pivots can present for
an S3 to R3 traverse (inside day) (chart illustrated by Thor
Young).
R4 EXTREME REVERSAL (INSIDE DAY) STRONG SELL
This reversal setup will likely become one of your most used
plays during earnings seasons81 and when you locate stocks
with a strong catalyst. Think of this as the “sell the news”
strategy. For this play to work, you will have a bullish overall
trend and most often a gap up82 in the price of the stock from
the previous day’s trading (including after-hours trading).83 The
key here is the price extension from value. There will be many
participants wanting to sell for profit and others who will be
excited to get in on a trade but need a better price. This
accordingly becomes the perfect move for a sell off.
As seen in following Figure 3.3, with this strategy, there is a
strong kill zone above R4. Remember, R4 is a breakout area so
you cannot take this trade above R4. If the stock you are
tracking opens above R4, then you will execute the R4 breakout
(outside day) strong buy strategy set forth next. For this specific
strategy, you need the price of the stock to open under R4 and
then stall. You can go over and under as in a head and shoulders
style setup,84 but the trade itself must be taken under R4. As
well, the ladder85 must be obviously bearish before taking the
trade short.
The main requirements for this setup are:
1. Bullish or neutral pivot relationship to the previous day.
2. Wide central pivot range, signaling an inside day setup.
3. Price opening under R4.
4. Do not short until Level 2 is bearish.
Figure 3.3 – Diagram showing how your pivots can present for
an R4 extreme reversal (inside day) strong sell (chart
illustrated by Thor Young).
R4 BREAKOUT (OUTSIDE DAY) STRONG BUY
This is personally my favorite strategy. In contrast to most pivot
strategies, which focus on locations where the pivots reverse,
breakout strategies are based on the continuation of a trend.
When utilizing this strategy, always keep in mind that volume
is key. You need a strong open above R4 and a weak pull back to
test R4. Below R4 is a very aggressive kill zone. Since going
below R3 will be apt to result in a sell down to value, this area
will chop a lot. My recommendation is to only initiate a trade
above R4. As this is a breakout strategy, there is no topside limit
here. Do pay attention to your Level 2 for large numbers of sell
orders at the same price (the ask column). This will be an
excellent guide for where to place partial orders.86 Once the
price is outside of R6, watch for stopping volume87 to signal
value and the end of the move.
The main requirements for this setup are:
1. Bullish or neutral pivot relationship.
2. Narrow central pivot range, signaling an outside day
setup.
3. Price opens with strong volume above R4.
4. Stock has a bullish Level 2, showing orders up to and out
of the pivot range.
Figure 3.4 – Diagram showing how your pivots can present for
an R4 breakout (outside day) strong buy strategy (chart
illustrated by Thor Young).
S4 EXTREME REVERSAL (INSIDE DAY) BIG SQUEEZE
This setup is perfect for earnings seasons and when you locate
stocks with a weak catalyst. During these times, you will see
that the prices of stocks will often strongly overreact to the
news being made public. With advances in technology, and
especially with the development of news algorithms,
automated computers will read news reports and make very
quick decisions on behalf of the big players on Wall Street. The
end result is that stocks will at times gap down significantly.
These gap downs will frequently provide an awesome
opportunity for previously engaged short sellers who are eager
to take profit at the lowest price possible. Nevertheless, as the
Bears take profit, the Bulls will no doubt recognize what is
unfolding and come in strong, leading to the initiation of a
squeeze. As the Bears then start to panic to get their profit, the
Bulls will be able to take control of the price and cause a large
squeeze back up to areas of prior value.
In this situation, there is a strong kill zone under S4.
Remember, S4 is a breakout area, so you cannot use this
strategy to take a trade below S4. If the price claims S3 and the
ladder is bullish, you may be able to add to your position88 for a
much bigger move but be careful to not overplay it. As shown in
Figure 3.5.
The main requirements for this setup are:
1. Bearish or neutral pivot relationship to the previous day.
2. Wide central pivot range, signaling the likelihood of an
inside day setup.
3. Price opens above S4.
4. Stock has a bullish Level 2.
Figure 3.5 – Diagram showing how your pivots can present for
an S4 reversal (Inside Day) (chart illustrated by Thor Young).
S4 BREAKOUT (OUTSIDE DAY) STRONG SELL
This is the second of the two trend continuation strategies that
I will be discussing in this book. In the VPA section, I will review
the different types of volume setups that you should be
watching for and it will then become more obvious why there
are so few pivot strategies that are based on the continuation of
a trend (as I mentioned not too many pages ago, most pivot
strategies focus on locations where the pivots reverse).
This outside day strategy will very often be used with stocks
that have experienced some sort of catalyst that has led traders
to put their shares in the company up for sale. You will be
looking for the market participants to reject the stock’s value
and then begin the process of establishing a new value. To
utilize this strategy, the stock’s price must open under S4, and
there will also often be a squeeze at the open.
You should only trade this strategy when the price is under S4
and you must be very careful to ensure you don’t get caught in
the kill zone. If the price ends up above S4, there is a good
chance it is going to start chopping and may have already found
new value. If you catch a breakdown, there is no limit to the
downside potential. You should use your Level 2 to find profit
targets and watch the volume for large cover orders89 getting in
the way. Otherwise, sit back and enjoy the ride down. These
moves can be by far the biggest and most profitable.
The main requirements for this setup are:
1. Bearish or neutral pivot relationship to the previous day.
2. Narrow central pivot range, signaling an outside day
setup.
3. Price opens under S4.
4. Stock has a bearish Level 2.
Figure 3.6 – Diagram showing how your pivots can present for
an S4 breakout (outside day) strong sell strategy (chart
illustrated by Thor Young).
R6 REVERSAL (VERSATILE)
This strategy is one of only two strategies that will work in
either a narrow or wide central pivot range. To utilize it, you
must look for a climax or stall after the price breaks out from
R4. You must also be very patient with this particular strategy.
You’ve likely heard the adage, “Never short a strong stock.” Well,
it’s a pretty good saying, and it should be taken seriously. The
key here is to pay attention to your Level 2. Later in the book, I
will discuss how to tell when a stock has topped out in price.
VPA and your tape are vital in every strategy, but they are
exceptionally critical when trading in the 6th levels.
Since you are trading at an extreme range, you will need the
price to open anywhere below R6. The kill zone for this play is
anything above R6. On breakout stocks, this strategy works
great for the return back to R4. At times it will even cross the
entire pivot range.
Given all that this reversal setup, illustrated in the following
Figure 3.7, works with any pivot relationship (bullish, bearish,
or neutral) and either central pivot range (narrow or wide).
The main requirements for this setup are:
1. Price opens under R6.
2. Stock has a bearish Level 2.
Figure 3.7 – Diagram showing how your pivots can present for
an R6 reversal (versatile) strategy (chart illustrated by Thor
Young).
S6 REVERSAL (VERSATILE)
This strategy is the other strategy that works in either a narrow
or wide central pivot range. The S6 reversal is a particularly
powerful reversal with a reward that can be literally huge.
When weak stocks sell off, they often sell into very sizable
liquidity areas,90 with either a large number of short sellers
waiting to cover91 or a large number of Bulls waiting to attack.
Reversals from the S6 range can initiate massive short cover
rallies92 as the Bears panic and buy and the Bulls rush in to take
advantage of the squeeze that the short sellers have found
themselves in.
In my commentary on the previous strategy, I affirmed the
rule of not shorting a strong stock. That goes double for stocks
that are selling off. When a stock is selling with a strong
catalyst, there are days when reversals will not happen. You
need to pay attention to your VPA and tape more than anything
else in these circumstances as the timing on this strategy is
paramount.
Since you are trading at an extreme range, you will need the
price to open anywhere above S6. The kill zone for this play is
anything below S6.
Given all that, this reversal setup, illustrated in Figure 3.8,
works with any pivot relationship (bullish, bearish, or neutral)
and either central pivot range (narrow or wide).
The main requirements are:
1. Price opens above S6.
2. Stock has a bullish Level 2.
Figure 3.8 – Diagram showing how your pivots can present for
an S6 reversal (versatile) strategy (chart illustrated by Thor
Young).
CLASSIC PIVOT LEVELS TO USE WITH MAJOR BREAKOUTS
On occasion, the price of a stock will breakout in a very
significant way or will experience a large gap (the latter often
from where the price closed one trading day and then opened
the next). The Camarilla pivots only calculate out to R6 and S6,
and so if you are ever outside those levels, it can be difficult to
know what to do.
While this book is focused on Camarilla pivots, classic pivots
are the type that come with virtually every trading platflorm
and are also frequently used in trading algorithms. They are
known by various names including floor levels, floor pivots, or
floor trader pivots. Regardless of what they are called, they are
the support and resistance levels that floor traders have used in
the pits of the exchanges for many years.
While you will not use the majority of the floor pivots when
breakouts occur, floors R3/R4 and S3/S4 can be very useful.
Floors S4 and R4 should be considered a maximum extension in
price. Do not take any new trades in these ranges because it’s
not common to encounter such large reversals, however, if you
are still holding a position, floors S4 and R4 are where you
would be looking to go all out.93 In the rarest of circumstances,
the price of a stock will continue to advance past the S4 and R4
levels. If that occurs, set a trailing stop order94 or close your
position when its price loses the major trending average.95
FLOOR PIVOT CALCULATIONS
As with the Camarilla pivot formulas set out in Chapter 1, to
start, you need the previous trading day’s high, low, open, and
close prices for the stock in question.
High: Prior Period’s High Price
Low: Prior Period’s Low Price
Close: Prior Period’s Close Price
Pivot: Pivot or Central Pivot (CP)
R4 = H - (3*(Low - Pivot))
R3 = H - (2*(Low - Pivot))
R2 = Pivot + (High - Low)
R1 = (2 x Pivot) - Low
P = (High + Low + Close)/3
S1 = (2 x Pivot) - High
S2 = Pivot - (High + Low)
S3 = Low - (2*(High - Pivot))
S4 = Low - (3*(High - Pivot))
These are the same calculations used by my preferred Trading
Platform DAS Trader Pro.
SETTINGS FOR FLOOR PIVOTS IN DAS
You will recall from earlier that the platform I use to trade with
is DAS Trader Pro. As shown in Figure 3.9 below, to set up the
floor pivots in DAS Trader Pro, the first step is to right click on
your chart and select Study Config.
Figure 3.9 – Screenshot of how to select Study Config in DAS
Trader Pro (screenshot courtesy of DasTrader.com).
As you will see in Figure 3.10, you next need to add the
PivotPoint study to your chart. Before configuring, go ahead
and click on the ConfigEx button and uncheck all the values in
the General Config box. This will help the screen fit. If you leave
these the chart will become unreadable. I like adding a second
study and leaving it below the prior one for easier
configuration.
Figure 3.10 – Screenshot of how to add a Pivot Point study to
your chart (screenshot courtesy of DasTrader.com).
The screenshot in Figure 3.11 shows you how I configure my
floor pivots. You will notice that I have them color coded in a
very specific way. I have unchecked all the pivots except S3, S4,
R3, and R4. The 1st and 2nd levels are left out because they would
cross our Camarilla Pivots. At the time of this publication DAS
does not provide the 5th and 6th levels. Leave them unchecked as
well. If you execute any trades in these areas, you should ensure
they are based on the previous day’s values at the stock’s
support and resistance levels. Since you should never use preor post-market calculations with floor pivots, do ensure that
particular box in DAS Trader Pro is checked.
If you are reading the paper edition of this book rather than
the e-book edition, the colors will of course not be displayed in
your version. For Figure 3.11, the boxes to the right of S3 and R3
are colored pink. The boxes to the right of S4 and R4 are colored
purple. The box to the right of PivotPointLine(P) is colored
yellow.
The Central Pivot or PivotPointline(P) is normally near the
center of the previous days price range. This makes it an ideal
target for moves from the edges of the range. NYSE Floor traders
in particular really like this one.
Figure 3.11 – Screenshot of how I configure and color code my
floor points in DAS Trader Pro (screenshot courtesy of
DasTrader.com).
PRE- OR POST-MARKET DATA, YES OR NO?
I’m now going to cover a very specific nuance that you are not
going to read about anywhere else. While you never use pre- or
post-market data with floor pivots, when programming
algorithms and other systems with Camarilla pivots, you may
very well use this data in order to calculate the Camarilla pivot
points. This adjustment is needed because certain tickers96
trade better with the data and others better without. The
determination is based on the amount of movement the stock
has made after hours. Without that data, if the ticker has
gapped or experienced major post- or pre-market movement,
the price of the stock will be outside the Camarilla pivot points.
The data will accordingly need to be added. If there was no
significant post- or pre-market movement, to increase the
accuracy of your calculations, you should not utilize any pre- or
post-market data.
In order to turn off the pre- and post-market calculation
option in DAS Trader Pro, you need to check the toggle box
highlighted in Figure 1.4 (back in Chapter 1). Figure 3.12 is an
example of what you are looking for to help determine which
configuration to choose.
Downloadable
Graphic
www.bearbulltraders.com/pivotbook
Available
at
Figure 3.12 – This table shows the 2-day relationship between
the previous day and the current premarket price range97
(illustrated by Thor Young)
PRE- AND POST-MARKET DATA, HOW ABOUT BOTH!
In the previous figure, I showed the scenarios that isolate which
system is most likely to work from day to day. However, I have
adapted the system to utilize both at the same time. The reason
why at first may not seem otherwise obvious but in hindsight I
often laugh at how long it took me to consider it. It is one of the
keys to unlocking the system. And adds an additional level to
management.
The reason I use both is because the Algos that drive the
market don’t all use the same configuration. Some use it and
some don’t. So, depending on which algo is driving the majority
share we can’t truly know which one will work. What I have
done is overlayed the two onto the same chart and started using
them as ranges. The tighter the two configurations the more
accurate I expect the range. But the breach of both is a clear
signal that the thesis I have in place is clearly wrong. Which is
another major benefit. Many systems fail because they don’t
make it clear when you’re wrong. You must know this so it will
be clear, and you can preserve your capital for a better
opportunity in the near future.
Figure 3.13 on the next page demonstrates this with a real
trade I took on $NFLX weeks prior to the publication of this
book.
Figure 3.13 – Screenshot showing the range created by the
overlayed R4-R4 (screenshot courtesy of DasTrader.com).
This concludes the first section of my book: the “Where”.
The “Where” can really be anything. Since I use a pivot-based
system, and that is what this book is focused on, I wanted to
ensure I introduce you to pivots right in the first few chapters.
From this point on, I am going to be discussing what
separates gamblers from traders. Many trading books only
center on the “Where”, but to have a complete trading system,
you need it all. You need to know not just “Where” to take a
trade but also “When” to take a trade and, of course, “How” to
manage your trade once you are in it. Trading is much more
than a few simple drawings. To precisely time your entries and
execute successful trades, you must comprehend how exactly
the market works.
In the next part of the book, I am moving on to the “When”. I
will be explaining a large number of topics in this section,
including volume and price analysis, the market auction theory,
price-based analysis (what some call value-based analysis), and
tape reading. Day traders need to keep the time they are in a
trade as brief as possible. It is essential to be able to get an
excellent risk versus reward in a short amount of time. To do
that, you need to understand the principles that drive not just
the stock market but every other type of auction too. In the
chapter that follows, I will break down the theory behind
market participation and what guides its participants to make
decisions.
26 The New York Stock Exchange, for example, is open for trading
between 9:30am and 4pm ET, Monday through Friday.
27 Volume refers to the number of shares in a company being traded
during a set time frame.
28 Breakout means when the price of a stock breaks out and moves
beyond what is its normal support or resistance level. Resistance is the
level that the price of a specific stock usually does not go higher than
and support is the level that the price usually does not go lower than.
Stocks often bounce and change the direction of their price when they
reach a support or resistance level. When a stock breaks out, it means
that it did not bounce and change direction. It instead broke through the
support or resistance level.
29 Each tick represents a single transaction (purchase or sale) of shares
in a stock.
30 An auction period occurs whenever the stock is moving without an
established value. Often a panic period, this occurs often in the first few
minutes but can occur at any time. A news catalyst like Federal Reserve
numbers as an example can instantly send the market into auction.
31 A conditionally-based trade is a trade that follows and If-Then-How
kind of methodology. In order to initiate a trade all variables must be
present.
32 The key to successful day trading is finding trading setups that have
excellent risk versus reward ratios (also called RVR). These are the
trading opportunities with a low-risk entry and a high reward potential.
For example, a 3:1 ratio means you will risk $100 but have the potential to
earn $300. A 2:1 ratio is the minimum I will ever trade.
33 VPOC, or Volume Point of Control, is a powerful tool that lets you drill
down to the specific price that is experiencing the most transactions. This
gives you the best representation of where the value for a stock is being
perceived by the overall market within your chart’s selected time frame.
34 A rally occurs when, over a somewhat small time frame, the stock
market as a whole increases in price.
35 Retail traders are people like you and I who trade as individuals and
do not work for a firm or manage the money of others.
36 A bid is the price traders are willing to pay to purchase a stock at a
particular time. It’s always lower than the ask price.
37 An ask is the price sellers are asking in order to sell their stock. It’s
always higher than the bid price.
38 The market auction cycle is a cycle of market participation that
moves through 4 phases: Value; Balance; Excess; and Imbalance.
39 Balance refers to a state within the market auction cycle where value
has been accepted by the market.
40 Consolidation means that the price of the stock is not making any
sharp moves up or down.
41 Trend very simply means the direction the stock is going. It could be
trending up in price. It could be trending down in price. It can continue its
trend or it can reverse its trend. At times, the majority of the market can
be trending in a specific direction.
42 As I mentioned, a chart tracks the price action (and more!) of a stock
in various time frames. For example, a 1-minute chart tracks the price of
a stock in 1-minute intervals. A 15-minute chart tracks the price of a stock
in 15-minute intervals. A daily chart tracks the price of a stock on a daily
basis.
43 The term “black box” refers to the top-secret hidden computer
programs, formulas, and systems that large Wall Street firms use to
manipulate the stock market.
44 A stock that is trading in a sideways manner is one that is trading
within a general price range. Its price is not trending up and it is not
trending down. At times, the majority of the market can be trading in a
sideways fashion.
45 High is the highest price achieved during the prior trading session.
46 Low is the lowest price achieved during the prior trading session.
47 Open is the price of the first transaction of the day after the market
opens trading.
48 Close is the price of the final transaction of the day prior to the market
closing.
49 Your trading platform is the trading software you use.
50 Kill Zones are price ranges that encounter very choppy price action
due to their close proximity to value.
51 The pivot point line is better known as the Central Pivot
52 The term ‘Bear’ in the stock market refers to a market participant
playing to the short side of the market anticipating a downward
movement in price.
53 The term ‘Bull’ in the stock market refers to a market participant
playing to the long side of the market anticipating an upward movement
in price.
54 Breakdown means the loss of the current range
55 The practice of short selling is where a trader sells a stock or ETF that
belongs to their broker and buys it back at a lower price keeping the
difference in price.
56 A high value area is a price level where considerable buying of shares
is taking place (i.e., there is a high volume of shares being traded).
57 At the risk of being repetitive, you will recall that resistance is the level
that the price of a particular stock usually does not go higher than and
support is the level that the price usually does not go lower than. A stock
will often bounce and change the direction of its price when it reaches a
support or resistance level. This is what I mean by testing its prior value
ranges. The price may also, of course, break through its support or
resistance level and continue either increasing or decreasing in value.
58 A long position is one where you buy stock in the expectation that it
will increase in price. To be “long 100 shares AAPL”, for example, is to have
bought 100 shares of Apple Inc. in anticipation of their price increasing.
59 A stock in play is a stock that offers excellent risk versus reward
potential. It will move higher or lower in price during the course of the
trading day and it will move in a way that is predictable. Stocks with a
catalyst (some positive or negative news associated with them such as
an FDA (the United States Food and Drug Administration) approval or
disapproval, a restructuring, a merger, an acquisition, or even just a lot of
buzz on social media) are often stocks in play.
60 When a stock sells off, it means that a large number of its shares are
being sold in a smaller time frame. The end result is that the price of that
stock will drop.
61 A location that can be considered a turning point after which you
should expect a dramatic change with either positive or negative results.
62 By retest and hold I mean that the price on the day you are preparing
to make your trade did not break through the previous day’s support and
stayed in the previous day’s breakout range.
63 You will see an illustration of this in Figure 2.3. Basically, for pivots to be
closed in, both the high and low of the previous day’s central pivot range
need to be higher and lower than the central pivot range for the day you
are planning to execute your trade.
64 The best way to think of compression is to visualize a V-shaped slice
of pie lying sideways on your dessert plate, with the wide end containing
the crust on your left and the narrow end of the slice of pie on your right
(i.e., |>). At first, there will be a significant difference between the highs
and lows being hit by each candle on your chart. As time passes, the
difference between the highs and lows will gradually narrow. Figure 6.7 is
a good example.
65 An outside day will be described later in this chapter. In general terms,
an outside day is a day where the price of the stock moves within a
smaller range than it did the previous trading day. The high price it hits
will be lower than the previous trading day’s high and, similarly, the low
price it hits will be higher than the previous trading day’s low.
66 Please don’t be concerned if you do not understand what I mean by
the term “auctions” (and “early auction period” in the next paragraph). I
will thoroughly explain the subject in Chapter 4. For now, just know that I
view the stock market as one giant auction with its sole purpose being to
facilitate trade between buyers and sellers. When these participants
come to an agreement on price, that is when I believe value is found.
67 To get chopped means getting caught up in non-directional price
movement.
68 VWAP, or volume weighted average price, is the most important
technical indicator for day traders. Your trading platform should have
VWAP built right into it. VWAP takes into account the volume of the shares
being traded at any given price. While other indicators are calculated
based only on the price of the stock on the chart, VWAP considers the
number of shares in the stock being traded at each price. VWAP lets you
know if the buyers or the sellers are in control of the price action.
69 A pull back occurs when the price of a stock temporarily stops its
movement and either remains at a certain price or retraces a bit in price
on low volume.
70 An inside day will be described in more detail later in this chapter. In
general terms, an inside day is a day with a wide CPR in which the stock
will likely trade inside and across the range.
71 The VPA in this situation should fit the profile of an Advance. This is
covered more in detail in Chapter 5.
72 A bullish Level 2 is one where there are considerably more asks
available away from the price to the top while the larger orders on the
bid remain close to the current price. This is covered in more detail in
Chapter 7.
73 A bearish Level 2 is one where there are considerably more bids
available away from the price to the bottom while the larger orders on
the ask remain close to the current price. This is covered more in detail in
Chapter 7.
74 A sell off, also known as a waterfall or slam is when the price suddenly
drops as the market realizes it has reached the likely highest price of the
day.
75 A squeeze occurs when short sellers begin to cover aggressively
which causes a sudden upward price movement. Because the squeeze is
caused by the short sellers there is most often low volume, and it doesn’t
last long.
76 In the stock market a fade refers to a slow trending drop in price.
77 A cover rally occurs as the result of a prolonged short squeeze. Most
squeezes are short however, if the Bull recognize the Bears losing ground,
they will begin buying into the strength which will intensify the squeeze
and start a rally.
78 A wide central pivot range means that the price of the stock will move
within a narrower range than it did the previous trading day. The high
price it hits will be not as high as the previous trading day’s high and,
similarly, the low price it hits will be not as low as the previous trading
day’s low.
79 A narrow central pivot range means that the price of the stock will
move within a greater range than it did the previous trading day. The
high price it hits will be higher than the previous trading day’s high and,
similarly, the low price it hits will be lower than the previous trading day’s
low.
80 As my friend and colleague, Dr. Andrew Aziz has written, “There are
plenty of traders out there who are making the error of overtrading.
Overtrading can mean trading twenty, thirty, forty, or even sixty times a
day. You’ll be commissioning your broker to do each and every one of
those trades, so you are going to lose both money and commissions.
Many brokers charge $4.95 for each trade, so for forty trades, you will end
up paying $200 per day to your broker. That is a lot. If you overtrade, your
broker will become richer, and you will become, well, broker!”
81 The companies you are trading the shares of usually publicly report
their earnings (or lack thereof!) every three months. These reports are
often all bunched together, and a large number of companies will make
their reports public in the same one-week time frame. Earnings reports
can lead to volatility in the trading of a company’s shares.
82 A gap up or down occurs when the price of a stock has moved
significantly up or down, often from where it closed one trading day and
then opened the next.
83 After-hours trading is the trading that takes place when the stock
markets are closed. The New York Stock Exchange, for example, is open
for trading between 9:30am and 4pm ET, Monday through Friday.
84 As my friend and Bear Bull Traders colleague Ardi Aaziznia has written,
“The Head and Shoulders Pattern is a bearish distribution pattern which
marks the end of an uptrend … The Head and Shoulders Pattern is
composed of three hills, with the right and left hills (the shoulders) being
approximately the same size, and the middle hill (the head) being the
largest of the three.”
85 The ladder is an Level 2 term to describe evenly placed orders at
various price levels creating imbalance in a particular direction.
86 Later on in this book, I will explain in more detail what partial orders
are. In basic terms, a partial is when your trade has multiple profit targets
rather than just one. Instead of planning to exit a trade at one price level
and take 100% of the profit, you may take 50% of it at one price level and
then the remaining 50% at the other price level. You could also structure
your trade so that you are taking, for instance, 50% of the profit at one
price level, 30% at a second level, and 20% at a final level. Partial orders
are a very good method of ensuring you pocket some profit should a
trade go south when you are in the midst of it.
87 As the price of a stock moves up or down into a high value area, the
Bears or the bulls will start to take their profits. At the same time, their
counterparts will begin anticipating reversals and start taking contrary
positions. This causes massive spikes in volume that will result in the
Market Makers having an imbalance in their inventory. This is where value
is being asserted and it is always the most likely spot for a reversal to set
up.
88 To add to your position means to purchase more shares in a stock as
your trade proceeds. It is important though to understand that you only
want to be adding shares when a trade is unfolding successfully, you
never want to add shares to a losing trade.
89 As Dr. Andrew Aziz, the founder of my trading community, has written,
a market order means, “Buy me at any price! Now!” or “Sell me at any
price! Now!” Due to how volatile the market can be, your broker may not
get you the price you were hoping for when you sent in your market
order. Every second can count. A limit order on the other hand means,
“Buy me at this price only! Not higher!” or “Sell me at this price only! Not
lower!” You have some protection if the price of the stock suddenly
changes between the time you send in your order and the time your
broker completes it. A cover order is when you send either a market order
or a limit order to your broker along with a stop loss order, which is an
order that instructs your broker to buy or sell when a stock hits a specific
price. A cover order can be considered extra protection.
90 Liquidity area or liquidity zone refers to an area where a large amount
of cash is available to purchase shares.
91 As previously explained, short selling occurs when you borrow shares
from your broker and sell them, and then expect the price to go even
lower so you can buy them back at the lower price, return the shares to
your broker, and keep the profit for yourself. To cover your shorts refers to
the process of wrapping up your short trade. Since your broker wants the
shares back, not your money, you will either buy those shares back at a
lower price and profit or buy them back at a higher price and suffer a
loss.
92 Short sellers want prices to drop so they can buy back the shares they
borrowed at a low price and make a profit on their trade. If a stock has a
large number of short sellers, as soon as the price of the stock begins to
rise, the short sellers will panic and start buying as quickly as they can to
minimize their losses. This frenzy of buying causes the price of the stock
to rise at an ever quicker pace. This event is referred to as a short cover
rally.
93 Going all out means to cover your shorts or sell your entire remaining
long position.
94 When you enter a trade, you must always have a target price in mind.
For example, for a long trade, if the stock is priced at $100/share when
you enter the trade, based on your research and investigations, you
might have a target price of $110/share for where you will sell your
position (i.e., your sell order). If the stock reaches $110/share, you will then
gross a profit of $10/share. You likewise should also place a stop order
(also known as a stop loss order) for where you will abandon your trade.
For example, if the stock drops to $90/share, you will abandon your trade
with a loss of $10/share (from your purchase price of $100/share). A
trailing stop order will move with your trade based on the instructions
you provide. To keep it simple, let’s pretend you set your trailing stop
order at 10%. In this example, if the price of the stock reaches $110/share
(a 10% increase on your $100/share purchase price), your trailing stop
order will increase to $99/share (10% below $110/share). If the price of the
stock then reaches $120/share, your trailing stop order will increase to
$108/share (10% below $120/share). If the price of the stock then suddenly
begins to drop, your trade will be abandoned when the price hits
$108/share. A trailing stop order helps protect you from suffering a bad
loss. (The definition of “stop/stop loss” will provide you with some general
information on how to calculate your stop loss.)
95 I will explain how to discern the trending average later in the book.
Essentially, you must analyze your chart as the stock is trending. You will
notice that one of the moving averages will be in play or interacting with
the price of the stock more strongly. You can tell which moving average
is in play because its price is honored every time it is tested in a pull
back. If you are not familiar with the term, a moving average (MA) is a
widely used indicator in trading that smooths the price of a stock by
averaging its past prices. The two basic and most frequently used MAs
are the Simple Moving Average (SMA), which is calculated by adding up
the closing price of a stock for a number of time periods (e.g., 1-minute,
5-minute, or daily charts) and then dividing that figure by the actual
number of time periods, and the Exponential Moving Average (EMA),
where more weight is given to the most currently available data. It
accordingly reflects the latest fluctuations in the price of a stock more
than the other MAs do. The most common applications of MAs are to
identify the trend direction and to determine support and resistance
levels. Your charting software will have most of the types of MAs already
built into it.
96 A ticker or stock ticker symbol is an abbreviation used to identify
publicly traded shares of a particular stock or ETF. The ticker is unique
and is assigned at the time of the stock or ETF’s listing.
97 The premarket price range is the range established between
premarket high and premarket low on the current day of trading.
PART II: The “When”
CHAPTER 4: MARKET AUCTION
THEORY
To appreciate the movement of stock prices, you must first
understand why and how they move. The market has a
psychology to it that is extremely organic and emotional. Never
forget that the market is made up of living, breathing, human
participants. Every single buy or sell order is made by someone.
Even the most complex trading algorithms out there have been
programmed by people who, without fail, impart their own
emotional bias into the programs they have developed.
As you move forward in this section, I will be discussing the
theory behind how, why, and when the market moves. This is
popularly known as the “market auction theory”.
My goal by the end of this section is to have changed the way
you look at the market entirely. I no longer want you to see bids
and asks. I instead want you to see the participants: the buyers
and the sellers, as well as the Market Makers working away in
the background. I also want you to see all of these participants
as competitors, fighting an epic battle, where the winners get
rich, and the losers go broke.
The information contained in these pages applies to ANY
market where supply and demand is in use. In this instance, it is
being applied to day trading in the US stock market, but it could
as easily be applied to a hog auction or the real estate market.
After all, that’s how I came to this view of the market in the first
place.
MARKET AUCTION CYCLE
As I mentioned before, the market is really just a giant auction.
Although people often attempt to complicate various aspects of
the market, its sole purpose is to facilitate trade between buyers
and sellers. And then, once the buyers and sellers have agreed
on a price, we find the value, plain and simple.
The process of the buyers and sellers agreeing on a price is
comparable to an auction and in the context of the stock
market, a price auction. An open auction is what the opening 15
minutes or so of trading on a stock is specifically referred to as,
and it is largely a period of imbalance.98 Your job each morning
is to be patient and hold off launching into your trading day
until the participants have established or rejected value.
This search for value, whether at the opening bell or later in
the trading day, is where the phases of the market auction
cycle99 commence. To help explain the market auction cycle, I
have created the diagram in Figure 4.1. How it functions may
remind you of a clock face. You will see that the cycle is broken
into four quadrants, with each quadrant representing a phase in
the movement of a stock’s price.
Each phase leads to the next and continues around the
diagram in a clockwise motion, with the cycle itself being
repeated, over and over again, throughout each trading day.
When you are able to identify your position in the cycle, you
can begin to predict likely changes within that cycle.
Figure 4.1 – Diagram of the market auction cycle (illustrated by
Thor Young).
MARKET AUCTION CYCLE DIAGRAM
As previously noted, the market auction cycle starts at value
and moves clockwise. You will recall from Chapter 1 that it is
the big players with their large orders and volume that assert
value. When the market accepts this value, the price of the
stock moves into balance. As the market prepares to reject
balance, excess100 begins to build in one direction or the other.
The market then rejects value in the direction of the excess. The
market will then remain in a state of imbalance until the entry
of another large order which asserts value once again, sending
the price back into balance.
Before I discuss the finer details of the market auction theory,
let’s first define the various roles people play in the market. Very
simply, the market is motivated by buyers and sellers. Their
stops and profit taking are what move the market. In the market
auction theory, they are considered participants.
MARKET AUCTION PARTICIPANTS
These auction participants can be divided into four major
groups:
1. Initiative participants101
2. Responsive participants102
3. Larger time frame (LTF) participants103
4. Smaller time frame (STF) participants104
Each of these four groups then need to be split again into the
buyers and the sellers. I cannot stress enough, you MUST
understand these roles in order to successfully identify what is
happening as a stock attempts to auction higher or lower. For
instance, think of how many times you have seen a stock start
to move higher than expected. I sense you more often than not
wonder who is buying the stock when it’s extended so far.
In the market, everyone has their role to play. The participant
who is buying higher is typically a short seller stopping out.105
As the price breaks higher, any trader thinking that a reversal
was underway will suddenly learn that they are mistaken and
will be (perhaps desperately) stopping out. All of that weakness
will concurrently draw in more and more bulls looking for a
larger move up.
Some participants are significantly stronger than others. You
need to be able to separate the LTF participants from the STF
participants. You will read later in the book that the LTF
participants are generally referred to as the strong hands and
the STF participants are usually referred to as the weak
hands.106 The weak hands are the ones who fold much faster.
Initiative participants are participants who buy or sell
breakouts. They are labeled as “initiative” participants because
they are buying away from value in the hope of a further move
from value. Those who trade HOD and LOD breakouts107 are a
good example of this type of participant.
In an HOD breakout, you do not know how far up the price
will go. But because the price has advanced in a manner you
like, you are betting that the price will go higher. An LOD
breakout is the opposite. You will sell short against the market,
betting that the price will continue to fall. Both HOD and LOD
participants are taking the initiative to get in “now”, without
even knowing if the stock will go to a new value range, let alone
when that next value range will be found.
As you can no doubt imagine, breakouts do fail, and when
they do, this will bring in the responsive participants.
Figure 4.2 – Screenshot showing the initiation of large volume
as Initiative participants buy anticipating the breakout.
(Screenshot courtesy of DasTrader.com).
Responsive participants are participants who buy or sell
reversals. They are labeled as “responsive” participants because
they are buying away from value in the hope of a return move
to value. Those who trade head and shoulder reversals are a
good example of this type of participant.
When trading a reversal, you are doing nothing more than
buying or selling a stock when it is extended from value and
then riding that return to value. This is often predicated by a
change in the stock’s volume profile before it begins to shift
direction. As a responsive participant, you will recognize that
there has been a change in that profile and then play the stock
against the trend as it returns to value. When a stock returns to
value, the initiative participants will be shaken out, often
leading to very fast and powerful moves in the price of the
stock. As they say take the stairs up but take the elevator down.
This is a direct result to the increased participation caused by
both participants sets agreeing on price direction. Initiative
Bulls realize they are wrong when responsive Bears realize they
are right.
Nonetheless, the biggest moves are reserved for the elite
traders. These are the large Wall Street investment banks,
mutual fund companies, hedges, props, etc. who I refer to as the
LTF participants.
Figure 4.3 – Screenshot of a stock with a large volume change
as we fail to break higher. The result is a return back to the prior
area of value. (screenshot courtesy of DasTrader.com).
LTF participants are participants who buy/sell stocks over
days, weeks, or even months. They are labeled as “LTF”
participants because they are working in extremely large time
frames and playing the “long game”. You will hear stories of
someone accumulating a position at a specific price level for
months and then securing a massive move for a massive profit.
These participants have gigantic accounts, and they have the
largest effect on price. Their share purchases create and add to
the support levels. As their selling of shares create and add to
the resistance levels that you will use to trade every single day.
An LTF initiative participant triggers range expansions. As
the price of a stock begins to reject value in any direction, this
participant will come in, signaling to the market that it is time
to move. The price will continue to run until a responsive
participant gets in the way. An LTF responsive participant
influences reversals at extreme price ranges. When the price
moves to an extreme price, they will take profit. As with the
actions of other types of responsive participants, this will then
cause the price to return toward value or establish a new value.
Since a retail day trader can do little to truly influence the
price of a stock, that should not ultimately be your goal. Rather,
your goal should be to identify when the LTF participants are
making their plays so that you can then simply ride their
coattails.
MARKET AUCTION CYCLES: IMBALANCE
The LTF participants’ moves are what create huge imbalances in
the market and, as I referenced earlier, the best example of
when the market is imbalanced is at the open. Imbalance occurs
when there is an excess of supply or demand. During this
opening auction, the price will frantically move in search of
value. It will bounce up, it will bounce down, and it may take
from 15 minutes to a full hour for the price to find value. Just
like at the start of a cattle auction, the real plays do not begin
until the big bidder raises their hand. As an aside, experienced
traders thrive in the opening auction as they look to take
advantage of all of the volatility this phase brings.
The imbalance phase can be considered the price discovery or
transition phase. It’s marked by high average volume.108 Any
trade you take will be based on momentum. Remember, when
you take trades during the imbalance phase, since you will have
no idea how much or how little they will move, you must also
be simultaneously searching for a new value range. While you
should not throw caution to the wind, so to speak, trading in
this phase can provide some great opportunities for profit.
Riding the imbalance as the price transitions to a new value is
the simplest way to make money in the least amount of time
with the least number of shares possible.
In the imbalance phase, you can know with certainty that at
some point the LTF participants are going to establish value.
Once they start to make their plays, you will be able to discern
both a general price range for the stock as well as where value is
apt to be established. You can often identify these LTF
participants by their large bids and asks on Level 2. Once you
spot their orders, value will become easier to see.
MARKET AUCTION CYCLES: VALUE
Value is the principal variable in the market, and it is changing
constantly. The current value is represented in the current
price. The current price is reached when the bid and the ask
agree that value has been found. Demand drives this value and
that is reflected by the price changing. As the price changes, you
will then again find value. I use the following equation to help
me quantify the concept of value.
In addition, price is valued differently in every time frame.
Therefore, tools such as VPOC dynamically change as you zoom
in and out. The larger the time frame, the wider the
representation of value as defined by the LTF participants.
Thus, the larger the position they have, the more they can
influence the supply and demand, and that correspondingly
influences the price.
This gives price historical value as value in the past has the
ability to influence value in the future. The market moves from
rejection into acceptance, and then rejects that acceptance. One
way you can think of this is as UNFAIR pricing moving back to
FAIR pricing. Once the price can establish value, it can then find
balance.
MARKET AUCTION CYCLES: BALANCE
After the price discovery phase (the imbalance phase) locates
value, balance will be found. Balance is achieved when a stock
has established a value range that all participants agree is fair.
During the balance phase, demand and supply are equal for the
most part. What occurs during the balance phase can be
referenced in many ways though. In VPA, we describe what is
happening as the accumulation109 and distribution110 phases.
For now, I will just reference them as consolidations, however,
they are not to be confused with a pull back or a retracement.111
In the accumulation and distribution phases, the volume profile
will start to change as large funds and institutions begin to do
business. Despite the lack of volume on a minute-by-minute
basis, these two phases are the times when the most shares are
exchanged. Stocks can consolidate for hours in these phases and
are marked by a characteristically constant low volume.
Over time, this “happy” state of balance will start to change.
As shares are sold and purchased, an excess of supply or
demand will gradually develop, and that will imbalance the
stock and send all of the players back in search of value.
Another key signal that a stock is in balance is the structure of
your Level 2. You will notice that the asks and bids in both
directions are equal. There might be so many transactions that
your Level 2 will be very congested, and the price action will be
difficult to read or there may not be that many transactions at
all. Either way, your Level 2 will be balanced. With low volume,
the stock’s price will remain in the balance phase until a
sufficient excess of supply or demand builds up.
* During this phase, it’s recommended that you don’t take new positions.
MARKET AUCTION CYCLES: EXCESS
As the end of a consolidation phase approaches, there will be an
abundance of either supply or liquidity. During a distribution,
for instance, there will be a large amount of selling as the stock
price is likely well above its established value. As the selling
continues, the buyers will eventually lose interest in the current
price.
Since there is so much available inventory, the buyers will
begin to feel that the current price is in fact overpriced and
unfair. This will cause the sellers to start lowering prices in
order to entice more buyers. In time, the sellers will worry that
they are going to be stuck with a whole bunch of shares and
thus, out of fear, they will commence dumping shares as LTF
participants take their profit and allow the stock to return to a
lower price. Also, at this stage of the market auction cycle, LTF
participants may enter into short positions if they are close
enough to the top of a value range.
Excess is marked by a building of demand in either direction.
As the volume profile gradually increases near the end of a
consolidation, liquidity or supply will congregate in an obvious
way. You will start seeing volume spikes as the LTF participants
make decisions about what they expect to happen next. Soon,
the stock will go in search of value. This will trigger a new price
discovery phase as imbalance returns and the process begins
anew.
* A fresh catalyst can often shift the balance to excess faster.
VOLUME BY PRICE / VOLUME POINT OF CONTROL
As I mentioned briefly earlier, most trading platforms allow you
to see not only where a stock’s value is, tick by tick, but also let
you chart where those ticks congregate. Each tick at a specific
price adds up and over time these individual transactions will
clump together, so to speak, and be clearly visible on your chart.
An example of this Volume by Price indicator is shown in
Figure 4.4. You will notice a number of horizontal bars on the
left-hand side of the chart. These indicate the volume of
transactions at each specific price level for the time frame
represented by the chart. Since this is a 1-minute chart, the gray
portion of each bar represents the total volume of transactions
at that particular price level for all of the one-minute periods
that the stock increased in price during the time frame
represented by the chart. The pink portion of each bar
represents the total volume of transactions at that particular
price level for all of the one-minute periods that the stock
decreased in price. Combining the gray and pink portions
together, each bar represents the total volume of transactions at
the specific price level for the time frame represented by the
chart.
If you are reading the paper edition of this book rather than
the e-book edition, the colors will of course not be displayed in
your version. The gray portion is on the left-hand side of each
bar and presents as a light gray. The pink portion is on the right-
hand side of each bar and presents as a dark gray.
While the Volume by Price indicator allows you to see how
many transactions are occurring at each particular price for
whatever time frame your chart is covering, Volume Point of
Control (VPOC) is a powerful tool in your platform that lets you
drill down to the specific price that is experiencing the most
ticks. As shown in Figure 4.4, VPOC will highlight this price on
your chart with a horizontal line at the single highest number
of ticks (the $119 price level in this example). This gives you the
best representation of where the value for a stock is being
perceived by the overall market within your chart’s selected
time frame.
Using VPOC, you can isolate exactly where the most buying is
taking place over time. These high value areas will act like
magnets to the price. If the price fails to advance as the stock
attempts to reject these areas because of the large transactional
volume, it will get pulled right back to value over and over again
– until it doesn’t.
Figure 4.4 – Screenshot of a 1-minute chart showing the
Volume by Price indicator (the horizontal bars on the left-hand
side of the chart) and the Volume Point of Control tool (the
horizontal line at the $119 price level) (screenshot courtesy of
DasTrader.com).
CONFIGURING VPOC IN DAS
VPOC is available in most trading platforms. In DAS Trader Pro
it is part of the Volume By Price study.
The steps to configure VPOC in DAS Trader Pro follow:
1. Right click on your chart and select Study Config.
2. Click to highlight the Volume By Price study and then
click Select to add it to your price study. You can locate it
in the studies on the left side of the dialogue. Move it to
the Studies on the right side by using the appropriate
arrow button the commit.
3. Click the ConfigEx button, uncheck all the boxes, and
click Commit.
4. Click the Config button and configure as shown in
Figure 4.5. Do ensure you check Show Point of Control
(on the right-hand side of Figure 4.5). When finished,
click Commit.
If you are reading the paper edition of this book rather than
the e-book edition, the colors shown in Figure 4.5 will not be
displayed in your version. On the left-hand side of the figure,
my Bar Color is gray and my Down Volume Color is red. On the
right-hand side, my Show Point of Control Line Style is yellow
and my Show Volume Area High and Show Volume Area Low
Line Styles are both red.
Figure 4.5 – Screenshot of how I configure Volume Point of
Control in DAS Trader Pro (screenshot courtesy of
DasTrader.com).
INTRODUCTION TO VPA
In Chapter 7, I am going to provide you with an in-depth review
of tape reading and you will find that the market auction cycle
is a very significant part of understanding how to read the tape.
Specifically, on Level 2 you will be judging the market’s auction
cycle by using order positioning.112 You’ll see how the four
phases of this cycle – value, balance, excess, and imbalance - are
all clearly shown on Level 2. With that said, let’s not get too far
ahead of ourselves. There are a few additional topics that need
to be covered before you are ready for the tape.
In the next chapter, I am going to discuss volume and price
analysis. VPA is the core skill that my Camarilla pivot system is
based on. It is an incredibly old method of market reading that
in fact predates computers. It has been touted by many of the
greatest traders of all time.
In the late 1800s and early 1900s, giants like Charles Dow,
Jesse Livermore, Humphrey Neill, J.P. Morgan, and Richard
Wyckoff forged the strategies that are still being used today.
Their pioneering work has been built upon by such notable
individuals as Richard Ney in the 1970s and Anna Coulling in
the 2010s. Although taken together their careers span well over
100 years, these inspiring traders and authors all share the
same approach to trading. And what is that you might ask?
They all have used volume and price to anticipate the market’s
direction. Between the 1870s and the 1960s, traders had the
ticker tape (for your information, Figure 7.2 is an illustration of
a sample circa 1950s ticker tape). Today, you have a computer
screen. While our technology has advanced, the principles that
drive the market have not. It’s driven by demand and demand is
volume.
CHAPTER 5: VOLUME AND PRICE
ANALYSIS
Many trading programs out there teach you that if you learn a
specific “special” pattern, you will be able to consistently create
profit. Regrettably, it’s not that easy, but I sense you knew that
already. If it was that simple, virtually anyone could be trading
on the stock market after watching one of those “guaranteed to
make you rich in 30 minutes” online videos. You would
certainly not be buying this book.
I preach taking the long road and that shortcuts will not get
you there. To be an adept day trader, you need to be able to
master momentum. You need to be able to identify which
stocks have the highest probability of giving you the substantial
percentage moves you are looking for in order to make a solid
profit in a timely manner.
If you are only trading with patterns, then you are looking at
the “micro” without considering the “macro”. This means that
you are going to be constantly stopped out on trades. You will
become confused and wonder why the pattern you are trading
isn’t working. Let me be frank with you. A pattern often does
not function as expected because a myriad of outside factors,
not related to the actual pattern itself, affect a stock’s ability to
reach your price target. You must also bear in mind that the
Market Makers have a job to do, and understanding their role is
a vital part of being successful at your own job.
Utilizing tools like VPOC, volume, and candle formations, you
can isolate the orders of the Market Makers as they move
positions for their large clients. You can then use their vast
liquidity to your own advantage and dramatically increase your
probability of executing a winning trade.
MARKET MAKING
I have had the good fortune of being invited to spend time on
the floor of the NYSE with Peter Tuchman. Peter is a veteran in
the business and has a unique passion for sharing his
perspective. I must note as an aside, I’m thrilled that he agrees
with me about the concept of participation in the market and
that he was willing to say so in writing (see Figure 5.1). Just in
case you’re curious, and can’t wait to get to Figure 5.1, when it
comes to participation, we both embrace the expression, the
more the merrier. Peter is dedicated to sharing his knowledge
far and wide because if we all know how the market works, then
we will all follow the rules and stay out of his way! Seriously
though, being aware of how the system operates, and then
cooperatively joining in with that system, will ultimately create
a much more pleasant (and profitable) trading experience for
everyone.
I was recently asked what my biggest takeaway was from
going to the NYSE. I responded that there really is a full system
in place. People often think that demand is the only factor that
drives the market. While true to a degree, there is also a very
controlled system in place to make sure everyone “in the know”
has a chance to make some money. Negotiations are always
going on, and they take place face to face, right on the floor of
the exchange. Nevertheless, as a retail trader, there is no way for
you to know what has been agreed to until it actually happens.
That is why you must pay attention to volume. It is the only
way you can know when the largest players have made a
decision (you’ll recall I provided considerable commentary
about the LTF participants in the last chapter).
When conducting VPA, I will be hyper-focused on the market
making process. The Market Makers have the best view of the
market. You can think of them as the bus driver in your search
for value. The more you pay attention to them, the closer you
will be sitting to the front of the bus. Eventually, you can begin
to anticipate where they will turn. Given its “invite-only”
restrictions, very few traders these days get to visit the
exchange. I am grateful for the opportunity since it provided
me with a firsthand view of the market making process in
action.
Figure 5.1 – A souvenir of my visit to the floor of the New York
Stock Exchange along with some very generous comments
tweeted by Peter Tuchman.
Market Makers play an exceptionally crucial role in the
market. These people spend their day moving around more
shares than you (or I) will likely move in our entire trading
career. They are literally the ones responsible for creating the
market that we can trade in. For the most part, if there is
liquidity available at the price we are eyeing, they offer us
instant fills for virtually any stock we want to trade.
But more than that, these folks move the price to help
facilitate the trades they want. Since they know where all the
major players are willing to do transactions, they will use
powerful computer algorithms to move the price to those
values, while simultaneously making their own profitable
transactions along the way. They get to see the big picture. The
only other people who know as much about what is happening
are the insiders, but it is solely the Market Makers who can
actually do something with that knowledge. In mere minutes,
they can negotiate amazing deals between massively moneyed
clients, and then steer the market in the direction they want.
An insider is basically someone high up the ladder at a bank
or similar financial organization. Though they are aware of
these deals and are “in the know”, so to speak, there isn’t much
they can do with that information other than tell the Market
Maker where they wish to buy or sell. It’s then up to the Market
Maker to make it happen and, if they do, they will get paid a
considerable sum of money, often $0.004 per share on what can
be 100Ks of shares. The more money they make for their clients,
the more apt they will be to get repeat business.
There are many Market Makers on the floor of the NYSE. There
are 1,366 seats to be exact, and they all want to win. It is
becoming increasingly important to understand your role in
the current market as it will define almost every aspect of your
trading style. Perhaps the two most vital questions you need to
answer are: Am I an investor? Am I a speculator?
I, for instance, am a speculator. As day traders, we are all
speculators. Accordingly, I recommend that you immediately
get rid of any and all concepts you learned from a book focused
on investing. As a day trader, you are constrained by one very
critical element: TIME! You have only a few hours to realize your
gains before you must exit your positions.
This is why traditional strategies that use only
fundamentals113 tend to underperform. A day trader doesn’t
need fundamentals, you need movement. You need to know
where the auction is hot so that you can play it. Remember, the
more participation the better. You need to isolate a few stocks
that have obvious participation and then watch for the order
flow.114 The Market Makers will ultimately move the price to
where the investors want it, and you (and I) don’t get a say in
that. You are only speculating on where you think the price will
go. As such, you have no power over value, and you shouldn’t
even worry about it because you can still make a lot of money if
you are paying attention.
How a Market Maker makes markets is an incredible process
(and the phrase is a tongue twister!). Without actually seeing it
in action, I don’t believe anyone can truly understand it. Figure
5.2 is a picture of me at the exchange with (dare I say) a
beautiful overview of the floor. I hope the photograph gives you
a taste of the same firsthand experience that I was so privileged
to obtain.
Figure 5.2 – An overview of the floor of the New York Stock
Exchange the day I visited in 2021.
When a client places an order directly with a Market Maker, the
Market Maker can negotiate and deal with other Market Makers
to set up the best result possible for their client. While Market
Makers get paid for each share traded in a transaction, whether
it’s a profitable trade or not, they also have their reputations to
uphold. The better they are at what they do, the more clients
they will get and the more leverage they will have over other
Market Makers. Nevertheless, market making isn’t just about
being a machine. It certainly helps to have a big personality,
which is why people like Peter Tuchman do so well in the
market and have been there for such a long time.
Market Makers are not concerned with the price of a stock.
You should think of them in the same manner as you do your
broker. For example, when you short and then cover your
shorts, you get to keep the difference. Your broker doesn’t really
care that the price is lower or higher because they were
intending to hold those shares indefinitely. Rather, they get to
make a little money from the commission charges you will
incur from the transaction, and that is more money than they
would have made otherwise.
In a similar fashion, Market Makers aren’t just trying to make
money by holding shares and selling them for a higher price.
The Market Makers make money on the commissions and fees
that will be generated by the thousands (if not millions) of
transactions they can perform on a stock that is in play.
Take a moment and think of a revolving door. This is a good
visual for how a Market Maker profits. The Market Maker is
buying and selling shares on demand. When you sell shares,
they will come in on the bid. At the same time, someone else
will be buying their shares and, as they do, it will be on the ask.
The Market Maker will make money both ways on these
transactions as their modus operandi is to buy low and sell
high. They will always win in this arrangement because they
are never at risk. They have seemingly unlimited capital and
can bag hold as much or as little as they want. They can naked
short115 to help them balance inventory; they can hold the price
to help them balance inventory. They’re just like a revolving
door. They’re continually circling around, moving in and out
and in and out of trades.
Where Market Makers will make money, beyond the
commission, is in the spread.116 They’re constantly selling and
buying. You pay them to take your shares and then you pay
them to give you shares back.
You should not perceive Market Makers as your competition.
You should treat them more as a utility company. I urge you to
think of them in particular as your power company. You’re
rarely mad at your power company because they provide you
with a very necessary utility. (I’ll concede though that I can get
annoyed when there’s a power failure or when I see how much
their bill is!) You need power. The Market Makers’ utility is
providing you with order flow. Understanding their function is
key to reading “when” it is time to take a trade based on the
tape.
Since Market Makers get paid per transaction, their goal is to
do as many transactions as possible. This incentivizes them to
follow the LTF participants to value. As the Market Makers then
move into high value areas, this will result in large amounts of
volume, and that will let you know where the proverbial ship is
heading. Remember, you can’t tell where a ship is going by
looking at its wake, and you can’t tell where the market is going
by where it has been. You must pay attention to where the
“ship” is bound for.
Volume is the great equalizer. When I write about volume,
what I am really referencing is the demand. Demand is
participation and participation creates volume. Demand
directly influences every aspect of a stock’s price action. A stock
in demand will be easier to trade and much more apt to hit price
targets. As well, when I discuss demand, I do not differentiate
between buyers and sellers. Demand is quite simply demand,
whether it raises or lowers the price. Similar to traders in the socalled olden days, what you are doing is following the volume to
see when the demand in a stock changes. Unlike back then,
however, today you use your gappers watchlist117 to find stocks
with quick price movement, and then you add high volume to
your search criteria in order to locate the stocks with excellent
catalysts.
Volume works on EVERY time frame. With volume and price
combined, you will be able to anticipate the direction a stock’s
price will be apt to head over time based on the level of
participation. You can see where the price ranges develop and
predict the movements between those ranges.
There are many places in the market that LTF participants can
hide. They can sell in small lots118 or pass their orders through
diverse routes. They can buy or sell over minutes, hours, days,
and even weeks. They have a detailed view of the big picture,
giving them the ability to move markets.
The only thing they can’t do is hide their volume. At some
point you will be able to see where they are buying or selling.
You can then reckon where their next move will be and even
when it will happen. It doesn’t matter what they do or when
they do it. You just need to be there, at the right place, waiting,
ready to ride their momentum until it is gone. You will then exit
your position and disappear from the scene.
Let’s use my childhood as an analogy. I’m a country boy who
was raised on farmland. You will recall from the Introduction
that one of my favorite activities growing up was to go to an
auction yard and watch the farmers bid on items ranging from
tractors, seeders, and cultivators to cattle, pigs, and other
livestock. Auction yards are huge, and it was challenging to tell
where the action was. How then did we as a family, know where
to head? Easy. We could hear the noise. Dad would put me on
his shoulders, and I would look in that direction for the biggest
crowd of people. We then knew where the good stuff was being
sold because of the size of the crowd congregating in that area.
That is what volume does for you. A stock with a catalyst and
high volume will attract a lot of attention. And that’s where you
want to be – right where the good stuff is being sold.
A Market Maker’s only goal is to make money. To help you
understand how they think, I want you to consider Market
Makers as the Amazon of stock trading. They profit by selling
you someone else’s product. Since it’s so much more convenient
for you to find everything, you need on a single site, you’re
willing to pay a premium for the service. Just like Amazon,
Market Makers profit from the spread. They buy the product
from the supplier for less and then sell it to you for more.
Although the only service they offer is that of an intermediary,
it’s one of the most critical roles in the market and one we can’t
live without.
You can compare a Market Maker to an Amazon warehouse.
Both have a job to do and that is to provide products. If their
warehouses are empty, they obviously don’t have enough
products, and that won’t cut it. You may remember my earlier
comment about how a stock can have a strong catalyst but still
be dropping in price throughout the trading day. That situation
isn’t a fluke, it’s a campaign. As the Market Makers start to fill
their warehouses, they will use their spread position to force
the price down. The more shares they accumulate, the more
they will place in action above the going price of the stock. This
will cause the market to look weak and shake out more sellers
(the suppliers), allowing the process to continue on indefinitely
until the Market Makers have filled their warehouses.
With their warehouses now full, they have all that they need
to support a price movement up to new highs. They will initiate
a large buying campaign, signaling to the insiders that they are
ready to proceed. As the price of the stock rises and falls, they
will play both sides of the spread, profiting from each and every
transaction until they have once again emptied their
warehouses.
Once emptied, it’s time to begin filling the shelves again. This
is how the market moves - and there’s nothing you can do about
it.
It is important to note as well that this entire process is
controlled by algorithms based on price targets that the Market
Makers themselves have entered.
I’ve occasionally had conversations with traders who tell me
that they feel it is easier for a stock to go down in price than go
up in price. Although I can see why one would think that way, it
is conceptually inaccurate.
There are two concepts in trading that are inherently similar
to what you are taught in high school physics. The first is
Newton’s third law of motion. Integral to VPA is the belief that
for every action there should be an equal and opposite reaction.
When that is not true, it creates an anomaly in the price action,
and that is a topic I will deep dive into later in this chapter.
The second concept rooted in physics stems from Newton’s
first law of motion (also called the law of inertia). Stated simply,
once the price of a stock has picked a direction, it will take time
for the price to slow down and eventually change that direction.
Putting these two concepts together, it doesn’t make sense to
assume that it is easier for a stock to drop in price than rise in
price. There is no gravity in the market but there is momentum,
and without momentum, the price of a stock will not move. You
expect to see low volume when the price of a stock is static and
not changing, and you expect to see high volume when the
price is rising or falling. Anything other than that is an
anomaly, and an anomaly is where you can learn the most
information about pending price action.
Like a very large ship, the price of a stock will, in general
terms, continue in the direction it is going unless something
impacts it. It requires a great deal of effort in order to reverse
the direction of a large ship, and the quicker the captain wants
their ship to turn, the even more effort that will be required. In
trading:
More Effort = More Volume
Imagine this large ship suddenly has something in its path
and needs to turn quickly. The person steering will throw the
rudder and thrust hard to one side to start the extreme turn.
When this happens, the entire ship jerks, everyone on the ship
notices, and some will panic while others will prepare.
When you are trading, you can literally see the ship change
course. You will see the rudder jerk, and you will see the speed
slow down, come to a rest, and then begin to increase again as
the ship’s course resumes. No matter what direction the ship is
going, the engine has to be running. The faster its speed is, the
more power required. The only time that changes is when the
ship isn’t moving.
With those concepts in mind, in the following section I will
review the various types of volume. However, volume without
price is as useful as price without volume. You need both to
have the full picture of what is happening. With that context,
you can then tell if the Market Makers are struggling because of
a lack of participants and are therefore lowering the price of a
stock to try and entice Bears to come in and push the price back
down to an area that is of more interest to the Bulls, if they are
stopping the price from rising and a reversal in the price is
perhaps pending, or if they are advancing the price higher. The
amount of effort they exert will directly affect the price action.
No matter what strategy or system you use, volume is the key to
unlocking consistency. Even if you never trade a single pivot, all
of your strategies will instantly increase in accuracy if you add
VPA to your decision-making process.
READING VOLUME
The basics of volume are not very complicated. There is low
volume, average volume, and high volume, and each
demonstrates varying degrees of interest in a stock. As
illustrated in Figure 5.3, low volume results in the price of a
stock remaining fairly constant. Average volume can get the
price moving a bit. As volume increases, the price will move
more. High volume can result in the price changing direction.
This is an excellent example of where an understanding of the
fundamentals of VPA will enhance your success in day trading.
In the top half of Figure 5.3, you will see three different types
of candles. They are called dojis in the lingo of trading. My
friend, Dr. Andrew Aziz, explains in How to Day Trade for a
Living that although dojis come in various shapes and forms,
they are all characterized by having no body or a very small
body. When you see a doji on your chart, it means that there is a
strong fight occurring between the Bears (the sellers) and the
Bulls (the buyers). As shown by the second doji in Figure 5.3,
nobody has won the fight yet.
If the bottom wick is longer, as in a hammer doji (the first doji
in Figure 5.3), it means that the sellers were unsuccessful in
trying to push the price lower. This may indicate an impending
takeover of price action by the Bulls. If the top wick is longer, as
in a shooting star doji (the third doji in Figure 5.3), it means
that the buyers were unsuccessful in trying to push the price
higher. This may indicate an impending takeover of price action
by the Bears. If the wick is even on both sides this is a spinning
doji or indecision doji. An indecision doji often marks the top
and bottom of ranges.
While it might seem apparent, for some reason we as traders
often ignore the principle at work. As I just wrote, moving the
price of a stock takes effort, and effort equals volume. When a
stock is trending, either up or down in price, there should be
high volume. Any variation in the volume profile will alert you
that the Market Makers are no doubt making moves around you.
Figure 5.3 – An illustration of how different types of volume can
impact the price of a stock (chart illustrated by Thor Young).
ADVANCING VOLUME AKA IGNITING VOLUME
Figure 5.4 is an example of how advancing volume can impact
the price of a stock. When the price of a stock consolidates, the
volume will decline (Rest), and as the stock then makes new
highs, the volume will increase with those new highs. This lets
you know that the Bulls are very confident and really hitting
the ask (buying lots and lots of shares). As they keep buying,
those who had previously bought shares (I’ll call them the prior
Bulls) are taking their profit. This gives the Market Makers the
perfect conditions to advance the price. Since the order flow is
good, and buying and selling is advancing, all the Market
Makers need to do is raise the price. There is no need to even
pull back at this point.
The price will continue to advance until both an imbalance in
the demand shows on your tape and the volume changes.
Figure 5.4 – An illustration of how advancing volume can
impact the price of a stock. The advance is confirmed with the
strong engulfing119 candle (chart illustrated by Thor Young).
STOPPING VOLUME AKA CLIMACTIC VOLUME, FIREWORKS,
BOTTLE ROCKETS, BOTTOMING TAILS, TOPPING TAILS,
TWEEZERS
Figure 5.5 is an example of how stopping volume can impact
the price of a stock. As the price moves up or down into a high
value area, the Bears or the Bulls will start to take their profits.
At the same time, their counterparts will begin anticipating
reversals and start taking contrary positions. This causes
massive spikes in volume that will result in the Market Makers
having an imbalance in their orders. This is where value is
being asserted and it is always the most likely spot for a reversal
to set up.
Figure 5.5 – An illustration of how stopping volume can impact
the price of a stock (chart illustrated by Thor Young).
STRUGGLING VOLUME AKA DIVERGING VOLUME
As illustrated in Figure 5.6, there are two major “events” that
will alert you that a reversal in the price of a stock is apt to be
forthcoming. One is when you observe a large spike in volume.
This lets you know that a large imbalance has just been created
and the price is no doubt going to stall. However, at times, a
huge order (which translates into huge volume) will not have
been placed, and the stock instead will lose its momentum due
to a lack of interest among participants. When this happens,
the Market Makers will need to lower the price to try and entice
Bears to come in and push the price back down to an area that is
of more interest to the Bulls. The signal for this is a rising price
on lowering volume.
This is when your VPA comes into play. You know that if the
price of a stock is advancing, you need building volume to
accompany it. Yet here, in this situation, you don’t have that.
You have the price rising with no volume. And that is an
anomaly.
Figure 5.6 – An illustration of how struggling volume can
impact the price of a stock (chart illustrated by Thor Young).
VOLUME ANOMALIES
As I mentioned, VPA is based on principles that are similar to
what you find in physics (two specific ones being Newton’s first
and third laws of motion (the first law being also referred to as
the law of inertia)). Nevertheless, VPA is not physics. Laws can
be broken and, when they are, you are given literally massive
clues into a stock’s pending price movement.
VPA is useful in many areas of trading and gaining the ability
to recognize these anomalies will be a vital addition to your skill
set. Before any significant move happens, whether it is a
continuation or a reversal, an anomaly may very well present
itself.
So then, what exactly is an anomaly? To keep it simple, it’s a
candle that forms under high volume that is not consistent
with Newton’s laws of motion.
For instance, in Figure 5.7, you will see a shooting star doji at
the top of a trend. When using VPA for your buying and selling,
you are more concerned with the body of the candle than the
wick. The wick does weigh in on some other factors but, in this
case, what is important is where the candle closes. You have a
candle with very high volume that managed to only move a
couple of cents. For all of that effort, the stock price not only
didn’t go up, it lost ground. If the stock was going to continue
moving up in price, this candle would engulf and break out
through the selling level. The fact that it has failed to do so
speaks volumes (pun intended!). The stock is experiencing
considerable selling pressure and is likely to fall in price soon.
As I discussed not too many pages ago, there is one volume
type that supports an advance and two that support reversals.
In all of these circumstances, if you have movement without
effort, or effort without movement, an anomaly will present
before the price reverses. You can thus easily spot when the
price is being moved in an unusual way. This is the key to
figuring out what the Market Makers are trying to do during a
campaign.120 If you hit a high level of selling on a narrowbodied candle, then this could likely be the best price the
market is going to give you that day.
Figure 5.7 – An example of a shooting star doji (a narrowbodied candle) forming on high volume (chart illustrated by
Thor Young).
In the top half of Figure 5.8, you will see three examples of
what are referred to as hammers (or hammer candles or
hammer dojis). Each hammer is the same and provides little
information other than that the price sold off and was bought
back up to close near the opening price.
However, once you add in the volume, the hammer candle
becomes one of the most telling candles in VPA. As set out in
Figure 5.8, with low volume, a hammer indicates weakness or
price testing. With average volume, a hammer indicates
continuation of the current trend. On high volume, a hammer
can indicate considerable strength and even signal a complete
reversal in a stock’s direction.
Figure 5.8 – An example of how a hammer candle can
demonstrate three different types of price action depending
upon the volume of shares being bought and sold at the time
the candle is formed (chart illustrated by Thor Young).
Without volume, you are missing so much of the picture.
Imagine you are in a trade and see a hammer near the top of a
price range. Because the price went down and came back up,
you might likely assume that the price action was strong and
the price would continue in an upward direction. However,
what if concurrently the volume had completely died off. At the
top of a trend, this means that buyers are exhausted and are no
longer stepping up. Shortly after, the price will be apt to begin
to fall back to a level more interesting to buyers. Had this
situation unfolded, you would have been trapped long at the top
of a range, hoping for a breakout. You would have just bought
the Market Makers’ shares for the most expensive price possible
before the price dropped back to the lows of the day.
This sort of scenario is where you can give up so much of your
money. You think a stock is strong, so you buy in anticipation of
a breakout, but instead you get stuck with a stock that is
overbought. Soon you will be stopped out and forced to sell the
stock right back to the Market Makers at (of course) a significant
loss.
If you had been watching the volume, you would have seen
the declining interest among participants, and instead
leveraged a short position for the return trip down.
THE LONG-LEGGED DOJI
The long-legged doji is an excellent example of how VPA can
take what is an otherwise ordinary-looking candle and turn it
into something much, much more.
Like the hammer candle, the long-legged doji is very common
but, as illustrated in Figure 5.9, depending on the volume
associated with it, you can expect the price action that follows
it to vary quite dramatically.
On low volume, the long-legged doji simply indicates that the
stock is resting121 and consolidating. As you would suspect with
low volume, the price will not be moving much at all.
On average volume, the long-legged doji indicates indecision.
Because there is still a good amount of volume coming in, you
can readily assume the price of the stock is consolidating (but
certainly not resting). Although transactions are being
completed, the price is not going anywhere. This type of volume
and price action on your chart should catch your attention. It
often unfolds on what you would consider to be a strong stock
when the overall market is declining. Because the market is
heading in the opposite direction, speculators will temporarily
lose interest in the stock. If its price can hold and the market
begins to gain once more, you could see a break back up. In the
alternative, if the market loses further ground, sellers could
start to really overpower the price of the stock.
The last candle in Figure 5.9 is exceptionally important, and
you will frequently be making use of it when conducting VPA.
An extremely high-volume candle with a narrow range bar is a
massive anomaly. It indicates that despite much, much effort,
the price did not go anywhere at all. This candle is usually
referred to as a spinning top candle because it regularly forms at
the top or bottom of a trend. It demonstrates that a huge
amount of selling is occurring. It is one of the most consistent
reversal indicators available.
As you can hopefully appreciate, VPA adds a third dimension
to your chart by providing you with new depth into the price
action that is transpiring.
Figure 5.9 – An example of how a long-legged doji can
demonstrate three different types of price action depending
upon the volume of shares being bought and sold at the time
the doji is formed (chart illustrated by Thor Young).
THE NARROW-SPREAD CANDLE
The narrow-spread candle is a commonly misinterpreted
candle. Most see it as it presents on the far-left side of the top
half of Figure 5.10. On low volume, the narrow-spread candle,
regardless of the color of its body, demonstrates validation of
the stock’s current price trend. All trends need to ebb and flow,
and if any pull back is on below average volume, you should feel
comfortable holding your position. Remember, while a big ship
will take time to turn, at some point you must first initiate the
turn, and that in itself will take considerable effort.
Accordingly, seeing the price of the stock retrace without much
pressure is a positive sign and poses no immediate issue. Your
position is good, and you can continue to hold. As well, if you
are looking for an advance in price this is a great candle to
watch out for. If, after an engulfing candle, the price starts to
pull back, and that occurs on below average volume with
narrow spread candles, then you can be confident that a
continuation play of some sort will be ultimately effective
(barring any sudden market changes).
For most traders, that is the end of the story, however, with
VPA, it is actually just the beginning. If it takes a lot of effort to
move the price of a stock, then what happens when there is a lot
of effort, but the price doesn’t move very much? You’ve likely
already identified this situation as another anomaly! Observing
a serious amount of volume coming in, and having the price
stall without wicking, means there is a “wall” in front of the
price that even the wick can’t break through. At this stage, you
can assume that a potential reversal in price is setting up.
Similar to a large ship starting to turn, a significant amount of
effort is being put in. Given that, since the price of the stock is
not moving forward, the only assumption that can be made is
that the price trend is starting to change direction.
It is important that you remain alert once you spot this
anomaly on your chart. A hard reversal in price is apt to soon
follow it.
Figure 5.10 – An example of how volume can impact the
interpretation of a narrow-spread candle. Low volume signals a
likely advance or continuation. While high volume signals a
likely failure or reversal (chart illustrated by Thor Young).
THE HANGING MAN CANDLE
There are many thoughts about why this candle is called the
hanging man. It could be related to something simple such as
the game hangman. It could also be so named because the
intent of the candle is to trap as many traders as possible while
giving the false hope of a continued move up. The candle occurs
at the top of a bullish trend when a stock will most often have
achieved a key price level or breakout before failing slightly and
closing below that level. As seen in Figure 5.11, the next candle
formed, the hanging man candle, will demonstrate that the
price dropped rapidly on high volume and then got bought up
and closed in a narrow bar. If you recognize the two candles
found in the red square, I have drawn in Figure 5.11. You will
have a setup that reads the same as a spinning top candle on
high volume. (If you are reading the paper edition of this book
rather than the e-book edition, the “red square” will of course
display as a black square in your version.)
Figure 5.11 – An example of how a hanging man candle can
form on your chart (chart illustrated by Thor Young).
If the price is being tested for another move up, you would
expect that to happen on low volume, as I explained in my
previous commentary on hammers. At the bottom of a trend,
this hammer could signal considerable strength, but at the top
of a trend, this hammer is a definite anomaly and indicates that
you are very likely to see the price changing direction.
MARKET PHASES
As the trading day progresses, a stock is constantly moving
through various price action phases (which are different from
the earlier described market auction cycle phases). Being aware
of what phase your stock is in is vital to good timing. You want
to take trades when your stock is transitioning between these
phases since the best traverses will set up as value is rejected
and the price of the stock moves into a new phase. These six
phases are illustrated in Figure 5.12 on the next page.
Figure 5.12 – An illustration of the six price action phases that a
stock is constantly moving through during a trading day (chart
illustrated by Thor Young).
MARKET PHASES: ACCUMULATION
You’ll recall from the warehouse analogy that there is always a
need for inventory. Once the price of a stock has moved down to
a price range that has been targeted by Market Makers, they will
start to accumulate their positions. Simply put, they are going
to begin buying shares. They won’t buy a lot of shares at first
because they don’t want to give away their positions just yet.
Given that they will lose a fortune in potential profits if the
move up in price commences without them, they will gather
shares and fill their warehouses a little at a time, until they have
enough shares to launch the next phase of their campaign.
I will review how to identify price ranges later, but for now,
understand that ranges move up and down between support
and resistance areas. As the price drops, higher volume buying
will appear, and that will move the price up. However, you’ll
notice that once the price moves up, the buying volume will
drop away. If you’re monitoring your Level 2, at this point you
will likely see the Market Makers’ orders drop completely off the
book.122 They will only buy at the bottom of a range. As their
positions grow, so will their ability to control the stock’s
movement. Imagine for a moment playing a card game with 52
cards. One player has 40 of the cards and the other 12 cards are
held by 12 different players (each with one card). This sort of a
card game parallels precisely what you are up against as a retail
trader versus the Market Makers. The imbalance is staggering.
Accordingly, your task is not to fight the Market Makers but to
rather pay attention and watch for their signals. They will let
you know when they are ready to move up. And if you are alert
and attentive, you can catch a ride on the wake of their large
ship.
Just before the move up occurs, you will most often see a
buying climax unfold at the bottom of the price range. The
candles that form will usually wick below the range and then be
bought up on extreme volume. This is the start of the Market
Makers’ moves. When they are ready, and there are sufficient
shares at hand to fill their warehouses to the brim, they will
execute quick buys and scoop up all the remaining available
shares. This will cause significant volatility as they will buy the
entire bid on the Level 2, leading to a large spread and (of
course) high volume.
This move will both shake out the traders who were buying
the bottom too early and it will trap a good number of short
sellers who were strictly trading a downward pattern instead of
also focusing on the price action. The Market Makers will be able
to buy every single one of those shares at a discount as they
maneuver to move the price up.
Figure 5.13 – An illustration of the Accumulation Phase that a
stock is constantly moving through during a trading day (chart
illustrated by Thor Young).
MARKET PHASES: BUYING CLIMAX
Get the warehouse full! That, very succinctly, is what the
buying climax market phase is all about. For the purposes of
this book though, I want to put a little more meat on the matter.
Firstly, when I reference climactic volume, be aware that I am
specifically discussing volume that is noticeably greater than
the surrounding volume.
As noted previously, climactic volume goes by many names
including stopping volume, fireworks, bottle rockets, bottoming
tails, topping tails, and tweezers. Regardless of what it is called,
once unleashed, the price of a stock will most often be moved
up. These reversals offer an excellent risk versus reward
potential and almost never return a stock to its low price. The
key is not to enter a position too early in anticipation of the
reversal. Wait for the Market Makers to finish their purchasing
and then jump in when your VPA demonstrates that the stock is
starting to move out of one price range and is also transitioning
to the next price action phase (this stage is known as the
climax). Figure 5.14 is an example of how the buying climax
phase will unfold on your chart.
Figure 5.14 – An example of how the buying climax phase will
unfold on your chart (chart illustrated by Thor Young).
MARKET PHASES: TESTING AND TRANSITION
The testing phase is a short one, however, don’t let that
diminish the significance of paying attention to the price action
during this phase. The price of the stock will test its prior value
range and either return to that value or reject it. I earlier wrote
briefly about the test candle and what it represents. Well, this is
the practical application.
Ideally, a low-volume hammer or similar candle will test the
top of the prior value range. If successful, you should see an
igniting bar123 on higher volume push the price up. This is your
signal. The price of the stock has left the testing phase and the
transition phase has commenced. You can finally begin trading!
As long as the volume stays consistent and follows the rules,
you can ride this position all the way up into the distribution
phase. For your ease of reference, these three price action
phases are illustrated in Figure 5.15.
Figure 5.15 – An illustration of the Transition and Testing phases
that a stock is constantly moving through during a trading day
(chart illustrated by Thor Young).
MARKET PHASES: DISTRIBUTION
It’s time to return to the warehouse! I will detail more later
about how price ranges are created, but for now, you need only
understand that during the distribution phase, the price will
move to the top of the range and then move down off of higherthan-average volume. This is the first signal that the winds are
changing. For up to the next hour or so, the stock price will
move up and down as it establishes a new range.
This is the stage when the Market Makers need to get rid of
their shares. As with their buying activity, they can’t just
quickly dump all of their shares. Due to the large volume of
shares they hold, that would cause a massive sell off and likely
mess with the stock’s fundamentals. Accordingly, the Market
Makers will start selling off their position bit by bit.
With the price range defined, the Market Makers will then
launch the more vicious part of their campaign. They will use
what’s left of their shares to begin pushing the price up. They do
this to give the impression that this was a consolidation and not
a distribution phase. But it’s most certainly a trap! As the price
rises and looks strong, you’ll notice an anomaly: low volume!
The Market Makers are doing their best to sell you their shares
for as high of a price as possible. Please, do not succumb to the
temptation to buy, because they are about to pull the rug out
from under you.
Right when you think the stock is about to breakout and
everything has set up amazingly, a selling climax will
commence. And if you are holding shares, you’ll suddenly
realize that you are stuck. For your ease of reference, the
distribution and selling climax price action phases are
illustrated in Figure 5.16.
Figure 5.16 – An illustration of the Distribution Phase that a stock
is constantly moving through during a trading day (chart
illustrated by Thor Young).
MARKET PHASES: SELLING CLIMAX
The selling climax is easily defined by climactic volume. This
results in a shooting star doji (also known as topping tails or
fireworks). The candle has many names, but they all signal the
same result: it’s time for the price to go down.
In Figure 5.17, you will notice an anomaly. Three narrowbodied candles have been formed on huge volume. This
demonstrates an extreme amount of selling pressure. All of that
volume should have pushed the price up and led to a wide range
candle. Instead, quite the opposite unfolded.
After the climax, the price will move back down on everincreasing volume. Just before that though, you will likely see a
low-volume test to flush out any remaining buyers (which I will
explain in the following section). Once that is out of the way, it’s
time to start accumulating again.
Figure 5.17 – An example of how the selling climax will unfold on
your chart (chart illustrated by Thor Young).
LOW-VOLUME TEST CANDLE
One of the most reliable continuation candles is the low-volume
test candle. The example in Figure 5.17 depicts the very end of a
distribution phase. With the Market Makers’ warehouses empty,
the next price move will be a downward one. But before that
move can happen, the Market Makers are going to conduct a test
in order to ascertain how much buying demand still exists in
the market. Too much buying or covering could lead to a rally
and force them into a bad position. Therefore, prior to moving
the price down, they will raise the price on low volume to see if
any buyers pounce.
You may want to call this the shake out candle. I labeled it as
“The Test” candle in Figure 5.18. Whether you think of it as a
test or a shake out, it’s all the same concept. The idea is to shake
out some liquidity and make sure the market is primed for the
move down. If buyers come in, the Market Makers will then wait
and let the market rally on low volume.
Figure 5.18 – An example of how a low-volume test candle can
present on your chart (chart illustrated by Thor Young).
HIGH-VOLUME TEST CANDLE
Figure 5.19, on the next page, is an example of a stock in a solid
trend up. As the price of a stock is moving up, your VPA will be
free of any anomalies. Big candles will have big volume and
small candles will have average volume. There will be no
indecision present in the market and the price will be heading
up in a very nice fashion. Nonetheless, at some point in this
upward journey, the Market Makers will try to judge the
strength of any potential sellers.
You will know their test is underway when a high-volume test
candle forms on your chart. Concurrently, you will notice that a
whole bunch of selling has commenced. It could be short
sellers, or possibly longs, taking profit. You will not be entirely
certain what is causing the selling, but it will be apparent that
while volume is building, the price has stopped its upward
ascent.
As the selling continues, the price action will begin to concern
the active participants. Also, because of the test candle, some
traders will be rushing in to capitalize on the next leg up.
Shortly after the price makes a new low and traders in long
positions start to get out of their positions, the price will move
down, flushing out more and more longs and allowing the
Market Makers to accumulate their positions. They will be
assisted by the short sellers who came in looking for a quick
scalp at the breakdown.
Keep an eye on the stock. This high-volume test does not
necessarily mean a reversal is imminent. What it does mean
though is that the stock is overbought, and the price must drop
to entice new buyers. You can expect a significant drop if a new
low is made with high volume hitting the bid.
Figure 5.19 – An example of how a high-volume test candle can
present on your chart (chart illustrated by Thor Young).
ESTABLISHING A RANGE – PART A
When the price of a stock is consolidating, it will do so in a
range. Similarly, when LTF participants are accumulating or
distributing stock, this also will unfold in ranges. It’s simply the
nature of the beast. A range is formed by the distance in price
between an area of support and resistance. As I’ve mentioned
earlier, the LTF participants’ share purchases add to the support
levels and their selling of shares add to the resistance levels.
A good analogy I have been using since I began trading was to
compare the establishment of a range to a ceiling and a floor. As
illustrated in Figure 5.20, support is my floor and resistance is
my ceiling. These areas of support and resistance will become
more and more solidified as the price moves up and down
through a range.
Well-established support and resistance levels can hold for
days, weeks, and even years. Being able to identify support and
resistance is one of trading’s vital skills.
Figure 5.20 – An illustration of how support and resistance
levels can be compared to a floor and a ceiling, respectively
(chart illustrated by Thor Young).
ISOLATED PIVOTS
There
are
many
names
for
the
price
action
during
accumulations, distributions, or consolidations. Some call it
chop, while others call it congestion. At Bear Bull Traders, we
really enjoy using the word “chop”, and so that is the term I will
utilize in this book.
As illustrated in Figure 5.21, when you discern a candle on
your chart with either a higher high and a higher low than the
candles on each side of it, or with a lower high and a lower low
than the candles on each side of it, that will be the defining
point for the start of a new price action phase. Created by a very
specific setup, it alerts you that the price action is reversing (I
caution though that this may not be a full reversal, it perhaps
will be just a pull back to the top of the range). As the price of a
stock moves up and down, the pivots will help you to define the
range that is being traded at that particular time. Once you can
recognize the range, you can use VPA to determine what kind of
phase you are in. You can then develop a trade plan based on
that information.
Isolated Pivots very often mark the tops and bottoms of
ranges.
Figure 5.21 – An illustration of the two specific candles that will
be the defining point for the start of a new price action phase
(chart illustrated by Thor Young).
ESTABLISHING A RANGE – PART B
As outlined in Figure 5.22 below, a range is established in two
major stages. The low pivot forms the support level, and the
high pivot forms the resistance level.
Figure 5.22 – An illustration of how pivots are used to establish
your range (chart illustrated by Thor Young).
IDENTIFYING TRENDS
There is a very well-known saying in trading: the trend is your
friend.
The popular consensus is that in order to be defined, a
traditional trend needs three upper points and three lower
points. Most textbooks will state that it is impossible to
accurately find a trend with anything less.
I could write a plethora of pages on the subject of trend
analysis and perhaps I will save that topic for another book, but
for the purposes of VPA, I would like to simply define it in its
rudimentary form.
If the volume on your stock is stable and the price action is
following a trend, you can sit back and wait until an anomaly
appears on your chart, alerting you that it’s time to make a
change. When the Market Makers turn on their algorithms, they
will begin moving the price toward their targets. This
movement requires constant loading and unloading of shares
as the price traverses upward. This causes the standard ebb and
flow in price action that you are familiar with. If the volume
remains consistent as the price advances, then you can feel
confident that the algorithms have not yet completed their
campaign.
As you will see in Figure 5.23, drawing a trend line is not very
difficult. Once you have three points to use, you will connect
those points with a straight line.
Horizontal trend lines represent the testing of strong support
and resistance areas. They define the tops and bottoms of
ranges, allowing you to easily identify locations where major
decisions need to be made.
As the price of a stock traverses toward value, upper and
lower trend lines provide some insight into how well the
advance is proceeding. The loss of a trend can be a very
significant signal to the market and its participants.
Trend lines perfectly complement the premise that as a price
moves up on average to building volume, there will be pull back
to retest previous areas. I encourage you to always keep
ingrained in the back of your mind the key principle that the
market moves up and down in ranges.
Figure 5.23 – An example of how horizontal, upper, and lower
trend lines can be drawn on your chart (chart illustrated by
Thor Young).
CHAPTER 6: PRICE-BASED ANALYSIS
Price-based analysis, or value-based analysis as I prefer to call it,
takes into consideration the price levels that are most apt to
generate transactional volume. As I discussed in Chapter 4, the
auction is in search of value. Value is price, and value over time
is established by repeated transactions at a given price. As value
is found and rejected and the price moves toward new areas of
value, a very intricate process begins to unfold.
The market is steered by Market Makers using incredibly
complex algorithms. These systems have access to the entire
depth of the market (the previously referenced Level 2). Every
order on the book is available to be scrutinized. You must
become aware of this system to avoid being trapped by these
algorithms.
Have you ever been stopped out to the penny? I know I
certainly have been. Since that seems almost impossible
statistically, why then does it happen so often? The answer is
because these programs can see where orders are starting to
congregate. Since so many traders all use the same trading
systems and strategies, this creates obvious locations for Market
Makers to grab liquidity or supply when needed. If that supply
doesn’t exist, these algorithms can move the price to entice or
shake out weak hands, leaving only the strong hands to survive.
While there is nothing wrong with being paper handed,124 you
need to make sure you aren’t fodder for the algorithms.
WEAK HANDS
A weak hand is what STF (smaller time frame) traders are
usually called. These are traders like us who are not looking to
hold positions for a long time. Any adverse movement and our
risk tolerance is very low. What truly defines a weak hand is the
ability to tolerate risk. It is not about the size of your account.
Even the smallest account can be a strong hand if you never sell
your position. And subsequently, a massive account can also be
a weak hand if your tolerance for risk is small.
An unfortunate reality that many traders need to grasp is that
as a weak hand, you frankly have no power over the market. You
have no influence on the price of a stock nor on the perception
of its value. You are merely plankton in an ocean full of whales.
In both poker and trading, weak hands can get pushed out by
the strong hands. You will feel as though some unknown entity
in the market is hunting your stops. Guess what: it is!! However,
it’s not what you think. It’s not a personal attack on you by
some greater market authority. You, similar to plankton, will
swarm together with other weak hands, and you will quite
often do that in obvious places. The whales comprehend this
and are using the tools I’m teaching you RIGHT NOW. They
know where your stop will be set because that’s where everyone
else’s stop is located. And, akin to a whale, they will scoop down
and eat the entire school of plankton and then move on.
Therefore, it is so important to understand this game. To be
one of the plankters (that’s the fancy name for an individual
plankton) that survive, you don’t need to beat the whale, but
you do need to know where they are going to feed. Let them
feed, then ride their wake as they move to the next feeding
ground.
You can recognize the weak hands by watching the volume
and the key price levels. You will be able to spot the levels being
tested on low volume. If there is no support from LTF
participants, the weak hands will be in jeopardy and, if
necessary, they will bail quickly.
Just above the key price levels being tested will be the stops
set by the short sellers. This zone is defined by the rectangular
box outlined in red in Figure 6.1. (If you are reading the paper
edition of this book rather than the e-book edition, the colors in
Figure 6.1 will of course not be displayed in your version. The
box framed in red is the rectangular box in the top left-hand
part of the chart.) As the top of this range is set, the prior range’s
floor will become the ceiling.
You will see in Figure 6.1 that the price of the stock bottomed,
and then rose and set a range top with an isolated pivot just
under the zone marked by red dotted lines. On the pullback
short sellers came in setting a second stop zone which is
identified by the box outlined in yellow (the larger of the two
rectangular boxes on this chart, part of which is below the box
marked by red dotted lines).
The downside wicks highlighted with a circle do not
represent major buyers, they result from the short sellers who
came in under the rectangle outlined in red and are now
covering and taking profit. These short covers lead to a short
squeeze. Short squeezes occur when the weak hands are forced
out as the price comes against them. Ironically enough, most
short squeezes are caused by shorts covering. Notice that as the
price moves into the rectangular box outlined in yellow, there is
a sudden acceleration through the two zones. There is no Bull
rally here, so the price quickly stalls after the squeeze ends.
Larger short sales are added into the mix and the price begins to
fall again. This occurs after momentum runs out and we lose
the range marked by green dotted lines. This causes Bulls to
stop out and more short sellers come in to establish a down
trend.
Stops will move the price of a stock and, in contrary fashion,
profit taking will cause the price to stall. At times, the most
effortless way to make the price move is to stop out the
opposition. Getting them out of the way frees up the ladder for
an easier move.
Figure 6.1 – Chart illustrating the process of weak participants
being shaken out on a test of the Central Pivot. (chart courtesy
of DasTrader.com).
STRONG HANDS
A strong hand is what the institutional traders (the Wall Street
investment banks, mutual fund companies, hedge funds, some
proprietary firms, etc.) along with some retail traders are called.
As I mentioned, if you are plankton, then they are the whales.
These are the participants you should be watching. How they
respond to the price of a stock will move the market. Remember
though, you need to stay out of their way, so you don’t get eaten
up.
How do you avoid getting eaten? The key is simpler than you
might think. All you have to do is wait. But that is easier said
than done, huh? You must patiently wait for them to make a
move and reveal their strong hand. Then and only then can you
make your move.
The stop zones that you identify are the same areas that these
large accounts will also be paying attention to. Don’t forget that
a short seller is a buyer. Accordingly, if a larger Bull participant
wants to go long, they will initiate a position when the price of
the stock makes a new high into one of these stop zones. When
all the shorts begin to cover, they instantly will propel the price
upward. This gives the Bull an equally instant pop in profit and
the Market Maker can sell their shares to the shorts that are
continuing to cover with market orders. Then, the higher the
price goes, the more shorts there will be that get squeezed. All of
this will provide the additional fuel necessary to cause the price
to go into a discovery phase (the imbalance phase of the market
auction cycle discussed in Chapter 4) and run up higher and
higher until value is established by an LTF Bull participant
starting to sell.
Always keep in mind that there are participants of all sizes. I
have referenced whales but there are participants at every price
level. Don’t lose your perspective. You are small. Most of us STF
traders are small. Don’t try to rush or force trades. You’ll just get
eaten. You must wait – patiently - for them.
In Figure 6.2, the three stop zones are defined with dotted
lines. In what follows, I want to highlight some important
aspects of them.
The first stop zone, outlined in yellow, was established during
the open auction. Bearish traders placed stops in this zone for
the initial hour of trading. The loss of this zone in the opening
minutes led to a sell off back to R3 and 2 sessions ago’s daily low.
(If you are reading the paper edition of this book rather than the
e-book edition, the colors in Figure 6.2 will not be displayed in
your version. The zone outlined in yellow is the large
rectangular box situated in the middle of the chart and running
across the chart from the time of 9:30am till 10:15am.)
The price action set out on this chart is a good example of the
weak hands getting flushed out as the stronger hands buy in.
The box outlined in green shows the stop zone below the bids
(the box outlined in green is the rectangular box on the bottom
left-hand side of the chart). The price dropped to a daily level125
to fill a short sellers lingering large bid, and that flushed out all
the weak hands that were sitting in the stop zone framed by the
green dotted lines. The box outlined in red shows the test (the
box outlined in red is the smaller square box to the right of the
box outlined in green). Immediately after this test, the price
moved all the way up to its premarket’s highest price. The flush
was necessary. Too many short sellers were in play and too
many weak bidders were taking profit. To move the price back
up, the sellers had to get covered, so they came closer to the
price, and concurrently the weak bidders needed to be stopped
in order to clear their partials off the books. Without the
bidders, the shorts can be squeezed.
I’ve circled in Figure 6.2 the perfect buying opportunity
created by the back test of R4. Earlier, the shorts were squeezed
and R3 held. The new high and break of R4 is a strong sign that
the Bulls are stepping up. With that bid holding, the shorts will
begin to cover and the price will quickly ascend upward.
These stop zones can be used all day. Any retest of these areas
will hold considerable weight intraday. You must wait for the
price to enter one of these zones though, and then make a
decision about your entry once you know whether the price will
hold or reject the zone.
Figure 6.2 – Chart illustrating showing a quick move down to fill
shorts and stop out Bulls before starting an all-day rally (chart
courtesy of DasTrader.com).
STOP ZONES AND KILL ZONES
A kill zone is a term that I “stole” from my Average Joe/Bear Bull
Traders colleague, Ed Martin. I use this lingo when I am
visualizing areas that have a high probability to have choppy
price action. Stop Zones form at the edges of ranges and become
the areas that will trigger many stops. Stops will come in the
way of market orders which allow for price movement. As the
price action reveals the LTF participants, you can begin to
isolate where their stops will most likely be. Focusing on that
location will give you the ability to start putting a trade idea
together.
If the same price is being bid every time, and there is plenty of
volume near the stop zone, then you can figure out how well the
LTF participants are doing in defending that position. Since you
now know where they are bought in, you can thus identify a
clear area where they will most likely have to stop out. This will
be your stop zone.
Remember, the best opportunities for you to make successful
trades arise when the big accounts are forced to make decisions.
Take a look at the price action set out in the chart comprising
Figure 6.3. I want to use this price action as an example of how
what I’ve just written about works in practice.
If you were considering entering a trade on this stock, you
need to find where the Bulls first bought in. You will note in the
chart that there was a strong pre-market move that was back
tested with a hammer before the price continued moving up
(what is marked by a green circle on the left-hand side of the
chart).
An obvious stop zone was formed just above a daily level (the
narrow and long rectangular box framed with dotted lines at
the very top of the chart). It was established in the pre-market
and confirmed during the Opening Range Breakout.126 You
would have wanted to enter a long position if the price had
broken through this level and held. However, the price instead
set a pivot there, and then the ask began stepping down,
offering at lower intervals with each pull back.
Figure 6.3 – Chart illustrating a stop zone marked by the
rectangle. A circle marks the range that established that zone
as buyers bought for the next leg up. Once the price moves
below that zone a large sell off begins as Stronger Hands are
shaken out. (chart courtesy of DasTrader.com).
An obvious downside stop zone was formed just below the
previous day’s closing price (the smaller rectangular box
framed with dotted lines on the middle right-hand side of the
chart). As circled on the right-hand side of the chart, a large
buyer revealed their position as they defended the price. A short
position subsequently entered into the scene when that buyer
stopped out.
You will see on the right-hand side of Figure 6.3 that the Bull
did in fact lose the battle. These stop outs triggered the start of a
large sell off.
Here are three “truths of trading” that you must accept: (1)
Stops fuel price movement. (2) For every winner, there will be a
loser. (3) When large stop zones are triggered, both demand and
the amount of participation will increase substantially. This is
fear and greed at its finest. It’s imperative that you are aware of
these kill zones. Paying attention to them will not only keep you
from getting stopped out, but it will also give you some possible
entry locations to play the break as others get stopped out.
BUYERS ARE SELLERS
There is one concept that is very critical to understanding price
analysis. It is the reality that buyers are sellers and vice versa. I
mentioned this a few pages ago in the context of short selling. It
is important to stress this point because to anticipate where
someone is going to get forced out of a position, you need to
first realize their role and thus where they must stop out.
The moment a participant enters the market and buys shares,
they are now by default a seller. Any buyer, no matter how large
their position, has a maximum loss that they can incur. When
the LTF participants hit their maximum loss, their stop outs
will have a massive impact on the price of the stock. On the
smaller time frames, it will cause squeezes and slams.127 On the
larger daily time frames, it will cause transitions between
ranges.
Uniquely, this is also true for short selling. In most instances,
being a seller does not automatically make you a buyer. The
exception is if you are a short seller. Short sellers must cover
their positions and carry a maximum loss. Therefore, a short
seller is in fact by default a buyer. Accordingly, short sellers are
a vital part of the game. You need their stops to help propel the
market upward.
The ideal location for a breakout trade is an area or zone
where it is obvious that many of the stops set by short sellers
will be triggered. These “short stops” are often required in order
to move a stock up to its next value area. Remember – all stops
move the price, but the stops set by short sellers fuel especially
strong upward expansion.
To be able to read these stops correctly, I like to identify
ranges and then map them out into zones. This helps me
visualize these areas.
I briefly reviewed ranges in the prior chapter. With valuebased analysis, you can easily spot where the strong and weak
hands are camping out.
Ranges can be identified using three major indicators:
1. Isolated pivots (discussed
accompanying Figure 5.21).
in
the
commentary
2. High value areas.
3. The confirmation of the strength of a specific level
through multiple tests of it.
As a stock trades throughout the day, ranges will become
more obvious. They are established by the LTF participants as
they make decisions about their positions. In Figure 6.4, a 1—
minute chart of NVIDIA Corporation (NVDA), you will notice
how the price of the stock tests both a previous daily level and
the R3 level multiple times before the top of the range is
confirmed with an isolated pivot. The price then breaks the
bottom of the range and enters a downward trend.
To assist you in understanding a value-based analysis process,
I have marked on this chart the three major indicators I just
listed. You will see that:
1. An isolated pivot set the top of the range before the loss
of the lower range.
2. A high value area was marked by VPOC in yellow at the
R2 level (the R2 level will of course not be marked in
yellow for those readers with the paper edition of this
book).
3. The strength of the range was confirmed through
multiple upside and downside tests of it.
Figure 6.4 – 1-minute chart of NVIDIA Corporation (NVDA)
illustrating how three major indicators can be used to identify
ranges (chart courtesy of DasTrader.com).
TREND CORRELATION
The next topic I want to expound upon is how to go about
identifying a trend. This might seem simple enough at first
glance, but often traders get caught up looking at a trend in a
smaller time frame and ignore the trend on the larger time
frame. LTF participants live in this larger time frame. I can’t tell
you how many times I’ve gone long (or short) on a break only to
have it halt and immediately turn around. It usually only takes
a quick review to discover what happened. My trade will be
straight into a daily level and it will appear strong on my 1minute and 5-minute charts. Once I examine my daily chart,
however, I without fail will realize that the market was offering
lower at certain retracements. The stock I thought was long
ended up having an all-day fade. Short and sweet, I was playing
against the strong hands. I’ll show you a good example of a
trade I got right later in this chapter.
To establish a trend takes time. Further, it isn’t always obvious
that a trend has been established because stocks trend using
different indicators. One stock will trend down using a moving
average, where another may trend down on daily levels, or
trend down on even numbers (half-dollars (such as $1.50,
$2.50, $3.50) and whole dollars (such as $1, $2, $3) normally
act as a support or resistance level). It’s important to study your
charts and figure out which indicator is working for that stock
at that time. If the price is ascending, where does the bid step up
during the pull backs? If you discern that the bid steps up every
time there’s a pull back to the 20 EMA, then that is going to be
your focus (and not just for existing positions being added to or
new positions entering the scene, but also for reversals). Once
you understand where a stock is trending, you can now wait for
an anomaly to signal that the trend is changing. For instance, if
the bid steps up every time the price touches the 20 EMA, you
will know that the 20 EMA has been lost and the trend is
changing. The only question will be whether the change in
trend will continue or falter.
Although moving averages are used as momentum indicators,
they work best as trend indicators: Is the price of the stock still
in the trend or is the price starting to have trouble holding the
trend? My personal favorite moving average is the 20 EMA. I use
it on all of my charts and it is a great tool for monitoring a
trend.
Your task is to assess where the market is trying to go and
how well of a job it is doing to get there. For instance, is the
price of the stock still trending down and making new high
volume lows with small low-volume retracements? Perhaps
instead the price is stalling and it’s crossing into the moving
averages. In Figure 6.5, a 1-minute chart of NVIDIA Corporation
(NVDA), you can see that once the range was broken, the price
trended down on the 9 EMA (if you look at the right-hand side
of the chart, this is the dotted line running across the chart that
ends at about the $235 price level).
Figure 6.5 – 1-minute chart of NVIDIA Corporation (NVDA)
illustrating that once the range was broken, the price trended
down on the 9 EMA (chart courtesy of DasTrader.com
CONSOLIDATION
Consolidation, not to be confused with compression, occurs
when the price of a stock encounters minor resistance as it is
trending higher. When the market is in an auction period, the
price will be moving up the order ladder until it runs into a
large seller. This seller will be large enough to stall the price
action because the Market Makers need time to adjust their
inventory after filling their orders. Because there are more
orders above where the price is at this moment in the market
auction cycle, the Market Makers will stall the price movement
and consolidate on low volume. Once they are ready, the price
movement will resume its advance. Although I myself do not
trade patterns, the vast majority of trend continuation patterns
will present on your charts during a consolidation. You will see
an example of a price consolidation in Figure 6.6.
Figure 6.6 – An illustration of how a price consolidation can
present on your charts (chart illustrated by Thor Young)
COMPRESSION
Compression, not to be confused with consolidation, occurs
when there is high average volume and the price of a stock
encounters heavy resistance as it is trending up or down. In a
Bull market, compression comes about as the effect of many
participants placing bids in order to purchase a stock causes the
bid price of the stock to rise on your Level 2, while concurrently,
the effect of many other participants placing asks in order to
sell the stock causes the ask price of the stock to be static or
descending on your Level 2. Once one of the LTF sellers is able
to make a sale, the stock price will begin to distribute slightly.
Nevertheless, you will notice that the effect of the number of
participants still placing bids in order to purchase the stock will
result in the bid side of your Level 2 continuing to step up at
higher prices. This creates an ascending wedge. Eventually, the
bid side of your Level 2 will be overleveraged if the price doesn’t
breakout. This causes a slam in the price. A slam is the opposite
of a squeeze. If they are too aggressive, the Bulls can create too
much resistance as they buy and place profit targets. The shorts
will recognize this imbalance and the Bears will pounce. You
will see an example of a price compression in Figure 6.7. (As an
aside, in a bear market, the process outlined in this paragraph is
inverted.)
Figure 6.7 – An illustration of how a price compression can
present on your charts (chart illustrated by Thor Young)
EXPANSION
When compression or consolidation breaks, you will get
expansion. The tightening of the price adds fuel to the engine
that will propel the price in its search for new value.
Consolidation, compression, and expansion can form on all
time frames. A stock can compress on a 1-minute chart or on a
daily chart. Both are valid and need to be considered. When you
are seeking for stocks to play, one item to focus on is the daily
chart. Does the stock look like it is in a range that should cause a
significant expansion? That potential for expansion paired with
a solid catalyst can be extremely powerful.
One point I need to clarify is that expansion does not mean
up. It’s simply the opposite of compression or consolidation.
The price will compress or consolidate and then expand. You
utilize VPA to learn if the price is compressing or consolidating
prior to the expansion.
I have highlighted an example of price expansion in Figure
6.8.
Figure 6.8 – An illustration of how a price expansion can
present on your charts (chart illustrated by Thor Young).
FAILED EXPANSION
Failed expansion is the final topic I want to cover in this chapter
on price-based analysis. When you trade with Camarilla pivots,
a large part of your strategy will center around this concept.
When a stock attempts to drop below a certain price level, or
tries to gain support above a certain level, the failure of that
attempt is a massive opportunity.
When you are searching for winning trades, one of the most
important factors is the possibility for a good risk versus
reward. When the price fails to expand, your risk is very small.
You can place stops above or below the failure location to force
the stock to prove intent128 in order for you to stop out. You will
recall from my commentary earlier in this chapter that the
strong hands will be with you in this endeavor if the correct
indicators are in place. You are also now moving into a position
at the absolute bottom or top of a range that was just defended.
This means you can play the entire range until you receive an
obvious signal to get out. You will see an example of a failed
expansion in Figure 6.9.
Figure 6.9 – An illustration of how a failed expansion after an upward test can
present on your charts (chart illustrated by Thor Young).
CHAPTER 7: TAPE READING
Compression and expansion occur mostly during consolidation
points near high value areas. Being able to identify compression
is very helpful but you nonetheless still must know “when” the
price will breakout or expand. In order to time your entries, you
will need more than just the ability to recognize how candles
are forming or where the price has been. To judge the extension
of the price, you need to know its value, but that will not tell
you when the price will move. To be successful, there is a vital
skill that must be developed by all day traders. It’s a skill that is
almost as old as the market itself. And that is tape reading.
Beyond where the price has been, you must also be able to read
the demand in order to know which direction the price will
break and when it will do so. You need to be able to read your
Level 2 and Time and Sales.129 Together, these two tools make
up the tape. When you understand both of them, you will be
able to spot imbalances in the market and isolate obvious
demand at specific prices. This skill will give you an extreme
edge over almost any chartist.
The rise of larger spreads in the 90s forced tape readers to
abandon the classic style tickers and focus their attention
instead on market depth screens, most commonly referred to as
“Level 2”. This was a pivotal decade in the world of trading as
complex algorithms took over the market. Concurrently,
incredibly large order volume slowly became the norm as bigger
and bigger firms began to be established.
After this revolution in market structure, tape readers found
an obvious edge over other participants. As I wrote in the
Introduction, even Investopedia admits that tape readers have
an inherent advantage over chartists because they can interpret
intraday data in real time.
Tape readers filter pages of numbers into surprisingly
accurate predictions of short-term price movement. This
market skill has many advantages including allowing its
proponents to measure the emotional intensity of participants
while they uncover the trading day’s leaders and laggards.
In contrast, chartists have an inherent disadvantage to tape
readers. They are using lagging indicators to attempt to predict
future price movement. Fortunately, since past participants do
affect the future price of a stock, this does work at times. But to
be a chartist, you must have a substantial risk tolerance, and
nerves of steel.
Whether you are surfing or trading, patience is a crucial
personality characteristic. You can’t just hop up on any wave.
You need an adequate wave, and if you are participating in a
competition, you need a great wave. It doesn’t matter how
skilled you are as a surfer or how long you have been doing it. If
you don’t catch a great wave, you aren’t going anywhere. As a
surfer, you must wait until you have a sufficiently large wave
with enough power behind it. If you jump up too early, you
miss; if you jump up too late, you miss. Timing in both surfing
and day trading is huge!
Drafting the opening of this chapter has reminded me of the
Bear Bull Traders chatroom. My good friend, Dr Andrew Aziz,
often talks about not being happy with a stock’s order flow. You
will hear him remark in chat: “It’s not moving,” or “I don’t like
it. It’s not going anywhere.” He is a master at catching the wave
at the ideal time. He waits until a stock has lots of volume and is
moving in a specific direction on high order flow. This skill
makes him one of the most dynamic and impressive
momentum traders in the game.
Similar to a pro surfer, Andrew no longer needs to overly
analyze the conditions of the water he’s in. He can feel the
conditions change and he knows when the wave is about to
come.
Free your mind to see the market as an entity that is living,
breathing, and changing in the present. Don’t view at it as a
construct that is bound and tied to the past. So many stock
traders fail attempting to predict the unpredictable. So why
even try?
You can’t tell where a ship is going by looking at its waves,
they can only tell you where it has been. You must pay attention
to the actual ship. When you are tape reading, you are doing
just that. You are watching the supply and demand to discern
where the market wants to go. Then, once there, you can read
the market auction cycle and decide when to get in or when to
get out. It’s all sitting in front of you on the tape. And if you
learn to read the tape correctly, you will have an edge over the
vast majority of retail traders.
THE STRUGGLING TRADER
Traders will very often share with me about not having
consistency in their trades. Their stories are generally the
same:” I always seem to have the right idea, but I wasn’t sure
when to take the trade,” or “I got in, but I got stopped out, and
then the trade did exactly what I thought it would do.”
These are symptoms of trading with a “Where”, but not a
“When”. A plethora of different indicators offer you a “Where”,
including moving averages, daily levels such as the previous
day’s closing price, Camarilla pivots, patterns, and even volume
spikes.
Nevertheless, none of these items can tell you “When” it is
time to trade. The solution? The tape. It displays the moves of
the market’s larger players. Since all transactions must be
recorded on the tape, there is nowhere to hide. This tool is very
simple to implement and given that every single order will pass
through it, you can observe “When” the larger players are
buying/covering or selling/shorting.
Your approach as a trader must be virtually identical to that
of a surfer waiting for a promising wave. Your wave is the larger
participants. When they move, the price moves with them.
Without them, the price goes nowhere. For a wave that’s worth
riding, you must wait for the wave they create.
I want to take a moment before reviewing some of the history
of tape reading to make one last comment about the relevance
of the tape and why it is critical to nailing consistent trades. To
do that, I will briefly summarize the three primary types of
indicators.
1. Predictive – These are indicators like daily levels, pivots,
retracements, new highs, or new lows. Although these
indicators are a “Where” and not a “When”, they are
crucial. You must determine “where” within your
system you are going to be looking for potential stocks to
enter a position in. However, that does not mean that
you will automatically take the trade.
2. Lagging – These are indicators like moving averages,
VPOC, VWAP, and RSI.130 These offer you some analytical
value, and in certain instances a “Where”, but none of
these tools will help you get into a trade, even if you use
the price of the stock crossing one of these as your entry
signal. While you may wonder why this cross and why at
this time, you still won’t have a trigger.
3. Realtime – These are indicators like Level 2 and Time
and Sales. These are two of the few indicators that show
you exactly what is happening. They are the “When”. In
Level 2, there are concerns regarding manipulation, but
even that is a clue as to what will happen if you can see it
unfolding. On Time and Sales, there is no manipulation,
just pure data. You will be able to spot precisely when the
LTF participants buy and when they sell. All you need is
a “Where” to focus on so you have a starting point. You
can then read the tape and note what the LTF
participants decide to do.
With that said, or typed, as the case may be, I want to now
provide you with some history about the actual tape and how it
came to be.
THE HISTORY OF TAPE READING
Back in the heyday of the early market, although telegraphs
were available and ticker tape machines were in wide use, to be
able to trade successfully you had to be on Wall Street and near
the exchange. But near the exchange was definitely not on the
exchange. At the beginning of the 1900s, massive office
buildings (massive for their time, at least) were constructed
around the exchange. Stock traders would read the incoming
ticker tapes and use floor runners to “run their order” from
their office down to the exchange and hand it to one of the
Market Makers. I’m being serious here. They would literally jog
down Wall Street and through the front door of the floor of the
NYSE. This was one of the main reasons the floor opens directly
to the street.
Thanks to the speed of the ticker tape machines, the trader
would often know their order had been filled before their
runner had returned to the office. Being a floor runner was a
sought-after, entry-level position that many aspiring traders
used as a way to get their foot in the door of some of the nation’s
most prestigious firms.
While telegrams and ticker tapes allowed you to effectively
judge the market, the mood of the market was not so easy to
discern. Given that, how did so many great traders make their
fortunes in this environment? Quite simply, they utilized the
same basic concepts that we do. They would take the
information being relayed and plot their own charts, looking
for any nuance that would indicate unusual buying. Seeing an
out-of-the-ordinary increase in volume was (and still is) always
a quick way to identify a stock with a catalyst. After making a
telephone call or two to verify the news, they would use their
telegraph to send an order to their broker. Of course, it took
much longer to get filled than it does today, as once their broker
received the order, it had to be run over to the floor of the
exchange. Once filled, they would get a telegram confirming
that they were entered in a position. They could then patiently
await the ticker tape.
Figure 7.1 below is an illustration of a circa 1889 trading desk.
Figure 7.1 – I sense this does not resemble the trading station in
your home office!
THE TICKER TAPE
Figure 7.2 is a sample of a more modern version of a ticker tape
from around the 1950s and thus it is a less complicated read
than what was available in the latter 1800s. Ticker tapes were
the principal tool of the trade for those pioneering traders.
Although the ticker tapes did not include an abundance of data
(whether it be in the 1800s or the 1950s), they did provide the
traders with what was necessary to execute a winning trade.
With this information, they could log the tape on any ticker
they were following and track any changes. It took a lot of work
to be a trader in those days (and it still does!). Back then, if you
missed a day, you could miss it all.
In the first block of text in Figure 7.2, the ticker tape
references the ticker symbol (ABC) and indicates that 100
shares of ABC had been traded at a price of $37.31/share. To
save space, the number of shares traded are referred to by lots,
with “s” replacing the zeros. You’ll recall from Chapter 5 that a
standard lot is considered to be 100 shares of a specific stock.
The next block of text indicates that there was a transaction
involving 7,900 shares at a price of $37.50 each. Accordingly,
the stock has increased by $0.19/ share.
The final block of text indicates that there was a subsequent
transaction of 10,000 shares at a price of $37.61/share. The
price of ABC’s stock has increased by an additional $0.11. This
stock is on the move price-wise and a good number of shares are
being sold and purchased.
This sort of price action would certainly catch the attention of
the traders of years past.
Figure 7.3 is a photograph from December 1918 showing two
employees reading the ticker tape and updating the stock
exchange board.
Figure 7.2 – A sample ticker tape from around the 1950s.
Figure 7.3 – This photograph dates back to December 1918.
The caption provided by the photographer, Underwood &
Underwood, states (using language that we would not today):
“The Waldorf-Astoria Hotel is employing girls to operate tickers
and stock exchange boards. The Waldorf is the first to employ
girls in its various departments, in order to release men for war
work.” (Notwithstanding that caption and the date attributed
to the photograph, I note that the First World War had actually
ended one month earlier.)
Figure 7.3 – This photograph dates back to December 1918. The
caption provided by the photographer, Underwood &
Underwood, states (using language that we would not today):
“The Waldorf-Astoria Hotel is employing girls to operate tickers
and stock exchange boards. The Waldorf is the first to employ
girls in its various departments, in order to release men for war
work.” (Notwithstanding that caption and the date attributed to
the photograph, I note that the First World War had actually
ended one month earlier.)
Figure 7.4 For over a century, used ticker tape has been
“repurposed” into a form of confetti. It is either cut up into
scraps and tossed from the windows above a parade, or at
times the entire spool will be thrown from a window. These
ticker tape parades are synonymous with New York City and, in
particular, Lower Manhattan. They generally celebrate a
significant event such as the end of World War I and World War
II, the safe return of one of the early astronauts, or a winning
sports team. *Fun Fact
TIME AND SALES
Now that you’ve had a look at the old ticker tape, it’s time to
learn about the new one. The new tape begins with the prints131
coming across your Time and Sales.
When looking at the tape you must first think about what you
are seeing. You are not seeing the buys and sells between traders
and other traders. You are seeing the transaction log of each
trader’s interaction with the Market Makers. This is a very
important distinction because with this we can isolate out
certainly players and what they are trying to accomplish. We
will talk more about the MM’s role but for the meantime let’s
just say it’s to provide order flow. But in order to do that they
need participation from the market.
As you watch the tape you must put yourself in the Market
Makers chair. I often think as if I am watching it from a third
person point of view. How much demand am I currently seeing?
Do I need to start accumulating for a move up or do things still
look weak? There are lots of orders coming in. Which direction
and where are they coming in at?
If the Market Maker starts encountering a significant amount
of buying volume then they will recognize that the demand for
the stock is increasing. Knowing that they need to start
warehousing, they will start moving the price up and down.
Each time they get to a price level you will see their volume
spike and a large set of transactions. Once the Market Maker is
ready, they will initiate the upward movement. If there is a
proper amount of participation the stock will move and a
traverse to new value will begin.
If you are watching the tape you can start to recognize when
those moves are beginning and ending by paying attention to
the order flow and quantity.
As mentioned, the Market Maker’s role is to provide order
flow. In many regards, they get a bad reputation, but the reality
is they are a vital component to how the market functions.
Without them the market would be chaos. Think of a cattle
auction without an auctioneer. It would be almost impossible to
establish a clear value and generate fair trade.
In the market making process, they only raise or lower price
as demand requires it. In order to maintain order flow, the
Market Maker will move the price up and down in order to
encourage participation. When the price goes down Bulls take
profit and Bears come in. When the price goes up the Bears
cover, and the Bulls come in buying positions. Anytime the
Market Maker moves the price there are decisions made by the
market participants.
If you ever play a stock that is really choppy and tends to have
a wide spread, you are likely looking at a stock with little
participation. Because of the lack of participation, order flow
generation is made more difficult. This will cause the Market
Makers to move the price action in a more erratic fashion as
they fulfill requests.
Recall the revolving door reference from Chapter 5. This
visual for how this profiting works must be considered as you
read the tape. The algorithms that the Market Makers use react
to demand at and away from the price.
Understanding their function is key to reading “When” it’s
time to take a trade on the tape.
For your reference, the following is an example of what might
unfold in a bullish situation:
Let’s assume that a large amount of volume starts to hit the
ask, which alerts the Market Makers that demand is coming in.
If Level 2 has orders to sell up the ladder, then the Market
Makers will commence to run the ladder. Nevertheless, there
MUST be orders on the ladder to the topside. As the price moves
up, previous buyers will sell, which will allow the Market
Makers to buy and replenish their inventory. They will then sell
that back to new buyers who are looking for a continuation in
the direction of the price. As the price maintains its rise, the
short sellers will begin covering. This will result in increased
buying demand and will prompt the Market Makers to move up
even faster to encourage even more selling. This will continue
until the Market Makers run into an order that is sufficiently
large to exhaust their inventory, forcing them to halt their
actions and consolidate.
If there is no potential for order flow to the topside, then the
Market Makers will realize that the demand has lowered, but
they will still want order flow and will also now need to
accumulate shares. Don’t forget though, they don’t care about
the price. Once the larger participants recognize that the Market
Makers have stalled on a large sell order, the short sellers will go
to work. As short sellers come in, they will start shorting, which
will force the Market Makers to take on too many shares. This
causes an excess that the Market Makers will need to rectify
soon. The Bulls will then catch on to the struggle that is
underway and begin taking profit, which will put even more
pressure on the Market Makers. The Market Makers will now be
overloaded with shares. They will need to sell them and will
therefore be forced to commence distributing. The Market
Makers will thus try to lower the bid in an attempt to entice
Bears to buy shares from them, but it won’t work in this range.
As well, the short sellers will start putting profit targets well
below the bid. The Market Makers will ultimately drop down to
the price levels of those orders to distribute the shares they
accumulated.
As the shorts cover their shares, the Market Makers will begin
to empty out their stockpile. However, until they can empty out
enough, they will keep dropping the price. The shorts will cover
more, buying back shares for their brokers at lower and lower
prices. (As an aside, the Market Makers love that.) Concurrently,
new short sellers will come in, helping to advance this price
drop. Eventually, just like before, a large cover order will empty
out the Market Makers’ warehouses, causing them to stall. The
Bulls will recognize that the Market Makers now need to
accumulate, and they will accordingly commence buying. This
will force the Market Makers to result to naked shorting so as to
handle the excess buy orders.132 With all of this buying demand
coming in, the Market Makers will start to raise the ask. This
will squeeze the shorts and bring in more buying. As this is
occurring, the Market Makers will use the sells on the order
book to fill the shorts and the Bulls. This can often create a very
fast upward movement in price since the Market Makers need to
accumulate while on the move. This will continue until the
Market Makers again run out of inventory.
The Market Makers will then be forced to stall the price as
they accumulate shares. At this stage, the volume is usually
lower and it takes the Market Makers a bit longer to gather in an
adequate quantity of shares. In addition, you will notice that
your Level 2 will become balanced (as I referenced in Chapter 4,
a balanced Level 2 is one where the supply and liquidity in both
directions are equal) and the stock will become difficult to
trade. You are now waiting for a signal that it is time to make
your next move. Once the Market Makers are ready, and if the
demand still appears to be somewhat high, they will begin to
run the ladder, forcing a large cover by short sellers, with the
Bulls simultaneously rushing in. You will be able to spot this
exact moment on your tape.
This quite simply is how the market moves, over and over
again. To be a successful trader, it is important that you
understand the basics of this process. I encourage you to read
through these few paragraphs a handful of times if necessary,
in order to digest the material.
I now want to explain how to distinguish the key
participants. Since the LTF participants are who the Market
Makers follow, you need to follow them too.
To be able to do that, you must separate the LTF participants
from the STF participants. There is literally a ton of noise in the
market, and it is essential that it gets filtered out to some degree
at least so that you can easily see the most significant
transactions. To assist you in doing this, you need to configure
your tape. In my platform, DAS Trader Pro, configuring and
filtering your tape is thankfully not a complicated task. As I
mentioned earlier, if you are using a different platform for
trading, you should not hesitate to reach out to that company’s
help desk if you encounter any obstacles in performing the
various steps I outline in this book.
SETTING UP TIME AND SALES
For your Time and Sales to display quotes from your Montage
window,133 it has to be anchored to your Montage window. This
is a very straightforward procedure.
First, open a new Time and Sales by going to the main tool bar
and select Quotes then, Time and Sales. Once the window pops
up, you will notice it is blank. Now, using your mouse, click and
drag the anchor icon from your Montage window to the blank
area on your Time and Sales and release the mouse.
I have indicated this step with an arrow in Figure 7.5 below. If
the market is open, you should immediately see quotes start to
come in.
Figure 7.5 – A screenshot showing how to anchor your Time
and Sales to your Montage window in DAS Trader Pro
(screenshot courtesy of DasTrader.com).
To read the tape, you need to understand how your Time and
Sales is color coded. If you wish, you can change these colors to
whatever your preferences may be. For the purposes of this
book, I am using the industry standard colors.
Figure 7.6 contains a screenshot of a sample tape plus a
summary of what the color of each transaction represents.
Unfortunately, if you are reading the paper edition of this book
rather than the e-book edition, the colors will not be displayed
in your version. However, they will of course be displayed on
your trading platform.
Light Green – A transaction in this color occurred above the
ask price. The more transactions there are in lime green, the
more enthusiasm being demonstrated, as they show that
buyers are willing to pay slightly more than what the stock is
currently worth.
Green – Means the transaction occurred at the ask price. A
good number of transactions in green confirm that “normal”
buying is underway and the stock’s price is moving.
White – Means the transaction occurred within (inside) the
spread. Most often, transactions in white are fractional orders
(e.g., $24.512). If there are many transactions in white, it can
also be an indication that the stock in question has a large
spread.
Red – Means the transaction occurred at the bid price. A
plethora of transactions in red show that the sellers are giving
up on the stock and are willing to sell on the bid price (the bid
price is always lower than the ask price). This demonstrates a
lack of demand.
Pink – Means the transaction occurred below the bid price. A
sizable number of transactions in pink show that the sellers are
in crisis mode and have started selling below the bid price. This
is often caused by a combination of panic selling and short
sellers beginning to jump in on market orders.
Keep in mind when reading your Time and Sales that each
transaction represents a buy and a sale occurring at the same
moment (in order for one trader to buy, another trader has to
sell). I have found that sometimes we as traders focus too much
on the transactions in green. But remember, when a Short
Selling Restriction134 has been imposed on a stock, a big flood of
green on your tape just might be traders going short (and not
long) on an uptick in price.
Figure 7.6 – Screenshots of a sample tape plus a summary of
what the color of each transaction represents (screenshots
courtesy of DasTrader.com).
The only information you need to take away from a
transaction on your tape (each of which represents a
simultaneous buy and sell), is the relationship of that
transaction to the current market price of the stock.
There are three major types of participants. Although they
can be broken down into various subcategories, it is easier to
keep them in their three groupings. Some of this will seem
rather obvious by the time I have finished my explanation, but I
can assure you that very few traders watch the tape in this way.
1. Participant group 1 is highlighted in Figure 7.7, a
screenshot of a sample small tape. These transactions
are normally comprised of under 100 shares and are
made by the retail/speculator group of participants
(that’s primarily you and me). Most of the traders who
have signed up with Robinhood, or who participate (and
I might add, very aggressively!) on the WallStreetBets™
subreddit, as well as the mom-and-pop traders working
from home will be coming in on this tape.
2. Participant group 2 is highlighted in the screenshot of a
sample tape marked as Figure 7.7. These transactions
are usually comprised of between 100 and 1000 shares
and are made by larger retail traders, props, and firms.
While there is definitely some buying power with this
group, nothing that they do will sway the market to any
significant degree.
3. Participant group 3 is highlighted in the screenshot of a
sample tape marked as Figure 7.7. These transactions
are always comprised of more than 1000 shares and are
made by the big dogs (i.e., large props, hedges, insiders,
designated Market Makers, and institutions).
Figure 7.7 – A screenshot of 3 sample tapes showing the 3
types of trades made by the various participants small to large
(i.e., retail, prop, institutional). (screenshot courtesy of
DasTrader.com).
When you are reading the tape, you are mainly going to be
using it to identify what the current type of participation is. If
the price is struggling and there are no large orders, you will
notice a lack of participation. This should stop you from trading
the ticker. The key here is to wait for the participation to build.
Although it does require patience, it will save you from a lot of
stop outs and ensure you are only entering into trades that have
the best potential for success. We need the Market Makers’
algorithms to get to work moving large orders and you can see
that move through the various tapes.
Below, in figure 7.8, is a screen shot of my Time and Sales
configuration. You will notice a field titled ‘Shares’, which is set
to ‘1000’, and field titled ‘Sign’, which is set to ‘>=’. Using two
addition Time and Sales windows, you can set their
configurations to ‘100’ with ‘>=’ and ‘100’ with ‘<’, allowing you
to see what is happening with each Participant group.
Figure 7.8 – A screenshot of the Time & Sales Configuration
Menu (screenshot courtesy of DasTrader.com).
Now that you understand how Time and Sales is configured,
let’s discuss how to interpret what you are seeing. You want to
focus on shifts in balance, stalls in flow, and contrary
movements. If the price of the stock you are watching is
trending downward, then you are going to be looking for large
buy orders which signal that Bears are covering, or Bulls are
starting to buy. I know that explanation sounds simple, but it is
far harder than you would think. There is a ton of random noise
on Time and Sales. There are many orders that do not make
much difference at all in the order flow. You need to be
searching for specific sizes of orders in certain locations.
A major component of knowing “when” to take a trade is just
merely waiting. Sometimes this can be very difficult because
you are constantly FOMO’ing,135 thinking the price is going to
move away without you. I can assure you though that without
the proper initiation, the price of a stock isn’t going anywhere.
You need to be patiently waiting, keeping an eye on the tape.
When you are monitoring your Time and Sales, always
remember that you are following the Market Makers’
transaction logs. Whenever there is green or lime green on the
tape, you are seeing buying. This buying can be for any number
of reasons. Shorts may be covering, or Bulls may be coming in.
Either way, to the Market Makers, they are hitting the ask, and
you are seeing that represented by green prints.
If you are scrutinizing your tape for a rise in the price of the
stock, you should expect to observe buyers coming in heavy
and, concurrently, shorts covering, bringing in even more
buying. This action will encourage the Market Makers to raise
the price of the stock to satisfy the demand. However, reading
Time and Sales isn’t only about noticing “when” buying is
unfolding. You need to pair that with what is happening with
your other indicators (i.e, VPA, Level 2). For instance, if the
green prints start coming in, confirming that there is
considerable buying underway at a key price level, but the price
isn’t moving, you should investigate what kind of prints you are
seeing. If they are transactions being primarily made by retail
traders (i.e., the participant group 1 I described not too many
pages ago), then there’s a chance you may end up being trapped.
One of the most important elements of Time and Sales is the
order flow and its rate of volume. How fast are the orders
coming in? Are they coming in large bursts? Are they coming in
a consistent flow? Are they stagnant?
1. Bursts – When participants start making decisions, you
will begin to spot short bursts of high volume. This
signifies some retail profit taking combined with larger
participants making decisions. If there is too much
volume at any one time, the market can turn faster than
expected, and so in the early stages, these short bursts
are what will alert you that a movement in the price of
the stock is afoot.
2. Constant – When the price of the stock is in transition,
there will be a constant flow of orders. The flow will slow
down as the price consolidates and then increase as the
advance continues. The order flow will remain
consistent with only occasional bursts of higher volume.
3. Stagnant – When the order flow stalls and completely
stops, red flags should be going off. If a stock is
advancing in price without orders, it is probably topping
out. This can make the stock a little volatile and choppy.
Without proper order flow, the spread will widen, and
risk management will be much more difficult.
Here’s a tip: When you are watching the tape, movement on
the tape should equal movement in price. If the tape is moving a
lot but your price is stagnant, then there’s a good chance the
price may be about to head in the other direction. For example,
let’s imagine the stock you are following is trending downward,
hits a certain price level, you see a large burst of green orders,
but the price doesn’t bounce. It instead holds at that price level.
This is not likely a buyer coming in but rather a short seller
covering. A buyer normally comes in with a market order to
ensure fill. Profit taking generally happens with limits in order
to control the recoil. The key will be in how the market
responds to the burst of green orders. What comes next? More
red orders or more green orders? More red orders will mean that
there is apt to be continued selling. If a market order comes
through with volume you will see the price move.
This flow helps you recognize large orders that are being sent
in by algos. Like the water out of a faucet, when the algorithm
kicks in it is comparable to someone opening the faucet to full.
When retailers and smaller accounts take positions, it just
creates small spurts. Recognizing the difference in flow will
allow you to see what type of participants are getting involved.
LEVEL 2 “ORDER BOOK”
Tape reading can be broken down into two vital skills: reading
Time and Sales and reading the Book.136 When teaching tape
reading, I often compare Level 2 and order flow to what I call
the “mirrors”. When you are driving down the road, you never
change direction without looking in your mirrors. In a similar
fashion, you should never trade without checking your tape
(i.e., your Level 2 and Time and Sales).
Being able to distinguish the nuances between a bullish and
bearish Level 2 will help you to isolate directional bias. You do
this by paying attention to what is known as the “ladder” of
supply or demand towards critical price levels. The core factors
are always supply, demand, and value. Every aspect of trading
centers around that. I also want to take a brief moment to stress
that patterns do NOT predict future price movement. What
they do is create a location to evaluate a trade, but that is all
they will ever give you. You must learn to read the current
supply and demand in the market if you are to be a successful
day trader. Once you are able to do so, you will see where buying
and selling is occurring, and you will see where large liquidity
and supply areas are situated. This in the end is the most
optimal way to accurately gauge the future direction of price.
Why overcomplicate the process by focusing on lagging
indicators? Nonetheless, to read the Book, you do need to know
how to configure your Level 2.
LEVEL 2 CONFIGURATION
Figure 7.9 is a screenshot of the Level 2 for Lucid Group Inc.
(LCID). You will see that I have flagged on the screenshot the
major components of Level 2, as follows:
1. Level 1 – Level 1 provides you with information such as
a stock’s Previous day’s Closing price, Volume, Bid-Ask
Spread, VWAP, current bid and ask prices, and last sale
price.
2. Level 2 – Level 2 displays a ranked list of the best bid and
ask prices from many different Market Makers and
participants. When orders are placed, they are listed
here, giving you a detailed insight into the price action of
a stock before your trade unfolds.
3. Market Maker ID – These abbreviations let you know
which Market Maker an order is coming through on.
4. Book – An order book is an electronic list of buy and sell
orders for a security or other instrument organized by
price level.
5. Tier – A tier is a price level for which there are buy or sell
orders. For example, I have marked as “5” in the ask
column of Figure 7.9 the $27.89 tier. There are three
different Market Makers with asks at that tier. (You will
recall that an ask is the price that a seller is offering to
sell their stock at.)
6. Grouping by Color – Level 2 will group by price every
buy or sell order and then highlight each price grouping
by color to assist you in focusing on a specific grouping
(aka a stack).137 For example, I have marked as “6” in the
bid column of Figure 7.9 the $27.64 tier. There are two
different Market Makers with bids at that tier and they
appear in gray. The bids at the price levels greater than
and lesser than $27.64 appear in white. (You will recall
that a bid is what a buyer is willing to pay for stock.)
These colors will repeat. I like to use alternating grey and
white to separate the tiers. It creates a clean neutral
background such that highlighted orders will be easily
visible.
Figure 7.9 – A screenshot of the Level 2 for Lucid Group Inc.
(LCID) flagged with the major components of Level 2
(screenshot courtesy of DasTrader.com).
Figure 7.10 is a screenshot of how I recommend you configure
your Level 2. I have flagged on the screenshot the major needed
elements, as follows:
1. “Tier Color” – As noted in point 6 in Figure 7.9, up to
seven price tiers can be given a color to help you focus on
a grouping of multiple bids or asks at the same price but
from different MMIDs.
2. “Price Format” – Being able to switch to two decimal
places can significantly clear up the bids and asks being
displayed. In addition, when trading the stock of
companies with medium or large floats,138 you will not
need to complicate the situation by having to worry
about any fractions.
3. “Highlight whole row” – As you’d imagine!
4. Tier Settings – I recommend setting all of the tier
options to a minimum of 150 each. This will allow your
Level 2 to display 150 tiers (price levels) and fill each tier
with the top 150 asks or bids from various MMIDs.
5. “Show quote size in number of shares …” – I
recommend unchecking this box so that the number of
lots in a specific Market Maker’s bids or asks is displayed
rather than the number of shares. I find the number of
lots much easier to process in my mind and, as well,
selecting this option cleans up the data being shown on
your screen.
6. “Column” – It’s important to keep your screen as simple
and uncluttered as possible. I recommend only having
four columns showing (“MMID”, “PRICE”, “SIZE”, and
“Condition139“). Everything in Level 2 moves and
changes very quickly. There is no need to have too much
displayed.
7. “Hide Market Maker” – I recommend hiding the MMID
“CHX”. It always seems to be a large NITF order140 that is
out of the price range, and I don’t want it to be
constantly grabbing my attention.
8. “Monitor Group 1” and “Monitor Group 2” – These
options allow you to monitor specific MMIDs. For
instance, NYSE often puts orders out that drop off at the
open.
9. “Quote Size Highlight” – This is one of the best features
in DAS Trader Pro. You can use this tool to highlight large
lot sizes and thus have your attention drawn quickly to
high value areas. You can select any color you’d like.
Figure 7.10 – A screenshot of how I recommend you configure
your Level 2 (screenshot courtesy of DasTrader.com).
TAPE READING – LEVEL 1
Figure 7.11 below is a screenshot of how the Level 1 for Lucid
Group Inc. (LCID) presents in DAS Trader Pro. “Lv1” shows you
the current bid and the current ask prices. (They will only show
prices where at least 1 lot is available for purchase.)
As referenced previously, the bid price (marked as 1)
represents the highest price that a buyer is willing to pay for a
share.
The ask price (marked as 2) represents the lowest price at
which a seller is willing to part with shares.
Figure 7.11 – A screenshot of how the Level 1 for Lucid Group Inc.
(LCID) presents in DAS Trader Pro. The current bid and ask
prices are flagged (screenshot courtesy of DasTrader.com).
The Bid-Ask Spread refers to the difference between the ask
price and the bid price. If the ask price for a share of ABC stock is
$25, and the bid price is $24.75, then the spread for ABC stock is
$0.25. I have marked with an exclamation point in Figure 7.12
below where DAS Trader Pro displays the current Bid-Ask
Spread in the Level 1 for Lucid Group Inc. (LCID).
The spread is an incredibly important variable in stock
trading and should not be underestimated. In risk
management, a large spread can equate to massive slippage141 if
not properly accounted for. When selecting a potential stock to
trade, you can quickly whittle down your list by using spread as
a qualifier. Most stocks in play with good volume will have a
relatively tight spread.
Figure 7.12 – A screenshot of where DAS Trader Pro displays the
current Bid-Ask Spread in the Level 1 for Lucid Group Inc. (LCID)
(screenshot courtesy of DasTrader.com).
TAPE READING – LEVEL 2
Level 1 is the data that everyone has. It doesn’t matter what
platform or application you download, Level 1 data is almost
always readily available. Level 2, on the other hand, shows you
the depth of the order book. By displaying supply and demand
grouped into lots of orders, you can easily find imbalance or
excess on the ladder.
A lot is a grouping of all orders posted by a specific MMID at a
particular price. Instead of showing every single order on Level
2, lots are used to in part to simplify the number of digits being
displayed. Accordingly, on the right-hand side (the ask column)
of Figure 7.13, the Level 2 for Lucid Group Inc. (LCID), I have
flagged a series of large orders, one of which is where NSDQ had
320 lots available for sale at $28.00 per share, and ACB had 180
lots available for sale at the same per share price. Therefore, in
total, 500 lots, which equates to 50,000 shares, were available
for sale at $28.00 per share.
This does not always mean though that there is a larger seller
at that price level waiting to exit a position. Rather, Level 2 lots
group together by lots all of the bids or asks at a particular price
level being advanced by a specific MMID. This allows you to see
the market as a whole as opposed to getting bogged down
trying to sort through too many individual orders.
I bet I know what you’re thinking. In the grand scheme of
things, you don’t think 50,000 shares is much. In response, let
me assure you of two facts. (1) The orders at that price level
definitely totaled more than the 50,000 shares displayed in
your Level 2. (2) Even 50,000 shares coming through on a $0.01
spread can tip the scale and result in the Market Makers having
an imbalance in their orders.
In Figure 7.13 on the next page, you can see how DAS Trader
Pro groups lots by price level in Level 2. I have flagged the larger
groups of lots.
One of the main ways I judge supply and liquidity is by
looking at where the lots are grouping together. I like to call
those stacks.
A stack is a grouping of lots on the Level 2. When a bunch of
sellers or buyers start to congregate at a particular price level, it
will begin to stack up. In Figure 7.14, on the following page, the
Level 2 for Lucid Group Inc. (LCID), I have flagged where a good
number of lots were stacking up on the ask side at the $28.00
price level. In our Bear Bull Traders community, someone would
have been apt to call this out as, “The ask is stacking at $28.00.”
When you hear that, you would know there were a lot of orders
starting to pile up. Remember as well, not every trader uses
Level 2 or even has access to it. Level 2 gives you an edge as you
have access to data that many others do not.
Figure 7.13 – A screenshot of how DAS Trader Pro groups lots by
price level in the Level 2 for Lucid Group Inc. (LCID). The larger
groups of lots are flagged for your ease of reference
(screenshot courtesy of DasTrader.com).
The more orders stacking at a price level, the larger the draw.
It leads me to continue to return to the price point that is
motivating Market Makers to place bids or asks. Considerable
orders stacking at a particular price level will be a large
incentive for the price to move to that level. For retail day
traders, there is no single better indicator of demand than Level
2. Demand is what tells the market where the price needs to go.
Seeing a large amount of demand will certainly gain the
attention of market participants. It will quite often move the
price of the stock and help to set a new value.
Figure 7.14 – A screenshot of how the stacking of large lots is
displayed by DAS Trader Pro in the Level 2 for Lucid Group Inc.
(LCID). (screenshot courtesy of DasTrader.com).
With Level 2, similar orders are grouped together, allowing
you to get a feel for the overall demand on the stock you are
monitoring. Lots are utilized to group all of the orders that a
specific MMID has that are at the same price. Colors are utilized
to let you more readily identify all of the lots at the same price
tier (regardless of which MMID has posted them). I personally
believe that too many colors make it difficult to focus on the
large orders and so I alternate between gray and white for a
simpler read.
In the previous Figure 7.14, you will see in the first rows at the
top of the bid column that there are lots posted by ACB, NSDQ,
ARCA, MEMX, and NASD. Grouping all of the $27.80 lots
together and highlighting them in gray makes it much easier to
identify that they are all at the same price tier.
When you are trading using Level 2, the volume is key. Given
that large orders assert value on the market, Market Makers will
be drawn to these large orders and, naturally, they are going to
make scads of money filling those orders. Why would anyone
leave those orders behind? As long as the demand isn’t too
strong in the opposite direction, this will be the Market Makers’
target.
These large pockets of liquidity or supply can be best
identified using the Quote Size Highlight feature in DAS Trader
Pro. This lets you clearly see the orders that are stacking up. On
a gray background in particular, they stand out very nicely. As
you will see in Figures 7.13 and 7.14, I highlight mine in pink to
make them pop. (If you are reading the paper edition of this
book rather than the e-book edition, the pink coloring will
present as a darker shade of gray in Figures 7.13 and 7.14. In
Figure 7.13, you will see in dark gray the four different large lots
that the arrows are pointing to, and in Figure 7.14, you will see
in dark gray the four different large lots that the arrows are
pointing to.)
As an aside, this is an opportune spot to remind you of my
“mirrors” story from a few pages back. NEVER trade against
your Level 2. If it’s bearish and there is volume, nine times out
of ten it’s going to run bearish.
This next section of my book covers what is no doubt the
most important aspect of tape reading: the ability to see the
auction as it is unfolding right in front of you. Unlike a chartist,
you aren’t waiting for a certain price level to be hit. As a tape
reader, you are waiting for a change in the way the price is
auctioning. You will recall from the previous commentary on
the market auction theory that there are four primary cycles value, balance, excess, and imbalance. The market auction will
rotate through each of these phases, but only one of them is a
phase that you will want to trade in.
Value is price and wherever the market is willing to perform
the most transactions is where it will set value. Value is most
often marked in the beginning by an unusually large bid or ask
appearing on your Level 2, followed by elevated volume as
participants purchase or sell the shares at this price level.
Eventually, as the market agrees on value, the price will move
into a period of balance.
In the balance phase, you will have an evenly distributed
Level 2. Similar to any sort of auction, balance will occur when
the sentiment for buying matches that for selling. If the Bulls
and Bears have agreed that this is a good price, then large funds
and institutions will commence to do business. As I wrote in
Chapter 4, despite the lack of volume on a minute-by-minute
basis, this is the time when the most shares are exchanged.
During the balance phase, you may see either an empty Level 2
or, in contrast, an overly full Level 2.
As balance is maintained, excess will in due course begin to
build on your Level 2. Pockets of liquidity and supply will start
to present as participants make decisions. Over time, these
pockets will congregate and result in large stacks of orders.
While these orders will be from different MMIDs, they will all
point in a specific direction. Once there is sufficient excess, the
price will move in the direction of the orders as volume comes
in.
As that volume comes in, excess will turn into imbalance.
This is the phase you are trying to trade in. As imbalance sets in,
the stock will go back into an auction mode and search for new
value. Once in transition, you will see that the price will most
often run in your Level 2 in the direction of the excess until a
large order attempts to set value. If the market agrees, the
process will commence all over again.
The market is about the balance between buyers and sellers.
As participants, they are constantly making new choices that
may move the price in one direction or the other. Too much
demand in any single direction though and the Market Makers
will end up with an imbalance in their orders. They will then
use their considerable weight to move the market in the
direction they want. The following Figure 7.15, is a diagram
that I created to illustrate this.
My main takeaway here is that you need to have a perspective
on what is happening. For instance, if you are seeing green on
the tape, who is participating? Are Bears covering or are Bulls
buying? Both will come in as green, but one can represent a
profit target on a continuation down and the other may be the
beginning of a reversal.
Figure 7.15 below details the relationship of price action to
the Market Maker and how that is tied to the emotional
response of the market. Confidence shows strength while panic
shows fear. It is vital that you understand this process if you are
to properly anticipate market movement.
Figure 7.15 – A diagram illustrating how Market Makers impact
the market and its participants (chart illustrated by Thor
Young).
One of the most difficult parts of reading the tape is
understanding that there can be buying and selling on both the
bid and the ask. Even seasoned traders will often struggle to
grasp this concept. Just because an order is green, it does not
mean it represents a buy. It only means that the transaction is
unfolding at the ask. As well, lots of red orders coming in at a
specific price level does not demonstrate weakness. They mean
that one or more larger participants are buying on limit orders
at the bid. You want to focus on when those market orders start
hitting the tape. You must also recognize that it is a big deal
when a participant is willing to pay the spread. As a Bull comes
in to buy using a market order, or a Bear covers using a market
order, both will get filled on the ask. Therefore, seeing green
orders is a sign of upward demand.
But at the same time, do remember that there was also a seller
at that exact level, and that seller has yet to be filled because the
buyer paid the Market Maker the spread in order to get filled
now, even though the price itself has not yet reached that level.
The Bull paid a premium and the buyers’ shares did not come
from the seller. As the go-between, the Market Maker sold those
shares in advance. This is why they can naked short (or short
without inventory). They will then raise the price until the bid
meets the ask and then buy the shares from the seller to
replenish their inventory. This allows them to profit off the
spread.
Let me give you an example of this. You want to buy XYZ stock
and the current bid is at $120.15 and the current ask is at
$120.17. That is a $0.02 spread. You buy with a market order
and you get filled on the ask at $120.17. Keep in mind, however,
the price is not at $120.17. It’s still at $120.15. The Market
Maker now moves the price up and buys back the shares they
sold you at $120.17. While the end result of the actual
transactions are neutral (everything balances out), the Market
Makers have netted all the fees and commissions. This is how
they get paid.
LEVEL 2 STRUCTURE
Level 2 is critical to being able to read high value areas. Do not
forget what motivates Market Makers. Once the market on a
particular stock has enough participation, Market Makers will
go to work handling all of those transactions. The structure of
your Level 2 is the easiest way to tell how engaged the market is
in the stock (along with ascertaining its present volume).
Knowing this, it is simple to break your Level 2 down and
determine whether it has a good structure or a bad structure.
The structure forms what is called the ladder. As supply and
demand builds near key price levels, participants and their
orders will start to line up like the rungs of a ladder. The more
organized the ladder is, the more obvious the demand is.
The following Figure 7.16, is a screenshot of the Level 2 for
Lucid Group Inc. (LCID), illustrates a good Level 2. In a good
Level 2, the main element you are looking for is overall
structure. You want stacks of orders at various price levels and
an even distribution of the price down to those orders. Notice
that each tier was incrementing down by $0.01,
complementing the stock’s $0.01 spread. You don’t want to see
large gaps in the price because this will show potential
inconsistency in the price action. You do though want to clearly
see price action transpiring. You don’t want the stock to be just
sitting there, stagnant, with no shares being purchased and
sold.
Figure 7.16 – A screenshot of the Level 2 for Lucid Group Inc.
(LCID), illustrating how a good Level 2 structure will present in
DAS Trader Pro (screenshot courtesy of DasTrader.com).
Figure 7.17 contains screenshots of examples of two bad Level
2s. On the left-hand side, the Level 2 for MoneyGram
International Inc. (MGI), the structure was bad because there
were too many orders. It is very difficult to try to read a Level 2
that is this congested since it becomes challenging to spot when
the market has entered a state of imbalance (you’ll recall that is
the best phase of the market auction cycle for you to be trading
in).
On the right-hand side of Figure 7.17, the Level 2 for Alphabet
Inc. (GOOG), you will notice that there were very few orders in
either the bid or ask column. Also, the bid-ask spread was
$2.03!! Further, as you scan down the ladder of tiers, you will
see massive price gaps. At this juncture, GOOG was very
dangerous to trade. A wise trader would have passed and moved
on to investigate a different stock. You may have also noticed in
this Alphabet Inc. Level 2 that some Market Makers had orders
with no shares attached to them (the “SIZE” in the bid or ask
column is “0”. Those types of orders do not count when
calculating the bid-ask spread.)
These Level 2s for MGI and GOOG show stocks that were in a
state of balance. Neither will trade well and both should have
been avoided.
As I mentioned balance in the previous paragraph, I will now
touch again on the concept of excess. Excess leads to imbalance
and imbalance is what you want. This is the key item to be
looking for when you are reading your Level 2. You must ask
yourself: Where is the excess? As you identify the excess, you
can then form a bias on whether the Level 2 structure is bearish
or bullish. This discernment of short-term bias based on
current demand is the skill that separates adept tape readers
from the rest of the pack. Once you become comfortable with
reading your tape, you will be able to pinpoint momentary
shifts in balance that give away the true intentions of the
market participants at that present time. This is “When” you
should take or exit your trades. This is “When” the excess will
become obvious, and the market will go into imbalance as it
transitions to new value.
Figure 7.17 – Screenshots of the Level 2s for MoneyGram
International Inc. (MGI) and Alphabet Inc. (GOOG), both
showing how a bad Level 2 structures will present in DAS Trader
Pro (screenshots courtesy of DasTrader.com).
Next, I will share some commentary on bullish and bearish
Level 2s.
BULLISH (STRONG) LEVEL 2
Figure 7.18 is a screenshot of the Level 2 for Li Auto Inc. (LI). I
note that this ticker’s ladder is known for having a very visible
imbalance to it. The initials SSR (ignore the final “S”, which
means that shares are available for short positions) on the top
right-hand side of the Level 2 means that the stock was in Short
Selling Restriction mode. Although it must have been down in
price within the past couple of days before this screenshot was
taken, a rally of some sort was now happening. This is a good
example of a bullish (strong) Level 2.
No matter what the pattern is that you are viewing on your
charts, remember my “mirrors” story. Never trade against a
ladder that has obvious imbalance to it. In this case, there is
nowhere for LI to even pull back, and so it is apt to run straight
up the ask. Notice, that on the ask side, the largest congregation
of orders was at a round number ($31.50). This was not by
accident. It was a price target. For profit taking, the perfect place
to have put your order in this instance was right in front of
$31.50 by a penny or two ($31.48 or $31.49).
Figure 7.18 – Screenshot of the Level 2 for Li Auto Inc. (LI),
showing how a bullish (strong) Level 2 will present in DAS
Trader Pro (screenshot courtesy of DasTrader.com).
BEARISH (WEAK) LEVEL 2:
Figure 7.19 on the next page, is a screenshot of the Level 2 for
Palantir Technologies Inc. (PLTR). This is what a bearish (weak)
Level 2 presents as. Unlike in the previous Level 2 for LI, you
can see stacks of orders comprised of large lots in a ladder to the
low side on the bid. These stacks were forming liquidity zones
as Bears place profit targets below the current price of this
stock, demonstrating a lack of enthusiasm and an overall need
for the price to drop in order to start bringing in new buyers.
Notice, that this time in the ask column, there were not many
stacks of orders at or close to the most current ask price of
$15.23. There were some larger sized lots, but they were further
away from the current ask price. What was happening here was
that sellers were rushing in to cover at the current price level. A
short seller would have viewed this as an opportunity to firstly
sell, and to then buy back into the liquidity zones below the
price, scalping142 some easy gains while everyone else was
losing money.
In addition, do note that once again there was a very obvious
congregation of orders at round numbers. The dark black
highlights on this Level 2 are highlighting the MMID for
Goldman Sacs or (GSCO) just for clarification.
Figure 7.19 – Screenshot of the Level 2 for Palantir Technologies
Inc. (PLTR), showing how a bearish (weak) Level 2 will present in
DAS Trader Pro (screenshot courtesy of DasTrader.com).
For major institutions and traders with a need to fill large
orders, finding pockets of sufficient liquidity is essential unless
you are part of a dark pool.143
A market’s liquidity has a significant impact on how volatile
the market’s prices are. When these big players take positions in
the market, they of course aim to be filled at the best possible
price. However, given the size of their positions, they need to
find enough counterforces to fill their orders, and the orders
must be filled with a minimal amount of slippage (the latter
being of utmost importance). If a big player were to enter the
market at an area of low liquidity, the volatility they would
create would have a negative impact on the average price they
get. Lower liquidity usually results in a more volatile market
and causes prices to change drastically. Alternatively, if the
same trader were to enter a trade at an area of much higher
liquidity, that action would typically create a less volatile
market in which prices don’t fluctuate as dramatically,
therefore ensuring a better average price for the trader’s entire
position. These pockets of liquidity are often seen as chop or
consolidation areas.
There is a delicate balance between supply and demand. In
order for you as a retail day trader to capitalize on this, you need
to be looking for the liquidity zones on your Level 2. As the large
funds try to move money around in their search for the most
optimal price, you will observe the price of the stock move from
one liquidity zone to the next, rising and falling. This is when
you can then enter into your own position(s).
As I monitor my Level 2 and endeavor to judge if the price is
going to move up or down, these pockets of liquidity are critical
to continued movement up. When, for example, you are trading
on either a price breakup or an ABCD pattern (should you be a
trader who trades patterns), what you are frequently doing is
playing the movement from one liquidity level to another. As
the liquidity at the lower levels starts to run out, the price will
move up or down to the next level. Many consolidations occur
at these levels where large orders are being exchanged by the
big players.
If there are held bids144 or offers,145 they can routinely be
spotted near crucial support and resistance areas. You can
commonly see these coming a mile away (dare I say 1.6
kilometers away for my non-American readers!). You will notice
a large lot size on your Level 2, and that will lead you to begin
moving toward that price. Per usual, the large order will move
the price as the Market Maker prepares to fill it.
Most traders refer to these types of orders as icebergs. They
are massive orders off the book with what sometimes feels like
an endless number of shares at their price level. You can be
assured though that while it will take time, the Market Maker
will eventually satisfy the order.
Observing considerable contrary pressure on your Time and
Sales will give you a heads-up that the Market Maker may not be
able to conclude their transaction in one attempt. This will
provide you with some tight reversal and scalping
opportunities should the price not budge past the wall
indirectly formed as a result of the large order.
These orders will normally stay on the book for hours (if not
days). They are LTF orders and should always be paid close
attention to. It’s not the large order that creates the wall, it is the
lack of demand above that order. That is why the large order
ends up being isolated as a held order. As discussed previously,
the Market Maker wants to profit off the transaction. If there is
no demand above an order, then there is no seller for them to
buy from when they raise the ask. Because of this, they can’t
profit from the spread and that puts them at risk. In order to
encourage participation, they will stall the price or reverse it.
An example of this is seen in Figure 7.20 on the following
page, the bottom half of which is a screenshot of liquidity levels
in a thermal map of Meta Platforms Inc. (META) provided by
Bookmap™. As marked on it, this thermal map of the company
that used to be called Facebook Inc. (FB) is from 12:25pm ET on
February 15, 2022. It also contains Level 3 data (which is an
even more detailed and deeper set of market data than what
Level 2 provides), access to information about transactions
occurring in the dark pool, and historical Level 2 data. If you are
reading the e-book version of my book, you can easily spot the
horizontal orange and red bars identifying the price levels
where there was substantial supply. Those price levels, listed on
the right-hand side of the screenshot, were where you would
have found the big sellers. (I note that if you are reading the
paper edition of this book, the colors in this screenshot from
Bookmap™ do not display. As I mentioned in the opening pages,
on the website of my trading community, BearBullTraders.com,
is a file of all of the figures that appear in this book in addition
to a copy of my glossary. I encourage you to download that file,
at no cost, in order to review and study the images, screenshots,
and charts I have included.)
The top half of Figure 7.21, a 5-minute chart of META,
indicates that the stock began to rally at around 12:25pm ET.
The screenshot from Bookmap™ reveals that at 12:25pm ET
there were heavy sellers stacked or camping at the $218.00 and
$218.52 price levels.
Based on the 5-minute chart, it is apparent that the Market
Makers had no problem filling all of those orders, and the price
then went on a run to well past $218.52. If you take a look
below the $218.00 price level on the Bookmap™ screenshot,
there were only small amounts of liquidity, and thus an obvious
imbalance to the topside. This means that the Bears were out
and the Bulls were in. No matter what pattern you may have
detected on your charts, this stock was a long unless the order
Book Flipped146 or changed its bias.
Figure 7.20 – 5-minute chart of Meta Platforms Inc. (META) and
a screenshot of the accompanying thermal map provided by
Bookmap™ (chart courtesy of DasTrader.com and screenshot
courtesy of Bookmap.com).
BOOK FLIP
On the next page in Figure 7.21, I have three Level 2s from the
same ticker on the same day, but different times during that
day. I have placed them side by side to demonstrate what it
looks like to see a Book Flip. I have marked each Level 2 with a
number to help follow the progression.
Recall a Book Flip occurs when participation changes from
bullish to bearish or vice versa. We will see a ladder stacked in
one direction change, over time, to an order ladder stacked in
the other direction. That switch from a bullish book (ladder) to
a bearish book (ladder) is what is referred to as a “Book Flip”.
1. This Level 2 demonstrates a bearish order book. Notice
the ladder is clearly imbalanced to the bid side. As long
as volume continues there is no reason to expect
anything other than a continuation downwards.
2. This Level 2 demonstrates a balanced order book. There
is no clear ladder and we have exhausted the bid leaving
only 1 held order set. Expect Chop as we consolidate at
this level.
3. This Level 2 demonstrates a bullish order book. Notice
here the ladder is clearly imbalanced to the ask side
creating a ladder of orders for the Market Maker to run
up.
Figure 7.21 – An example of 3 Level 2s from the same ticker
demonstrating a Book Flip (chart courtesy of DasTrader.com).
On the right-hand side of the following Figure 7.22, the Level
2 is displaying an incredibly bullish Apple Inc. (AAPL). On the
left-hand side of this figure are my 1-minute (top left) and 5minute (bottom left) charts for AAPL. You can see that AAPL
had been in a major bull rally for the 30 minutes prior to when I
took the screenshot, and it was certainly showing no signs of
slowing down. Since orders were stacking up to the topside of
my Level 2, it can be assumed for at least that moment that the
Bulls were still in control and AAPL’s price will most likely
continue to advance until a large order is hit, which will assert
value and stall the price.
Figure 7.22 – 1-minute and 5-minute charts of Apple Inc. (AAPL),
along with a screenshot of my Level 2 for AAPL, illustrating how
a stock experiencing a major bull run will present on your
charts and Level 2 (charts and screenshot courtesy of
DasTrader.com).
WALL:
Now that I have defined most of the concepts related to tape
reading, I want to explain how you can use that skill to help you
decide if the price of a stock is going to continue to move up, or
down, or if it’s going to bounce and change direction.
As the price of a stock is advancing, you will often notice a
large stack of orders start to congregate together at one
particular price level on your Level 2. You will also notice that
there are not a lot of other orders being placed above or below
this large stack. This shows a lack of participation because no
profit targets are being placed higher.
As the price approaches this wall of orders, other participants
will start to profit in front of the large stacks of orders. Everyone
else will get filled, leaving the held order.147 Referring back to
VPA, this is why seeing volume increased during a price
retracement is bad signal. This shows selling is increasing as we
move away from the orders. If the order book flips the other
direction, it will be a clear indication that the move is done, and
a reversal is impending. Figure 7.23 on the next page shows you
and example of 2 Levels 2s each showing held orders.
The assumption is that it requires a large number of orders for
a stopping point to be formed. In reality, that is not accurate.
What stalls the price is a lack of imbalance. Large orders can
quickly create imbalance because they assert value and change
the balance in the Market Makers’ warehouses. As I discussed in
the section on VPA, if the market is struggling, an obvious lack
of liquidity or supply can create a reversal point.
Figure 7.23 – Screenshots of two Level 2s for Carnival
Corporation (CCL), showing held orders on the order book.
(screenshots courtesy of DasTrader.com).
Eventually, if not enough momentum can be gained, the large
order will drop off and traders will begin covering in front of its
price, leaving this held bid stranded. If over time your Level 2
starts to load to the topside, demonstrating that a sufficient
imbalance exists, the price may make a run in the other
direction. Always pay attention to Level 2. When the ladder
breaks, it becomes very difficult for the market to advance a
stock.
High Frequency Traders148 (or HFTs) know this and use their
sizable buying power to move the market. No one understands
what motivates Market Makers more than HFTs. They use large
orders as if they were bread crumbs, (mis)leading the market
into thinking there is more demand on a stock than there really
is at the time. This allows the HFTs to manipulate the market.
While activities like spoofing149 and placing NITF orders
(described earlier in this chapter) are clearly illegal, that doesn’t
stop some firms from pushing the boundaries on these
approaches.
HFTs know that serious retail traders keep an eye on their
Level 2. They thus will use their vast bank and margin to try to
push us around and stop us out of our positions. The trick is to
recognize these players and profit from their moves. This is why
timing your entry is so critical. You need to wait for the HFTs to
commit themselves to their positions.
Don’t let yourself be fooled by either their NITF orders or their
spoofing. The HFTs use these types of orders to entice opposing
forces to come in and shake out the price. These are traps for
tape readers. If you are patient, you will catch these orders
dropping off your Level 2 as the price gets close to them.
Once the HFTs do commit to a position, you can enter your
own position, and then you are with them, instead of being
against them or fuel for them. HFTs are well aware of the
previously mentioned maxim that ‘stops fuel movement’.
HFTs work using the same concepts expounded upon in this
book: value, balance, excess, and imbalance. HFTs use excess to
their advantage. Since with their large number of buying power
they can try to set value, they can also create excess, and help
move the market into imbalance. This is why you must always
watch your tape and time your entry so that you are trading the
imbalance as the price runs in the direction of the available
excess.
When an auction begins, there is nothing to show you what
the value for the particular stock will be. Like an auctioneer
awaiting the opening bid, you must simply bide your time,
waiting for someone to step up and get the auction underway.
This can happen very quickly for a stock with a strong catalyst.
It can take hours though on stocks experiencing mixed news or
a limited sentiment in the market. Prior to some orders
appearing on the tape, the Market Makers will stand by and
chop ranges.150 Your task is to be patient since you cannot start
to put your trades together until value has been asserted.
The only effective method for finding where value has been
established is by looking for the large orders. Who is buying and
selling? And where? Once the price hits those areas, you can
monitor how the LTF participants are reacting. Their reaction is
where you can take some big moves and make some
considerable money.
Figure 7.24 is an example of two stocks that were in a state of
balance.
On the left-hand side is a screenshot of the Level 2 for Palantir
Technologies Inc. (PLTR). Despite excess building to the
downside, there were still quite a few large orders near the top.
If the market rallied and the trend held, these orders would
readily serve as pull back locations for adding to a position.
On the right-hand side is a screenshot of the Level 2 for Nikola
Corporation (NKLA). As you can tell, there were orders all over
the place. With so many orders on the book, there was no reason
for the Market Makers to move the price. They will be content to
hold the price at this level and take the easy money. Since
volume was low, you can assume that the market participants
had agreed on value and, accordingly, value had been
established (for the moment).
Figure 7.24 – Screenshots of the Level 2 for Palantir
Technologies Inc. (PLTR) and Nikola Corporation (NKLA), both
showing that the stocks were in a state of balance
(screenshots courtesy of DasTrader.com).
In Figure 7.25, you can see a clear situation of excess on the
tape. Nonetheless, imbalance had not yet been reached as there
were still some orders with decent quantity to the topside.
As you look further down on this screenshot of the Level 2 for
Palantir Technologies Inc. (PLTR), you will notice that there
were obviously more orders at a lower share price than there
were orders at a higher share price. This indicates a tape
showing a bearish excess. However, because of the remaining
orders, the imbalance phase had still not quite been reached.
The transition to the imbalance phase will be signaled when
these orders are either filled or dropped and the price moves
toward the large orders with volume.
Figure 7.25 – Screenshot of the Level 2 for Palantir Technologies
Inc. (PLTR), showing that the stock was in the excess phase
(screenshot courtesy of DasTrader.com).
The screenshot of the Level 2 for Palantir Technologies Inc.
(PLTR) displayed in Figure 7.26 on the next page. Demonstrates
an example of where a stock had settled into the imbalance
phase. There was a much higher quantity of orders to the
downside and most of the selling was happening close to or
below what was the present price. As orders build below $15,
the additional excess to the downside will help the stock run
down into the larger orders. Remember, these large orders are
Bears. They want the price to drop. Don’t be tricked into
assuming that in this case the price will bounce because of
these orders. You need to always check past a large bid and see
how many orders there are below it. If you do, and there are lots
of orders, never underestimate how far a stock’s price can move,
especially on a breakout day.
The final part of putting the Level 2 together is to pair it with
Volume and Price Analysis. Remember you must have volume
for the price to break out or to advance. It’s a core part of how
price moves. With that in mind, you can combine it in the
following concept.
Where L = Ladder, V = Volume, A = Price Advancement, and R
= Price Retracement.
L+V=A
L–V=R
If there is no clear ladder, then you are in balance and should
expect choppy action regardless of volume. Only with the
ladder in proper alignment do the algos know to initiate the
movement. Remember advancement doesn’t mean up it just
means in the same direction.
Always keep in mind that you are more likely to return to
previously established areas of value. So, if the volume is
struggling look for a pullback to a recent support to test the
resolve of the current participants.
Now that I have covered “Where” to look for a trade and
“When” to take a trade, I next want to discuss “How” to manage
a trade. Managing a trade is a long process that requires
preparation, execution, and management.
Figure 7.26 – Screenshot of the Level 2 for Palantir Technologies
Inc. (PLTR), showing that the stock had settled into the
imbalance phase (screenshot courtesy of DasTrader.com).
You can significantly minimize your losses if you are
managing your trades well. When working with a newer trader,
this often is the aspect of trading that they need to focus on the
most. They know how to read charts, patterns, and the market,
but they don’t have the discipline, the conviction, nor the
ability to create a plan to manage a trade effectively. This
usually leads to short-term success and long-term loss. Day
after day, the trader will do fine, only to blow out their good
days with massive loss days. The simple truth is that even an
experienced trader will fail if they are not managing their
trades well.
This is what separates the consistent trader from the
inconsistent trader. When the FURUs tell you that you are
guaranteed to succeed if you embrace their system that is
centered on some wild and crazy indicator, run from them as
fast as you can. Their “shtick” doesn’t work because they don’t
know you. They don’t know your life experiences. They don’t
know your financial situation or what phase of life you are in.
As I explain in what follows about how to properly manage a
trading system, I will be including some psychological checks
and evaluation methods to ensure that you are managing your
trades perfectly and not allowing your emotions to become a
variable that you cannot account for during the trade.
98 Imbalance is a state in the market auction cycle where the market
has a large amount of demand in one direction and the price is quickly
moving through it.
99 Market Auction Cycle is the 4 phases (Value, Balance, Excess, and
Imbalance). Every Market will move through these phases as its
participants make decisions.
100 Excess refers to a large amount of Bid or Ask in one direction on the
order book. Excess building is a key indicator that a directional move is
about to start.
101 Initiative participants are participants who buy or sell breakouts. They
are labeled as “initiative” participants because they are buying away
from value in the hope of a further move from value.
102 Responsive participants are participants who buy or sell reversals.
They are labeled as “responsive” participants because they are buying
away from value in the hope of a return move to value.
103 Larger time frame (LTF) participants are participants who buy/sell
stocks over days, weeks, or even months. They are labeled as “LTF”
participants because they are working in extremely large time frames
and playing the “long game”. You will hear stories of someone
accumulating a position at a specific price level for months and then
securing a massive move for a massive profit. These participants have
gigantic accounts, and they have the largest effect on price. Their share
purchases add the support levels and their selling of shares add the
resistance levels that you will use to trade every single day.
104 Smaller time frame (STF) participants are participants (traders) like
you and I who are not looking to hold our positions for a long time. As a
day trader, your risk tolerance should be very low and so you will be apt
to close your position when there is any sort of adverse movement in the
price of the stock.
105 To be stopped out means that you have hit your stop (or stop loss or
stop order or stop loss order). It’s time to gracefully exit your trade and
accept whatever your loss is.
106 A strong hand and a weak hand are defined by the ability to tolerate
risk. The size of the account does not factor in. Even the smallest account
can be a strong hand if the holder never sells their position. Likewise, a
massive account can be a weak hand if the holder’s tolerance for risk is
small. The holders of weak hands truly have no power over the market.
They have no influence on the price of a stock nor on the perception of its
value. A strong hand is what the institutional traders (the Wall Street
investment banks, mutual fund companies, hedge funds, some
proprietary firms, etc.) along with some retail traders are called. How
these participants respond to the price of a stock will move the market.
As an aside, a proprietary firm, also referred to as a prop, is one that
trades their own money rather than the money of clients.
107 An HOD breakout occurs when the price of a stock breaks its High of
the Day. An LOD breakout occurs when the price of a stock breaks its Low
of the day.
108 Average volume means the number of shares in a company being
traded on average each day. A quick internet search can give you that
number. For example, as of writing, Apple Inc. (AAPL) has an average
volume of 98 million shares/day. In the imbalance phase, the volume of
shares being traded will be higher than average.
109 The accumulation phase, not to be confused with the four phases of
the market auction cycle, is one of the price action phases that a stock
can move through during the course of the trading day. The
accumulation phase is when the Market Makers are slowly purchasing
the shares of the stock in question.
110 The distribution phase is another one of the price action phases that a
stock can move through during the course of the trading day. The
distribution phase is when the Market Makers are slowly selling the
shares of the stock in question.
111 A Retracement is another name for a Pull Back
112 Order positioning means how the orders on the orderbook are
congregating or adding to the excess.
113 As my colleague Ardi Aaziznia, has written – fundamental analysis
“involves taking the time to understand a company’s internal financial
health by in part reviewing its income statement, balance sheet and
cash flow statement, in addition to calculating various financial ratios
(knowing basic math is definitely a prerequisite!). Equally important, you
must also investigate what the economic outlook is for the company
(and industry or sector) you are potentially investing your money in.”
114 Order flow means the speed at which orders are transacted.
115 Naked short selling refers to the short selling of shares that you
actually have not borrowed yet or confirmed that you will be able to
borrow. It can impact the liquidity and value of a stock.
116 The spread refers to the difference between the ask price and the bid
price for shares of a stock. If the ask price for a share is $25, and the bid
price is $24.75, then the spread for that stock is $0.25. It’s the difference at
any given moment between what people are willing to pay to purchase a
particular stock and what other people are demanding in order to sell
that stock. The bid price will always be lower than the ask price.
117 Before the market opens, you can use your scanner to identify stocks
that are gapping up or down in price. You then search for the
fundamental catalysts that explain these price swings and build a list of
stocks that you will monitor that day for specific day trading
opportunities. The final version of your gappers watchlist generally has
only two, three, or four stocks on it that you will be carefully monitoring
when the market opens. Many traders call their gappers watchlist simply
their watchlist. If you are not familiar with the term, your scanner is the
software you program with various criteria in order to find specific stocks
to day trade in.
118 A standard lot is considered to be 100 shares of a specific stock.
119 An engulfing candle is one that completely engulfs the previous
candle. A bearish engulfing candle opens higher than the previous
candle’s close and closes lower than the previous candle’s open, thus
engulfing the previous candle. A bullish engulfing candle opens lower
than the previous candle’s close and closes higher than the previous
candle’s open, thus engulfing the previous candle.
120 A campaign is an orchestrated and intentional movement of the
stocks price from one area of value to another.
121 Resting or a pull back is a short-term consolidation on a stock that is
currently trending. As the Market Makers run into limit orders, they will
need to pull back to entice more buyers. This will cause the price action
to rest.
122 An order book is a listing of all of the trades that have not yet closed
on a specific stock.
123 For certain trends, an igniting bar, also known as an ignition bar, will
be the first candle on your chart to signal to you that the trend is starting.
124 A paper hand is a trader who for whatever reason (generally due to a
lack of confidence) sells too soon and misses out on a potentially
profitable trade.
125 If you go back in time on a daily chart, you will usually find specific
price levels where candles have often closed or opened in the past.
Where these correlate can be assumed to be levels of resistance and
support and are referred to as daily levels.
126 Dr. Andrew Aziz writes in How to Day Trade for a Living, “Another wellknown trading strategy is the so-called Opening Range Breakout (ORB).
This strategy signals an entry point, but does not determine the profit
target … The ORB is an entry signal only, but remember, a full trading
strategy must define the proper entry, exit and stop loss. Right at the
market Open (9:30 a.m. New York time), Stocks in Play usually experience
violent price action that arises from heavy buy and sell orders that come
into the market. This heavy trading in the first five minutes is the result of
the profit or loss taking of the overnight position holders as well as new
investors and traders. If a stock has gapped up, some overnight traders
start selling their position for a profit. At the same time, some new
investors might jump in to buy the stock before the price goes higher. If a
stock gaps down, on the other hand, some investors might panic and
dump their shares right at the Open, before it drops any lower. On the
other side, some institutions might think this drop could be a good
buying opportunity and they will start buying large positions at a
discounted price. Therefore, there is a complicated mass psychology
unfolding at the Open for the Stocks in Play. Novice traders sit on their
hands and watch for the opening ranges to develop and allow the more
experienced traders to fight against each other until one side wins.
Typically, a new trader should give the opening range at least five
minutes (if not more). This is called the 5-minute ORB. Some traders will
wait even longer, such as for thirty minutes or even for one hour, to
identify the balance of power between the buyers and sellers. They then
develop a trade plan in the direction of the 30-minute or 60-minute
breakout. The longer the time frame, the less volatility you can expect.”
127 A slam is the opposite of a squeeze, in the way the shorts squeeze by
taking profit to abrasively. The longs can do the same. By taking profit too
aggressively, the price can slam quickly down.
128 To prove intent is similar to confirmation. Once the stock has moved
beyond a level the further it gets away from the price the more likely it is
to keep going.
129 Part of the DAS Trader Pro platform, Time and Sales (T&S) lets you see
where each transaction happened. Was it at the ask or above the ask?
Was it happening between the bid and the ask? Was it happening below
the bid? The way traders are actually making their trades demonstrates
what kind of attitude they have toward the current price and its future
direction. It helps you to understand the psychology of the traders
sending orders to the market.
130 The Relative Strength Index is a technical indicator that compares the
magnitude of recent gains and losses in the price of stocks over a period
of time to measure the speed and change of price movement. Your
scanner software or platform will automatically calculate the RSI for you.
RSI values range from 0 to 100.
131 A print refers to a single transaction that is displayed in your Time and
Sales.
132 A buy order is the order you submit to your broker to buy a certain
number of shares in a company.
133 Montage is the most critical window in your trading platform and
much important information can be found in it. The top section of the
Montage window in the DAS Trader Pro platform is called Level 1 and
information such as a stock’s previous day’s closing price, volume, VWAP,
current bid and ask prices, the spread, and last sale price can be found
here. The second section of the Montage window is called Level 2 or
market depth and it provides you with the leading indicators, information
on the activity taking place on a stock before the trade happens,
important insight into a stock’s price action, what type of traders are
buying or selling the stock, and where the stock is likely to head in the
near term. The next section of this window features the hotkey buttons,
and the bottom part of this window contains the manual order entry
fields that you can use to enter your orders manually if you choose not to
use hotkeys. As an aside, if you have not come across the term before,
hotkeys are key commands that you program to automatically send
instructions to your broker by touching a combination of keys on your
keyboard. They eliminate the need for a mouse or any sort of manual
entry. High speed trading requires hotkeys and you should practice using
them in real time in a simulator before risking your real money.
134 Regulators and the exchanges place restrictions on the short selling
of a stock when its price is down 10% or more from the previous day’s
closing price. When a stock is in Short Selling Restriction mode (aka SSR),
you are still allowed to sell short the stock, but you can only short when
the price is going higher, not lower, intraday.
135 FOMO is the acronym for the “fear of missing out” on a trade. If not
controlled, the fear of missing out will lead you to make reckless and risky
moves that can cost you dearly. This is why the psychological side of
trading is such a critical part of a successful trader’s arsenal.
136 Book in this instance is being used as a shorthand for Order Book or
Level 2. Book is the most common term used by Market Makers.
137 A stack is a grouping of lots at the same price level in either the bid or
ask column of your Level 2. The bids or asks in a stack can be posted by
one or more Market Makers.
138 A float is the number of shares in a particular company available for
trading. For example, in July 2022, Apple Inc. (AAPL) had 16.17 billion
shares available. While fairly subjective, I consider a low float stock to
have under 20 million shares available for trading, a medium float stock
to have 20 million to 500 million shares available for trading, and a large
float stock to have over 500 million shares available for trading.
139 Condition – in reference to the Level 2 condition codes are added
with certain orders. These conditions can affect the way the order is
interacted with at the market level. Some conditions are more
associated with NITF orders.
140 An NITF is a “No Intention To Fill” order. They are most often put far
away from the price of a stock but in an unusually off size to gain
attention and make speculators think there is more liquidity in the
market than there really is at that moment.
141 Slippage is an industry standard term for unintended loss. If you are
risking .10 and the stock has a .02 spread when you stop out you could
get filled for more loss than expected.
142 Scalping is a trading strategy that involves incredibly precise entries
using tight risk parameters to maximize profit potential on extremely
small price movement. Most scalps are 1 in 1 out. Scalping is all about
share volume. As an example, let’s say on a stock you’d like to make $400
risking $100. If you risk .10 you are going to need the stock to move in your
favor .40 in order to reach your objective. A scalper will risk $100 but at a
.02 stop they will only need an .08 cent price movement to make $400
dollars. Scalping can be very effective way to make quick money. But it is
also a very easy way to lose a lot of money and with the potential for
slippage should only be done on highly liquid stocks with an extremely
tight spread.
143 A dark pool, also known as a black pool or an Alternative Trading
System (ATS), is a non-public exchange where larger market participants
can trade in confidence in private. Since the trades conducted in dark
pools are not made public until some time has passed, large players can
make large trades without impacting the “public” market price for the
stock of a company (e.g., the price on the New York Stock Exchange).
144 A held bid is a buy order that is left unfilled or abandoned on the
order book.
145 A held offer is a sell order that is left unfilled or abandoned on the
order book.
146 A Book Flip occurs when participation changes from bullish to bearish
or vice versa. As we look for a ladder to one direction over time, we will
build an order ladder in the other direction. That switch from a bullish
book (ladder0 to a bearish book is what is referred to as a “Book Flip”.
147 A Held order refers to a held bid or ask interchangeably. If we are
describing movement in terms of volume (i.e., Advancing) then I may use
this term instead.
148 High Frequency Trading (HFT) is the type of trading the computer
programmers on Wall Street work away at, creating algorithms and
secret formulas to try to manipulate the market. As my friend, Dr Andrew
Aziz states, although HFT should be respected, there’s no need for day
traders to fear it.
149 Spoofing is an illegal form of market manipulation in which a trader
places a large order to buy or sell a financial asset (such as a stock,
bond, or futures contract) with no intention of executing it. By doing so,
the trader - or the “the spoofer” - creates an artificial impression of high
demand for the asset.
150 Chopping ranges refers to the up and down movement associated
with low volume algorithm transactions. Since there is very little
participation, the computers will start executing transactions slowly and
at very precise levels.
PART III: The “How”
CHAPTER 8: PREPARATION
The “How” is the method for how you manage your trading
system - and that means not just how you manage a trade, but
also how you manage yourself. Although this section has the
fewest pages, if you take my advice to heart, it will have the
most significant impact on your trading. To be candid for a
moment, the greatest adversary you are going to face in the
marketplace is yourself. There isn’t an exclusive clique or topsecret cabal lurking in the shadows that is, out to get you. The
issue is and will always be you. Please trust me, you must accept
this small piece of reality.
I want to begin conditioning you to be able to trade
consistently and well, and in order to achieve that, you must
recognize that conviction and honesty are the two key
fundamentals. Many mentors use the word confidence, but I
don’t care for that word because I’m not at all confident in my
trades. What I do have is conviction that my system will work if
I follow it precisely. This may seem a bit nuanced, but it is a
huge difference psychologically. I sense most of the people
studying this book likely believe that they should feel literally
delighted about every trade they enter. Unfortunately, that
perspective sets you up for disappointment. You don’t need to
feel anything about your trades. In fact, to be a successful
trader, it’s integral that you figure out how to get you and your
emotions out of the way.
Our children have Autism and we’ve found that providing
them with a structure and routine is the best way for us, as a
family to stay focused. Nevertheless, to establish any routine,
you must first have a method in place to prepare. Before you
start calculating your pivot points, let alone enter into a
position, you need to be primed both mentally and physically.
Make sure you are awake, alert, refreshed, and ready to take on
the market. Stock trading is a high-performance occupation.
There is no room for error, as even one misstep has the potential
to cost you your entire trading account. If you are not well
rested and ready to trade, you may want to consider not trading
that day. You know yourself better than anyone else does
though. If you are good to go, then don’t let me stop you. As you
commence your trading day, you want to give yourself every
possible advantage, including ensuring that the system (you!)
controlling the trading system is running at peak capability. It is
hard to expect a trading system to run efficiently when the
person responsible for executing it isn’t ready.
I want to stress that while a routine is important, it does not
have to be overly rigid. The market doesn’t give you all of the
information you require at the same time every day. Your
watchlist won’t be finalized at the same time every day. Some
days, you’ll practically wake up with a watchlist, but on other
days, the opening bell will ring and you won’t have tracked
down a single stock to trade.
Many trading coaches emphasize the necessity of having a
routine. I’m challenged by that notion, however, because we live
in a real world with real-life interruptions: children, your other
job, a rain and wind storm that knocked out the power for ten
minutes, whatever. Real life happens and routines are broken all
the time. You don’t want the fact that you are running five
minutes late due to traffic to derail your entire trading day. For
me, structure is crucial, but routine is not. I take each trade one
trade at a time. And my system is built around that.
You need to manage your day, but if you are a consistent
trader, you do not require two hours of prep time followed by a
lengthy process for locating your stocks in play. You should be
able to sit down and in about 15 to 30 minutes build your
watchlist and be ready to start taking trades. If you are studying
this book, then you are apt to be an aspiring day trader. Having
a solid watchlist is just as valuable as managing your risk. I
often hear of traders who have massive lists of stocks that they
review each day. I honestly have no idea how they can possibly
do that! It is perhaps necessary for a long-term trader or a swing
trader since they can take days to analyze tickers for the right
opportunity, but a day trader does not need to do all of that. The
number one thing you are looking for as a day trader is
volatility.
It is critical that you realize early on in your trading career
that day traders have a single major disadvantage to the other
types of market participants, and that, quite simply, is time. It
doesn’t matter what indicators you use nor how well you read
charts, if the stock doesn’t move, then your time will run out
before you are able to make any profit.
There are some tools out there such as the average true range
(ATR)151 that can help, but there is one tool that is superior to
the rest, and by this point you can probably guess where I’m
heading. Like the traders of old, all you really must do is search
for the crowd. If volatility is the result of participation, then
you need to be monitoring your charts and scanners for
volume. Stocks that trade the best are stocks that are in play.
Stocks in play are stocks with a strong catalyst and tons of
participation. While breaking news and financial catalysts are
by far the most effective, in today’s meme world, virtually
anything can set a stock off. When a stock is being impacted by
a catalyst, and has drawn in sufficient participation, it not only
becomes much easier to read its price action, it also trades
better.
Once you have prepared yourself, the next task is to build
your watchlist. I aim to keep this part uncomplicated. The
reason this “prep chapter” is short is because I don’t invest an
overwhelming amount of time in my pre-trading preparations.
Considering everything else I worry about, the last thing I want
to do is to catch the Analysis Paralysis virus as I am hunting for
potential stocks to trade. There are too many tickers to choose
from (over 2,400 companies were listed on the NYSE alone at
the end of 2021) and you can end up bogged down, unable to
make your mind up about which ones to focus on. You must
recognize from day one that every trading day you will miss
hundreds of moves on tickers you aren’t watching. You can’t
butterfly around all day or you will never get yourself to enter
into a position. You require specific criteria that permit you to
narrow down and then prioritize your watchlist.
To begin, I delete my previous watchlist. Even the strongest
trending stocks have pull back and chop days. There is no need
to be constantly reevaluating stocks that are not in play. There
is a saying that patience is a virtue. You’ll get to play them soon
enough once they are in the appropriate place with the right
level of participation (volume). The time for preparing your
watchlist each trading day is limited and you cannot be waiting
for the non-performers to shine.
To get the building of my new watchlist underway, I use a
straightforward but incredibly effective volume and price
scanner.
To include this sort of scanner as part of your preparation for
trading, I recommend setting up a high-volume scanner. Most
platforms come with a basic scanner. In DAS Trader Pro, I have
configured their built-in rudimentary scanner to look for stocks
that have:
1. traded over 250,000 shares in the pre-market (and I note
that this trading should not be comprised of strictly one
(or a very few) blocks of shares), and
2. a price range of between $20 and $400.
These two search criteria will let you commence the process
of whittling down the thousands of stocks out there. Simple,
isn’t it? Yes, it really is, and that’s the idea. There is so much
going on when trading that you want your preparations to be as
effortless as possible. You don’t need 1000 tickers to scan
through; you need just a handful. If truth be told, you actually
only require one solid and promising ticker.
You will find the Scanner Script Builder window in DAS
Trader Pro by going to tools > scanners. Figure 8.1 is a
screenshot of how I configure this filter for my own trading.
Figure 8.1 – Screenshot of how I configure the Scanner Script
Builder window in DAS Trader Pro (screenshot courtesy of
DasTrader.com).
Once you run your high-volume scanner, I run mine around
9am EST. You may be surprised to know that there are usually
not a lot of stocks in play from day to day. This is why searching
for volume is so beneficial during your pre-trading
preparations. It will save you from wasting a huge amount of
time weeding through a plethora of charts. During earnings
seasons or on market catalyst days, you can at times have a few
more stocks in play, but more often than not, this specific scan
will generate between 5 and 20 stocks.
As mentioned earlier in this section, to assist you in tracking
down the stocks which are in play, I recommend you perform a
scan that separates stocks out by both volume and price. For the
latter, I have found it considerably easier to read my Level 2 and
tape for stocks in the price range of between $20 and $400.
Stocks that trade above $400 are typically in such small lot sizes
that spotting when they are in the imbalance phase can be very
challenging. In direct contrast to that are stocks under $20.
Some stocks under $20 will read well but frequently there are so
many transactions that your Level 2 becomes congested, and
the price action will be difficult to read.
For the same reason, I only trade medium- or large-cap
stocks152 and ETFs, with a large available float. Low floats are
incredibly tricky to trade consistently. As well, they can be
extremely risky to manage your trades in due to the imbalance
between supply and demand when they are in play. I prefer the
larger caps since they ordinarily run a tight spread, and a tight
spread means a better risk versus reward potential.
With this scan completed, I now will have some promising
tickers to conduct my quality assessment of. This assessment is
a very quick way to further narrow down your watchlist and
eliminate additional tickers. As you undertake your pre-market
preparations, I urge you to not spend too much time
overanalyzing matters. The look of the pre-market will change
100 times each morning and you need the price to open before
you can cement your plan. For instance, it is not an accident
that the pre-market will regularly represent itself strong before
selling off all day. The Market Makers do this to move the price
early in order to introduce FOMO into the market and thus
negatively affect the mindset of everyone who was not able to
trade in the pre-market. When this transpires, and once the
market opens, every trader who was bullish will end up trapped
long as the Market Makers unload their shares at as high of a
price as possible before dumping the price. With some
experience, you will recognize these manipulations. If, for
example, you had shorted R3 because it was an inside day and
the price was high in the central pivot range, you would be
expecting the trap before the price moved back to value. To
summarize, your list of potential stocks in play can be rapidly
reduced after the opening bell has rung.
There are four elements to my quality assessment:
1. No block orders – Although I want to see a high volume
of shares being traded in the pre-market, the trading
should not be comprised of strictly one (or a very few)
blocks of shares.
2. An appropriate spread – The spread should be
appropriate for the price of the stock. For instance a
stock under $50 should trade at a .01-.02 spread at most.
A stock that is $350 will likely run a spread around .05.
Any more than that and managing slippage starts
becoming very tricky.
3. Chart quality – There should be a consistent flow of
volume with good chart structure that is concurrently
respecting price levels and establishing ranges in an
obvious way. This isn’t fancy – we are all looking at the
same charts. If the stock is in play it will hold and test
key participation areas.
4. Level 2 quality – There should be a good Level 2. (You’ll
recall from Chapter 7 that in a good Level 2, you are
primarily looking for overall structure. You want stacks
of orders at various price levels and an even distribution
of the price down to those orders. You don’t want to see
large gaps in the price because this will show potential
inconsistency in the price action. You do, however, want
to clearly see price action transpiring. You don’t want the
stock to be just sitting there, stagnant, with no shares
being purchased and sold.)
As part of your daily preparations, you can use the table in
Figure 8.2 to quickly identify “Where” best to trade. Once you
have determined the current directional bias of the market
based on the relationship between the current trading day’s
central pivot range and the previous trading day’s central pivot
range (Step 1), you can then confirm that bias based on where
the price opens (Step 2). You can next judge the potential for a
trade based on that central pivot range (Step 3) and then
pinpoint “Where” to enter your trade. With a little practice, it
should only take one or two minutes to run each of your
shortlisted stocks through the four steps set out on this table.
Figure 8.2 – A table setting out a four-step process you can
work through to help you identify “Where” best to trade each
day (chart illustrated by Thor Young).
Figure 8.3 – A flowchart that you can work through to help you
identify “Where” best to trade each day (chart illustrated by
Thor Young).
To wrap up this chapter, here is a summary of what I
recommend be your pre-market checklist:
1. Prepare yourself.
2. Run your volume and price scanner.
3. Perform your quality assessment.
This will provide you with your initial watchlist. Any tickers
that did not meet the quality assessment should be discarded.
Approximately five minutes before the open, you will start to
finalize your watchlist. This system requires the price of a stock
to open in very specific locations and I will use that information
to prioritize my list.
1. Check the relationship between the current trading
day’s central pivot range and the previous trading day’s
central pivot range. Is it an inside day or an outside day?
2. Prioritize by expected opening position. Tickers near
extremes such as R4 take priority as they are most apt to
experience a solid opening move.
3. Move tickers near value to the back of your watchlist.
They will take time as they chop and they will need to
move to an extreme before they become tradable. These
will be the stocks you can evaluate again some 15 to 30
minutes after the opening bell. Or if they come up on a
scanner.
By this point, there will likely be only a few stocks to watch,
and you don’t require a ton of computer screens in order to do
that. Depending on the opening position a stock on your
watchlist makes, you can select the appropriate pivot play set
out in Figures 8.2 and 8.3. That will let you identify your
“Where”. You then must patiently wait for the “When”
(reviewed in Chapters 4 through 7).
In the following chapter, I will discuss the next fundamental
component of the “How”: your risk management.
CHAPTER 9: RISK MANAGEMENT
These last two chapters focus on where trading really begins.
First though, I want to be up front with you about something.
We traders are gamblers. We may be well educated, but when
the dust settles, we are gamblers. We do enjoy fancying
ourselves as speculators because we employ intelligent
foresight, and that does help to make it easy to forget that we
are gamblers. But gamblers we are.
Similar to a professional Black Jack player, you need a risk
management system. This system will allow you to statistically
control how much money you lose during drawdowns, and it
will also assist you in increasing your profit as much as possible
when you are winning. I compare this concept to poker. You
never know what hand you are going to be dealt. You must ante
in to see what hand you are going to get but that by no means
commits you to playing the hand. You may ante in two or three
times before you finally land one worth playing. When you win,
if you can cover the cost of your previous antes, you are at
minimum breaking even. If you land a couple in a row, you win.
Risk management is where traders blow up. This is where the
fine line between consistency and the lack thereof is drawn. I
cannot stress enough, you need to become comfortable with
loss. All gamblers lose – and they often lose a lot. But when you
win, you plan to win big and outbalance your losses. Once you
become adept at using your risk management system, you will
be amazed at how quickly the winnings start to add up.
I use multiple risk management systems, and the one I choose
to utilize in a particular trade is determined by whether I am
taking an initiative or responsive position based on a trend or
counter trend.
An initiative position is a reversal or breakout taken without
confirmation. Because you are taking the position without a
retest, you are therefore taking the initiative. These positions
play best off extreme volume at large liquidity and supply
levels. In a sense you are going to go in where previous
participants are taking profit to use that imbalance for a quicker
move.
A responsive position is one taken with confirmation from a
retest. These positions will most usually be taken after both a
low-volume retest and the price of the stock hitting a new 5minute high, if going long, or low, if going short.
When a position (whether an initiative position or a
responsive position) is based on a trend, it means that the
position is going with the current directional bias. Your overall
goal is for there to be a continued advance in the current price
movement.
In contrast, when a position is based on a counter trend or
reversal, it is going against the current directional bias. Your
overall goal will be to play the extension of price back to a high
value area.
Before you can determine the ideal risk management system
for a specific trade, the risk inherent in that trade needs to be
defined. To simplify this, I use a variable “R153” with “R” being
equal to my risk. You will find that this is a fairly common
practice. Every position you take is going to be based on the
concept of “R”. This allows you to scale your risk as your
accuracy improves. For the purposes of this book, I will be using
a default risk of $100 per trade. This method is called a fixed
risk. Fixed risk uses the same amount of risk for every trade. It
is incredibly important to only lose exactly the amount of
money you intend to lose on a trade. In my risk management
systems, I plan for something that most other systems don’t. I
plan to lose. In fact, I plan to lose two out of every five trades.
I’m not concerned by that, and neither should you be. Your real
concerns should be what you do with a loss and, when you win,
will your profit outbalance your losses. You must think like a
gambler. Only lose as much as you need to but never
overcommit to any position until you are extremely certain
about it. When looking at your risk versus reward, your aim is
to absorb your losses with your wins. If you can keep this in
mind, then you won’t have issues with losing trades.
The other side of the “R” coin is Reward. I use the concept of
RvR or “Risk verses Reward.” We must ensure our winnings outbalance our losses. In the upcoming section you are going to see
(2 to 1) or (3 to 1). These are RvR concepts. For instance, if you
are using (3 to 1) then for every $100 you risk you are looking to
profit $300. This means you can lose 3 trades. Win the 4th and
still be break even. So even with a 25% hit rate which is quite
low you can still survive and make changes. I have included two
charts in the following pages. Figure 9.1 Shows the various
accuracy levels “Hit Rates” that are needed to be at least break
even on your risk. After that, Figure 9.2 shows you the various
profit taking methods that are available. Not all of which I use
regularly.
A
download
of
this
graphic
www.Bearbulltraders.com/pivotbook
is
available
at
Figure 9.1 – A chart demonstrating the various hit rates required
to out-balance losses. (chart illustrated by Thor Young).
Each Tier is a profit target so a (1 to 1) trade will exit at tier 1.
When the chart says, ‘trail till cross’, this means you hold the
position until it loses momentum and crosses the 9 and 20
EMAs on the 1m chart.
In all instances, I move my stop loss to break even after my
trade makes it past tier 1. “If it goes it goes,” is my general rule
here. If you catch the transition, you shouldn’t get retested. Stop
out and reenter if appropriate.
I am next going to outline the main risk management systems
that I employ and how you can use them to calculate your
anticipated profits on a trade. Each system that follows will
present the risk versus reward based on the default $100 risk
mentioned in the previous paragraph.
The more profit you take the less potential your position has.
So always try and hold as many shares as long as possible.
Figure 9.2 – a Grid Chart outlining the various profit taking methods I use. (chart
illustrated by Thor Young).
2 TO 1 SCALP (INITIATIVE)
A scalp is a single entry, single exit position. For newer traders, a
2 to 1 scalp (initiative) trade, as illustrated in Figure 9.1, can be
a great way to start out as it does not require considerable trade
management after entry. The focus will be pivots R4/S4 on
inside days and R3/S3 on outside days. As the price approaches
your pivot, and assuming the tape and Level 2 are supportive,
you should go long/short, as appropriate, at your pivot.
As illustrated in Figure 9.3, your stop will be a new 1-minute
high/low with a profit target of 2 to 1 all out. (As I referenced
back in Chapter 3, to go all out means to cover your shorts or
sell your entire remaining long position.)
With R (your risk) equal to $100, this trade will capture $200
in profit. If you take five trades that day and only two succeed,
you will still be able to cover your losses. If you do a bit better,
you can see below how quickly it adds up:
@ $100 risk, 3 losing trades = -$300
@ $100 risk, 2 winning trades = +$400
Profit after 5 trades with 2 wins is +$100
Profit after 5 trades with 3 wins is +$400
Figure 9.3 - Example of how a 2 to 1 scalp (initiative) trade can
be played. (chart illustrated by Thor Young).
2 TO 1 SCALE OUT (INITIATIVE)
To scale out means that you will be taking partials. Instead of
your position having one profit target, you will have multiple
profit targets. To take a partial is when you take a portion of
your position (one of your multiple profit targets) but not all of
it. This is an excellent strategy for either breakouts or positions
where you may have at least a little skepticism as to whether or
not the price trend will be continuing. In these situations, you
do not want to hold for too long. Scaling out with partials
ensures you will receive some profit should your trade suddenly
go south and, concurrently, if the price of the stock makes a run
in the direction you are hoping it will, you can extend your
profit margin because of your multiple profit targets.
Figure 9.4 on the next page is an illustration of a 2 to 1 scale
out (initiative) trade. In this instance, your first partial will be at
2R, but you are only going to take half of your position versus
all of it (you will profit 1R (1/2 of 2R)). At 4R, you will then take
half of what remains of your position (you will profit 1R (1/4 of
4R since 1/4 is half of what remains of your position)). You will
then go all out if the price of the stock makes it to 6R (you will
profit 1.5R (1/4 of 6R since 1/4 is what is left of your position)).
The total profit on this position will be 3.5R.
Figure 9.4 - Example of how a 2 to 1 scale out (initiative) trade
can be played (chart illustrated by Thor Young).
3 TO 1 SCALE OUT (INITIATIVE)
In a 3 to 1 scale out (initiative) trade, as illustrated in Figure 9.5
on the next page, you are taking a position at a failure point.
Since you are responding to that failure, the expectation is for a
strong move back toward a prior area of high value. Because the
expectation is for a larger move, you must scale out at a slower
pace and leave more on the table until you are going all out. The
first target will be at 3R, scaling out 1/3 of your position. At 6R
you will then take off half of what remains (another 1/3 of your
position). You will then go all out at 12R (taking the final 1/3 of
your position).
Figure 9.5 - Example of how a 3 to 1 scale out (initiative) trade
can be played (chart illustrated by Thor Young).
3 TO 1 RUNNER (SCALE OUT WITH TRAILING STOP)
This risk management method is one of my personal favorites
as it lets me lock in some solid profit. The key component of this
system is the setting of a trailing stop order to lag behind the
trending moving average. As mentioned earlier, a trailing stop
is a type of order that keeps you from giving back too much
profit should the price of a stock suddenly make an unwelcome
move. A trailing stop order only moves when the price moves in
your favor, and it is only triggered if the price of the stock hits
the price level it is sitting at. Figure 9.6 illustrates a 3 to 1
runner (scale out with trailing stop) trade. With this risk
management method, instead of going all out on the third
target, you should protect the profit you have reaped and leave
yourself open for the possibility of even more profit by setting
the third targeted price level as a trailing stop.
Figure 9.6 - Example of how a 3 to 1 runner (scale out with
trailing stop) trade can be played (chart illustrated by Thor
Young).
1R TO TREND TARGET (RESPONSIVE)
This particular risk management method is ideal for
maximizing profits. While it is also one of the simpler systems
to use, due to most new traders having itchy cover fingers when
it is time to hold, it can be surprisingly difficult to implement.
This method could run more stops and break evens, but the
larger returns will outbalance the extra stops if they occur.
Figure 9.7 illustrates a 1R to trend target (responsive) trade.
Figure 9.7 - Example of how a 1R to trend target (responsive)
trade can be played (chart illustrated by Thor Young).
SCALING OUT VERSUS HAVING STRICTLY ONE PROFIT TARGET
Using the previously illustrated 3 to 1 scale out (initiative) trade
as an example (figure 9.5), if 1R equals $100, then to take 1/3 of
your position at 3R results in $100 of profit, 1/2 of your
remaining position (another 1/3) taken at 6R results in $200 of
profit, and to dispose of your remaining shares at 12R (the final
1/3) results in $400 of profit. If you are always taking 1/3 of
your original position until you hold no more shares, you will
make a total of $700 (7R) in this imaginary trade.
Most traders will make the natural connection that if 1R
equals $100, and if you held for a 12R move, you will then net
$1,200 on your trade. Since there is so much more money to be
made from not scaling out, you may be wondering why a trader
would scale out when they could just patiently hold. The
legendary trading coach, Mark Douglas, answers that question
perfectly: “Take what the market gives you, not what you want.”
I heard him say that in an interview and it completely changed
the way I thought about profit taking. In today’s incredibly
volatile market, a social media post can send the market into
turmoil. I use partial taking because I am willing to sacrifice
potential profit for the assurance of having some money in my
pocket. The market can turn on a dime and quickly erase a day’s
work and put you in the red. If you are only losing 1R per trade,
then you only need 4R or 5R on any one winner in order to outbalance multiple prior losses. If you hit two winners in a row,
you are having a great day. This system is all about cutting your
losers and letting your winners run. Do keep in mind as well
that 1R can be anything. It can be $1,000 or it can be $10. It all
works the same. That’s why I use “R” as a reference because, no
matter what your bank size is, you can focus on the process of
profit. That part will come in due time.
Similar to cutting your losers, there is also a time to cut your
winners, and that is when they lose momentum. This is why
you profit take. A harsh reality of trading is that most of the
time, your trade will not hit its target. Accordingly, how then do
you know when to go all out?
ALL OUT
Going All Out is a classic term for covering or selling your entire
remaining position. In the 1R to trend target (responsive)
method described in this chapter (figure 9.7), there are no
partials being taken. This provides you with the maximum
reward, but it also means if the stock turns on you, there is no
profit on the table. Regardless of the situation, many traders
will hold no matter what. For me, this leads to a missed
opportunity. If the circumstances call for it, I am going to go out
early, knowing that I can always get back in if the opportunity
arises. Quite a few all or nothing strategies miss this. Since you
will be coming back to retest, why not get out, lock in some
profit, and then get back in IF the stock sets up favorably.
In order to judge momentum loss, I use the 9 EMA and 20
EMA cross. An EMA, or Exponential Moving Average, is a
lagging indicator based on average price movement. As the
price moves up and then struggles, these averages will
eventually begin to converge and then diverge, forming a cross.
When they do, the ticker is apt to be in balance or reversing.
Either way, it’s time for you to get out! If the stock sets up later,
or if it’s doing a pull back on a larger time frame, you can always
get back in at a possibly better average with a better risk versus
reward. In some instances, like the R4 breakout, you won’t
really know how far the price will move, as you will be outside
the usual average true range at this point. It may only move a
little. It could move a lot. I often prefer to set a trailing stop
order behind the trending moving average.
MOVING AVERAGES SET UP IN DAS TRADER PRO
Setting up moving averages in most platforms is fairly simple.
For DAS Trader Pro, you need to go to Study Config.
1. Right click on your chart and select Study Config.
2. Click to highlight the Moving Average study and then
click Select to add it to your Moving Average
(Expone@20) study.
3. Click the ConfigEx button, uncheck all the boxes, and
click Commit.
4. Click Config and configure as shown in Figure 9.8 on the
next page. Make sure you check Draw Slope in order to
change the up and down color. Click Commit when
finished to update the studies.
Figure 9.8 – Screenshot of how to set up moving averages in
DAS Trader Pro (screenshot courtesy of DasTrader.com).
Moving Averages Cross Set Up in DAS Trader Pro
1. Right click on your chart and select Study Config.
2. Click to highlight the Moving Average Pair study and
then click Select to add it to your Moving Average Pair
(Expone@9, Expone@20) study.
3. Click the ConfigEx button, uncheck all the boxes, and
click Commit.
4. Click Config and configure as shown in Figure 9.9 on the
following page. Ensure you check “Show cross over
arrows”. Click Commit when finished.
Before continuing, a quick reminder that if you are reading
this
in
a
hard
copy.
You
can
go
to
www.bearbulltraders.com/pivotbook to get a copy of all the
figures and charts from this book in a color PDF you can
download.
Figure 9.9 – Screenshot of how to set up moving averages
cross in DAS Trader Pro (screenshot courtesy of
DasTrader.com).
IDENTIFYING THE TRENDING AVERAGE
Once stocks are in transition, a moving average allows you to
discern how far the price is moving on average during a
specified time frame. This creates a smooth line marking the
average price you can use to judge when you are losing
momentum. This works because, as the price action slows, the
price of the stock will meet back up with the moving average on
your chart, flattening the curve of the line. Eventually, the
curve will start in the contrary direction, showing that
momentum is shifting in the other direction. At Bear Bull
Traders, we use Exponential Moving Averages when trading
because they are weighted, they are more sensitive than simple
moving averages (SMAs), and they perform well in the lower
time frames that your 1-minute and 5-minute charts cover.
As illustrated in Figure 9.10, to find the trending average, you
need to analyze your chart as the stock is in trend. You’ll notice
that one of the moving averages will be in play or interacted
with more strongly. You can tell it is in play because every time
it is tested in a pull back, the price is honored before it begins to
advance again. This EMA will thus become the main average to
watch. As that average is crossed by the price and then the
lower moving averages, there will be a moving average
convergence. As they cross and diverge, there will be a moving
average cross. At this stage, you will exit most of your positions
or enter new positions in response to the lack of momentum.
Figure 9.10 – 1-minute chart of NIO Inc. (NIO) with two different
EMA crosses marked (chart courtesy of DasTrader.com).
FREE ROLL
Identifying which moving average is trending also provides you
with an opportunity to add into your position. Nonetheless,
adding into a position can be very tricky to manage. The last
thing you want to do is add risk into a winner and end up giving
back some of your realized profit. If the price pulls back and
holds your EMA, you can add in, using the EMA as a stop.
I recommend that you use a risk-free adding method that I
like to call the free roll. The idea behind the free roll is to only
add in sufficient shares to bring your average cost to your new
desired break-even price. The hardest part though is calculating
how many shares you will need. For that purpose, I use a hotkey
that automatically calculates the number of shares based on
where I click on my chart. I use fixed risk hotkeys as well. Again,
risk management is the key to being consistent. I only add off of
the trending average or VWAP. In most instances, it’s better to
cut your entire position and capture the profit once the
momentum is lost, as you are more apt to reverse or chop at
that point. You should wait until the liquidity returns to the
market and then look for a stock in a more extended range that
is ready for a better move that you can capitalize on. You can see
an example of this on the next page (figure 9.11), as I added into
a winning trade as the stock I was trading tested the 9ema and
VWAP.
Figure 9.11 – 1-Minute chart of $NFLX showing a Free Roll add
using 9ema and VWAP test. R3 was used as new stop out.
(chart courtesy of DasTrader.com)
AVERAGE IN
The free roll is just a fancy way to average in to a trade you have
already taken profit on. To average in is to add shares into a preexisting position. Some traders use this to limp into or test
positions before committing. In my experience, this has little
value for a day trader. In swing trading or long-term trading,
you have the luxury of waiting for the price to reach you. As day
traders, however, the clock is always chasing us. We must get
our profit and soon. If you are not certain enough about a
position to assume full risk, then don’t take the position at all.
You need to be picky with your entries. Your decisions in day
trading are absolutely not meant to be based on a toss of the
dice.
If you are going to average in, I recommend using the same
method as the free roll. You should wait for a pull back to a
significant moving average or VWAP and then, if it holds, add
into your position. If you are only risking your unrealized profit,
you are never exposing yourself to any more risk than you
initially intended.
You survive the market by never adding risk to a position. It is
incredibly important to be humble and recognize when you are
wrong. Cutting a loss quickly will give you the opportunity to
recover and still make some profit. Not being able to accept a
loss, and then trying to use some sort of method to average in, is
the primary reason why the majority of traders will blow up
(destroy) their accounts.
AVERAGE DOWN
In a similar fashion, averaging down also breaks the cardinal
rule of risk management: never add on risk. Averaging down is
the desperate trader’s YOLO (you only live once) trade, and a
foolish trader’s path to destruction.
You average down a trade by adding shares into an already
existing position (and at a worse average price). This ultimately
adds in risk to your position and, if a stop is accepted, you will
end up losing more money than you would have projected at
the outset of your trade. Traders will often succumb to the
allure of averaging down because, if the price moves in a
favorable direction, the additional shares will allow them to
swiftly make back the loss from their original entry.
The worst part of averaging down is that it will from time to
time work, and that is why averaging down is one of the chief
setups for failure. Attempting this type of risk management
will undoubtedly lead to massive multiple losses and they will
be followed by large drawdowns from your account. Where you
are only supposed to lose a maximum of 3R to 4R per day, you
will lose 12R or even more. In order to survive this kind of
management, you must have capital. Swing trades and longerterm positions have the potential for coming back in due time,
but day trades are exactly what their name implies. They’re day
trades. Trust me, you don’t have the time for an averaging down
approach to trading. To help manage your wins and losses, I
recommend you establish a daily profit/loss target to let you
know when to keep trading and when to quit for the day. I want
to show these next 2 charts to help you visualize why it is better
to cut losses immediately rather than averaging down.
In the first chart, figure 9.12, you will see what we like to call a
‘bag hold’. As mentioned before, this is when someone holds
through their stop “hoping” the stock will return in their
direction. In this example, this ended up risking more than 2R
before finally turning and getting to the target gaining 4R. The
wide stop and hold require a larger distance for profit.
In the second chart, figure 9.13, you will see what it looks like
to have exited and reentered. Not only is this better risk
management by only risking the intended 1R. It gives you a
chance at making more money on the increased distance from
your target. That’s the big misconception in risk management.
That you need “Diamond Hands154“ or a huge bank. The key is
not holding. But getting out exactly when you are supposed to
get out. This trade lost 1R but ended up making 6R totaling 5R.
Better management and an extra R for your trouble.
Figure 9.12 - Example of how a Bag Hold increases risk while
lowering your potential for reward (chart illustrated by Thor
Young).
Figure 9.13 - Example of how a Stopping out is better and the
better price position will offer the potential to net higher gains
(chart illustrated by Thor Young).
DAILY PROFIT/LOSS TARGETS
The final element of your risk management system needs to go
beyond how you respond to loss from a single trade to include
what happens with your overall day-to-day trading. It’s very
easy to adhere to your rules for one day at a time, but to
consistently execute day after day after day is quite another
story. Just as you should not expect to win every trade, you
should not expect to come out on top at the end of every trading
day. That is why you need to also manage your daily risk. The
market changes every single day. Some days will be volatile days
with more price movement. Other days will be low-volume
choppy days will little overall price movement. Although this
pivot system works on any trading day because it is based on
playing value, it will inherently work better on days with more
volume and more participation.
Knowing that, you must be prepared to experience days that
underperform. Your objective is to never do so much damage to
your trading account in one day that you cannot get it back in
another. This system works well, and with it you should expect
to have more profitable days than not. This is why you need to
make sure your losing days are kept as small as possible. Having
reasonable daily goals is extremely crucial to being successful.
The main reason I always reference profit or loss as “R” is
because I don’t want the system (nor myself) to focus on profit.
I want to focus on process. It doesn’t matter how much you risk.
Once you are conversant with the system, it will return at the
same rate regardless of the amount of money you risk in a
position. Then, you can start to scale your risk as you become
more comfortable.
Many of the traders that I have interviewed share of a similar
struggles when it comes to finding consistency. Those
challenges lead them to suffer huge drawdown days that can
literally destroy weeks of consistent profit. This happens
because they are not managing their daily loss. I personally
have set up my trading program to automatically lock after I
have reached a specific amount of loss. That loss is my daily “R”
(my daily risk). Like any good gambler, every trader needs a
system that will shout, “Stop! It is time to stop.” You want to live
to trade another day when the market is more in your favor.
Further, you must recognize there will be days that you might
not be in peak performance mode. I will discuss this topic in the
next chapter, which is centered on the psychology of trading.
DAILY RISK MANAGEMENT
The following are 3 rules I have put together to help control day
to day risk. The concept here is to never lose more in one day
then can be made back in the next. These rules help me with
controlling profit and loss. This means when I can keep trading
versus when I must stop trading. I used to struggle a bit with
continuing to trade after I was near my goal. I’m only trying to
average around 4R a day, but I want to allow for days I’m
performing well. It can be difficult to continue trading past goal
for me at times. Because fear of losing a successful day can
cause the loss of my conviction. My good friend, Peter Donnelly,
a fellow moderator in Bear Bull Traders, helped me detail the
rules that allowed me to continue trading with conviction. They
are as follows.
Where R = Risk: (This could be $10 or $100)
1. Trade 1R per trade. 1 position at a time. Every trade
with no exceptions. The daily goal is 3R-4R a day with
that range being a trading stop for the day.
2. I stop trading for the day if I lose 4R without exception.
I want to insure I preserve capital on poor performing
days.
3. I can continue to trade past goal unless I lose 2R or have
2 consecutive losses. Once over 3R I am not allowed to
trade if trading risks losing 3R minimum goal.
TRADE EVALUATION
I recommend evaluating trades in 25 trade sets. This will allow
you to grade your performance. It really shouldn’t take any
more then 25 trades to assess the effectiveness of any strategy. I
will assign myself a grade based on my performance and as long
as I’m performing in the A range then I will continue trading
without additional evaluation. I have created some conditions
for trading around these grades.
Where 1 trade = Your entry of a position, long or short, and
then All Out that position.)
A - 21-25 trades result in profit (My performance is at peak
and no changes are needed; I can increase risk if desired)
B - 17-20 trades result in profit (My performance is good.
Begin trade and system review to correct for lowered
performance.)
C - 15-16 trades result in profit (My performance is ok.
Increased stop outs are occurring, so a complete review of
my performance and the systems performance is needed.)
D - 13-14 trades result in profit (My performance is struggling
and will basically be breaking even at this point. Major
adjustments are needed)
F - 12 or less trades result in profit (My performance is poor.
Since capital is being regularly lost, returning to SIM should
be considered.)
The system works so if something is wrong its likely a
variable that has injected into the system. I will talk about that
more shortly.
It is extremely important to keep the data as clean as possible
and that means following the system without variation. To
evaluate performance, you need the best data possible.
In this industry you need to become very comfortable with
loss. In the best of scenarios, you can expect 3 out of 4 trades to
result in profit. That still means you lost 1 trade. And if that was
your first trade of the day you need to be able to execute the 2nd
trade just as accurately. To make this easier this system doesn’t
account for second guessing. Look for all the things that are
needed for the ideal setup and then take the trade. If the data is
clean, you will be able to figure out if the system is working or
not. However, if you second guess the system, the data you get
from it will be much less valuable. If you go to the website listed
below you can obtain a copy of the evaluation sheet that I use
for tracking my trades.
Basic
Trade
Tracking
www.bearbulltraders.com/pivotbook
Sheet
at
The idea behind this risk management system is to allow you
to hit your daily target in one well-managed trade, while
concurrently being able to absorb multiple losses. This will
generate consistently winning days. If the end result of a series
of losing days is a big and painful drawdown from your trading
account, the system won’t work. There isn’t a single system
available to out-balance that.
You can look at it this way. Given that there are an average of
20 trading days in a month, if you only win half of your trading
days, and make an average of 6R on those winning days, you
have made 60R (6R x 10 days). If your losses then average 6R
per losing day, you will also lose 60R and break even for the
month. If, however, your losses average 3R per losing day, you
will instead lose 30R (3R x 10 days) and come out ahead with
30R of profit for the month. Let me tell you something though.
This system works far better than that. You should expect a
much higher win ratio once the system is in place.
The key to getting the system to perform is the hardest part of
mastering trading - and that is mastering yourself. The
foundation for all of this is conviction. Once you are ready, you
must implement your system, and then commit to your system.
In the final chapter that follows, I will be expounding upon
your trading mentality or psychology. The most essential
component to any trading system is to control the trader by
eliminating the trader’s emotions as a variable that will
constantly undermine the system. The large drawdowns
described by the traders I’ve interviewed were nearly
exclusively caused by a lack of control. You need to find a way to
overcome and shut down the emotions that lead you to deviate
from the well-thought-out system that you have committed to.
If you are not able to figure that out, the chances are excellent
that you will experience wild and erratic trading, what we call
“hulking” in the lingo of traders.
The reason trading is so difficult is because of the following
equation:
A+B=C
This equation is a mathematical representation of your
psychology, when you are trading in a simulator or practice
trading. You will find that trading and developing your skills
always seem to work exceptionally well until you go live. That’s
when everything stops working! Most new traders blame the
market, thinking some secret cabal of traders is out to get them.
The reality is that once they go live, the equation changes.
It now becomes:
I (A+B) = C
The “I” represents the trader. You! The trader’s emotions
create an uncontrolled variable in their trading system. And
trust me here – If you are unable to control your risk in
simulator, you will never be able to control it in a live
environment. You must master your psychology to be a
consistent trader. In the next chapter, we are going to briefly
cover some concepts I’d like to highlight to help dial in your
mindset to ensure you are trading at peak performance.
CHAPTER 10: TRADER PSYCHOLOGY
As I wrap up this book, I want to turn to the only part of a
trading and risk management system that really matters. And
that is the trader who is executing it. I started off in this book
pointing out an obvious flaw in how Furus push their systems.
They are bold and make claims about their system’s simplicity
and ease of implementation. Even if those claims are true, their
systems do not account for the conditions of the market at the
time they are being used. They also don’t account for the trader
who is trying to implement the system. I have already
addressed the first issue. Now I will address the latter.
Like any high-performance sport, there is a significant
amount of pressure on traders. That is why it is critical to focus
on your psychology prior to putting your money on the line. To
begin, I recommend that whenever you implement a strategy or
trading system (including mine), that you first test it in a stressfree environment. Before adding yourself into the equation,
make sure you understand exactly how the system works and
prove to yourself that it can be executed consistently. The
market isn’t going anywhere. If anything, the latest changes in
technology are bringing in more participation than ever.
In the year prior to the publication of this book, millions of
new users have signed up for mobile-based trading systems.
This is why you need a system such as what I have outlined in
this book. The fundamentals of old are not going to be effective
in this new trading landscape. You need a system that is based
on participation because every single day there are more and
more individuals jumping into trading. Now that people are
realizing they can sit at home in front of their computer and
make money using their money, the thought of sweating all day
to make less just isn’t that attractive. In this post-pandemic
world, the job market has changed. Working from home is
extremely appealing. Being able to make money while raising a
family or helping with loved ones is very enticing. So is not
needing to drive for an hour or more through rush-hour traffic
in order to get to an office, factory, store, or restaurant so that
you can then toil away in obscurity for eight-plus hours,
making money for someone else.
All projections show participation to be at an all-time high
and growing. Focusing on a volume-based system will give you
an edge that can bring you the conviction you need. With that
conviction, you will survive when others will fail. You will be
able to make money in the market while others are blaming
their losses on the market’s poor conditions. Every single day,
there are opportunities to make successful trades. The only
thing that gets in the way is the trader and the trader’s ability to
execute at a high level.
I’m going to spend a little time offering you a few tips for
controlling this variable. After all, “how” to remove yourself
from the equation is a big part of “how” to take a trade. Cutting
your losers and letting your winners run takes conviction. And
that takes time and evaluation. And that is the main reason you
must take yourself out of the equation. If you don’t, how will
you possibly know if the issue is the “system” or “you”? This is
why you must embrace loss as a part of this system. Remember,
it’s merely an ante. Keeping yourself out of the equation and
embracing loss is very important. I am not advising you to be
reckless with your money, however, I am encouraging you to
embrace loss.
I will shortly discuss how to evaluate the system to figure out
if it is being implemented well. But you will never be able to get
to that stage if you don’t access what I regard as the “pure” data.
If you stop out when you are supposed to, and partial when you
are supposed to, you will gain the ability to adjudicate the data
in a non-biased way.
This is what separates simulated trading from live trading. In
most respects, it is analogous to playing a video game versus
actually doing, for real, whatever the video game is portraying.
Consider this scenario – You go to the arcade and choose a video
game. It’s a popular NASCAR racing simulator. It simulates
every part of racing including the speed, steering, shifting, and
braking. You sit down and, in an instant, become the most
amazing stock car driver ever. The lack of real danger brings an
incredible level of confidence and a false sense of competency.
This is known as the Dunning-Kruger effect. I have inserted as
Figure 10.1 below a graph illustrating this effect.
Figure 10.1 – Graph illustrating the Dunning-Kruger effect.
This is the issue most traders will face as they begin
implementing any risk management system. It’s exactly like
switching from an arcade to the Daytona International
Speedway. You can’t expect the required level of competency to
form overnight. Unfortunately, most traders will learn this the
hard way. They will donate a small fortune to the market before
they can attain any sort of sustainable profit.
To help with this, I recommend transitioning from the
simulated environment to the live environment with an
amount of money that you are comfortable with losing. It’s not
that you will necessarily incur the loss though. It’s that, in order
to be able to remove the emotional variable, you must be willing
to lose that sum of money and be able to recover quickly from it.
One of the most impressive characteristics about my mentor,
Dr. Andrew Aziz, is this very thing. Because he can perform well
under extreme pressure, he is an ideal example of what it takes
to be a successful day trader. He trades live every day, showing
his PNL at the end for everyone in the chatroom to see. And on
his losing days, he shrugs it off. He, however, faithfully returns
the next day and gets it all back and then some.
You must have the ability to learn from loss but concurrently
not take it as a personal failure. This is the primary takeaway
from this section of my book. In order to access pure data, to
trade consistently, to perform well over and over, you must
have an elite mentality. Do not accept anything less from your
trading. It is better to lose a trade, take a loss, and in return get
some more data that you can then use to improve your trading.
If you become the variable in the equation, all you will be left
with is questions. You won’t know if the system you have
chosen to implement works or not. The system actually could
be working perfectly but you may just not be following it
correctly. Subsequently, the system could be not working at all.
Either way, you’ll never know. If you adopt this approach, you
will never be able to find consistency. To be successful in this
market, you must be humble. Realize that the market is a huge
money-making machine that you are trying to be a part of. At
no point in time will you have any control over this machine.
Your task is to become a master of reading the process that
drives it.
As you start to implement a risk management system in a live
environment, I recommend scaling into your daily risk (your
daily “R”) and subsequently your risk per trade.
For your daily profit, you should aim to make around 6R per
day. You can achieve that with one or two winning trades mixed
in with a couple of losing trades. If you are struggling, you
never want to lose more than 3R to 4R per day. The expectation
is for the system to return better than 50/50 results.
Accordingly, that ratio should tip heavily in your favor once you
get the system working. The key to this system, and really any
trading system, is to ensure your losing days don’t outbalance
your winning days. By limiting your downside, you can leave
yourself open to letting your upside make it back for you. But if
your downside is too large, there will be nothing you can do
other than to begin taking YOLO (you only live once) trades that
will eventually blow up your account.
The main reason I use “R” instead of a dollar amount is
because scale then becomes the sole variable. The system works
on a $50 risk per trade as easily as it does on a $500 risk per
trade. The only difference is your ability to execute at the higher
risk level. If you can generate the appropriate outcome with this
system at any risk level, you are then in a position to commence
scaling. My recommendation for scaling is definitely based on
your level of success. As well, I would not scale more often than
once in a fiscal quarter. Markets shift and it’s beneficial to
confirm that you are not just getting lucky in a directional
market.
You need ample amounts of time to evaluate your risk
management system and make changes to it. No single system
will work for every trader without some variation to fit the
individual’s trading style and psychological makeup. My hope
for this book is to not just give you a system to blindly follow,
but to teach you to read the market so that this system becomes
a part of you. To know if that is indeed occurring, you must be
constantly evaluating the system.
I have found that it works quite well to evaluate my trading by
giving myself a trader rating after every 25 trades.
If my win ratio is greater than or equal to 20 trades, I give
myself an “A” rating. In that instance, I allow myself to continue
trading with no major adjustments, although I do review and
analyze the five (or less) losing trades for any missed signals. I
also always record my screen so I can easily go back and see
exactly what I did on any given trading day.
If my win ratio is greater than or equal to 15 trades but less
than 20 trades, then I give myself a “B” rating. This rating is
immediately concerning. “B” is simply not good enough. While
I will still be profitable at this stage, I expect my system to
return “A” level results. A “B” will lead to significant review on
my part.
If my win ratio is less than 15 trades, then I have a serious
problem on my hands. My lowest rating is a “F”. An extensive
review is a must and I may possibly implement a temporary
reduction in my risk per trade. The reduction in risk is not
because of me, the trader, but because a factor may have
changed that is impacting either me or my system. Whatever it
is, it must be addressed urgently.
Many outside forces can impact a trader or the trader’s ability
to perform. To expand on this point, I want to discuss briefly
another effect called the Halo Effect.155
Each new habit makes it easier to install the next. As such,
learned behavior builds momentum in your brain. It’s hard to
expect your trading to do well and be at peak performance
when the other aspects of your life are not complementary of
that concept. Becoming a consistent trader isn’t just about
learning this system. It’s about performance.
The reason I am bring up this effect is due to the reality that
your system of trading can break down because there are strong
forces outside of the system impacting you. When any system
reaches a level of performance lower than a “C” rating, the most
likely issue is the trader and not the system. Even the
probabilities of rolling the dice should return better results.
With a “C” rating, not only is the trader not hitting an average
expectation, they are undershooting it by a large margin. This is
why you must focus on process and not on profit. If the process
is well established, then regardless of what is going on in your
life, you will be able to perform consistently. Given the Halo
Effect though, you must acknowledge when the individual
executing the system is at fault. This is why you must be
constantly evaluating your system and yourself. Protecting
your liquidity is your number one priority, and sometimes, that
means protecting it from yourself.
I would be remiss to not mention that the Halo Effect can also
have positive results. By fixing these aspects of your life and
putting your “house in order”, so to speak, your trading will
almost certainly improve. From a personal perspective, adding
this kind of structure to my life has definitely spilled over into
my trading and vice versa.
As you find success and begin to develop consistency in the
live trading environment, you will need to start scaling to make
more profit. Every quarter, I encourage you to evaluate your
overall trading and issue yourself a rating. This should be based
on the average “R” you are generating each month (and not on
the amount of profit you are making). As your trading account
and risk change, your profit will exponentially change. To keep
your evaluation simple and consistent, don’t forget to always
think in terms of “R” or risk.
Each month, you should be consistently generating a
minimum of 30R to 50R. If you are managing your risk
correctly, you can achieve this even if you lose on 5 out of 20
trading days. Your profit is only restricted by the amount of risk
you assume per trade.
If, at the end of a quarter, you are at 90R or more, then I would
recommend scaling your risk. You are obviously executing at a
very high level and there is no reason not to put on some risk.
Just remember the Halo Effect. If you find after adding the risk
that your accuracy rate over the next 25 trades drops
significantly, be prepared to immediately reduce the risk.
No one becomes a doctor, lawyer, musician, or professional
athlete without an extreme amount of competency in their
field. It takes literally a ton of studying and much, much time in
the saddle to build that conviction. It is considerably easier to
lose your conviction than it is to build it, and that is why you
need to be continually evaluating, growing, and sharpening
your edge.
So many people talk about what they call the “trader’s
intuition”. In the trading community I belong to,
BearBullTraders.com, one of our lead traders is known as the
“Prophet of Profit”. We all joke that his catchphrase is, “I knew
it.” It’s funny because it’s true. His intuition for market direction
is amazing. While he uses many strategies, it’s his experience
acquired through years and years of trading that make him a
prophet of price action.
This is the final reason why risk management is so absolutely
critical. Part of becoming a trader is surviving the amount of
time it will take for you to gain the feel of the market. No book
can give you that. However, my book will not steer you down
the wrong path. Let me be forward with you – this journey is
going to take a few years. It’s precisely the same as earning a
degree, or becoming a professional athlete, or launching a new
business, or beginning a new career. Nothing will replace the
amount of time that is required to achieve competency.
THE CORRECT TRADING EXPECTATIONS AND ENVIRONMENT
To survive this development phase in your trading career it is
critical to have the right trading environment and expectations.
Many traders burn out long before they achieve their goals. Not
because they fail but because they don’t succeed quick enough. I
have had many new traders start mentoring sessions with me
saying, “I’ve got this much money and have given my self six
months to learn how to trade and start making money.”
Without even really knowing what they are getting into, they
are already setting expectations. There is unfortunately no way
to know how long it will take you. There’s no way to preplan
that. The conditions of the current market can make trading
very difficult for months at a time. If you start trading during
one of those cycles, you will quit long before realizing it. I was
fortunate to start trading in 2017 as we were going into a
massive market run. It made trading quick and simple for the
first few months. This did cause me to struggle later in my
career when I needed to adapt to a more difficult market. That
adaptation is what inspired this book. I wanted a system that
would perform year after year in any environment. And it took
years to get it just right. Take your time and focus on process
over profit and your profit, in due time, will come.
The other factor that we often don’t account for is the literal
physical and emotional environment you are trading within. As
a special needs parent this can often be a challenge for me. If my
daughter is having a meltdown or there is some major issue at
the house it can be difficult to go into my office and focus. This
is where I must take a moment to speak on my primary trading
partner. My life partner and wife, Janelle. Through my entire
trading journey, from learning to trade through writing this
book, she has been incredibly supportive. She has been a major
factor in creating the environment that I rely on.
A very important part of this journey for you will be having
the support of your loved ones. Trading can be very stressful at
times especially during periods of long drawdowns. The market
will test your resolve over and over again and the last thing you
will need is your resolve being tested at home as well. Be honest
with your family, setting the proper expectations and make
sure they are really on board with the journey you’re on.
Remember no one expects anyone to become an engineer,
financial advisor, doctor, or a lawyer in 6 months. All these
careers require time to build the competency needed to be a
high performer. And for those looking to do this part time, keep
in mind – the more time you put in, the faster you will progress.
There is no substitution for saddle time. Be reasonable with
yourself and manage your expectations.
CONCLUSION
Throughout this book, I have highlighted and explored the
three parts of my risk management system that are imperative
for every trade you take, even if you are merely trading one
single pivot. Those three components are the necessity to have a
“Where”, a “When”, and a “How” for every position you enter.
To augment your existing edge, a crucial takeaway from this
book is that you must find a way to only permit yourself to
execute A+ trades. That does not mean they need to win, but it
does mean that you need to execute them in the way you
intended to when you developed your meticulous trading plan
for the day ahead. If you are capable of doing that, you are
capable of becoming a professional trader. It does not matter
how talented or smart you happen to be. Nevertheless, and
forgive me for being so blunt, if you are not able to execute
properly and follow your trading rules, you will fail.
The second takeaway is to not let your emotions control your
decisions. We need to remove ourselves as a variable that
interferes with our proven system. In order for a system to
work, you must believe in the system and execute it in a
systematic way. When you start injecting randomness like
FOMO, Greed, Fear, and YOLO, then your proven system will be
compromised. As you trade, do not forget that the market is
100% trying to manipulate you. Most new traders, especially
are not aware of this. They can spend years feeding their money
to the market until they finally come to this realization. The
Market Makers, insiders, and seasoned retail traders have been
in the manipulation business for a very long time, and they are
really good at what they do. They also have extremely
sophisticated computer systems and algorithms that do the
majority of the heavy lifting.
Their goal is to sell you their shares at as high of a price as
possible and then buy them back from you at the lowest price
possible. They want to make money for themselves and they
want to get the best deal for their clients. They are constantly
attempting to trap you into positions so they can squeeze you
out and take your liquidity.
I watch it happen every single day – a stock pushes up but on
low volume. This demonstrates that the Market Makers aren’t
participating. Yet, concurrently, shares are appearing on the
Level 2’s Ask above the current price range, showing strength.
Too many traders only look at the price and do not consider the
volume, and because of that they will get taken advantage of by
the Market Makers. They will go long, anticipating a breakout,
only to have the price go against them and stop them out.
Subsequently, the price will go back up to their target. This is
also intentional. The Market Makers want you to experience a
generous dose of FOMO and become rattled. They want to shake
you out of both your shares and your money.
It’s like playing cards with a marked deck. You are at a massive
disadvantage. In this game, they are the house. They will
continue the process for as long as it takes to sell off sufficient
shares to move the price back down to the prior range. But you
are not going to buy those shares if the stock looks weak, are
you? So, naturally, they will make the price action appear strong
at the top of the range, causing you to buy in at a high price for
fear of missing out on the move. You will end up trapped and be
forced to sell at the bottom of the range for fear of losing more
of your money. The price will then go back up and once again
look strong, you will go long, the price will drop down, and you
will be stopped out.
You eventually will be too frustrated to trade the stock
anymore. You will be curious though and come back an hour
later to find that the Market Makers had dumped the stock. Over
and over, you had been trying to go long, but you were never
going to get that move. Instead, the Market Makers dropped the
price and achieved their goal.
So, how do you beat them? Easy… you don’t! You let them do
what they are going to do. You have no ability to stop them or
even make a dent in their diabolical plans. Rather, you need to
focus on what you have just read. Know “when” and “where”
they are moving the price action to. And you also must know
“how” to take the move with them as everyone else gets
liquidated.
Thank you so much for investing your money and your time
in reading this book. I believe that time is the most valuable
asset we have as day traders. It’s the only asset we can give but
never gain. And I’m both humbled and honored that you chose
this resource to invest it in. I truly hope this system brings you
new knowledge of the market and the trading consistency it has
brought me.
Always remember, The Market is a system. The better the
market’s participants understand how the system works. The
better the system will work.
151 A stock’s average true range is how large of a range in price it has on
average each day. If ATR is $1, then you can expect the stock to move
around $1 daily. If you are trading 1,000 shares, you may then expect to
profit $1,000 from that trade.
152 A company’s market cap (or market capitalization) is the total dollar
value of its float. For example, if a company’s shares are worth $10 each
and there are 3 million shares available for trading (a 3 million share
float), that company’s market cap is $30 million.
153 “R” is an industry standard way of defining the variable of Risk. If you
risk $100 then your “R” is $100.
154 Diamond Hands is a term coined by meme traders that would old
positions “No Matter What.”
155 The Halo Effect (sometimes called the “halo error”) is commonly
defined as an effect cause by a mental heuristic, that improving aspects
in one area can positively influence aspects of one’s performance in
other areas.
ACKNOWLEDGMENTS
Dr. Andrew Aziz – My first mention is to recognize the author of
the book that got me started in day trading. However, Andrew
has been more than the Mentor and Coach that gave me my
entrance into the educational side of the trading industry, he is
a brother that has been there to help my family in times of need
and has been the largest single catalyst in my trading career.
Brian Pezim – The Prophet of Profit has been my major
support/wingman while trading the opens. Make sure to read
his books on Swing trading.
Norm G – My wingman when I cover the premarket show.
Introduced me to VPA which ended up defining my principal
edge.
Peter Donnelly – Coached me through a major hurdle in my
psychology regarding risk management. A portion of those
conversations directly influence the “How” section of this book.
Peter Tuchman – The Einstein of Wall Street. This gentleman
gives the common man access to the VIP lounge of the big dogs.
Thank you for your hospitality.
Ed Martin – The Average Joe Trader. Bringing real talk and realworld philosophy to the trading world. Appreciate your support
and friendship.
Carlos M. – My other premarket co-pilot. Thank you for your
guidance especially in recaps and media production.
Jarad C – JRad! Thanks for all your contributions to my trading
style. Your expert analytics and disposition are always valued.
Mark Allen – Author, Mentor, and good friend. Thank you for
your guidance. Too much to say so I won’t say too much.
Hamish Arnold – Hamish the Researcher! Thank you for your
countless hours of work helping with this book and its edits.
You give a lot while asking for very little. Cheers Mate
The #BBTFamily – I have developed this system because of all
my trading buddies at the #BBTFamily. There is no chatroom for
traders that equals the collective generosity and community
spirit fostered within this room. Being able to educate and
moderate for you all has been the defining part of my edge.
Thank you for all of your support in this as in all my projects.
Janelle Young – My final mention is to my wife. She is my #1
supporter and my partner in life. Thank you so much for
constantly motivating me to improve and to always strive to be
the best version of myself. You are an inspiration.
APPENDIX
In what follows, I have provided 14 pages of live trading
examples of entries and exits. I have also included some
commentary with each on my process. These are all 100% my
personal live trades in a real trading account. If you’d like to see
more trades from me. As well, if you’d like to see trades from the
#BBTfamily. You search in social media for #PivotTrade, you
will be able to review every trade that I, and other traders, have
tagged using those hashtags.
REAL TRADE EXAMPLE 1
1-minute chart of Meta Platforms Inc. (META), R3 to S3
Traverse
$META on this day is a great example of both an S3 to R3 and R3
to S3 traverse which I Traded in this example. A lot of trading
strategies under perform on range days. This strategy double
dips on days like this. You can play the open long. Once it tops
out, play the reversal back to value. I went short here under R3
once the order book was bullish and I saw heavy order flow hit
the tape. Notice how immediate the drop was after my entry. I
went all out at S3 as this was the anticipated move. We bounced
shortly after.
REAL TRADE EXAMPLE 2
1-minute chart of Apple Inc. (AAPL), S4 Reversal
$AAPL on this day was set to open just above S4 which put it on
watch. Since it was a little above S4 I let it sell off first to the
bottom of the range and when it hit S4 you could see the book
flip bullish very quickly. This happens on these V style reversals.
The price will hit a large short cover order and quickly squeezes.
At this extension Bulls are watching to by the dip for the next
day’s swings so the order book can flip very quickly as they start
coming in aggressively with a clear stop range defined. I played
the stock back to an establish value area highlighted by VPOC.
REAL TRADE EXAMPLE 3
1-minute chart of Microsoft Corporation (MSFT), S4 Break
Down
$MSFT opened in a Break Down range below S4 and squeezed at
the open. In this trade I entered a little higher than usual
because the stock squeezed with the market and the Book Flip
was very obvious. Usual Entry would be short at S4. Tape
reading greatly improved entry.
REAL TRADE EXAMPLE 4
1-minute chart of Meta Platforms Inc. (META), R4 Extreme
Reversal to S4.
$META on this day is again a great example of a large move in
both directions. Where a swing trader or long-term trader is
break even at best this ticker could’ve been traded in both
directions. This is the Day Trader’s supper power. The ability to
get in an out at will. It started as a solid S3 to R3. Then Reversed
at R4 and started traverse which I Traded in this example all the
way back to S4 which was my target. I also added into this trade
at R3 as the bid because extremely imbalanced. I added using a
Free-Roll after we held under VWAP. This trade was quite
profitable at over 10R.
REAL TRADE EXAMPLE 5A
1-minute chart of Netflix Inc. (NFLX), R4 Reversal to S4
$NFLX here is a great example of stopping volume. Just after
12:00pm EST there is a fast move with volume followed by a
high-volume inverted hammer or shooting star. The order book
wasn’t bearish enough. So, I didn’t enter off the volume signal.
But after I saw a low volume squeeze back to high of day, I went
short with the order book looking much more bearish. Notice
my fills at even numbered levels. I was targeting the large orders
on the order book.
REAL TRADE EXAMPLE 5B
1-minute chart of Netflix Inc. (NFLX), R4 Reversal to S4 with
Level 2
This is the same trade on $NFLX as on the prior page. I wanted
to show you what the order book looked like at the time I
entered the trade and what I was seeing. Notice how 245.00 has
a larger set of orders. If you go back to the prior page you can see
it much clearer. When I speak of imbalance this is the look you
want from your order book when you are trading short. Never
trade against and order book that looks like this regardless of
where you are in the pivots.
REAL TRADE EXAMPLE 6
1-minute chart of Carnival Corporation & plc (CCL), R4
Reversal to S3
$CCL opened under R4 with a bearish ladder. In the opening
minute it picked up a lot of volume and the order book only got
more bearish. I shorted using a new High of Day as my stop loss.
When breakouts fail my favorite target is Previous Days Close.
As my good friend Jarad calls “The King of All Levels.”
REAL TRADE EXAMPLE 7
1-minute chart of Apple Inc. (AAPL), R3 Traverse to S3
$AAPL in this trade opened under R3 with a heavy bid. The
opening minute had high volume, but a held offer (reference
page 278) kept attracting the Market Makers to the price. When
the offer pulled off the order book. The price transitioned lower
to S3. It took to tries to get in this one. First attempt I went out
at break even after getting a partial. I reentered shortly after as
all factors for the reversal were still in place.
REAL TRADE EXAMPLE 8
1-minute chart of NVIDIA Corporation (NVDA), R3 travers to
S3
$NVDA in this trade opened under R3. It opened with high
volume and rejected Premarket High (the top dashed line) with
an inverted hammer in on high volume. Notice how high the
volume remains on such a small candle. This set an isolated
pivot. I went short on a new 1m low using a new 1m high.
REAL TRADE EXAMPLE 9
1-minute chart of Tesla Inc. (TSLA), S4 Reversal to R3 (Entry
at S3)
$TSLA in this trade had found a bottom near the range created
by S6 and S4 of the overlayed camarilla pivots (reference page
93). This is an area where we are expecting shorts to cover.
After high volume set value just before 11:30 the stock began to
squeeze. I entered after it held VWAP and the S3/S4 range. This
was a 3 to 1 trade using S3 as the stop loss.
REAL TRADE EXAMPLE 10
1-minute chart of Carnival Corporation & plc (CCL), R4
Reversal.
$CCL opened under R4 with a bearish ladder. In the opening
minute there was a lot of volume that came in and the order
book held bearish. I went short using a new HOD and got a great
move down to PDC.
REAL TRADE EXAMPLE 11
1-minute chart of The Boeing Company (BA), R4 Reversal to
S3
$BA opening well under R4. I was notified of the high volume
near R4 by my Pivot Scanner called the Pivot Alerts Bot
(@Pivotalertsbot on Twitter) which sends alerts into the Bear
Bull Traders chatroom or the Pivot Bots Discord. After the call
out the order book was very bearish. I decided to go short using
R4 as my stop and was rewarded with a nice bit of profit.
REAL TRADE EXAMPLE 12
1-minute chart of KE Holdings Inc. (BEKE), R4 Breakout with
Order Book.
$BEKE opened just under R4 and started out by picking up a lot
of volume during the opening minute. I played long when we
crossed R4 using the loss of R3 as my stop. This trade broke out
and ran for a quite a while thanks to the bullish ladder you can
see. Notice at 19.50 the large ask. You can also notice my order
sitting right in front of it. This was my first target and ended up
being a great trade.
REAL TRADE EXAMPLE 13
1-minute chart of NIO Inc. (NIO), R4 Reversal with Bearish
Order Book
$NIO opened under R4 with a bearish ladder. In the opening
minute there was very little volume. This is very typical with
our China listed stocks like $BABA, $XPEV, or $BILI. Be aware of
this during the open few minutes. Don’t get shaken out getting
in during the first minute with low volume. It took a few
minutes before the volume came in. I shorted R4 into this heavy
ladder using R4 as my stop. This trade ended up making a nice
run down through PDC.
GLOSSARY
A
Accumulation phase: not to be confused with the four phases
of the market auction cycle, this is one of the price action
phases that a stock can move through during the course of the
trading day, the accumulation phase is when the Market Makers
are slowly purchasing the shares of the stock in question.
Add to a position: to purchase more shares in a stock as your
trade proceeds, it is important though to understand that you
only want to be adding shares when a trade is unfolding
successfully, you never want to add shares to a losing trade.
After-hours trading: the trading that takes place when the
stock markets are closed, the New York Stock Exchange for
example is formally open for trading between 9:30am and 4pm
ET, Monday through Friday, excluding trading holidays. On
trading days, the market operates from 4:00am for pre-market
trading and until 8:00pm from after-hours trading.
Alternative Trading System (ATS)/black pool/dark pool: a
non-public exchange where larger market participants can
trade in confidence in private, since the trades conducted in
Alternative Trading Systems are not made public until some
time has passed, large players can make large trades without
impacting the “public” market price for the stock of a company
(e.g., the price on the New York Stock Exchange).
Ascending triangle pattern: represents a bullish inclination in
the market, the upper trend line will present in a clean
horizontal line, demonstrating that the price of the stock is
hitting virtually the same high in each time frame covered by
your chart, the lower trend line will present in an upward
moving direction, demonstrating that the price of the stock is
hitting higher lows in each time frame.
Ask: the lowest per share price a seller is asking in order to sell
their stock, it’s always higher than the bid price.
Average True Range/ATR: this indicator measures how large of
a range in price a particular stock has on average each day, if
ATR is $1, then you can expect the stock to move around $1
daily, if you are trading 1,000 shares, you may then expect to
profit $1,000 from that trade.
Average volume: the number of shares in a company being
traded on an average each day, a quick internet search can give
you that number, for example, as of writing, Apple Inc. (AAPL)
has an average volume of 98 million shares/day.
B
Bag Holding: means holding on to a stock or other instrument
that is not doing well, in the hope that it will bounce back, even
when there is no indication that it will indeed bounce back.
Balance: a state within the market auction cycle where value
has been accepted by the market’s participants.
Bear: a seller or short seller of stock, if you hear the market is
Bear it means the entire stock market is losing value because the
sellers or short sellers are selling their stocks, in other words,
the sellers are in control.
Bearish engulfing candle: a candle that opens higher than the
previous candle’s close and closes lower than the previous
candle’s open, thus engulfing the previous candle.
Bearish Level 2: your Level 2 data feed will show that there are
considerably more shares being sought by buyers (the bid
column of your Level 2, the price traders are willing to pay for
their shares) than there are shares being offered by sale (the ask
column of your Level 2, the price sellers are asking for their
shares).
Bid: the highest per share price a buyer is willing to pay to
purchase a stock at a particular time, it’s always lower than the
ask price.
“Black box”: the top secret hidden computer programs,
formulas, and systems that large Wall Street firms use to
manipulate the stock market.
Black pool/dark pool/Alternative Trading System (ATS): a
non-public exchange where larger market participants can
trade in confidence in private, since the trades conducted in
black pools are not made public until some time has passed,
large players can make large trades without impacting the
“public” market price for the stock of a company (e.g., the price
on the New York Stock Exchange).
Bottle rockets: another name for stopping volume.
Bottoming tails: another name for stopping volume.
Breakdown: a price Breakout through a support level.
Breakout: when the price of a stock breaks out and moves
beyond what is its normal support or resistance level, stocks
often bounce and change the direction of their price when they
reach a support or resistance level, when a stock breaks out it
means that it did not bounce and change direction, it instead
broke through the support or resistance level.
Breakup: a price Breakout through a resistance level
Broker: the company that buys and sells stocks for you at the
exchange.
Bull: a buyer of stock, if you hear the market is bull it means the
entire stock market is gaining value because the buyers are
purchasing stocks, in other words, the buyers are in control.
Bullish engulfing candle: a candle that opens lower than the
previous candle’s close and closes higher than the previous
candle’s open, thus engulfing the previous candle.
Bullish Level 2: your Level 2 data feed will show that there are
considerably more shares being offered for sale (the ask column
of your Level 2, the price sellers are asking for their shares) than
there are shares being sought by buyers (the bid column of your
Level 2, the price traders are will to pay for shares).
Buy order: the order you submit to your broker to buy a certain
number of shares in a company.
C
Catalyst: some positive or negative news associated with a
stock that causes it to move in price, this can include an FDA
(the United States Food and Drug Administration) approval or
disapproval, a restructuring, a merger, an acquisition, or even
just a lot of buzz on social media.
Central Pivot Range/CPR: this range is comprised of the 1st
and 2nd level pivots (S2, S1, R1, and R2).
Chart: a chart tracks the price action (and more!) of a stock in
various time frames, for example, a 1-minute chart tracks the
price of a stock in 1-minute intervals, a 15-minute chart tracks
the price of a stock in 15-minute intervals, a daily chart tracks
the price of a stock on a daily basis.
Chart trader: also known as a chartist, these types of traders
focus their analysis on the past trends of a stock as a way to
predict future price movements.
Chop: if you read that a trader got chopped, it means to be
caught in a kill zone or area of indecision. They keep trying to
get in and out taking loss but never catching the move.
Choppy price action: refers to stocks trading with very high
frequency and small movements of price, day traders avoid
stocks with choppy price action as they are being controlled by
the big players on Wall Street.
Climactic volume: another name for stopping volume.
Closing bell: the New York Stock Exchange, for example, closes
for trading at 4pm ET, Monday through Friday.
Compression: the best way to think of compression is to
visualize a V-shaped slice of pie lying sideways on your dessert
plate, with the wide end containing the crust on your left and
the narrow end of the slice of pie on your right (i.e., |>), at first,
there will be a significant difference between the highs and lows
being hit by each candle on your chart, as time passes, the
difference between the highs and lows will gradually narrow,
Figure 6.7 is a good example. Compression occurs during a
consolidation with volume increasing.
Consolidation: the price of the stock is not making any sharp
moves up or down.
Cover order: this is when you send either a market order or a
limit order to your broker along with a stop loss order, it gives
you extra protection from loss.
Cover your shorts: the process of wrapping up your short
trade, since your broker wants the shares back that you
borrowed when short selling, not your money, you will either
buy those shares back at a lower price and profit or buy them
back at a higher price and suffer a loss.
D
Daily levels: if you go back in time on a chart, you will usually
find specific price levels where candles have often closed or
opened in the past, these can be assumed to be levels of
resistance and support and are referred to as daily levels.
Dark pool/black pool/Alternative Trading System (ATS): a
non-public exchange where larger market participants can
trade in confidence in private, since the trades conducted in
dark pools are not made public until some time has passed,
large players can make large trades without impacting the
“public” market price for the stock of a company (e.g., the price
on the New York Stock Exchange).
Day trading: when you day trade, all of your trading is done
during one trading day, you do not hold any stocks overnight,
any stocks you purchase during the day must be sold by the end
of the trading day.
Descending triangle pattern: represents a bearish inclination
in the market, the upper trend line will present on your chart in
a downward moving direction and the lower trend line will
present in a clean horizontal line, demonstrating that the price
of the stock is hitting virtually the same low in each time frame
covered by your chart.
Distribution phase: not to be confused with the four phases of
the market auction cycle, this is one of the price action phases
that a stock can move through during the course of the trading
day, the distribution phase is when the Market Makers are
slowly selling the shares of the stock in question.
Doji: a type of candle, as my friend, Dr. Andrew Aziz, explains in
How to Day Trade for a Living, although dojis come in varying
shapes and forms, they are all characterized by having either no
body or a very small body, when you see a doji on your chart, it
means that there is a strong fight occurring between the Bears
(the sellers) and the Bulls (the buyers), as represented by the
second doji in Figure 5.3, nobody has won the fight yet.
E
Earnings season: the companies you are trading the shares of
usually publicly report their earnings (or lack thereof!) every
three months, these reports are often all bunched together and
a large number of companies, within the same industry, will
make their reports public in the same one-week time frame,
earnings reports can lead to volatility in the trading of a
company’s shares.
Engulfing candle: one that completely engulfs the previous
candle.
Excess: refers to a large amount of Bid or Ask in one direction
on the order book. Excess building is a key indicator that a
directional move is about to start.
Exchange-Traded Fund/ETF: a tradable investment fund
composed of assets such as stocks and bonds.
Exponential Moving Average/EMA: a form of moving average
where more weight is given to the more recent data, it
accordingly reflects the latest fluctuations in the price of a stock
more than the other moving averages do.
F
Fireworks: another name for both stopping volume or topping
tails.
Float: the number of shares in a particular company available
for trading. For example, in July 2022, Apple Inc. (AAPL) had
16.17 billion shares available. While fairly subjective, I consider
a low float stock to have under 20 million shares available for
trading, a medium float stock to have 20 million to 500 million
shares available for trading, and a large float stock to have over
500 million shares available for trading.
FOMO/Fear Of Missing Out: if not controlled, the fear of
missing out on a trade will lead you to make reckless and risky
moves that can cost you dearly, this is why the psychological
side of trading is such a critical part of a successful trader’s
arsenal.
Fundamental analysis: as my friend, Ardi Aaziznia, has
written, fundamental analysis “involves taking the time to
understand a company’s internal financial health by in part
reviewing its income statement, balance sheet and cash flow
statement, in addition to calculating various financial ratios
(knowing basic math is definitely a prerequisite!). Equally
important, you must also investigate what the economic
outlook is for the company (and industry or sector) you are
potentially investing your money in.”
Futures: futures trading is when you trade a contract for an
asset or a commodity (such as oil, lumber, wheat, currencies,
interest rates) with a price set today but for the product to not
be delivered and purchased until a future date, you can earn a
profit if you can correctly predict the direction the price of a
certain item will be at on a future date, day traders do not trade
in futures.
G
Gap: a gap up or down occurs when the price of a stock has
moved significantly up or down, often from where it closed one
trading day and then opened the next.
Gappers watchlist: before the market opens, you can use your
scanner to identify stocks that are gapping up or down in price,
you then search for the fundamental catalysts that explain
these price swings and build a list of stocks that you will
monitor that day for specific day trading opportunities, the
final version of your gappers watchlist generally has only two,
three, or four stocks on it that you will be carefully monitoring
when the market opens, many traders call their gappers
watchlist simply their watchlist.
Going all out: to cover your shorts or sell your entire remaining
long position.
H
Hammer doji: a type of candle, if the bottom wick is longer, as
in a hammer doji (the first doji in Figure 5.3), it means that the
sellers were unsuccessful in trying to push the price lower, this
may indicate an impending takeover of price action by the
Bulls.
Head and shoulders pattern: as my friend and Bear Bull
Traders colleague, Ardi Aaziznia, has written, “The Head and
Shoulders Pattern is a bearish distribution pattern which marks
the end of an uptrend … The Head and Shoulders Pattern is
composed of three hills, with the right and left hills (the
shoulders) being approximately the same size, and the middle
hill (the head) being the largest of the three.”
Held bid: is a buy order that is left unfilled or abandoned on the
order book.
Held offer: is a sell order that is left unfilled or abandoned on
the order book.
High Frequency Trading/HFT: the type of trading the
computer programmers on Wall Street work away at, creating
algorithms and secret formulas to try to manipulate the
market. As my friend, Dr Andrew Aziz, states, “although HFT
should be respected, there’s no need for day traders to fear it.”
High of the Day Breakout/HOD breakout: occurs when the
price of a stock breaks its previously-set high of the day.
High Value Area/HVA: a price level where considerable buying
of shares is taking, or has previously taken, place (i.e., there is a
high volume of shares being traded at that price level).
Hotkey: a key command that you program to automatically
send instructions to your broker by touching a combination of
keys on your keyboard. They eliminate the need for a mouse or
any sort of manual entry, high speed trading requires hotkeys
and you should practice using them in real time in a simulator
before risking your real money.
Hulking: part of the lingo of trading, the wild and erratic type
of trading that unfolds when a trader is unable to find a way to
overcome and shut down the emotions that lead them to
deviate from the well-thought-out risk management system
that they have previously committed to.
I
Igniting bar/ignition bar: for certain trends, an igniting bar
will be the first candle on your chart to signal to you that the
trend is starting.
Imbalance: is a state in the market auction cycle where the
market has a large amount of demand in one direction and the
price is quickly moving through it.
Indicator: a mathematical calculation based on a stock’s price
or number of shares being traded or both. Almost all of the
indicators you choose to track will be automatically calculated
and plotted by the trading software you use, always remember
though that indicators indicate but do not dictate.
Initiative participant: a participant who buys or sells
breakouts, they are labeled as an “initiative” participant because
they are buying away from value, without a retest for
confirmation, in the hope of a further move from value.
Initiative position: an initiative position is a reversal or
breakout taken without confirmation. Because you are taking
the position without a retest, you are therefore taking the
initiative
Inside day: in general terms, an inside day is a day where the
price of the stock moves within a narrower range than it did the
previous trading day, the high price it hits will be not as high as
the previous trading day’s high and, similarly, the low price it
hits will be not as low as the previous trading day’s low.
Institutional trader: the Wall Street investment banks, mutual
fund companies, hedge funds, some proprietary firms, etc.
Investing: although some people believe investing and trading
are similar, investing is in fact very different from trading,
investing is taking your money, placing it somewhere, and
hoping to grow it in the short term or the long term.
K
Kangaroo market: a newly coined term, this type of market acts
just like the marsupial, it’s a market where stocks are bouncing
up and down, increasing in price, decreasing in price, over and
over again.
Kill zone: an area inside your pivot range where a stock or ETF
will likely get caught up in choppy price action, you should
never trade inside a kill zone.
L
Ladder: in this context it refers to regularly tiered limit orders
on the order book to one side creating what looks like rungs on a
ladder. Where you can take a trade in the direction of the ladder.
Lagging indicator: these are indicators that provide you with
information on the activity taking place on a stock after the
trade happens.
Larger Time Frame (LTF) participant: a participant who
buys/sells stocks over days, weeks, or even months, they are
labeled as an “LTF” participant because they are working in
extremely large time frames and playing the “long game”, you
will hear stories of someone accumulating a position at a
specific price level for months and then securing a massive
move for a massive profit, an LTF participant has a gigantic
account, and they have the largest effect on price, their share
purchases add the support levels and their selling of shares add
the resistance levels that you will use to trade every single day.
Leading indicator: unlike lagging indicators, leading indicators
provide you with information on the activity taking place on a
stock before the trade happens.
Level 1/Lv1: the top section of the Montage window in the DAS
Trader Pro platform, information such as a stock’s previous
day’s closing price, volume, VWAP, Bid-Ask Spread, current bid
and ask prices, and last sale price can be found here.
Level 2/Level 2: also known as L2 or the Order Book, is a data
feed provided by the various stock exchanges. It gives you a
ranked list of the best bid prices (what traders are willing to pay
for shares of a particular company) and ask prices (the price
sellers are asking for shares of a particular company) from each
of the different Market Makers and participants. When orders
are placed, they are listed here, giving you detailed insight into
the price action of a stock before your trade unfolds.
Level 3/L3: a more detailed and deeper set of market data than
what Level 2 provides. This includes Dark Pool Data, Order stop
data.
Limit order: as Dr. Andrew Aziz, the founder of my trading
community, has written, a limit order means, “Buy me at this
price only! Not higher!” or “Sell me at this price only! Not
lower!”, you have some protection if the price of the stock
suddenly changes between the time you send in your order and
the time your broker completes it.
Liquid: being liquid means to not be holding any stocks at the
end of the trading day.
Liquidity area/liquidity zone: a price level with a large amount
of limit orders waiting on the order book aka the Level 2.
Long: a long position is one where you buy stock in the hope
that it will increase in price, to be “long 100 shares AAPL” for
example is to have bought 100 shares of Apple Inc. in
anticipation of their price increasing.
Long-legged doji: is a narrow-bodied candle with long wicks in
both directions. In all instances this is an indecision candle. VPA
helps to read candle meaning.
Lot: a standard lot is considered to be 100 shares of a specific
stock.
Low of the Day Breakout/LOD breakout: occurs when the price
of a stock breaks its previously-set low of the day.
M
Market auction cycle: is the 4 phases (Value, Balance, Excess,
and Imbalance). Every Market will move through these phases
as its participants make decisions.
Market auction theory: is a philosophy for observing and
trading markets. The theory is based on observing value and
the overreaction of the markets participants as that value is
accepted or rejected.
Market capitalization/market cap: the total dollar value of a
company’s float, for example, if a company’s shares are worth
$10 each and there are 3 million shares available for trading (a 3
million share float), that company’s market cap is $30 million.
Market Maker: a big player on Wall Street, a broker-dealer that
offers shares for sale or purchase on the exchange, the firm
holds a certain number of shares of a particular stock in order
to facilitate the trading of that stock at the exchange, a firm will
often be designated by an exchange as the sole Market Maker for
a specific stock.
Market order: as Dr. Andrew Aziz, the founder of my trading
community, has written, a market order means, “Buy me at any
price! Now!” or “Sell me at any price! Now!”, due to how volatile
the market can be, your broker may not get you the price you
were hoping for when you sent in your market order, every
second can count.
Montage: the most critical window in your trading platform,
much important information can be found in it, the top section
of the Montage window in the DAS Trader Pro platform is called
Level 1 and information such as a stock’s previous day’s closing
price, volume, VWAP, Bid-Ask Spread, current bid and ask
prices, and last sale price can be found here, the second section
of the Montage window is called Level 2 or market depth and it
provides you with the leading indicators, information on the
activity taking place on a stock before the trade happens,
important insight into a stock’s price action, what type of
traders are buying or selling the stock, and where the stock is
likely to head in the near term, the next section of this window
features the hotkey buttons, and the bottom part of this
window contains the manual order entry fields that you can use
to enter your orders manually if you choose not to use hotkeys.
Moving Average/MA: a widely used indicator in trading that
smooths the price of a stock by averaging its past prices, the two
basic and most frequently used, MAs are the Simple Moving
Average (SMA), which is calculated by adding up the closing
price of a stock for a number of time periods (e.g., 1-minute, 5minute, or daily charts) and then dividing that figure by the
actual number of time periods, and the Exponential Moving
Average (EMA), where more weight is given to the most recent
data, it accordingly reflects the latest fluctuations in the price of
a stock more than the other MAs do, the most common
applications of MAs are to identify the trend direction and to
determine support and resistance levels, your charting
software will have most of the types of MAs already built into it.
N
Naked short selling: the short selling of shares that you
actually have not borrowed yet or confirmed that you will be
able to borrow, it can impact the liquidity and value of a stock.
Narrow central pivot range: the price of the stock will move
within a greater range than it did the previous trading day, the
high price it hits will be higher than the previous trading day’s
high and, similarly, the low price it hits will be lower than the
previous trading day’s low.
NITF/No Intention To Fill order: they are most often put far
away from the price of a stock but in an unusually off size to
gain attention and make speculators think there is more
liquidity in the market than there really is at that moment.
O
Open auction: the opening 15 minutes or so of trading on a
stock after the market opens. It is largely a period of imbalance.
Opening bell: the New York Stock Exchange, for example, is
open for trading between 9:30am and 4pm ET, Monday through
Friday.
Opening Range Breakout/ORB: Dr. Andrew Aziz writes in How
to Day Trade for a Living, “Another well-known trading strategy
is the so-called Opening Range Breakout (ORB). This strategy
signals an entry point, but does not determine the profit target
… The ORB is an entry signal only, but remember, a full trading
strategy must define the proper entry, exit and stop loss. Right
at the market Open (9:30 a.m. New York time), Stocks in Play
usually experience violent price action that arises from heavy
buy and sell orders that come into the market. This heavy
trading in the first five minutes is the result of the profit or loss
taking of the overnight position holders as well as new
investors and traders. If a stock has gapped up, some overnight
traders start selling their position for a profit. At the same time,
some new investors might jump in to buy the stock before the
price goes higher. If a stock gaps down, on the other hand, some
investors might panic and dump their shares right at the Open,
before it drops any lower. On the other side, some institutions
might think this drop could be a good buying opportunity and
they will start buying large positions at a discounted price.
Therefore, there is a complicated mass psychology unfolding at
the Open for the Stocks in Play. Novice traders sit on their hands
and watch for the opening ranges to develop and allow the
more experienced traders to fight against each other until one
side wins. Typically, a new trader should give the opening range
at least five minutes (if not more). This is called the 5-minute
ORB. Some traders will wait even longer, such as for thirty
minutes or even for one hour, to identify the balance of power
between the buyers and sellers. They then develop a trade plan
in the direction of the 30-minute or 60-minute breakout. The
longer the time frame, the less volatility you can expect.”
Order book: found in Level 2, an electronic list of buy and sell
orders for a security or other instrument organized by price
level.
Order flow: the speed which orders are being transacted.
Order positioning: means how the orders on the orderbook are
congregating or adding to the excess.
Outside day: in general terms, an outside day is a day where the
price of the stock moves within a greater range than it did the
previous trading day, the high price it hits will be higher than
the previous trading day’s high and, similarly, the low price it
hits will be lower than the previous trading day’s low.
Overtrading: as my friend and colleague, Dr Andrew Aziz has
written, “There are plenty of traders out there who are making
the error of overtrading. Overtrading can mean trading twenty,
thirty, forty, or even sixty times a day. You’ll be commissioning
your broker to do each and every one of those trades, so you are
going to lose both money and commissions. Many brokers
charge $4.95 for each trade, so for forty trades, you will end up
paying $200 per day to your broker. That is a lot. If you
overtrade, your broker will become richer, and you will become,
well, broker!”
P
Paper hands: a trader who for whatever reason (generally due
to a lack of conviction) sells too soon and misses out on a
potentially profitable trade.
Partial order: in basic terms, a partial is when your trade has
multiple profit targets rather than just one, instead of planning
to exit a trade at one price level and take 100% of the profit, you
may take 50% of it at one price level and then the remaining
50% at the other price level, you could also structure your trade
so that you are taking, for instance, 50% of the profit at one
price level, 30% at a second level, and 20% at a final level,
partial orders are a very good method of ensuring you pocket
some profit should a trade go south when you are in the midst
of it, this practice can also be referred to as scaling out.
Pattern: is lines or shapes drawn onto price charts to help
predict future price action.
Pivot: this book is all about pivots and especially the Camarilla
pivots. In very basic terms, a pivot is a critical price level on
your charts.
Pivot point line: a synonym for the Central Pivot Line within
the Floor Pivot system.
Platform: your trading platform is the trading software you
use.
PNL: an abbreviation for profit and loss.
Price-based analysis: or value-based analysis as I prefer to call
it, takes into consideration the price levels that are most apt to
generate transactional volume.
Print: refers to a single transaction that is displayed in your
Time and Sales.
Prior bear: a trader who had previously sold shares in a specific
stock.
Prior bull: a trader who had previously bought shares in a
specific stock.
Proprietary firm/prop: a firm that trades their own money
rather than the money of clients.
Pull back: occurs when the price of a stock temporarily stops its
upward movement and either remains at a certain price or slips
down a bit in price.
Q
Quote: the most recent price at which an investment (or any
other type of asset) has traded.
R
Rally: occurs when over a somewhat small time frame the stock
market as a whole increases in price.
Range bound: a stock that is trading in a range-bound manner
is one that is trading between its support and resistance levels.
Relative Strength Index/RSI: a technical indicator that
compares the magnitude of recent gains and losses in the price
of stocks over a period of time to measure the speed and change
of price movement, your scanner software or platform will
automatically calculate the RSI for you, RSI values range from 0
to 100.
Resistance level: the level that the price of a specific stock
usually does not go higher than.
Responsive participant: a participant who buys or sells
reversals, they are labeled as a “responsive” participant because
they are buying away from value, after a retest for
confirmation, in the hope of a return move to value.
Responsive position: is one taken with confirmation from a
retest. These positions will most usually be taken after both a
low-volume retest and the price of the stock hitting a new 5minute high.
Retail trader: a person like you and I who trades as an
individual and does not work for a firm or manage the money of
others.
Risk Versus Reward/RVR: the key to successful day trading is
finding trading setups that have excellent risk versus reward
ratios, these are the trading opportunities with a low-risk entry
and a high reward potential, for example, a 3:1 ratio means you
will risk $100 but have the potential to earn $300, a 2:1 ratio is
the minimum I will ever trade.
S
S&P: the abbreviation for S&P Global Inc., a company formerly
known as Standard & Poor’s.
Scale out: in basic terms, to scale out is to set up multiple profit
targets for your trade rather than just one, instead of planning
to exit a trade at one price level and take 100% of the profit, you
may take 50% of it at one price level and then the remaining
50% at the other price level, you could also structure your trade
so that you are taking, for instance, 50% of the profit at one
price level, 30% at a second level, and 20% at a final level,
scaling out is a very good method of ensuring you pocket some
profit should a trade go south when you are in the midst of it,
this practice can also be referred to as taking partials.
Scanner: the software you program with various criteria in
order to find specific stocks to day trade in.
Sell off: when a stock sells off, it means that a large number of
its shares are being sold in a small time frame, the end result is
that the price of that stock will drop.
Sell order: when you enter a trade, you must always have a
target price in mind, for example, for a long trade, if the stock is
priced at $100/share when you enter the trade, based on your
research and investigations, you might have a target price of
$110/share for where you will sell your position, this is what
your sell order will then be for.
Shooting star doji: a type of candle, if the top wick is longer, as
in a shooting star doji (the third doji in Figure 5.3), it means
that the buyers were unsuccessful in trying to push the price
higher, this may indicate an impending takeover of price action
by the Bears.
Short cover rally: short sellers want prices to drop so they can
buy back the shares they borrowed at a low price and make a
profit on their trade If a stock has a large number of short
sellers, as soon as the price of the stock begins to rise, the short
sellers will panic and start buying as quickly as they can to
minimize their losses, this frenzy of buying causes the price of
the stock to rise at an ever quicker pace, this event is referred to
as a short cover rally.
Short selling: you borrow shares from your broker and sell
them, and then hope the price goes even lower so you can buy
them back at the lower price, return the shares to your broker,
and keep the profit for yourself.
Short Selling Restriction/SSR: regulators and the exchanges
place restrictions on the short selling of a stock when its price is
down 10% or more from the previous day’s closing price, when
a stock is in SSR mode, you are still allowed to sell short the
stock, but you can only short when the price is going higher, not
lower, intraday.
Sideways market: a stock that is trading in a sideways manner
is one that is trading within a general price range, its price is
not trending up and it is not trending down. Regularly, at times
the majority of the market can be trading in a sideways fashion.
Simple Moving Average/SMA: a form of moving average that is
calculated by adding up the closing price of a stock for a
number of time periods (e.g., 1-minute, 5-minute, or daily
charts) and then dividing that figure by the actual number of
time periods.
Slam: similar to a squeeze but in reverse. A slam is initiated by
longs taking profit and then selling on the new lows using
market orders causing quick downward price movements.
Slippage: I define slippage as unaccounted for loss during a
trade. There are times when you stop out of a trade that you do
not get filled instantly. Most stop orders hit the book as a market
order which will often result in a slow fill if the market is
moving quickly.
Small Time Frame (STF) participant: a participant (trader) like
you and I who are not looking to hold our positions for a long
time. As a day trader, your risk tolerance should be very low and
so you will be apt to close your position when there is any sort
of adverse movement in the price of the stock.
Speculator: a day trader is a speculator, the Market Makers will
ultimately move the price of a stock to where the investors want
it, and you (and I) do not get a say in that, you are only
speculating on where you think the price will go.
Spinning top candle: a long-legged doji with high volume at the
top of a trend or chart pattern.
Spoofing: an illegal form of market manipulation in which a
trader places a large order to buy or sell a financial asset (such as
a stock, bond, or futures contract) with no intention of
executing it, by doing so, the trader - or the “the spoofer” creates an artificial impression of high demand for the asset.
Spread: the difference between the ask price and the bid price
for shares of a stock, if the ask price for a share is $25, and the
bid price is $24.75, then the spread for that stock is $0.25, it’s
the difference at any given moment between what people are
willing to pay to purchase a particular stock and what other
people are demanding in order to sell that stock, the bid price
will always be lower than the ask price.
Squeeze: similar to a slam but in reverse. A squeeze is initiated
by shorts taking profit and then covering on the new highs
using market orders causing quick upward price movements.
Stack: a grouping of lots at the same price level in either the bid
or ask column of your Level 2, the bids or asks in a stack can be
posted by one or more Market Makers.
Stock in play: this is what you as a day trader are looking for.
It’s a stock that offers excellent risk versus reward potential, it
will move higher or lower in price during the course of the
trading day, and it will move in a way that is predictable, stocks
with a catalyst and heavy volume are often stocks in play.
Stop/stop loss: the price level where you must accept a loss and
get out of your trade, the maximum amount you should ever
risk on a trade is 2% of your trading account, for example, if
your account has $20,000 in it, then you should never risk
more than $400 on a single trade, once you calculate the
maximum amount of money you can risk on a trade, you can
then calculate your maximum risk per share, in dollars, from
your entry point (for instance, using $400 as your maximum
loss on a trade, if you are entering a long trade at $10/share, and
buying 1000 shares, your stop loss will be hit at $9.60/share (a
loss of $.40/share x 1000 shares)), you must always honor your
stop loss, do not change it in the middle of a trade because you
hope something will happen, if the price of the stock reaches
your stop loss, gracefully exit your trade and accept the loss, do
not be stubborn and risk seriously damaging your trading
account.
Stops/Stop loss order/stop order: an instruction to your broker
to buy or sell when a stock hits a specific price, it helps protect
you from suffering a significant loss (the definition of
“stop/stop loss” will provide you with some general
information on how to calculate your stop loss).
Stop out: to be stopped out means that you have hit your stop
(or stop loss or stop order or stop loss order), it’s time to
gracefully exit your trade and accept whatever your loss is.
Stopping volume: as the price of a stock moves up or down into
a high value area, the Bears or the Bulls will start to take their
profits, at the same time, their counterparts will begin
anticipating reversals and start taking contrary positions, this
causes massive spikes in volume that will result in the Market
Makers having an imbalance in their orders, this is where value
is being asserted and it is always the most likely spot for a
reversal to set up.
Strong hands: a strong hands and weak hands are defined by
the ability to tolerate risk, the size of the account does not factor
in, even the smallest account can have strong hands if the
holder never sells their position, likewise, a massive account
can have weak hands if the holder’s tolerance for risk is small.
Strong hands are what the institutional traders along with
some retail traders are called, how these participants respond to
the price of a stock will move the market.
Support level: the level that the price of a specific stock usually
does not go lower than.
Swing trading: when you swing trade, you hold stocks for a
period of time, generally from one day to a few weeks. Swing
trading is a completely different business than day trading is.
T
Tape: originally a physical tape that would print out transaction
information. In modern times, we use the Time and Sales.
Tick: each tick represents a single transaction (purchase or sale)
of shares in a stock.
Topping tails: another name for stopping volume or fireworks.
Ticker: another name for a stocks symbol. For instance, the
ticker for Microsoft is $MSFT.
Time and Sales/T&S: part of the DAS Trader Pro platform,
Time and Sales lets you see where each transaction happened
(was it at the ask or above the ask, was it happening between
the bid and the ask, was it happening at the bid or below the
bid). The way traders are actually making their trades
demonstrates what kind of attitude they have toward the
current price and its future direction. It helps you to
understand the psychology of the traders sending orders to the
market.
Trailing stop order: when you enter a trade, you must always
have a target price in mind. For example, for a long trade, if the
stock is priced at $100/share when you enter the trade, based
on your research and investigations, you might have a target
price of $110/share for where you will sell your position (i.e.,
your sell order). If the stock reaches $110/share, you will then
gross a profit of $10/share. Likewise, you should also place a
stop order (also known as a stop loss order) for where you will
abandon your trade. For example, if the stock drops to
$95/share, you will abandon your trade with a loss of $5/share
(from your purchase price of $100/share). A trailing stop order
will move with your trade based on the instructions you
provide. To keep it simple, let’s pretend you set your trailing
stop order at 10%, in this example, if the price of the stock
reaches $110/share (a 10% increase on your $100/share
purchase price), your trailing stop order will increase to
$99/share (10% below $110/share), if the price of the stock
then reaches $120/share, your trailing stop order will increase
to $108/share (10% below $120/share), if the price of the stock
then suddenly begins to drop, your trade will be abandoned
when the price hits $108/share, a trailing stop order helps
protect you from suffering a bad loss.
Trend: the direction the stock is going. It could be trending up
in price, it could be trending down in price, it can continue its
trend, or it can reverse its trend. Regularly, the majority of the
market can be trending in a specific direction.
Trending average: to discern the trending average, you must
analyze your chart as the stock is trending, you will notice that
one of the moving averages will be in play or interacting with
the price of the stock more strongly, you can tell which moving
average is in play because its price is honored every time it is
tested in a pull back.
Tweezers: another name for stopping volume or topping tails.
Tweezers generically comes in 2 candle pairs. Hence the name.
V
Value: at its most basic level, Value equals price. Wherever
participants transact we get value.
Value-based analysis: is the analysis of price action based upon
transactional volume at various price levels.
Volatility: a stock is considered to be trading in a volatile
fashion when it is significantly fluctuating in price – hitting
extreme highs and extreme lows, volatility can impact not just
a single stock but also the entire stock market or a specific
sector of it (e.g., the tech sector).
Volume: the number of shares in a company being traded
during a set time frame.
Volume and Price Analysis/VPA: is a system of reading market
effort and result using the amount of participation as the price
moves.
Volume by Price indicator: most trading platforms allow you
to not only see where a stock’s value is, tick by tick, but also let
you chart where those ticks congregate, each tick at a specific
price adds up and over time these individual transactions will
clump together, so to speak, and be clearly visible on your chart.
Volume Point of Control/VPOC: a powerful tool in most
trading platforms that lets you drill down to the specific price
that is experiencing the most transactions, this gives you the
best representation of where the value for a stock is being
perceived by the overall market within your chart’s selected
time frame.
Volume Weighted Average Price/VWAP: the most important
technical indicator for day traders. Your trading platform
should have VWAP built right into it, VWAP takes into account
the volume of the shares being traded at any given price while
other indicators are calculated based only on the price of the
stock on the chart, VWAP considers the number of shares in the
stock being traded at each price, VWAP lets you know if the
buyers or the sellers are in control of the price action.
W
Watchlist: before the market opens, you can use your scanner
to identify stocks that are gapping up or down in price. You
then search for the fundamental catalysts that explain these
price swings and build a list of stocks that you will monitor that
day for specific day trading opportunities, the final version of
your watchlist generally has only two, three, or four stocks on it
that you will be carefully monitoring when the market opens,
some traders call their watchlist their gappers watchlist.
Weak hands: a weak hands and strong hands are defined by the
ability to tolerate risk, the size of the account does not factor in,
even the smallest account can have strong hands if the holder
never sells their position, likewise, a massive account can have
weak hands if the holder’s tolerance for risk is small. The
holders of weak hands truly have no power over the market,
they have no influence on the price of a stock nor on the
perception of its value.
Wide central pivot range: the price of the stock will move
within a narrower range than it did the previous trading day,
the high price it hits will be not as high as the previous trading
day’s high and, similarly, the low price it hits will be not as low
as the previous trading day’s low.
ABOUT THE AUTHOR
I have personally been a professional trader for over 4 years at
the time I authored this book. I have the privilege of being a
moderator and educator at Bear Bull Traders and have been for
over 2 years. I really enjoy creating high quality education
material to help explain the complexities of the market in
common language.
I was originally exposed to trading when working for an
options trading platform, although on the IT side of things
focusing on support and technology issues. I learned the basics
of the markets, even wanting to learn more, but my career
moved well in the IT field. So, I focused my efforts there and
with my family. After being in the IT for well over a decade, my
daughter, Allie, was diagnosed with severe Autism. I, along
with my son, are also diagnosed on the spectrum so this isn’t
really much of a surprise. However, the severity of her
condition changed our family and shifted our priorities
considerably. We decided to move to a new location in Florida
that has a private school for our daughter. After that move, I
found myself in need of a new career and one that was much
more flexible time wise. Day trading soon became that career.
My wife bought me Andrew’s book after I showed interest in a
radio ad. And I joined the Bear Bull Traders community shortly
thereafter. Since then, I have committed myself to becoming the
best trading educator and mentor I can be. Hopefully, giving
back to the trading community, for all the generosity it has
shown me.