Tricks Of The Trader Long Version - Afta-dfw

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TRICKS OF THE TRADERDay Trading andSwing Trading PrinciplesBy Paul Janiak1

Disclaimer This presentation is composed of reports embodying a unique system ofstock analysis. All contents and recommendations are based on dataand sources believed to be reliable, but accuracy and completenesscannot be guaranteed. There is a very high degree of risk involved in trading. Users shouldbe aware of the risks involved in stock investments. It should not beassumed that future results will be profitable or will equal pastperformance, real, indicated or implied. The presenter assumes noresponsibility for your trading and investment results. The information presented here is for educational purposes only andshould not be construed as investment advice. Although everyprecaution has been taken in the preparation of this presentation, theauthor assumes no liability for errors or omissions. Use of this material constitutes your acceptance of these terms. You are completely on your own.Thank you 2

Day Trader (n):One who buys and sells an investmentwithin a very short time (minutes orhours), in order to take advantage ofrapid price changes PJ day trader qualificationsSlow LearnerToday’s Objective*Definition courtesy of www.morganstanleyindividual.com3

Day Trader Tax Advantages Links to articles about the tax advantagesof qualifying as a professional day trader http://www.bankrate.com/cbsmw/itax/tax adviser/20040826a1.asp?prodtype php4

Special Rules for Tradersin Securities According to IRS Publication No. 550Pattern Day TraderWash Sales RulesLosses are more tax advantageousDay Trading income is ordinary incomeThis year’s big change: Gain/Loss and Markto Market Election5

Qualities of a Good Day Trader90% of Day Traders lose money becausethey don’t have these qualities: Discipline and focus, PJ example Decisiveness Sophisticated risk-taking, withoutcompulsiveness Belief in technical analysis** Gene Ricci Motivation** Linda storyWritten goal settingConfidence without arroganceAnxiety control6Paigow Poker

Trading Tools & Resources Two high-speed Internet connections Cable and DSL line with own routerSeparate hard drive dedicated toswitchovers onlyPC with two monitors, plus Notebooklaptop w/ extra monitorSchwab / Think or Swim / Street SmartPro / Level 2 Platform / Trade Log / TeleChartsRates are negotiable7

Daily Market Commentary TV – CNBC, on low volumeThink or Swim – Shadow Trader – PeterReznicickRick Saddler at hitandruncandlesticks.comScott Redler at T3 at MinyanvilleDay Trading Partners, LLCTrading System8

What does it take to buildSuccessful Trading Strategies? Risk or Money Management (70%) Mental Motivation and Emotional Control(20%) Trading Systems or Strategies (10%)9

Books Introduction to Technical Analysis Day Trader’s Advantage by Howard AbellHit and Run Trading I and II by Martin Pringby Jeff CooperStreet Smarts by Linda Raschke and Lawrence Connors10

Books, continued The Complete Turtle Trader Life is Not a Game of Perfect by Michael Covelby Dr. Bob RotellaSecrets of a Pivot Boss by Frank Ochoa11

Paper Trading (n):Using “play dollars” to execute realistic trades Practice for three monthsSet up weekly and/or monthly benchmarks forprofitabilityRefrain from excusing big losses on the groundsthat “you won’t do that in the n.comwww.ThinkorSwim.com.Risk Control12

Howard Abell, The Day Trader’sAdvantage“I think most, if not all, of the traders we’ve interviewedhave recognized that if there’s any secret or Holy Grailattached to success in our business, it comes fromwithin. It has nothing to do with any specific indicator orsystem. It has to do with how you perceive the marketsand operate within that context of your ownpsychological makeup And if there’s anything thatwe’re trying to do, it is to remind people that they have tounderstand the inner workings of themselves in order tooperate in the day trader’s environment.”- Emotional Control13

Interview with Bill Williamsfrom The Day Trader’s Advantage by Howard Abell“Trading is like breathing. You inhale, and youtake in enough oxygen that you need andmaybe a little extra, and then you exhale and letsomebody else have the rest of that oxygen. [If]all you want to do is take every penny of yourprofits, and if you breathed like that, all youwould be doing is inhaling and you’d be dead infive minutes.”- Emotional Control14

Interview, continued“I know some S&P day traders who say they will never takeover a 100 point or a 500 loss. From my point of view,that’s stupid trading, because you’re trading your wallet,and you’re not trading the market. My wallet will not helpme trade the market profitably. I know that! The onlyway I can be profitable – and this may not work foreverybody – is to be so in tune with the market that I’mgoing to do what the market tells me and try not todictate to it by listening to my wallet.”Risk Control15

Interview with Toby Crabelfrom The Day Trader’s Advantage by Howard Abell“The real secret for success is that it’s a lot of hardwork, and if you want to do this over a longperiod of time successfully, then you’d better notthink about going in and making a lot of moneyfast. The common idea is let’s make a big killingand quit.”Risk Control16

The Essential Psychological Barriersto Successful Day Trading Not defining a lossNot taking a loss or profitGetting locked into a beliefTrading on “inside information” or taking a tipKamikaze tradingEuphoric tradingHesitating with your numbers(from Day Trader’s Advantage, by Howard Abell)Emotional and Risk Control17

Psychological Barrierscontinued Not catching a breakoutNot focusing on opportunitiesBeing more invested in being right than in makingmoneyTrying to be perfectNot consistently applying your trading systemNot having a well-defined money managementsystemNot being in the right state of mindEmotional and Risk Control18

Risk Managementor Loss Management Establish specific and rigid financial constraints. Having goals on theupside is important, but it is crucial to decide how much you are willingto lose—a decision requiring patience, discipline and, for many, belief ina higher power. My loss parameters are onesy and twoseys and five/ten. Onesey/twosey are 1000 and 2000 and represent ½ and a fullposition – Leo Durocher I use the loss parameter of 5/10 for 5000 and 10,000 for a “totaltransaction”. A total transaction uses two positions and “all-in” margin;i.e., being “all-in” with my day trading buying power.Risk Control19

Profit Goals Your real goal should be set at least 20 percentabove what you think you can make, in order to takeinto account the potential of having one day a weekas a losing day.Once you have made your daily goal, considerwalking away for the day or setting new rules forplaying with the house’s money. Poker TexasHold’emMy goals are: 2K per day 5K per week 20K per monthRisk Control20

Not Being in the Right State ofMind“It is our belief that continually elevating your state of mind byfocusing on internal and external phenomena that allow you tostay resourceful and true to your trading strategy is the answer.We have demonstrated how to do this through processingpositive beliefs and thoughts and by directing your physiology.When a negative thought comes into consciousness and beginsto distract your focus, don’t fight it. Acknowledge its existenceand go forward.”-Koppel and Abell, The Inner Game of TradingEmotional Control21

Not Being in the Right State ofMind, continued“Successful trading, in essence, comes down tothis: Formulate a day trading plan that works,overcome your own personal psychologicalbarriers and condition yourself to producefeelings of self-trust, high self-esteem andunshakable conviction and confidence.Doing this naturally leads to good judgmentand winning trades with a provenmethodology, based on probability.”Emotional Control22

Accountability The length of measurement periods is crucial. WTD and MTD is everythingMore than a month is too longA single day is too shortP.E.R.I.L. ScaleRisk Control23

Getting Started:Daily Preparation24

Homework Helpers and Timers StockTiming.comHarleyMarketLetter.comSchwab Market EdgeSy HardingJeff Cooper’s AlertsFinViz.comMinyanvilleT3 AlertsDaily WealthStansberry & AssociatesLarry Connors’ Daily Battle PlanVector VestChris WeberDayTradingPartnersLLC.com25

Rolling Timer26

Common Homework Setups Expansion Breakouts – source Jeff Cooper1-2-3 Pullbacks – Trade Market/Jeff Cooper180’s – Trade Market/Jeff CooperLizards – Trade Market/Jeff CooperGilligans Island – Trade Market/Jeff CooperUnfilled Gap Reversals – Trade Market/Jeff CooperInside Day Narrow Range 4 – Linda Rasche and Lawrence ConnorTurtle Soup and Turtle Soup Plus One – Linda Rasche andLawrence ConnorUnfilled Gaps – Linda Rasche and Lawrence ConnorSpike and Ledge Patterns – Linda Rasche and Lawrence ConnorBasic T.A.27

Expansion Breakout28

ID NR429

Important Dates The last day of the month, quarter and year Option expiration weeks Employment data – weekly and monthly Fed Open Market meeting days When financial news is announced30

The News It is important to keep apprised of the news,particularly when its announcement time isprearranged. Try to be flat prior to the announcement. Unless the news is extremely significant, be contrarian,or let the market run a little bit and try to get the pushback. Cramer fan31

Daily Market Commentary TV – CNBC, on low volumeThink or Swim – Shadow Trader – PeterReznicickRick Saddler at hitandruncandlesticks.comScott Redler at T3 at MinyanvilleDay Trading Partners, LLCTrading System32

Mental Edge Trading The Mental Edge Newsletter ispublished by Nazy Massoud, Founderand CEO of Mental Edge Trading, Inc. You can go towww.mentaledgetrading.com., sign upfor the free report, and you areautomatically signed up for thenewsletter. Emotional ControlSample PacketCome to Play33

Daily Market Commentary TV – CNBC, on low volumeThink or Swim – Shadow Trader, PeterReznicickRick Saddler at hitandruncandlesticks.comT3 at Minyanville, Scott RedlerDay Trading Partners, LLC34

Prepare to Trade Do what it takes to get yourself into a positiveframe of mind each morning, as a positiveattitude is the single best indicator of success.My records have shown me that I consistentlytrade better when I begin my day reading My trading journalMental Edge NewsletterSomething spiritual – Daily Bread from RBCMinistries @ www.rbc.orgEmotional Control35

ConfidenceIn any endeavor I’ve ever studied, from playinggolf to selling lipstick, confidence is the singlemost important and least understood factor.Without confidence, an individual is like anairplane without wings. No matter how powerfulthe engines are, the wingless airplane is notgoing to get off the ground. If you lackconfidence, you’re probably going to be nervous,tight, and hesitant in anything you try. You won’teven try some things you could have succeededat. And your preparation for performance is likelyto be halfhearted. Why practice hard if you don’tthink you’re going to succeed in the end?36

Confidence, continuedIf you don’t prepare, if you perform hesitantly andif you give up easily, you can’t expect to succeed.But that’s the way people who lack confidenceoperate.Such people probably believe, mistakenly, thatconfidence can only come from a history ofsuccesses. They say they’re only being realisticif they lack confidence. Unwittingly, they use“realism” as a justification for thinking negativelyand limiting themselves. How can they believethey can accomplish something if they’ve neverdone it before? Particularly if they’ve tried andfailed in the past?37

Confidence, continuedThe answer goes back to free will. Confidence isnothing more than what you think about yourselfin relation to a given challenge. It’s not aboutwhere you’ve been. It’s about where you’regoing. It’s not about what you’ve done. It’sabout what you perceive you will do. You canchoose what you think about yourself. Peoplewith real talent choose to think they can succeed.They prepare themselves to succeed.Life Is Not a Game of Perfect, by Dr. Bob Rotella38

Trading Strategies39

Three Types of Markets1.Trending markets2.Trend-changing markets3.Markets that swing more than two times in one day40

Stocks We GDUGFASFAZSSGSSOTNATSA41

Four Main Intraday Strategies Holy Grail, which we primarily use in trendingmarkets (Linda Raschke) Turtle Soup (Raschke and Connors), which we usein choppy markets Recross-over of the 8/34 (Rick Sadler) A successful retest of the high or low42

Holy Grail Bull and BearsFor Buys (Sells are Reversed) The 14-period ADX must initially be greater than 30 and rising. This willidentify a strongly trending market. Look for a retracement in price to the 20-period exponential movingaverage. Usually the price retracement will be accompanied by aturndown in the ADX. When the price touches the 20-period exponential moving average, puta buy stop above the high of the previous bar. Once filled, enter a protective sell stop at the newly formed swing low.Trail the stop as profits accrue and look to exit at the most recent swinghigh and tighten stops on the balance. If stopped out, reenter this trade by placing a new buy stop at theoriginal entry price. After a successful trade, the ADX must once again turn up above 30before another retracement to the moving average can be traded. Substitute 8 or 34 EMA for the aboveRORO43

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Turtle Soup Bulls and BearsFor Buys (Sells are Reversed) Today must make a 20-day or period low – the lower the better. The previous 20-day or period low must have occurred at leastfour trading sessions earlier. This is very important. After the market falls below the prior 20-day or period low, placean entry buy stop 5-10 ticks above the previous 20-day or periodlow. This buy stop is good for today only. If the buy stop is filled, immediately place an initial good-tillcanceled sell stop-loss one tick under today’s low. As the position becomes profitable, use a trailing stop to preventgiving back profits. Some of these trades will last 2-3 hours andsome will last a few days. Due to the volatility and the noise atthese 20-day or period high and low points, each marketbehaves differently. Reentry Rule: If you are stopped out of the trade, you mayreenter on a buy stop at your original entry price level.45

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Recross-over of the 8/34For Buys (Sells are Reversed) The 8-day exponential moving day averagecrosses over the 34 exponential moving dayaverage to the upside. Place a stop-loss below the 34 MDA and trailthe stop up as it becomes profitable. For swing trading, look at the 34-, 50- and200-day moving averages.47

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Peak and Trough Reversal50

Double Top51

Double Bottom52

Identifying Trends Market timers are great indicators, of course, but the trend isalso measured more generally by the basic market indices:1) Russell 20002) Transportation3) NASDAQ 1004) The S&P 500,5) Dow Jones Industrial AverageAdditionally, be sure to pay attention to the Federal Reserve.The Fed supports interest rates in a variety of money and creditavailable to the market. The Treasury is also now a much biggerplayer in the market.Use daily commentary.53

Intraday Chart Example for AAPL54

Intraday Chart Example for RIMM55

Entry Strategy Only trade one stock at a time, unless you’re hedgingyour position with a short On entry points, make a limit trade if the stock isn’tmoving so fast that you miss out on the majority of thechange in price. I use a 20 – 33% rule.56

Focus on the Trade Study the 3- or 5-minute candlestick chart.For big decisions, consider the 3-, 5- and15-minute candlestick chart.For still bigger decisions, consider theIntraday 5 minute, 30- and 90-day chartsin conjunction with the above.Pay attention to the support andresistance lines.57

Exit Strategy The most critical part of the trade is the exit point. I use asimple rule of double the loss. First loss, best loss. Almost always use conditional alerts rather than a stop.We use a graduated 10/50 rule. Once you hit your gain level, manage the exit with atrailing stop or a conditional alert.58

Conditional Alerts (a.k.a. Stops)Buy and sell limit orders, as well as gain and stoploss orders Market makers cannot see them. When you exit a trade, be sure to review andpossibly cancel any conditional alerts you maystill have in place.59

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Building PositionsAre you a BMW type of trader Or, are you a PINTO trader?61

BMW Trading (n)Buying More of a Winner Successful day trading is buying “moreof a winner” (BMW) in a consistentlymoving market. Think of “BMW” asdoubling down in Vegas. You do thatwhen you have a good hand and are ina good position vs. the dealer. This isparticularly important in swing trading.Paigow Poker62

PINTO Trading (n)Piling on like No Tomorrow Unsuccessful trading is buying more of a loser tolower your average cost as you pile on. History has shown me that about 40% of the timethat I do pile on, I will make money. However, thatother 60% of the time, when I have piled onto aloser to make a bad loser worse, I wipe out aweeks’ worth of profit or worse. Best Loser63

Remain Flexible!Wait, Wait, Wait!Patience is an incredible virtue in daytrading. Waiting a bit longer than you arenaturally inclined is the single best way toimprove most trades.64

Mistakes Happen! All traders make mistakes. The general rule is to eat your mistake asquickly as you an, and get out of it.65

Take Your Profit! Winning a trade? Take your profit!Don’t reassess completed trades.If you believe the market is still movingin your direction, use a trailing stop. Jack Nicklaus66

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Take Time Out! Breaks are key, especially when you have Two losing trades in a row (brief time-out) Significant loss (at least 15 minutes) Break from tradingJack Nicklaus68

STARSJanuary 201134567Weekly Total1011121314Weekly 0650.00P 5 510E 3 58R 3 58GRADESI 4 48L 2 156DEF100010000169

170.00184679.00 623192053.00 918205340.00 714212165.00 - 4Weekly 12174100241440.00- - 464254947.00 - 5262700.00 71627542.00 - 337281993.00 005738.00 6265738.0011111626000M-T-D 171710439108100Weekly TotalM-T-D31Weekly Total3270

February 20111234Weekly Total7891011Weekly 373.002587.005568.001903.005634.004123.001575.00P 2 57E 2 46R 4 59I 4 59L 2 0000071

14195.00 515234.00 5165299.00- 41712761.00- - 182368.00 - Weekly Total15731.003454M-T-D14156.00 42.00 7235395.00 6246989.00 5112513353.00 32519689.0044444215180005533.00 14141817167819920002507.00 724Weekly Total2507.0011111724000M-T-D 198040.00 1515191817852196000Y-T-D 3947407.00 343136353418960204100Weekly TotalM-T-D28672

March 2011TOTALPERILABC35DEF00018444.00 621754.00 638113.00 52244526.00 7262441.00444442471872675.00 74182201.00 71792252.00 49109004.00 62115530.00 46Weekly 000Weekly Total573

141680.00 725155274.00 5211610165.00 -- -817171860.00 625189113.00 3444402.005445429112200028505.00 1413131413812365000Weekly TotalM-T-D218824.00- 319221598.00 72723748.00 - 546242462.00 1035253870.00 - 6277886.004454531123400020619.00 1817181818112359900028Weekly TotalM-T-D282286.00 629431.00 4303481.00 925314291.00 5139627.005555513640121000M-T-D 2330246.00 232223232324875220000Y-T-D 6277653.00 5753595857437135424100Weekly Total674

Last Hour Trading Rules1.2.3.4.5.6.7.Know the daily trend.Grind whenever possible.Stop trading when you make your nut.Be patient.Pay closer attention to support andresistance and let the market come toyou.Take smaller positions.Don’t add to a position – all in on entry75

Grinding (n):An effort to place quick buys and sells Smaller profitsMore frequent tradingShortened loss parametersEffective on choppy days, at the beginningof the day, at the end of the day, and whenyou don’t trade the whole day.76

Sell Today or Hold? Almost never hold-over a day tradingposition.A trade that’s bad at the end of the daywill usually continue to run against you atthe beginning of the next day.It is best to just get out of the trade.But when you don’t . . . Separate account. . . Insure loss with an option. . . Make a daily plan77

Commentary April 5, 2011Dear Friends and Family,I may be a few days or even weeks ahead of myself here,but it takes time for most people to change.That once a year time period to make a major move inyour portfolio that I often talk about is just about here.To be clear, that move is moving your investments tocash (or money markets) and eventually finding someshorts if you are a risk taker. I will be protecting any ofthe profits that I have in long positions with stops ofsome kind by the end of this week. I will go short onbad market days and go really short when there is aconfirmation of the turn to the down side, but more onthat when it happens later.78

Commentary, continuedThe exact time and day is way beyond my capability tocall, but here are the three time periods that the timers Ifollow suggest:?April 15-20?3rd week of May?1st week of JulyI know these are big ranges, but what I plan on and hopeto execute is protecting profits now, which is why I writethis early. The market is up 27% since September 1st,and that is profit worth locking in. That’s two or threegood years of return for most people and you shouldconsider protecting it NOW!79

Commentary, continuedThat said, I have the advantage of day trading, whichallows me to trade to the long side on a daily basiswhen appropriate. You can do that if you are wellversed in that, but the market will be volatile until it justplain turns down. The Fed continues to provide liquidityand Ben Bernanke said just last night that the currentbout of inflation is merely a short term blip that iscommodity based and will go back to acceptable levelsvery soon.Well. . . I don’t think so. I have attached one of the timer’snotes for a much better explanation than I can give.Porter Stansbury is a terrific timer and has proven hisworth with me. I would suggest subscribing to his80

Commentary, continuedService which is loaded with solicitations, but they providevalue to me. His piece on the “End of America” isfascinating, and, though poorly named (in my opinion),there are positions he has that are tough to dispute.I am even moving my fixed income portfolio to moreconservative positions. As a further sidebar, I haverecommended Silver to some who have asked as analternative investment for safety. It hit a 30 year highyesterday, and though it has some more room to run, inthe last major down move in the market (up to March2009), there was pull back on even precious metals. Ithink there will be a correction on Silver, and I amspeculating that it will come around mid May.If you want a free copy. . .81

Post-Trading Strategies82

Record KeepingBefore you trade the next day: Record all trades manually, as backup documentation Convert them to a spreadsheet of some type for taxtracking Trade LogWe can provide tracking service; email my partner at Fine LineAdministration (carols@daytradingpartnersllc.com)83

Trade Journal Of course it is crucial to make extensive notes aboutbad trades, but it is also important to reinforce goodtrading.I try to read past journals daily before trading.While daily evaluations are key, don’t let themimpact your overall assessment of yourself as atrader.Only week-to-date and month-to-date evaluationscan give you a a good picture of your performance.84

The P.E.R.I.L. Scale*****P – PrepareE – Emotional ControlR – RulesI – Immediate ImpactL – Last Hour85

Evaluate the Day’s Activities Was your homework properly done and properlyset up and did you get in the proper mindset?Did you keep your emotions in check?Did you adhere to your own trading rules?Did you make an immediate impact at the righttime?Did you trade well in the last hour of the day?Did you take proper breaks within the day and havealerts in at all times?What is your weekly and monthly standing?86

How do you improveyour critical factorsand P.E.R.I.L. rating?87

Why Partners are Better1 1 2 My final turning point – training makes theteacher better Discipline at the crucial time vs the Abyss You follow the rules better – Admin to Partner88

PartnershipWe have put together a partnership that offers At least six homework setups per day Daily commentary with the ability to ask your keyquestions Timers The chance to invest with each other, based on aset of rules Daily Audits Tax tracking service for Cap Gain/Loss spreadsheet89

Critical Factors in Determining the EdgeThat Makes the Difference in DayTradingTraderResponsePatienceHaving theEdgeWaits for opportunitiesto materialize based onwell-thought-out gameplan.Losing theEdgePlans very little, reactsaccording to personalwhim.DisciplineSees the big picture;responds deliberatelyIs emotional, anxiousand often confusedabout what to do.StrategyPlans carefully; limits losseslets profits run.Plans little or not at all;Does not rely onconsistent methodology.90

Critical Factors, continuedExpertiseIs well-prepared; has done thenecessary homework.Knows little about marketIs unpreparedMotiveHas long-term motive, e.g.intellectual challengeWants to make money;wants instantgratificationGoalsDefines goals clearly.Has ill-defined goalsRisk controlWants highly controlledrisk/reward ratioKnows little or no controlover risk/reward ratioState of mindHas positive, resourcefulempowering beliefs and focus.Has high level of self-esteem andtrust; is relaxed and confidentIs nervous, anxious;Believes the worst willhappen. Focus is distracted,trades in conflict.91

You May Not Want ToBe a Day Trader If . . .92

If your monitor has ahole or smash in it . . .93

If you have to replace yourkeyboard more thanweekly . . .94

If you have a rubberizedmouse for bouncingpurposes. . .95

If the words “margin call”terrify you . . .96

If you drive a pinto . . .97

If you think the marketmaker has a secretcamera view of yourmonitor . . .98

If the only time you pray is to astock chart on your monitor . . .99

Finish on a positive note for allof us Day Traders out thereIf I have a Day TradingAccount of say 1mm, DayTrading Buying Power is 4mm; so how much do Ipay in interest: 0100

If the pre-market movestriple digit up or down, areyou mentally positive andfully ready for a greatday? Good Day Tradersare.101

RiskI’m in cash at the end ofthe day and know wheremy money is . . . Doyou?102

Additional Resources103

Day Trader Tax Advantages Links to articles about the tax advantagesof qualifying as a professional day trader http://www.bankrate.com/cbsmw/itax/tax adviser/20040826a1.asp?prodtype php104

Q&A105

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that’s stupid trading, because you’re trading your wallet, and you’re not trading the market. My wallet will not help me trade the market profitably. I know that! The only way I can be profitable – and this may not work