Online Trading

ONLINE TRADING
FOR
FINANCIAL FREEDOM
“The Definitive Work On How To Succeed In Stock Trading”
By Zoran Kolundzic
You as a novice trader have a ninety five out of one hundred chance
to fail in your endeavor.
If you do fail who is to blame?
Bad luck? I don’t think so.
Trading success has nothing to do with luck.
It has everything to do with you. Your discipline. Your hard work. Your courage.
This course will be your complete step by step guide to trading success.
Nothing less.
Copyright © 2001-2002 All rights reserved.

First Edition 2001. ISBN 0-9688891-0-7
1. Introduction ………………………………………………………………………………………….. 5
1.1. Understanding Trading Dynamics ………………………………………………… 7
1.2. Trading vs. Investing …………………………………………………………………… 9
1.3. Trading vs. Gambling …………………………………………………………………. 10
2. 8 Steps That Will “Jump Start” Your Trading Career ………………………………… 12
2.1. Step 1: Understand How The Stock Market Works ………………………… 13
2.2. Step 2: Carefully Choose An Online Broker …………………………………… 13
2.3. Step 3: Use Appropriate Computer Tools ……………………………………. 14
2.4. Step 4: Get A Superior Internet Connection …………………………………. 14
2.5. Step 5: Secure An Adequate Amount Of Trading Capital ……………… 14
2.6. Step 6: Learn How To Properly Use TA Tools …………………………….… 14
2.7. Step 7: Choose Trading Software That Meets Your Needs…………….. 15
2.8. Step 8: Learn How To Utilize A Proven Trading Strategy……………… 15
3. Stock Market Basics ……………………………………………………………………………. 16
3.1. What Is A Stock Exchange? ………………………………………………………. 16
3.2. Understanding Exchange Orders ………………………………………………. 17
3.3. The New York Stock Exchange ………………………………………………… 18
3.4. Nasdaq …………………………………………………………………………………… 20
3.4.1. Small Order Execution System SOES ………………………………… 21
3.4.2. SelectNet ……………………………………………………………………….. 22
3.5. Electronic Communication Networks ECN’s ……………………………… 22
3.5.1. Island (ISLD) ………………………………………………………………….. 24
3.5.2. Archipelago (ARCA) ………………………………………………………… 25
3.5.3. InstiNet (INCA) ………………………………………………………………. 26
3.6. Stock Market Indexes …………………………………………………………….. 27
3.6.1. Dow Jones Industrial Average DJIA ………………………………… 27
3.6.2. Standard & Poors 500 Index SPX ……………………………………. 29
3.6.3. Nasdaq Composite Index COMP …………………………………….. 29

3.7. About Short Selling ……………………………………………………………… 31
4. Choosing An Online Broker ……………………………………………………………… 33
4.1. Online Brokers ……………………………………………………………………. 33
4.2. 8 Questions To Ask When Choosing An Online Broker …………… 34
4.2.1. Is The System They Use Reliable? ………………………. 34
4.2.2. What Are Their Commissions? ……………………………… 35
4.2.3. How Fast Are Their Executions? ………………………….. 35
4.2.4. Do They Provide Direct Access To
Different Exchanges And ECN’s? …………………………. 36
4.2.5. Do They Provide Reliable, Real-Time Quotes? …….… 36
4.2.6. Do They Provide Free Quote
And Charting Software? ……………………………………… 37
4.2.7. How Is Their Technical Support

And Phone Service? ……………………………………………. 37
4.2.8. What Is Their Account Minimum? ………………………… 38
4.3. A List Of Brokers Are Suitable For Active Trading ………………… 38
5. Choosing The Right Hardware And Equipment ………………………………… 50
5.2. What Kind Of Computer Do You Need? ……………………………….. 50
5.3. How Many Monitors Do You Need? ……………………………………… 51
5.4. What Kind Of Operating System Should You Use? ……………….. 53
6. Internet Connection ……………………………………………………………………… 55
6.2. Cable Connection ……………………………………………………………… 55
6.3. DSL Connection ………………………………………………………………… 56
7. Trading Capital ……………………………………………………………………………. 58
7.2. How Much Trading Capital You Should Start With? ……………… 58
7.2. How To Obtain Startup Capital? ………………………………………… 60
8. Technical Analysis …………………………………………………………………….… 61
8.1. Why Does Technical Analysis Work? ……………………………………. 61
8.2. Price Chart ……………………………………………………………………….. 63

8.3. Volume ……………………………………………………………………………… 65
8.4. Understanding Exponential Moving Average EMA …………………. 66
8.5. Using Nasdaq Level II ………………………………………………………… 68
8.6. Time And Sales Window ……………………………………………………… 70
8.7. Nasdaq TRIN ……………………………………………………………………… 71
8.8. Relative Strength Index RSI ………………………………………………… 72
8.9. Using Bollinger Bands ………………………………………………………… 74
8.10. Understanding Support And Resistance …………………………….. 76
8.11. Chart Patterns And Trendlines …………………………………………. 78
8.11.1. Head And Shoulders ………………………………………….. 78
8.11.2. Double Tops And Bottoms ………………………………….. 79
8.11.3. Rounding Tops And Bottoms ………………………………. 80
8.11.4. Trendlines ………………………………………………………… 82
8.12. Candlestick Patterns ………………………………………………………… 83
9. Trading Software ………………………………………………………………………… 84
9.2. Medved Quote Tracker …………………………………………………….. 85
9.3. Qcharts ……………………………………………………………………………88
9.4. Other Software …………………………………………………………………89
10. Trading Strategy …………………………………………………………………………. 91
10.1. What to trade? …………………………………………………………………… 92
10.2. When to enter the trade? …………………………………………………… 101
10.3. When to get out of the trade? …………………………………………….. 109
10.3.1. Cut your losses short …………………………………………… 109
10.3.2. Let your profits run ……………………………………………….111
10.4. Paper trading …………………………………………………………………….112
11. Trading Strategy II Swing Trading – Short-Term Trading………………. 114
11.1. Which stocks to trade? ……………………………………………………..116
11.2. When to enter the trade? …………………………………………………..128

11.3. When to exit the trade?……………………………………………….133
11.3.1. Cut your losses short …………………………………….134
11.3.2. Let your profits run…………………………………………135

Chapter 1
Introduction
“Therefore it is said that one may know how to win, but cannot necessarily do so”
Sun Tzu: The Art of War
By the end of this course, you will have the skills necessary to consistently profit
from everyday fluctuations in the stock prices regardless of whether the prices are rising
or falling.
Entering the stock trading field may be similar to entering a war zone. Without
the proper tools, scouting devices, ammunition and strategy, your chances of success are
small. Whether you’re a beginner or a more experienced trader, this course will greatly
improve your chances of success and it will transform you into a competent stock market
combatant.
Stock trading is not a skill that people are born with. Successful traders learn to
use their tools, skills, and strategies effectively. This takes time and effort; but the payoff
can be very rewarding. Once you have acquired these skills and learned how to employ
them successfully, you’ll be able to generate an exciting new means of income. One of
the benefits of becoming a stock trader is independence. Successful stock traders only
work for themselves. The most important tool that you will need to get by in the stock
trading world will be your brain. Your profits, and the fact that you are making an
adequate living while depending on nobody else will be the true measures of your
success.
Because stock trading is a skill, not a talent, there are huge drawbacks if you jump
in without the proper understanding and training. When you don’t understand the market
and don’t have a set strategy, stock trading can become a very painful and expensive
experience. The actual number of novice traders who can relate to that kind of experience
is ninety five percent. The reason for such high percentage of losers is that most of those
traders don’t take stock trading for what it is. A serious business that needs to be
seriously approached.
Many books on the subject of active stock trading say that it is normal for
beginners to lose money at first. Some even go as far as to say that it is normal to have a
losing streak that lasts several months! This philosophy stems from the rationale that after
losing a significant amount of money; you’ll have more experience and knowledge in
future trading endeavors. Broadway Trading tells beginners that you should start with at
least $75,000 and expect to lose money for several months.
If you went by their standards, how much of your hard-earned money will be left
in a few months? This type of attitude sets you up to fail. Why enter a battle you are
destined to lose? The only purpose for such advice is for day trading firms and day
trading and investing brokers to make money on the commissions you will pay to them.
Most of the day trading books and courses are written by and provided by people
who either own or have interest in such firms.
This course was written by one of you and is intended to keep you from losing your hard-
earned money.
Maybe after several months you’ll decide that you are not cut for trading or that you
are not making enough money. That’s fine. But there is no reason for you to lose your
hard-earned money just to find out that trading is not for you.
The road to trading success is not easy, but it’s also not as hard as you may think.
It can all be summed up in the following phrases:
• Equip yourself with the right knowledge and tools.
• Choose a proven strategy that suits your personality.
• Become proficient in implementing the chosen strategy
• Don’t be afraid to win. (This may sound strange but most people are afraid of
success. Fear of success is one of the most common reasons for the lack of it.)
This course will show you two existing profitable strategies and it will show you
everything you need to know in order to implement them successfully. The first strategy
that is outlined in the Chapter 10 is geared towards those of you who are free to trade
during market hours and the second strategy that is outlined in the Chapter 11 is geared
towards those that will trade in a little bit longer time frames (several days, weeks) and to
implement it you don’t have to sit in front of computer during market hours.
It will also teach you how to test these strategies without risking any money
And finally it will help you develop necessary skills to be able to put your strategy into
action, profitably.
1.1. Understanding Trading Dynamics
From a historical perspective, stock trading sounds easy. The general direction of
the stock market has traditionally been upwardly mobile. Unfortunately, this
generalization misleads many people to believe that the odds are always on their side.
They may think that even if they randomly choose stocks to buy at any given point in
time, market tendency is upward. They also believe that on the average, they will make a
profit this way. This might work for people who buy stocks only few times a year and
hold onto them. However, active traders may experience the opposite effect. Active
traders make trades, on the average, several times a week to several times a day. The
odds for randomly-generated success decrease in this way.
For example, what if the stock market on average appreciates 15% per year? There are
approximately 250 trading days per year. Your daily expected return would then be
0.06%. If you have a capital of $10K you would expect to make $6 on any given trading
day. However, that is only in case if you don’t trade that day.
There are two variables that will take that $6 profit from you if you trade often:
♦ Spreads
♦ Commissions
How This Works: You trade 5 times during one day and randomly choose your entry
positions. (“Randomly choose” means that you have no relevant information that justifies
your entry in either direction, similar to playing random lottery numbers.) By playing the
stock market this way, you are forced to rely only on the stock market’s upward trend. If
you buy 100 shares of company ABCD at $100 per share, then you turn around and sell
it, you will get $99 7/8. The 1/8th difference is the spread. (It’s also called the difference
between bid and ask.) By trading this way, you are already down 1/8 times 100, which
equals $ 12.50.
On top of this difference, you also have to pay commission of approximately $10
when you buy and $10 when you sell which is $20. If you trade like this 5 times a day
you will loose ($12.5 + $20) * 5 which equals $162.5. Now, subtract those $6 profit; that
is the advantage that historical upward trend of stock market gives you. You are left with
loss of $156.5. After 50 trading days like this one you will be left with about 20% of your
starting capital or approximately $2000. When you play the stock market this way, you
lose. Inexperienced traders that try to use this method will give up at this point and try to
forget this unpleasant experience. Where do they go from here? They usually return to
mutual funds where somebody will at least make an attempt to properly manage their
money.
This story is little exaggerated for illustrative purposes, but you get the idea.
Many traders will reduce number of trades after initial losses, and some days they will
stay out of the market completely. Those 50 trading days will become 100 trading days or
maybe even a few months. This is the time period that “experts” from your online
brokerage firm said you should be losing. If you trade often and when choosing your
entry positions, rely solely on hunches or the historical direction of the market, the end
result will be the same. You will lose all or most of the money from your account.
Who will get the profit, then? The people who will profit from your experience will be:
• Your broker
• Market makers for the stocks you were trading on Nasdaq
• Specialists for the stocks you were trading on NYSE
• Traders with more experience than you
1.2. Trading vs. Investing
Many people confuse trading with investing. What’s the difference? In reality, these
two terms are very far apart. The main difference between them is the time period of
holding the assets. An investor is not concerned with short-term fluctuations in the asset’s
price, and is generally more oriented toward long-term appreciation in the value of his
holdings. In making an investing decision, an investor relies mostly on Fundamental
Analysis. This is the analytical method of predicting long term prospects of the given
asset. The most popular approach among long term investors is called “buy and hold”. It
means that you buy shares of some company and forget about them for a long time. Such
approach can be very dangerous, even devastating in the extremely volatile market such
as today’s Nasdaq. Let’s consider someone who bought shares of Amazon.com at their
peak value of around $100 per share at the beginning of year 2000. Two years later they
are worth $20 per share. If that person had invested $100,000 , two years later his
holdings would be worth $20,000. Such devastating losses can occur if “buy and hold”
strategy is literally followed. Investing should not be about weathering storms together
with your “loved” company; it is about making money.
On the other hand, a trader is trying to profit exactly on those short-term price
fluctuations. Holding periods for active traders and day traders are very short, in many
cases minutes, even seconds. All the active trader needs to make a comfortable living is
to catch 1-2 point move in the stock price on any given day. The most powerful tool in
the hands of active stock trader or a day trader is his ability not to take a trade. He or she
only takes those trades that have the highest probability of success. In their decisions, day
traders rely mostly on Technical Analysis, a form of market analysis that is trying to
predict shorter-term price directions. The most popular forms of active trading and day
trading are:
• Scalping - scalping is a form of day trading that has the shortest holding timeframe.
Scalper is trying to profit from very small movements in the stock prices such as ¼ or
even 1/8. There are very, very few traders who are able to scalp successfully.
Scalping is profitable only for brokerage houses and therefore I do not consider it as a
viable trading option.
• Swing – swing trading is a form of day trading or short term trading in which you are
waiting for a stock to hit certain support or resistance level and reverse its trend. This
is very popular and viable trading approach especially in markets that do not clearly
trend in either direction.
• Breakout – breakout trading is a form of day trading or short term trading in which
you are waiting for a stock to pass through certain support or resistance level as a
clear sign of continuation of that trend. It is also viable approach especially in the
clear bull or clear bear markets.
• Event – event trading is a form of trading in which you are waiting for specific news
on a company or a sector or any other news that may influence market. In this course
we will not discuss event trading because it requires lots of experience and
understanding of markets on the behalf of a trader.
1.3. Trading vs. Gambling
Many people think that trading is similar to gambling. Is this really the case?
For example, let’s take a look at Black Jack.

If you start with $10,000 gambling capital, placing bets of $100 per hand, and play 100
hands a day, how long will you last?
In the game of Black Jack, with Las Vegas Strip rules, the casino has a built-in
advantage of 1.5 % in the long run over the player. That means that on average, a player
will lose $1.5 per any $100 he bets with. After 100 hands, on average he’ll be down
$150. Starting with a capital of $10,000, a player could last about 67 gambling days.
That’s very similar to the previously described trading scenario. In such case, I would
choose gambling because at least I would be losing my money in more pleasant
environment!
I chose Black Jack for our example because it is the only casino game in which it is
possible for skilled player to increase his odds to such extent as to be able to beat the
House. A skilled counter can obtain advantage of up to 1.5% per hand over the House in
the long run. That means that such player playing 100 hands per day and average hand
being $100 could double his gambling capital of $10,000 in less than 50 days.
The similar odds apply to stock market, with more potential for profit and less chances of
being kicked out of a casino. In order to make it work for you, we’ll need to get the odds
on your side.
The objective of this course is to help you bring those odds on your side. We
want to ensure that you are not wasting your time and money in a battle that is lost before
it has started.
Active stock trading is a war. You’ll need tools, ammunition, a good “scout”, and
a set, proven strategy to multiply your chances for success. These are factors that you
have control over, and by using them to your advantage, you’ll be ready to enter the day
trading war zone. After that, you’ll need to choose your battles wisely. What are we
waiting for? Let’s get started!
Chapter 2
8 Steps that Will “Jump Start” Your Trading
Career
Many “would-be” traders believe that trading is a skill that they are born with. Their
reasoning is that all you need to do is to buy stocks at a lower price and sell them at a
higher price. “How hard can that be?” they ask themselves.
If you share that kind of reasoning then why don’t you compete in professional
basketball? All you need to do is to throw the ball into the basket. If you feel that you can
be a day trader and live off of talent alone, but wouldn’t dream of jumping into a pro
basketball career, ask yourself this: Why do you think that professional basketball players
train so hard? They do so because pro basketball is an extremely competitive business.
So is stock trading. These professions are similar in this sense. Both businesses
reward competent and successful participants with great amounts of money. Stock trading
is more attractive to the average person because success doesn’t require any physical
talents. Young or old, tall or short doesn’t make any difference. What makes the
difference in success and failure is discipline and focus. And, of course, hard work.
You can make your living as an average car mechanic. You’ll do fine as an average
salesman. But what happens to you if you are an average trader? You will lose your shirt.
An average stock trader is a loser. He may lose a little less than the below average
trader and he loses more than a trader who is just a bit above average. Only the top 5% of
people who actively trade make money. To make a living off of active stock trading,
you’ll need to be among those top 5%. And only then you can afford the luxury of being
average.
We have devised an eight-step program that will gradually transform you into a
competent stock market participant. To understand the importance of each element,
think of each step as a link in an eight link chain. The chain is only as strong as its
weakest link. Your trading success depends on each of those eight elements. If one “link”
is not up to standards, your chain will break. You’ll lose money.
If you are a beginning trader, you should follow these steps in the order they are
presented. If you have some trading experience you will probably concentrate more on
the areas that you feel need improvement.
These are the steps:
2.1. Step 1: Understand How The Stock Market Works
Before you begin trading, you need to gain solid understanding of Stock Market in
general and the driving forces behind it. Even though it may seem to you that some of
this information is not directly related to your trading, you’ll never become competent
trader without this understanding. How would you like to buy 1000 shares of a volatile
Nasdaq company five minutes before Federal Reserves Chairman announces rising of the
interest rates? Without the understanding of how this affects the market, you could lose
20% of your capital in minutes. Read as much as you can about history of the markets,
order executions, market indexes… In Chapter 3, you will find information that you can
start to build your knowledge on. Go to your local public library and get several books on
Stock Market in general. After couple of weeks of reading you will notice big
improvement in your knowledge.
2.2. Step 2: Carefully Choose An Online Broker
After you have gained solid knowledge about Stock Market in general you will better
understand the importance of having a reliable broker. Chapter 4 which deals with
choosing an online broker has all the information you will need to find a decent broker
that will meet your requirements.
2.3. Step 3: Use Appropriate Computer Tools
Your computer will be one of the main tools of your profession. If you were a
gunfighter would you want to go in a duel armed with a rusty old gun? You’d be an easy
prey. Trading is an extremely competitive business and you need all the help you can get.
Chapter 5 will help you choose the right equipment.
2.4. Step 4: Get A Superior Internet Connection
Active trading requires high bandwidth, high performance and reliable Internet
connection. How do you find what’s right for you? Chapter 6 will show you how to find
the best Internet connection possible.
2.5. Step 5: Secure An Adequate Amount Of Trading Capital
If you do look at day trading as a war, (trust me, there are many reasons for you to do
so) then your trading capital can only be compared to the ammunition. Once you run out
of the ammunition, the war is over. Chapter 7 will answer all your questions regarding
trading capital.
2.6. Step 6: Learn How To Properly Use TA tools
The secret that successful traders don’t like to share is that Technical Analysis works
but not necessarily for reasons most people believe. It works because many people use it
and successful traders are able to predict how other people will react on the different TA
indicators and signals. Chapter 8 will show you which TA signals you should follow.
2.7. Step 7: Choose Trading Software That Meets Your Needs
Without reliable and comprehensive trading software, an active trader won’t be able to
make informed trading decisions, and therefore can’t trade successfully in the long run.
There are a great number of companies that provide trading platforms, data feed, charting
software and it can be a difficult task to choose one that is right for particular style of
trading. Chapter 7 will help you choose the software that meets your needs.
2 .8. Step 8: Learn How To Utilize A Proven Trading Strategy
Once you have decided that you are willing to invest your time, money and effort in the
profession with a low success rate, such as active stock trading, you will be confronted
with three simple but hard to answer questions: What should you trade?, When should
you enter the trade?, When to exit the trade? Chapters 10 and 11 will supply you with
answers to those questions.
Chapter 3
STOCK MARKET BASICS
3.1. What Is A Stock Exchange?
“Stock market” is a term used to describe business activities that are transacted through a
stock exchange.
A stock exchange is a place where stocks, bonds or any other types of securities are
purchased or sold.
The United States securities market is divided into two classes:
1. The organized securities exchanges

2. The over-the-counter market.
Section 6 Of Securities exchange act of 1934 requires National Securities Exchanges to

register with the Securities and Exchange Commission.
You are probably familiar with a few names of the traditional floor-based National
Securities Exchanges. They are:
New York Stock Exchange NYSE

http://www.nyse.com
Philadelphia Stock Exchange PHLX

http://www.phlx.com
American Stock Exchange AMEX

http://www.amex.com
Pacific Stock Exchange PSE
http://www.pacificex.com
Chicago Stock Exchange CHX

http://www.chicagostockex.com
Boston Stock Exchange BSE

http://bostonstock.com
The two major screen-based Securities Exchanges are:
Nasdaq
http://www.nasdaq.com
GLOBEX – the electronic trading system of the Chicago Mercantile Exchange CME
http://www.cme.com/electronic/index.html
The main focus of this chapter will be the two biggest and for the purpose of this course
most important Exchanges: NYSE and Nasdaq. There are two main differences between
the NYSE and Nasdaq:
1. Types of securities traded.

2. The way in which they provide market liquidity.
3.2. Understanding Exchange Orders
When an order is placed to buy or sell shares, the priority of its execution will be
based upon its type. Market orders get first priority. A market order is an order to buy
or sell at the best price currently available. Different market orders are prioritized based
on time of their placement. Order size doesn’t play a role in the priority of its execution.
Second in the priority queue is a limit order. A limit order is an order that is executed,
when and only when, the specified limit price is reached. The priority of different limit
orders is determined by specified limit price. An order whose limit price is closer to the
market price gets a higher priority. A stop order is an order that becomes a market order
once the stock has traded at a specified stop price. A stop limit order is a combination
of a stop order and a limit order. It is executed at a specified price or better, only after a
given stop price has been reached. All of these order types apply to both NYSE and
Nasdaq.
3.3. The New York Stock Exchange
Securities traded on NYSE are usually large, blue chip companies with a long term
record of steady earnings.
Some of the companies traded on NYSE are: General Motors (GM), Coca Cola
(KO), Philip Morris (MO), and McDonalds (MCD). You get the idea? The Dow Jones
Industrial Average (DJIA) is the most closely followed market index in the world. DJIA
is composed of 30 NYSE securities. Stock trading on the NYSE functions as an auction
that is executed by NYSE members. The members act as agents for private or
institutional investors. All buy and sell orders for any given listed stock meet at a single
trading post that is assigned to it. The person who manages the auction process has the
title of “Specialist”. A Specialist is the broker to the other brokers. The buy or sell order
can be brought to the Exchange floor by a floor broker, or, if it is a smaller order it can be
filled using an electronic system called the Designated Order Turnaround (DOT). The
order flow is usually “funneled” to a single location. This works to ensure a great deal of
liquidity.
The role of a Specialist is crucial in understanding how NYSE operates. Each listed
security is assigned only one Specialist, who is responsible in keeping the market for his
stock fair, liquid and continuous. If there is no current buyers for his stock he has to buy
it. If there are no current sellers for his stock, he has to sell it. In doing so he makes his
profit by keeping spread. Spread is the difference between current “BID” and “ASK”.
BID is the current highest price someone is willing to pay for a given stock. ASK is the
current lowest price someone is willing to sell a given stock for.
The ten largest NYSE listed companies are: General Electric Co. (GE), Exxon
Mobil Corporation (XOM), Pfizer Incorporated (PFE), Wal-Mart Stores (WMT),
American International Group (AIG), Citigroup Incorporated (C), Merck & Company
(MRK), SBC Communications Incorporated (SBC), International Business Machines
Corporation (IBM) and EMC Corporations/MA (EMC). Their combined Market
Capitalization Value in November 2000 was 2, 483.8 billions of dollars. The Combined
Market Capitalization of all of 3,025 NYSE listed companies was worth more than $16
trillion. To understand the size of NYSE Market Capitalization, the Gross Domestic
Product of Europe’s major economy Germany in 1999 was 1, 864 billions of US dollars.
NYSE Average Daily Stock Volume for the period of January – November 2000 was
1,027 millions of shares. Knowing that the average price per share traded at NYSE is
$42, we can calculate that on average approximately 40 billions of dollars change hands
at NYSE in one day.
So how is a trade executed on the NYSE? Let’s take a look.
A trade starts when an order to purchase or sell shares of a NYSE company is

placed by an investor. The order is then transmitted to the NYSE trading floor by a
NYSE member brokerage firm. Orders that can be transmitted either by computer or by
telephone are then stored and routed to a broker’s booth, or, if specified otherwise,
directly to the trading post specialist. If the order was routed to a broker’s booth then the
broker takes the order to the trading post and makes the trade while competing with other
brokers. If the order was routed directly to the Specialist, he tries to improve the price for
the customer and then makes the trade. After the trade is completed, the brokerage firm
receives the transaction report. Brokerage firms then adjust the customer’s account
accordingly and send a trade confirmation to the customer.
3.4. Nasdaq
The Nasdaq Stock Market was introduced in 1971 as the world’s first electronic
stock market. While the NYSE functions as an auction, on the Nasdaq liquidity is
provided by Market Makers, Order Entry Firms and Alternative Trading Systems that
include Electronic Communication Networks (ECN). As we already know, the
Specialist’s role on the NYSE is to provide orderly trading of the stock he is assigned to.
Market Makers have a different role. They execute orders for their customers at the best
possible price. All of the trading on the Nasdaq is done through an advanced computer
and telecommunications network. All Nasdaq participants have equal access to all of the
market information because quotes are simultaneously broadcast over computer screens.
The Nasdaq Stock Market has approximately 5000 listed companies that are divided
on the larger Nasdaq National Market and The Nasdaq SmallCap Market. There are over
475 independent firms that act as Nasdaq Market Makers. They commit their own capital
and compete for the other investor’s orders. Market Makers participate on both sides of
the market simultaneously. The second type of Nasdaq Market Participant are Order-
Entry Firms. An Order-Entry Firm enters customers orders into the Nasdaq system but
they do not commit their own capital. The third type of Nasdaq Market Participants are
Electronic Communication Networks (ECN’s). ECN’s became part of Nasdaq in 1997,
and in order to participate in the Nasdaq market they have to be certified by the Securities
and Exchange Commission and registered with NASD Regulation. In 1999. Nasdaq
surpassed NYSE in the market share of dollar volume capturing 54% of the total dollar
volume of the primary U.S. markets compared with NYSE’s 44%.
Nasdaq’s total market capitalization was $5.2 trillion in 1999, compared to NYSE’s
$16 trillion. The fact that Nasdaq is capturing greater market share of dollar volume and
at the same time has three times smaller total market capitalization value than NYSE may
confuse you. This is due to the more speculative nature of the securities listed at Nasdaq.
Such securities attract more traders and investors due to their increased potential for
profit. Nasdaq companies tend to be younger technology and growth-oriented companies
such as Sun Microsystems, Juniper Networks, and Yahoo.
As you learned in the previous section, the NYSE specialist has to be on the both
sides of the market and provide continuity of the trading. Nasdaq Market Makers have to
have quotes on both sides of the market but may choose to actively participate in only
one direction of trading. This means that Market Makers’ spread doesn’t have to, and
usually doesn’t, reflect the inside spread. Nasdaq’s inside spread is the equivalent of the
NYSE spread. It is the difference between the best bid and best ask among all market
participants trading one stock.
One of the reasons of Nasdaq is capturing larger and larger portion of market
share of U.S. dollar volume is that it offers to its participants several different ways to
route their orders. Users can route their orders through the Small Order Execution System
(SOES), SelectNet, and Electronic Communication Networks (ECN’s).
3.4.1. The Small Order Execution System SOES
All Market Makers are required to participate in SOES. This system can execute
orders of up to 1000 shares in five minutes intervals. SOES was designed to guarantee
that all orders are executed at the best available price when they order is placed. SOES
execution is automatic which means that it locates Market Maker with the best displayed
price and automatically executes it, without the Market Maker a choice of taking
somebody else’s order instead. SOES rules were tightened after 1987 Market crash in
order to protect smaller investors and help provide them with more liquidity. During 1987
Market crash many Market Makers refused to pick up the phone and execute orders from
panicking investors. Since the rules have been tightened, SOES has become one of the
most important cornerstones of small investors confidence in the Nasdaq Stock Market.
3.4.2. SelectNet
SelectNet was designed to make life easier for Market Makers. Selectnet is an order
routing option available to all Market Makers and to the investors with direct access to
the Nasdaq. SelectNet trading takes place through screen- based negotiation. A Market
Maker who receives an order through SelectNet has the option to accept or counter it. A
SelectNet order is not automatically executed, as is the case with SOES. This is why
SelectNet is favorite routing option for Market Makers.
3.5. Electronic Communication Networks (ECN’s)
Electronic Communication Networks are trading systems that take orders

electronically and match buy and sell orders at specified prices. They have to register
with Securities Exchange Commission as brokers/dealers.
The SEC defines ECN’s as “automated mechanisms that widely disseminate Market
Maker orders to third parties and permit such orders to be executed through the system,
other than crossing systems”. The order type of choice in most ECN’s is limit order.
Subscribers to ECN’s can be Market Makers, institutional investors and other brokers-
dealers. As an individual investor, you have to have an account with a registered broker
in order to route your order to a specific ECN.
Currently registered ECN’s are:
Archipelago, L.L.C. ……………….ARCA

100 South Wacker Drive, Suite 2012
Chicago, IL 60606
1-888-514-7284
http://www.tradearca.com
Attain ……………………………... ATTN

160 Summit Avenue
Montvale, NJ 07645
1-888-328-8246
http://www.attain.com
B-Trade Services L.L.C…………….BTRD

499 Park Avenue
New York, NY 10022
1-212-310-9500
http://www.blomberg.com
The Brass Utility, L.L.C……………BRUT

1-212-952-0280
http://ebrut.com
Instinet Corporation ………………..INCA

875 Third Avenue
New York ,NY 10022
1-212-310-9500
http://www.instinet.com
Island ……………………………….ISLD
50 Broad Street, 6th Floor
New York, NY 10004
1-212-231-5000
http://www.island.com
Market XT …………………………MKXT
100 Broadway
New York, NY 10005
Fax: 212-777-7676
http://www.marketxt.com
NexTrade …………………………..NTRD
301 S. Missouri Avenue
Clearwater, FL 33756
1-727-423-5495
http://www.nextrade.org
Spear, Leeds & Kellogg ……………REDI

120 Broadway, 6th Floor
New York, NY 10271
1-212-433-7000
http://www.redibook.com
The ECN’s that provide the greatest deal of liquidity are Island, Archipelago and Instinet.
Let’s take a look at them.
3.5.1. Island (ISLD)
More investors than ever, both institutional and retail, look to Island ECN as the first
routing choice for their trade order. Island has been founded in 1996 and has experienced
phenomenal growth ever since. Island ECN is popular because it is both inexpensive and
easy to use. It provides investors with an open and fully accessible market place.
Anybody can view its open order book, The BookViewer, for free during market hours at
Island’s web site (www.island.com.) When a trader places an order to Island, the system
is searched to find out if there is a matching order. If it exists, the order is immediately
executed. If the matching order doesn’t exist, the order is placed at the BookViewer until
someone places an order that will match it. Priorities of execution are based on price and
time. Size of the order is not relevant when determining execution time. If an Island order
results in number of partial fills, it depends on your brokerage if you will be charged
commission on one or more orders.
Figure 3.1 is an example of the Island’s order book.
Figure 3.1
Only Island’s best limit orders are posted on Nasdaq. Securities that can be traded on
Island are Nasdaq’s NMS and SmallCap securities as well as any security that is listed on
NYSE. Limit orders are the only kind of orders accepted by Island and there are three
types of limit orders on Island: Display order, Subscriber only order and Non-Display
order. Display orders are limit orders that are displayed both on Island’s order book and
on the Nasdaq quote. Subscriber only orders are limit orders displayed only on Island’s
order book. They are not displayed on a Nasdaq quote. Non-Displayed orders are limit
orders that are not displayed on either on Island order book or on Nasdaq quote. Non-
Displayed orders have lower priority of execution than Display and Subscriber only
orders.
3.5.2. Archipelago (ARCA)

Archipelago ECN was founded in December 1996 and it became fully operational in
January 1997 as one of the four ECN’s approved by the SEC. Archipelago’s order book
is not freely available to everyone like Island’s. It is available only to those who have
access to the Archipelago. Orders that can’t be immediately executed because there are
no current buyers/sellers at specified limit price are added to Archipelago’s National
Order Book. If the order can’t be matched with other ARCA orders, it will be given
preference over other market participants. In doing so it uses the SmartBook software,
which is based on proprietary routing algorithm.
ARCA accepts only round lot share orders. This may be a problem if your order has
been partially filled on some other ECN, and you have been left with 47 shares, for
example. Unlike Island, which accepts only limit orders, ARCA accepts both market and
limit orders. Although it may seem like substantial advantage market order can be
extremely dangerous during volatile periods. If you place an order to buy a number of
shares of company ABCD at a time when market price is 55 and at the same time there is
a great buying pressure don’t be surprised if you get filled at much higher price than
anticipated. The same problem applies if you are trying to sell the stock. Securities than
can be traded on Archipelago are Nasdaq National Market, SmallCap and Listed
securities.
3.5.3. InstiNet (INCA)
Instinet was founded in 1969 and today it is the world’s largest agency broker. It
changed the way trading was conducted when it allowed customers to see its order book
and to instantly get the best price for their order. INCA’s philosophy is based on
neutrality, anonymity and transparency.
The main drawback to InstiNet is that it is not usually not accessible to individual
investor. Its order book is not available to public, but some orders can be viewed at
Nasdaq’s quotes under symbol INCA. InstiNet also allows customers to place orders by
telephone with one of its trading desks.
During regular market hours, prices on the InstiNet are usually less attractive than
those of other exchanges. Combined with the fact that it is not easily accessible, InstiNet
will not be your exchange of choice. It is still primarily used by large institutions.
3.6. Stock Market Indexes
The role of a stock market index is to measure changes in the value of specific
groups of stocks and help measure changes in the entire market. Indexes can provide a
quick snapshot to see how a specific group of stocks performs compared to other groups
of stocks. Because performance varies greatly from one sector to the other, it’s very
useful to know your way around the major Indexes. Traders use Market Indexes as
important tools when trying to anticipate future movement in stock price. For example, it
is not realistic to expect stock ABCD to perform greatly outside of scope of index it is
part of. It is therefore important to know what index is representative of stock you are
trading.
What are the different indexes and how do they differ? Here’s a breakdown of some of
the indexes that you’ll probably use of in your trading efforts:
3.6.1. Dow Jones Industrial Average (DJIA)
Popularly known as the “Dow,” this index was created in 1896 as a 12 stock average.
Today it is the best known and most widely followed market indicator in the world. It
tracks the performance of 30 large, blue chip companies. Companies are added on the list
and subtracted from the list based on their importance and influence in the specific sector.
Unlike most stock market indexes that are market capitalization weighed, the DJIA is
computed by adding the stock prices of 30 participating companies and dividing by a
factor that adjusts for differences caused by stock splits.
Figure 3.2
Figure 3.2 shows performance of DJIA from September to the late December of 2000.
Companies that are currently represented in the DJIA are:
Alcoa (AA), American Express (AXP), Boeing (BA), Citigroup (C), Caterpillar
Incorporated (CAT), Du Pont (DD), Disney (DIS), Eastman Kodak (EK), General
Electric (GE), General Motors (GM), Home Depot (HD), Honeywell International
(HON), Hewlett-Packard Company (HWP), IBM, Intel (INTC), International Paper (IP),
Johnson & Johnson (JNJ), JP Morgan (JPM), Coca-Cola (KO), McDonald’s (MCD), 3M
Corporation (MMM), Philip Morris Co. (MO), Merck & Company (MRK), Microsoft
(MSFT), Procter & Gamble (PG), SBC Communications (SBC), AT&T Corp (T), United
Technologies (UTX), Wal-Mart (WMT), Exxon Mobil (XOM).
From the list above you can conclude that with selection of this 30 stocks, DJIA attempts
to capture market as a whole.
The other four important Dow Jones Averages are:
Dow Jones Transportation (DJTR)

Average of 20 railroad, trucking and airline companies.
Dow Jones Utilities (DJUT)

Average of 15 power, gas and electric companies.
Dow Jones Composite (DJCP)

Average of all 65 companies in the three previous averages.
Dow Jones Internet Services(DJSVC)
Average of 25 Internet-service-oriented companies
Some other important market indexes are:
3.6.2. Standard & Poors 500 Index (SPX)
S&P 500 consists of a very broad base 500 stocks. It includes 400 industrial
companies, 40 utilities, 40 financial and 20 transportation companies.
S&P 500 is capitalization-weighed index. It is calculated by multiplying outstanding

shares by stock price of 500 stocks that are traded on NYSE, Nasdaq and AMEX. The
benefit of capitalization weighing is that each company’s influence is proportional to its
market value. S&P 500 Index is followed more by large institutional investors than by
average public that is more informed about much publicized DJIA.
Figure 3.3.
Figure 3.3 shows performance of S&P 500 Index from September to the late December
of 2000.
3.6.3. Nasdaq Composite Index (COMP)
If Dow Jones Industrial Average is the most popular index for general public and
recreational investors, Nasdaq Composite Index is by far the most important index for
active investors and day traders. It measures all Nasdaq domestic and foreign stocks. Like
S&P 500 and unlike DJIA, it is market capitalization weighed. The market value, the last
sale price multiplied by total shares outstanding, is calculated during market hours, and is
related to the total value of the Index. Nasdaq Composite Index began on February 5,
1971 with a base of 100.
Figure 3.4
Figure 3.4 shows performance of Nasdaq Composite Index from September to the late
December of 2000.
All of the securities that are part of Nasdaq Composite Index are at the same time
assigned to one of the following eight sub indexes:
Nasdaq Bank Index BANK

It consists of 625 banks and savings institutions and companies performing functions
closely related to banking. It began on February 5, 1971 with a base of 100.
Nasdaq Biotechnology Index IXBT

It consists of 202 companies involved in biomedical research and development. It began
on November 1, 1993 with a base of 200.
Nasdaq Computer Index IXCO

It consists of 906 computer hardware and software companies and companies that
produce computers, office equipment and electronic components. It begun on November
1, 1993 with a base of 200.
Nasdaq Industrial Index INDS
It consists of 2,297 companies that are not classified in any other Nasdaq sub indexes and
areas of their business include agriculture, mining, construction, manufacturing, services
and public administration. It began on November 1, 1971 with a base of 100.
Nasdaq Insurance Index INSR

It consists of 73 insurance companies including life, health, property, casualty, brokers,
agents and related services. It began on February 5, 1971 with a base of 100.
Nasdaq Other Finance Index

It consists of 153 credit agencies, security brokers, exchanges and dealers, real estate, and
holding investment companies. It began on February 5, 1971 with a base of 100.
Nasdaq Telecommunications Index IXTC

It consists of 386 telecommunications companies. It begun on Nevember 1, 1993 with a
base of 200.
Nasdaq Transportation Index TRAN

It consists of 97 transportation companies of all types. It began on February 5, 1971 with
a base of 100.
3.7. About Short Selling
Short selling is a term used to describe market activity in which a trader is selling a
stock that he does not own. Short selling is fueled by the anticipation of a price decrease
where a trader will attempt to buy it back later at a lower price. Short selling is very
simple concept; it’s simply the opposite of buying. When you buy a stock you hope that
price will go up. When you short sell you hope that price will go down. Short selling is a
powerful tool in a sense that it gives opportunity to skilled traders to profit in good and
bad market times alike. Many novice traders have difficulties with short selling because it
is a concept that goes against human nature. The average person is not always
comfortable profiting from somebody else’s troubles. After losing your own share of
money in this way, however, you’ll very quickly realize that stock market goes by its
own rules and games. You’ll need to play by them as well.
Chapter 4
CHOOSING AN ONLINE BROKER
4.1. Online Brokers
Online brokerage companies facilitate trades between buyers and sellers. They receive
a commission for the services they provide. There are two types of stock brokerage
houses: full service brokers and discount brokers. The broker you’ll most likely work
with is the discount brokerage house. Discount brokers don’t usually offer any trading
advice to their customers. The main function of a discount broker is to execute trades on
your behalf. Choosing the right broker is a critical link to success in your trading career.
Without a reliable broker, even the best traders may have a limited chance for
success. Every trader I know has at least one horror story about his or her broker. What
happens if you try to sell your position because its value is depreciating quickly, only to
find that your broker’s server is down? By the time they fix the problem you might be out
of 100’s, or even 1000’s of dollars. When you choose your broker, you’ll need to take
several factors into account. You’ll also need to understand that one broker may be
excellent choice for one style of trading, and may not be adequate for some other type of
trading.
If you’re not happy with the service you receive from your broker, you should
look for a new one. It is not worth the time or money investment to be loyal to somebody
whose service isn’t working for you. While it is not in the interest of your broker to cause
you to lose money, you need to remember that your broker makes his commission
whether you win or lose. They are only not happy if you lose your money too quickly,
because they won’t make the kind of profit from as they would like. This is why many
daytrading brokers give advice or even hold courses on scalping. Scalping is a form of
day trading in which a trader makes up to a couple of hundred trades in one day. Scalpers
are closely monitoring Nasdaq Level II screen, waiting for buying or selling pressure on
the stock of their choice. They attempt to catch small movements in the stock price and as
soon as the trade turns against them they immediately get out. It is becoming more and
more known that scalping is the surest way to lose money in the long run. Those kinds of
brokers usually have very high account minimum so that your money can last longer. For
most traders, scalping is slow death, but for the brokers it is the most profitable way of
trading. How much does an average scalper pay in commissions per month? If he trades
50 times a day, 22 trading days per month, and his commission is $10 per trade, he will
pay $11, 000 a month in trading fees.
There are literally hundreds of brokers that you can choose from. When it’s
time to choose your broker, take the time to get informed about several prospective
brokers. Although you can always change your broker, it can be a frustrating experience,
so try to do everything in your power to make sure you get it right the first time. By
choosing your broker carefully, you will save valuable time and money. Another tip: Just
because a broker is heavily advertised doesn’t mean that he or she is the right broker for
you. Usually the opposite is true.
4.2. 8 Questions to Ask When Choosing an Online Broker
4.2.1. Is the System they Use Reliable?
System reliability is the most important factor to look for when choosing a
broker. Find out how often the system they use is down. There is nothing worse than
being disconnected from your broker’s server while you are in the middle of the trade.
(By the time you find out what is going on and place the order over the phone you may
loose big chunk of your money!) Some Nasdaq stocks can move 5-6 points in less than
10 minutes. With 200 shares, that can mean a loss of over $1,000. Some brokers will say
that there is equal probability that stock will move in either direction while system is
down. Sometimes you will win, sometimes you will lose. In the long run it should have
no effect on your trading success. I strongly disagree. The most powerful weapon in the
hands of direct access trader is his/her ability to control losses. If you lose 50% of your
account (i. e. your account goes from $10, 000 to $5, 000) you now need to increase your
account by 100% just to break even. If the broker is down too often you should definitely
stay away, even if they meet all of your other criteria.
4.2.2. What are Their Commissions?
To an active trader, the value of commissions is a factor that can not be

underestimated. The importance of commissions depends greatly on size of your initial
account investment. If you are starting with $2,500, it won’t be possible for you to
actively trade with $20 commissions. With a $2,500 in your margin account, you are
limited to buying 50 share lots of stocks that are under $50. You need a move of 1 point
in the price of that stock just to break even. It would not be possible to profitably trade
under such conditions. If you have small or relatively small initial capital, ($2,000 -
$10,000) you can trade only in share lots up to 300 shares and you have to find a broker
with relatively small commissions (under $10). This also applies for beginning traders, no
matter how much initial capital you have. As a beginner, you should not be trading in
more than 100 share lots. If you have a larger initial capital, you can always switch to
some other broker later on, after you have gained experience and are ready to trade in 500
to 1000 share lots. In such cases, commissions don’t play an important role since you
need only 1/32 of a point move in the stock price to pay even the most expensive
commission.
4.2.3. How Fast Are Their Executions?
In order to succeed in trading you need to be able to get the most favorable price
at any given time. This is especially true for market orders. Prices move very quickly and
by the time your order gets filled it may be at a price that is far from the price you were
hoping to get. If you are using mostly limit orders you may have trouble getting them
filled at all. Look for brokers that provide quick confirmation of executed orders. Under
regular market conditions, round lot orders from 100 to 1000 shares should get filled in a
few seconds time or less. If this is not the case, look for another broker.
Brokers that normally provide fast executions occasionally take longer to fill your
order. High trading volumes affect the speed of their execution, and when prices move
quickly your limit orders may become outdated. Your market orders are also affected by
volume, (everybody is buying/selling at the same time) and there may not be enough
sellers/buyers on the other end. During these high-traffic times, you are most likely to
lose money and have your executions fall through the cracks. It may not be your broker’s
fault, however, so you’ll want to avoid passing the blame to him.
4.2.4. Do They Provide Direct Access to Different Exchanges and ECN’s?
An active trader wants to have as many options available to route his order. A Broker
can make this possible by providing you with direct access to major exchanges. Some
online brokerages let you place the orders through your browser, but then there is a delay
before your order is presented on the floor of the exchange. Direct access to exchanges
lets you skip a step in this process.
The direct access routing options that you should look for are: Island, InstiNet,
Archipelago, SOES, SuperDot for NYSE trading. Some brokerages offer a “best
execution option”, where they attempt to locate the best possible price for your order.
Exercise caution when using this option. There are stories of deep discount brokers
selling their order flow to other institutional investors. Make sure that your broker is not
selling your orders, because this could prevent you from getting the best possible price.
4.2.5. Do They Provide Reliable, Real-Time Quotes?
Most brokers provide basic real-time quotes to their customers, but many of them are
often unreliable. Accuracy and real-time delivery problems can arise due to several
factors. Sometimes problems arise due to brokers’ servers, sometimes there is an
“Internet traffic jam”, and sometimes the original quote provider experiences technical
problems. Unfortunately, your broker will always say that fault is somebody else’s. It is
up to you to estimate if your broker’s quote delivery is preventing you from trading
efficiently. You should also NEVER rely solely on your broker’s quotes. There are many
ways to obtain second quote provider for free (we’ll discuss this in more detail later). By
using two quote providers, you’ll be able to trade safely. I actually use three different
quote providers because I’ve had situations when two of them are not functioning at the
same time.
4.2.6. Do They Provide Free Quote And Charting Software?
Charting software is a “must” for active traders. If your broker provides it for free,
you have a definite advantage. Some of the free or discounted software that brokers may
provide are: Real Tick III, Qcharts, Esignal, Nasdaq level II book. Be aware that value of
free software is not enough to compensate for some other flaws your broker may have.
One bad execution can cost you six months worth of Qcharts or Esignal subscriptions!
4.2.7 Do They Provide Technical Support and Phone Service?
If you’re in trouble, you’ll want to get help fast. Technical support should be there to
help you with any problems you may have regarding your order executions, lost orders,
order confirmations, trading platform etc. Don’t expect them to give you any investing
advice. That’s not their job. If your Internet connection is broken, and you need to get out
of your trade, you need someone available to answer the phone quickly. Technical
support is important because when a broker experiences a technical problem, all the
traders will call at the same time. This can create a situation where no one will answer
your call when you need him or her the most. You should look for a broker that is able to
operate with reasonable efficiency at such times.
4.2.8 What Is Their Account Minimum?
Brokers who cater to general investing public tend to have lower initial deposit
requirements than brokers who cater to active traders and daytraders do. Those who cater
to active traders tend to have better speed of execution and more routing options for your
orders. They will tell you that reason for high account minimums (i.e. $25, 000) is that it
is not possible for you to succeed with less money. They say that in order to be profitable,
you must trade in 1000 share lots in order to compensate for high commissions. In this
case, they are right. This is why you should find a broker with reasonable commissions
and a reasonable account minimum. Beware of brokers with no account minimum,
because are often unsuitable for active trading.
4.3. A List of Brokers That are Suitable for Active Trading
PreferredTrade
http://www.preferredtrade.com
Preferred trade is a custom electronic order entry and real time account access service for self-
directed, active traders. Because it does not require a browser, this unique front end provides unprecedented
speed and dynamically updates information similar to professional trading systems. At the center of the
Preferred Trade system is an algorithm that automatically selects the routing for an order depending on if it
is a listed stock. For example, it helps you determine if it is an OTC stock priced in various ways for
routing to the various ECN's or SelectNet; or if it is a stock or index option, including direct connections to
the electronic option markets.
Customer’s comments:
“Fastest direct access with routing choices to all option exchanges. See option quotes on all
exchanges and send your order to the exchange of choice. For stock trades, choose from ECN, Select-Net
or discounted routing. Integrates with several quote providers. No hidden fees I'm aware of. “
Minimum Deposit $5, 000

Commissions $ 15 per trade, $7.75 on eligible Nasdaq NMS
stocks
Execution Speed and Reliability Excellent *****
Range of Services Good ***
Support Very Good ****
MB Trading
http://www.mbtrading.com
The “MB Trader” gives its users the full capabilities of RealTick III and the ARCA system. Its features
include real-time quotes time and sales data, intraday and historical charting with technical studies,
dynamically updating portfolio tracking and Nasdaq Level II with integrated order entry. They also offer a
60 day reduced commission rate at $5 per trade. MBTrading provides access to SOES, SelectNet, Island,
Instinet and Achipelago book.
Customers comments:
“ One great thing is that when you call, phone is answered immediately, and information provided by
truly knowledgeable people.” “ The one sore spot has been quote delays at the opening bell. They claim it
is the Nasdaq but other secondary providers do not experience the delay.” “ As a long time customer I have
had very, very little to complain about. One would be hard pressed to find an equal, let alone a better
service.”
Minimum Deposit $ 10, 000 (margin account)
Commissions $9.95 - 14.95 per trade depending on number of

trades per month
Range of Services Excellent *****
Tradescape
http://www.tradescape.com
Tradescape has an impressive Nasdaq execution system. You can click on any participant on the Level
II screen and it automatically fills in the routing option and price in the order entry box, which gives you
fast execution with two clicks of the mouse. They also offer direct access to INCA, ISLD, REDI and
BTRD. They offer charting software, but it is not very customizable. Due to their low commissions they are
very good choice for a trader who trades blocks of 100 – 300 shares.
“Order entry is superior and commissions are cheap if you trade less than 500 shares. Trading platform
is great if it works but is prone to disconnect. Called up their trading desk one time to get out of a position
and the guy told me he can only do it after 20 mins. Since there were people ahead of me and I had to wait
in line!”
Commissions $0.015 per share, $1.5 minimum per trade

Execution Speed and Reliability Very Good ****
Support Good ***
Interactive Brokers LLC

http://www.interactivebrokers.com
Interactive Brokers, LLC offers extremely low commissions and is probably one of the best choices
for novice traders. They give you access to NYSE and AMEX listed and NASDAQ National Market
Securities and SmallCap stock as well as listed equity options on a margin basis. Their Traders Workstation
software provides a simple and effective trading platform. It includes all of the most important order types
such as limit, market, stop and stop-limit orders. It will cost you only $1 to buy and 1$ to sell 100 shares.
“Low commissions and control of execution are great... you get what you pay for... no frills, just
execution.... Customer service is staffed with beginners and their work is hit or miss... “
Minimum Deposit $3,500 margin account

Commissions $0.01 per share, $1 minimum per trade
Range of Services Very Good ****
Support Fair **
Cybercorp
http://www.cybercorp.com
CyberCorp is an electronic trading firm focused on real-time, direct access trading and execution
technology. It is a wholly owned subsidiary of The Charles Schwab Corporation. CyberCorp offers an array
of platforms to meet the trading needs of the individual investor.
I found their software good to excellent, customer response well meaning but mixed in terms of some of
their people's knowledge, and their fees high because one is cautioned to trade 100 share lots until
profitability comes. . .but to pay from $10 to $18 for 100 share lots is tough going for any number of
trades.”

Commissions $9.95 - $14.95 per trade (depending on number
of trades per month)
Execution Speed and Reliability Fair **
Support Excellent *****
Datek Direct
http://www.datek.com
Datek Online customers have the ability to choose either Datek Direct’s five direct access routing
options or to utilize Datek’s highly acclaimed intelligent order-routing system. The only drawback is that it
uses web browser-based, not stand alone, software.
Datek Direct is excellent for trading and has low fees, but only if you use third-party software like
Quotetracker or Daslinger. Otherwise the default interface is too cumbersome.
Minimum Deposit None

Commissions $9.95 per trade
A. B. Watley
http://www.abwatley.com
A. B. Watley offers two “Ultimate Trader” services: FREE and PRO. Both services are engineered for
active traders relying on real time, dynamically updating data.
“The only reason I can think of using Watley is to get free software (not the complete Real Tick, but
one chart, 2 level 2 boxes & a couple other features.) And then only if you don't trade very actively. They
start out at $24/trade, which is competitive if the year is 1998. They're also $.015/shr for every ECN except
ISLD. As far as I know, they offer nothing that any other cheaper Real Tick broker doesn't offer. I opened
an account with them because they offer trading with ISLD before 8AM, but closed it when I discovered
that there is almost no liquidity at that time. “

Commissions $18.95 – 23.95 per trade ( depending on number
Suretrade
http://www.suretrade.com
Suretrade offers a wealth of free research, real-time quotes, news, charting, portfolio and life planners,
stock and mutual fund screeners, 24-hour online broker-assisted help, all while offering commissions as
low as $7.95 per trade and one of the lowest margin rates schedules on the Internet.
“ Poor phone service, great rates and executions. For experienced traders only.”
Minimum Deposit $2, 000 (margin account)

Support Good ***
Equity Trading
http://www.equitytrading.com
Equity Trading provides a powerful version of RealTick software that enables customers to route their
orders to different markets. It offers access to all Electronic Communication Networks.
Customers comments:
“These guys are honest and straight forward. No hidden costs. They assign an account rep to each customer
so I talk to someone who really knows me and I know them. I like that personal touch. “
Minimum Deposit $ 5, 000

Commissions $5 per trade for first 60 days after that $9.95 -
$14.95 per trade
Noble Trading
http://www.nobletrading.com
Noble Trading offers the NobleTrader Level 1.5 and Level 2 direct access trading packages which both
come equipped with the intelligent order routing feature. It scans the market in real-time in search of the
best possible price, execution method, and order route.
“Talk about stretching your dollar. Nobletrading has given me the best deal. No other direct access
broker came close. The guys at Noble really care about you and really try to give you the best deal.”

of trades per month
Support Good ***
RML Trading
http://www.rmltrading.com
RML Trading offers four different packages for all levels of traders and two different quote providers (PC
Quote or Townsend Analytics data feeds). All of the Real Tick III packages have real time data and the
same order entry box.
"Good Firm using RealTick software. Excellent training & support."
Minimum Deposit $5,000

Commissions $9.90 - $14.90 per trade ( depending on number
of trades per month )
Range of Services Excellent ***
RJT
http://www.rjt.com
RJT is the first on line broker to prominently display system availability on its home page. All system
downtime is displayed, including the duration of the event, the nature of the problem, and the steps taken to
ensure that the problem does not recur.
“Quote & execution speed is usually good, but occasionally lags. Customer service answers quickly and
is friendly and helpful. $5 trades are great. They have been very reliable. Service is almost always up.”
Minimum Deposit $2, 000 (margin account)

Commissions $5.00 per trade ( any number of shares)
Source Trade
http://www.sourcetrade.com
SourceTrade provides the RealTick and ARCA systems. ARCA is an electronic order routing system
which gives the client excellent order execution. SourceTrade provides immediate order routing via ARCA
and ISLD and utilizes ISI for the execution of listed securities
“They are the only broker that I have met that brings you into a family rather than just trying to make you
trade so they can profit. I enjoy their camaraderie as well.”

Commissions $16.00 - $19.00 per trade ( depending on number
of trades per month )
Execution Speed and Reliability Good ****
Support Very Good ***
Muriel Siebert
http://www.msiebert.com
SiebertNet offers after-hours trading, Zacks Signature series, real time portfolio updates, market
indices, charts, and intraday balances, up to a year of account statements and 1099s online, and streaming
real time quotes.
“Very low margin rates, excellent customers service, execution can be really slow sometimes.”
Minimum Deposit No minimum

Execution Speed and Reliability Good ****
Terra Nova Trading

http://www.terranovatrading.com
Terra Nova Trading, L.L.C. offers a highly sophisticated, integrated software application that
electronically routes orders via the Internet. This enables you to track live orders and positions while
watching the markets move. Point and click to electronically route your order.
Customers comments:
“Good place to trade. Helped me to understand the difference between trading and investing.”

Stock Trade Network

http://www.stocktrade.net
Stock Trade Network offers direct links to the AMEX/NYSE/Nasdaq via their private LAN network (no
Internet lag). Real time P & L screen with net long and short positions. After-hours trading on Island and
Redi ECN’s.
“The Redi Plus execution system is extremely fast, especially with the ISLD, & REDI book. It is also real
easy to customize hot keys etc... “

Commissions $0.03 - $0.15 per share depending on number of
shares per month
Execution Speed and Reliability Excellent ****
Support Good ***
Charles Schwab
http://www.schwab.com
Schwab provides active traders with Velocity trading software for powerful online trading, priority
access to a dedicated team of trading specialists, extended hours trading after market close, access to
wireless trading.
“Good support, but cost too high for what you get.”

Execution Speed and Reliability Good ***
Support Good ***
Fidelity
http://www.fidelity.com
Fidelity offers a Powerstreet Pro trading workstation that caters to their most active customers.
Powerstreet Pro provides integrated design display with centralized real time quotes, automatically updated
watch lists, charts and independent news. It also provides real time Nasdaq Level II quotes.
"Customer service can be spotty but keep complaining and eventually someone will listen. . .Some
[reps are] rude and unhelpful [but others] are really nice and helpful. Usually quick executions but not
always.”

Support Good ***
Ameritrade
http://www.ameritrade.com
Ameritrade offers free real-time quotes, customizable charts, market summaries, and research tools,
including company profiles and earnings estimates. They provide current financial news from Business
Wire™, Reuters, and PR Newswire to help you make your investment decisions.
"Okay for online buying, but not trading.” “I am satisfied. . .telephone was answered in a minute or less,
response was helpful. I have e-mailed questions, got replies in two days. . .All OK”

Commissions $8.00 market orders $13.00 limit and stop orders
Range of Services Very Good ***
Support Good ***
AF Trader
http://www.aftrader.com
AF Trader provides to its customers easy accessibility to a wide variety of investment products and
resources.
“I never get put on hold.” “No response from AF Trader one month after I sent my application in.”
Minimum Deposit No minimum

Support Good ***
Chapter 5
Choosing the Right Hardware and Equipment
In this chapter we will discuss computer hardware configurations, monitors and

operating systems that are suitable for active stock traders. Unfortunately, if you think
that you can get by with an outdated computer system, a 15” monitor and a Windows 95
OS, then you’re out of luck. Such system may be good enough for someone trading once
or twice a month, someone who looks at online trading only as a less expensive version
of his ex broker.
You want to make a living out of online trading. Think of your computer as one of the
main tools of your profession. If you were a gunfighter, would go into a duel armed with
a rusty old gun? Of course not! You would be an easy prey. Trading is an extremely
competitive business and you need all the help you can get. A successful trader is usually
knowledgeable about computers. He doesn’t learn about computers for the fun of it,
though! Because the key to his profession is reliable technology, he is forced to become
knowledgeable. You should also spend some time at gaining some general knowledge
about computers and operating systems. In addition to making you a more successful
trader, it will also make your life a lot easier in the future!
5.1. What Kind Of Computer Do You Need?
As we all know, advances in computer speed and power happen almost on a weekly
basis. It’s impossible to give you precise advice that can hold for more than a few
months. There are two main computer components that are of importance as related to
effective trading: microprocessor and RAM. At the time of this writing (March, 2002) for
those of you who are considering short term/swing trading Pentium II 330 MHz or more
microprocessor should be sufficient. For those of you who are considering active day
trading Pentium III 500 MHz or more is recommended.
Short term/swing traders will need at least 64 MB RAM. Active day traders should go
for 128 - 256 MB RAM. The size of your hard drive is not relevant. Spend your hard
drive money on buying more RAM.
Here are links of some of the best places on the Net to find affordable computer
components:
Computers4SURE.com Inc
1-203-615-7000
http://www.computers4sure.com
Dell Computer Corporation

1-800-WWW-DELL
http://www.dell.com
….or, if you are looking for used one:
eBay Inc
http://www.ebay.com
5.2. How Many Monitors Do You Need?
Short term/swing traders will need at least one 17” - 19” monitor. Active day traders
will need at least two 19” monitors. For active day trading one monitor is just not enough.
Why two monitors? As we’ll discuss later, you will need access to a great deal of
real time information and it can not fit on one screen. Some of you who are short on
startup capital will probably try to pass by with two 17” monitors. It is possible to trade
with two 17” monitors, but it is much tougher on your eyes. Save yourself the trouble.
You’ll end up buying 19” monitors anyway.
Experienced and successful traders usually use three to four 19” - 21” monitors. You
as a novice trader would probably not be able to simultaneously follow and interpret real
time information from four screens. Invest your money in four monitors only when you
can do so by using your trading profits. As far as the difference between 19” and 21”
monitors goes, it depends how far away from them are you sitting. If you are going to use
21” monitors you will have to sit farther away and you will have to set up your display
resolution at 1600 x 1200 pixels. For the 19” monitors your display resolution should be
1024 x 768.
Multiple monitor graphics cards let you increase the virtual size of your desktop by
adding additional monitors. The card will allow you to view your running applications at
the same time without clicking between windows. If you already have a decent (16MB or
more) graphics card, find out if it supports multiple monitor display. If it does, you will
need to buy one more compatible card.
To find out if your card supports multiple monitors go to:

http://www.microsoft.com/windows2000/guide/professional/
The easier, more reliable but also more expensive way to install multiple monitors is by
buying a graphics card that has two or more display slots built in. One card that is gaining
more popularity due to of its relatively low price and solid performance is Matrox G450
Millennium. To see the different versions, you can visit them at:
http://www.matrox.com
Another popular but more expensive multiple monitor graphical card is Jeronimo Pro.
You can find more about it at:
http://www.appian.com/products/jeropro.html
5.3. What Kind Of Operating System Should You Use?
An operating system is a program that provides a software platform on top of which

other application programs can run. The most important factor in choosing an operating
system is its stability. The bad news? You are probably using Windows 98 or Windows
ME. Although they are good enough for short term/swing trading their stability is not
adequate for active day trading. Windows 98, when running several applications at once,
tends to freeze up very often. You will need to manually restart it. If you were in the
middle of the trade your winning position can quickly turn into losing one.
The operating system of choice at the time of this writing is Windows 2000
Professional. It is stable and fast. If you have an adequate amount of RAM, it can run for
weeks without freezing up. You second best choice is Windows NT 4.0 Workstation. It is
even more stable and robust than Windows 2K, but it is getting more and more difficult
to find compatible drivers for different devices you will be using. Windows 2000 Server
and Windows NT 4.0 Server are also excellent choices but they require better than
average computer knowledge and if you are not computer savvy you should stay away
from multiple user OS’s. You should only use them if you need two or more people to be
able to use your computer at the same time. In that case, you’ll also need more powerful
processor and more RAM.
If you are thinking about using Linux OS for your trading, you should probably wait
until there are enough Linux users out there and more compatible software. Most of the
trading software is written for Windows based OS’s only, and you’ll have to take that fact
into account.
Some of the best places to get help when experiencing problems with your OS are:
http://www.computing.net/
http://computingcentral.msn.com/topics/windowsnt/
http://windows2000.about.com/compute/windows2000/mpboards.htm
http://www.linuxhelp.org/
Chapter 6
Internet Connection
Active day trading requires high bandwidth, high performance and reliable Internet
connection. Dial-up connections are suitable for short-term/swing trading, however
although it is possible to day trade using regular phone line connection, it is not
recommended. Dial-up connections are sometimes slow and unstable. If you use them,
you will have to redial at least a few times during one trading session. On top of that you
don’t need delays in your real time data feed because that can cost you money. Several
years ago, the only alternatives that you had to the regular dial up connection were T1, T3
and ISDN connections. Their high cost (over $1,500!) was the main reason that stopped
them from becoming widespread. Thanks to the huge amounts of money being pumped
into high speed Internet access divisions of main cable and phone companies, there are
now several alternatives. The two new reasonably priced Internet connection alternatives
are: Cable Internet service and DSL Internet service. Both of those connections have their
pros and cons.
6.1. Cable connection
Cable companies and cable Internet service providers are claiming that cable
modems are as much as 100 times faster than a regular dial-up connection. They say that
you can get a speed of up to 5Mbps compared to 50 kbps dial-up speed. Theoretically, it
is possible. Realistically, you should be happy if you get 1Mbps. This is still more than
enough for your trading needs. If you are a TV cable subscriber you will probably be
charged for your cable Internet service on the same bill. At the moment costs range from
$30 - $50 per month including cable modem rental. You’ll also pay installation charges
that run from $50 - $150. The main benefit of cable modem is that it is always on; there is
no need to dial every time you want to connect to the Internet. The drawback of cable
access is that it is shared by people in one neighborhood, meaning that if more people are
on at the same time, the slower your connection becomes. Fortunately, between 9:30 am
and 4:00pm, most people are working. This is the time period that Stock markets are
open for trading. Cable modems also create security concerns. Because cable lines are
shared, it makes it easier for someone to hack into your computer. To reduce the risk you
can install firewall protection software.
6.2. DSL connection
A Digital Subscriber Line (DSL) is the other reasonably priced high speed Internet
access choice. In theory, it is not as fast as cable. In practice, its performance is equal to
that of a cable modem. Depending on your distance from the provider’s central office, it
can perform at even higher speeds. As the distance increases, the signal quality decreases
and reduces the connection speed. At the extremes of distance limits you can have a
speed far below promised maximum. DSL connections use your regular phone line at
different frequency, allowing you to use your telephone at the same time. DSL
connections have faster download speeds than upload speeds, which means that they
work faster when receiving data than sending data over the Internet. The security of DSL
service is greater than that of cable, because your DSL connection is not shared with
other users. One of the problems with some DSL companies has been poor technical
support. They have this trouble because it’s difficult to hire skilled employees while
maintaining high growth levels.
You can test your Internet connection speed at following sites:
http://dslreports.com/stest
http://speedtest.mybc.com/
http://www.toast.net/performance/
As far as active trading is concerned differences between cable and DSL Internet
access are minor. You should make your decision based on price and availability. If only
cable is available you will have to go with cable and vice versa. If neither option is
currently available in your area, regular dial up will have to do the job. Check with your
phone and cable companies to be notified when they are able to provide you with Internet
service.
You should never rely only on one ISP. If you have either cable or DSL high speed
access you should also have one extra account with a regular dial-up provider. Both cable
and DSL providers often experience technical problems and you may not be able to
connect to the Internet for hours at a time. If this happens while you are in the middle of
the trade, you’ll need an extra connection to be able to get out of that trade. Think of the
extra $15 that you spend on the additional account as a form of insurance.
Chapter 7
TRADING CAPITAL
If you look at stock trading as a war, and there are many reasons for you to do so,
then your trading capital can only be compared to the ammunition. Once you run out of
the ammunition the war is over. Always remember that if you lose 50% of your trading
capital you now need a hundred percent increase just to break even. It is more important
not to lose than it is to win. Do what it takes to preserve your capital. You’ll always have
another chance tomorrow to make a profit.
You should only use money in your trading account that you can afford to lose.
Depending on your current financial and employment status, you might not have the
opportunity to make the lost money back. If you’re drawing funds from your retirement
accounts, you should have more conservative trading strategy than someone who is
saving for their next family vacation. Do not use money that you have set aside for family
emergency situations, children’s education, etc.… Trading with such money will impair
your trading abilities and greatly increase your chance of failure.
7.1. How much trading capital should you start with?
Don’t count on stock trading to cover your living expenses. If you count on your
profits to cover your daily expenses, you’ll be a nervous, and unstable, trader. You should
be able to trade confidently and not make irrational, erratic decisions based on your need
to cut a profit quickly. You’ll have a clear head as long as you don’t have to worry about
losing the only money you have, so be reasonable with both your start-up capital as well
as your expectations.
As a beginning trader, you are a long way of being able to live from your trading
profits. You can begin your trading career with relatively small startup capital as long as
you don’t count on your trading profits to cover your living expenses. If your trading
capital was $5,000, you would have to make monthly trading profits of 50% to be able to
survive on it. Even the best traders can not count on that kind of return.
Begin your career in trading gradually. Don’t jump right into full-time trading. (In
other words, don’t quit your day job!) You don’t want to make any life-altering decisions
such as selling your business or quitting school until you have already made consistent
profits. You should make consistent profits during a reasonably long time period to
justify any life-changing decisions.
Depending on the amount your broker charges you for commission, you can start
trading with an amount as low as $2,000. Remember that starting out with such low
trading capital may put you at a disadvantage. You’ll only be able to trade in very small
share lot sizes. Commissions will likely take big chunk of your potential trading profits.
You may also end up with severely reduced capital if you suffer a losing streak. If your
capital allows you to trade in 50 share lots only, and your broker charges you $15 per
transaction, you will clearly be at a disadvantage. In such case the stock you are trading
needs to move 5/8 in the direction of your trade for you to just break even. If you add an
average spread of 1/8, the stock needs to move no less than ¾ of a point. In such
conditions, your chances of success are very slim. If your stock moves 1.5 point in the
direction of your trade, and you were trading a 50-share lot, your net profit on that trade
would be only $33.
If starting with a small amount of capital is too risky, what amount of capital is
better? Start with an the amount that is low enough to make it affordable, and high
enough that you are able to weather losing streaks as well as commission costs.
For the average beginning trader, this amount may be around $5,000 in a margin
account. Having a margin account doubles your purchasing power. If you have $5,000 in
your trading account it is possible for you to purchase up to the $10,000 worth of stock.
For example if stock ABCD were trading at $89 per share with your $5,000 you would be
able to purchase only a 50-share lot. If you are using a margin account, you can buy a
100-share lot. This will reduce the percentage value of the transaction fee cost.
7.2. How Do You Find Startup Capital?
What if you have confidence in your abilities, but not enough money to fund your
ambitions? Many traders that have success in paper-trading find themselves ready to
trade, but without the ammunition to enter the battle. One of the best ways to obtain some
quick cash is to sell some of your “toys”, gadgets, and other items you may own but very
seldom or almost never use. You can auction them on the Ebay.com, and a few days later
you may have a few hundred extra dollars that you didn’t count on.
You’ll want to avoid borrowing off of your credit cards. It’s too risky and the
costs are too high; If you lose, you’ll have to repay that money with 18 – 20% rate of
interest. If you have decided to borrow money for your startup trading capital, the best
way to do so is to use personal line of credit. You will pay much less in interest and there
is no minimum payment other than the accumulated interest for each month.
Obtain the money you need with the minimal amount of risk. If you can’t afford it
without risking your daily expenses, don’t do it. “Better safe than sorry,” is the mantra
you’ll want to follow when weighing your startup capital risks.
Chapter 8
Technical Analysis
8.1. Why does technical analysis work?
Once you’re got your ammunition, you’ll need to know what kind of odds you’re up
against. This will help you plan your strategy successfully. Active stock traders usually
use technical analysis to determine the risk factors involved. Technical analysis
describes different ways of predicting the future of the stock market based on its history.
Unfortunately, technical analysis is not an exact science. Many prominent scientists label
it as “voodoo science”. They claim that due to market efficiency, if you use TA to find
your entry positions, you’re no better off than someone who chooses those positions
randomly. Market efficiency means that all the available information is already
calculated in the stock prices, and that you can only guess how will the price behave in
the future.
The “voodoo science” theory would make sense if it wasn’t for the fact that there is a
significant number of traders who are able to consistently make profits in the stock
market. These traders use technical analysis as their main tool. Since any trader has or
can have access to the same TA tools we have to ask how can small group of traders
consistently win and the other larger group, more or less consistently lose in the stock
market game. What is it that winning traders know about technical analysis that gives
them the upper hand?
The answer is simple: Technical Analysis works but not necessarily for the
reason most people believe. Many successful traders don’t want to share this secret. TA
works because many people use it, and successful traders are able to predict how other
people will react on the different TA indicators and signals. In other words, while the
losing traders are using TA to determine their trades, the winning traders are winning
because they know how the losers are going to react based on this data. For example,
when a stock price goes below one of the key exponential moving averages, (EMA’s)
many investors sell that stock to protect themselves against additional losses. By doing
so, they will drive the price of that stock lower and that will prompt some traders to start
short selling that stock in anticipation of further decline. Prices continue the downward
trend, forcing traders who were long on that stock to sell their positions because it is
going below their stop limits. This creates a domino effect as the price continues to
decline. However, at this point, successful traders realize that most of the current price
action was created artificially. They start to enter positions on the buy side and more
often than not price starts to reverse. The losing traders have already sold their stock
based on the TA tools. The winning traders buy the stock because they understand that
the fluctuation was temporary, and they seize the opportunity based on the losing trader’s
reactions.
No TA tool by itself will give you reliable buy or sell signals. There is no holy
grail or magic black box that will give you the perfect, accurate signal. However, the
combining the right group of TA indicators with discipline and adequate trading capital
has been the road to fortune for many traders. There is no reason why you cannot emulate
their success.
Technical Analysis is similar to studying history. Historians are usually able to make
the most accurate predictions of future and outcomes of events. Usually, the past repeats
itself. History proves that people historically behave in the same manner in the similar
situations. Great empires start to fall when everybody starts thinking that they are
invincible. The same thing happens with stock market. Every time there has been a long
lasting bull market, new experts come from the woodwork claiming that this time it is
different, that this time there is new technology, that this new bull will never stop because
unlike in previous bull markets fundamentals are now much stronger… Out of fear,
people start to invest more so they don’t get left out of the boom. This results in them
spending more than they can afford. Some may even borrow money to be able to play
stock market. When there is no more fresh money to feed this beast, it has to start to feed
of itself. Then comes the bear market.
If investors who were among last to join the party looked at the charts of previous
bull markets, they would have noticed that many technical indicators were behaving
similarly as they had in the past, before previous bull markets were close to the end.
When you’re unprepared and unaware of historical facts, history is doomed to repeat
itself. This is the last lesson you want to learn the hard way when entering the daytrading
battle. If you learn it while in battle, not beforehand, your chances of success will most
likely be lost.
In this chapter we will examine most important TA indicators and how can they be
effectively used in predicting future movements in stock prices.
8.2. Price Chart
The price chart is a basic TA tool. Its horizontal axis indicates time and the vertical
axis indicates price.
Figure 8.1 shows a one-hour line chart covering the period from mid-December 2000 to
early January 2001. It is the most simple price chart because it doesn’t show price
behavior inside the one hour intervals.
Figure 8.1
Figure 8.2 shows one-hour bar chart. Bar chart shows us more information than line chart
since it is possible to see approximate price behavior inside one hour intervals. We can
see price at the start, price at the end, highest price and lowest price of each one-hour
interval.
Figure 8.2
The price chart that is most widely used among active traders is the candlestick
chart. It reveals basically the same information as a bar chart. In addition, it is also
possible to tell at what volume the stock was trading at different price levels inside
specified interval. Figure 8.3 is an example of a one-hour candlestick chart Note that
those intervals with opening prices higher than closing prices are in white color and
intervals with opening prices lower than closing prices are in red color.
Figure 8.3
8.3. Volume
Volume is simple, yet single most important indicator of the current stock trend.
Volume measures quantity of shares of given stock that changed hands during a specific
time period. From figure 8.4 we can see how the changes in the stock price and changes
in the volume are closely related
Figure 8.4
8.4. Understanding Exponential Moving Average (EMA)
Unlike simple moving averages, EMA gives equal weight to each price point and
where the oldest price data is removed from average, exponential moving average assigns
a weight to the price data while calculating the average. The oldest price data is not
removed from the calculations, but it has less impact on the EMA than the more recent
price. EMA crossovers are used in many trading systems as buy or sell signals. Usually,
combinations of two or three EMA intervals are used.
In our example we will use 4 and 12-minute EMA intervals. A buy signal occurs
when longer term EMA (12 minutes) crosses shorter term EMA (4 minutes) from above
to below. A sell signal occurs when longer-term EMA’s cross shorter-term EMA’s from
below to above. You should never use these signals if they are not confirmed with a
number of other signals.
Figure 8.5 is an one-minute candlestick chart for AMCC.

We can observe the first buy crossover signal at 10:02 am when the longer term (12
minute) EMA (blue line) crosses shorter term (4 minute) EMA (red line). In this case it is
a strong buy signal. This is because it is confirmed by a very high increase in volume and
a very bullish candlestick pattern. At 10:38 am, we can observe very strong sell crossover
signal when the longer term EMA crosses shorter term EMA from below to above. This
is confirmed bya decreased volume and bearish candlestick pattern.
Figure 8.5
Another popular way of observing buy and sell signals is by using single, longer term
EMA. Buy signals occur when the current price crosses EMA from below to above. The
sell signal occurs when current price crosses EMA from above to below. Notice that
those crossovers occur at approximately same times as two EMA crossovers but they also
occurred several other times thus creating false signals. For the purpose of this course we
will be using two EMA crossover method since it eliminates much of the market noise.
8.5. Using Nasdaq Level II
Nasdaq market provides three levels of quotes. Level I, Level II and Level III.
Level I is also called the “inside market” and is provided with almost any real
time software. Level I provides information about current highest bid, lowest ask, last
sale price, volume, high price and low price of the day.
Level III quotes are accessible only to market makers. Information provided in
this level is in no way superior to the information provided in the Level II quote. On top
of the information provided in the Level I quote, Level II quote displays all the current
bids and offers of market participants in a specified stock.
Nasdaq’s Level II is a very powerful tool in the hands of skilled trader due to the
abundance of information it provides. Classic buy signals are increased volume on the bid
side. Another buy signal is when an important market maker (axe) enters with a large
order on a buy side. A trader has to know who the important market makers are for a
stock he is trading. Basic sell signals are when the volume on the bid side decreases and
market makers start leaving the bid side and start joining the offer side.
By observing the Level II screen, a trader can also determine what the best routing
option is for this trade. Figure 8.6 shows Level II screen for AMCC at 12:19 pm.
Figure 8.6
From the information provided in the Figure 8.6 we can observe that AMCC opened
at 64 3/8. High of the day so far was 66 11/16, Low of the day was 63 ½. Last trade was
at 65. Current price was 8 3/8 lower than previous day’s close. The volume so far was
17,214,500 shares. We can also observe increased volume on the bid side. This is a
bullish, short-term indicator. Each line on the bid and the offer shows market maker ID,
current bid or offer, size of the order and the time order was entered respectively.
Although Level II is an important technical tool, its significance has been reduced
recently. It is used too often by active traders. When the Level II screen was first
introduced, some traders were able to successfully trade using Level II almost
exclusively. This is no longer possible and Level II can be used only as one of several
technical indicators when making a trading decision.
8.6. Time and Sales Window
Time and sales windows are technical tools that are used to determine the speed and
momentum of trades as the price approaches one of its breakpoints. Figure 8.7 shows
Time and Sales window of Junniper Networks JNPR, at 14:02 pm. As we can observe,
last trade was at 14:02:12 when 100 shares changed hands at 113 ½ per share.
Figure 8.7
Trades that are displayed in green took place at the best ask or above. Those that are
displayed in red took place at the best bid or below. If a trader observes that majority of
trades flying by on the screen are green, at a speed higher than usual, it is used as a
bullish sign. This is because a majority of the trades are taking place at the ask or above,
this means that traders are starting to chase the stock and are offering prices that are even
higher than the current ask. On the other hand, if a trader observes that the speed of trades
is increasing and majority of trades are red, this is considered a bearish sign. Red means
that sellers are not able to sell their stocks at current bid prices and are forced to sell them
for even less.
8.7. Nasdaq TRIN
Nasdaq’s TRIN is an indicator that traders use to detect overbought and oversold levels
in the market. If the TRIN is a high, market is usually bearish. If the TRIN is low, market
is usually bullish. TRIN has an inverse relationship with the market. This can be
confusing for the beginning traders. Figure 8.8 shows a one-minute candlestick chart of
the Nasdaq TRIN from open until 14:00. During this period, we can observe that most of
the time TRIN was above 2, which is a very bearish indicator.
Figure 8.8
When the value of the TRIN is above 1.25 market is considered bearish and when the
TRIN is below 0.75 market is considered bullish. TRIN is calculated based on the
following formula:
TRIN = ((advancers/decliners) / (advancing volume/declining volume))
Advancers is number of issues advancing. Decliners is number of issues declining.

Advancing volume is the volume of advancing issues and declining volume is the
volume of declining issues. TRIN is never used as a buying/selling signal by itself but is
a very important indicator when used in combination with a number of other technical
tools.
8.8. Relative Strength Index (RSI)
Relative Strength Index is a momentum indicator. It usually moves ahead of price. It

is an indicator that measures a stock’s price relative to itself. The values that it can have
are between 0 and 100. It is not affected by sudden, shorter-term movements in a stock’s
price. Therefore, it looks at the overall picture and eliminates much of the
marketplacenoise. RSI is usually used in combination with other indicators. RSI value of
30 or less is generally considered as buy signal and RSI value of 70 or more is considered
as sell signal. Those values do not necessarily apply for each stock and trader is
encouraged to research every stock he is trading to determine correct buy and sell signal
levels for each particular stock. Figure 8.9 shows a one-minute candlestick chart for
Junniper Networks (JNPR) together with 14 minute RSI from open until 14:04.
Figure 8.9
The values of RSI are represented by blue line, which is most of the time moving
between two straight parallel lines. The upper line has value of 70 and the lower line has
value of 30 which many traders use as sell and buy signals. From the chart above we can
observe that when the RSI starts reaching upper horizontal line stock price is often
peaking and is starting to reverse its course and when the RSI starts reaching lower
horizontal line stock price is often bottoming and is starting to reverse. Traders also look
for the divergence between price movement and RSI (price moving up and RSI moving
down and opposite). If you see such movement, it is very likely that price is about to
change direction.
8.9. Using Bollinger Bands
Bollinger Bands are technical tools in a form of envelopes that surround stock price
on a chart. There are three bands in the standard Bollinger Bands inputs (20,2): lower,
middle (average) and upper.
Price that is rising within the lower band and prices that are falling within the
upper band represent change of current trend (divergence). Price that is rising within the
upper band and prices that is falling within the lower band represent continuation of
current trend (convergence). If the price is crossing the center from below to above it is
signifying increase in strength. If the price is crossing the center from above to below it is
signifies an increase in weakness.
Bollinger Bands cannot be used alone as a technical tool when looking for buy
and sell signals. You will need to use it in combination with other technical tools. One
tool that produces excellent results when used in combination with Bollinger Bands is
RSI. When the price touches the upper band and RSI is below 70 or when the price
touches lower band and RSI is above 30, current trend will most likely continue. On the
other hand, when the price touches the upper band and RSI is above 70 or when the price
touches lower band and RSI is below 30, current trend will most likely reverse. Figure
8.10 shows a one-minute candlestick chart for AMCC from 11:25 until close.
Figure 8.10
At 15:37 we can observe an excellent bullish signal when the price bar is closely
leaning to the upper Bollinger Band and at the same time RSI crosses value of 70. This
was a clear buying opportunity and in this particular situation an experienced trader
would have made a profit of almost 4 points in less than half an hour.
8.10. Understanding Support and Resistance S/R
Support and resistance is the most basic concept of technical analysis. Support is
created at points below current price where there is enough buyers to prevent and
eventually to reverse decline of the stock price. Resistance is created at points above the
current price where there is enough sellers to stop and eventually to reverse advance of
the stock price.
Support and resistance are often established around key exponential moving
averages such as 20 DEMA or 50 DEMA. Very often they simply establish around round
numbers such as 100, 75, 40 because they represent psychological barriers to many
investors. Figure 8.11 shows a one-minute candlestick chart for Yahoo (YHOO) for
Monday, January 8, 2001.
Figure 8.11
As you see in the above chart, support (blue line) was established at 25 ½ and
resistance (red line) was established at 27. Note how each time price reached resistance
level, sellers outnumbered buyers and prevented price from rising and each time price
reached support buyers outnumbered sellers and prevented price form further decline.
Support and resistance should not be used alone when looking for potential entry
signals but in the combination with other signals. In Figure 8.11 at 10:50 when the price
reached resistance level and started reversing would have been an excellent entry position
on the short side only if it could have been confirmed with other technical indicators. On
the other hand at 15:05 when the price reached resistance level and started reversing, this
would have been an excellent buying opportunity if other technical indicators were
supporting such trading decision. This trading approach, when a trader anticipates the
price to bounce off support/resistance levels is also called swing trading.
On the other hand, traders who anticipate continuation of the current price trend
after the price crosses support/resistance levels are said to be using breakout trading
approach. Figure 8.12 shows one-minute candlestick chart for AMCC between 11:45 and
close on Monday, January 8, 2001.
Figure 8.12
A breakout situation occurred at 15:38 when the resistance line, unsuccessfully tested
several times during the trading day, was finally broken as the price continued to climb in
the typical breakout fashion.
8.11. Understanding Chart Patterns and Trendlines
Traders who make the majority of their trading decisions based on recognizing
familiar price patterns are called “chartists”. This type of trading is based on the theory
that history repeats itself. (This is also the theory behind technical analysis as a whole.)
However difficult it may be to assign any scientific credibility to charting, it us
very often works. Patterns are created, because trends do not last forever.
Sooner or later prices slow down, pause, and then change direction. The
importance of a price pattern is the direct function of its size and depth. Usually, the
longer a pattern takes to create, the more significant the following price move is likely to
be. The foundation of the price move is an acumulative pattern. This is a place where
neither buyers nor sellers have the upper hand. Some of the most typical price patterns
are:
8.11.1. Head and Shoulders
The Head and Shoulders price pattern is the most widely used and recognized bearish
chart pattern. Figure 8.13 shows daily candlestick chart for AMCC from late 1999 to
early 2001.
Figure 8.13
We can observe that first shoulder was created in the spring 2000. It was followed by
a reversal that did not reach pre-first shoulder low level. The price was looking for the
direction during the early summer and at the beginning of July new rally started and took
the price to the new high (head). Price was able to hang on to the new high for a brief
period of time and it was followed by swift decline. It returned to the pre head low. The
new advance ensued but was not able to reach previous high (head). Instead, a new high
was established at the second shoulder level. This signifies the end of the upward trend.
When the price started to fall from the second shoulder level, it would have been an
excellent shorting opportunity. An inverse Head and Shoulders formation is recognized
as one of the most widely used bullish price patterns.
8.11.2. Double Tops and Bottoms
A double top is a price pattern that signals the beginning of a downward trend. This
is therefore a bearish indicator. It is created as the price climbs to the resistance level two
times but is unable to breach it. A double bottom is the opposite of the double top since it
signifies beginning of an up trend and is considered as a reliable bullish indicator. It is
created as the price falls to the support level two times and is not able to breach it. Figure
8.14 shows one-day candlestick chart for BRCM for the period from mid 1999 to mid-
2000.
Figure 8.14
By looking at the chart above, we can see the first top was met because the price
wasn’t able to move through resistance level of 250. Being unable to do so for the second
time, a double top pattern was established and it was followed by sharp decline in the
stock price. When the new bottom was established at 120, the price couldn’t fall through
level of support at 120 price was able to recover for a brief period of time. It was
followed by the decline that for the second time ended at the level of support of 120.
Double bottom was established and the new advance of stock price ensued.
8.11.3. Rounding Tops and Bottoms
Rounding tops are formed when sentiment gradually shifts from bullish to bearish
and rounding bottoms are formed when sentiment gradually shifts from bearish to bullish.
Figure 8.15 shows a five-minute candlestick chart for AMZN.
Figure 8.15
As we can observe formation of rounding bottom between 14:00 and 16:00 was
followed by very strong and substantial upward move in the price.
8.11.4. Trendlines
Straight lines that can join series of ascending or descending tops or series of ascending
or descending bottoms on a price chart are called trendlines. Trendlines are a simple, but
very powerful, trading tools. Figure 8.16 shows one-day candlestick chart for AMCC
together with the two trendlines of different direction.
Figure 8.16
When the price declines, touches the trendline and starts to reverse it is considered a
very strong bullish signal. Trading on such signals is called swing trading. If the price
declines, crosses the trendline, and continues to fall it is a very strong bearish signal.
Trading on such signals is called breakout trading.
8.12. Candlestick Patterns
Candlestick patterns are formed on the real time candlestick price chart and can be
additional technical help when choosing your entry/exit positions.
bullish
bearish
neutral
Chapter 9
Trading Software
Without reliable and comprehensive trading software an active trader can not make
informed trading decisions and therefore can not trade successfully in the long run. Such
software is essential in watching and establishing patterns. Without seeing the moves
your competition is making, comprehensively and up-to-date, you may miss the chance to
make your move. There is a great number of companies that provide trading platforms,
data feed, and charting software. It can difficult to choose one that is right for particular
style of trading. A trade execution platform provided by your broker usually lacks decent
charting and TA tools that are necessary to your trading success. Such platforms, in most
cases, let you execute trades, calculate your portfolio and provide you with Level I data
feed for the stocks of your choice. These software solutions are provided to you at no
cost, and because they greatly vary from broker to broker, we will not discuss such
platforms in more detail.
What you will need to understand is the value of third party data feeds and charting
software. In some cases, you may be able to get this software from your broker at
discounted price. If you generate lots of income for your broker by trading often, you
may even be able get it for free. If you have already chosen your broker based on factors
that we discussed earlier, find out if he offers a cheaper alternative to get the software
you need. If he offers it, take it! You can always change your software later if you find
that it is not up to your standards.
When choosing your TA and data feed software, you’ll want to look for:
♦ reliability of data feed

♦ number of real time TA indicators (EMA, Bollinger Bands, Volume…)
♦ Nasdaq Level II
♦ And, of course, the cost
Make sure the software you choose can be integrated with your trading platform. Ask
about its scalability.
When scouting out trades, the reliability of a software’s data feed is the most important
factor. You’ll need to have accurate information on bids, offers, and last prices at any
given time. Without reliable information, it is impossible to trade. Every data feed
software sometimes experiences technical problems. However, this should be a rare
occurrence. The TA indicators your software should provide will depend greatly on your
trading style. The standard features you’ll want to look for are:
♦ Volume
♦ EMA’s
♦ Bollinger Bands
♦ RSI
♦ Candlestick charting
♦ The ability to draw trendlines
Price may also be an important factor for beginning traders and traders who have a small
start up capital to work with.
We will discuss two such programs in more detail:
Medved Quote Tracker
Qcharts from Quote.com
9.1. Medved Quote Tracker

http://www.quotetracker.com
Medved Quote Tracker is a very reliable and resourceful TA software. It also has one
more very positive characteristic: It’s free!
When I first downloaded this excellent trading tool I found it hard to believe that it was
completely free. Figure 9.1 shows an example of how you can set up your screen if you
are using QuoteTracker as your primary TA tool. You can fill your portfolio with as
many stocks as you please, but only a limited number will fit on a single screen.
Figure 9.1
Medved Quote Tracker does not provide a quote feed of its own. It is, however,
compatible with many popular quote providers such as Yahoo, Fidelity, Datek, Etrade,
Quote.com.
To get started, you’ll need register with one of those providers and then specify which
one you have chosen to Quote Tracker.
In the picture above, the data provider is Datek, which doesn’t require you to be their
customer. You can register for free on their web site. If you are wondering how such
reliable software can be free, the answer lies in advertising. Because it is free, Quote
Tracker has many users so it can charge more money from its sponsors.
Here are some of the services Quote Tracker provides:
♦ Multiple simultaneous, self-updating

♦ Real time intraday charts
♦ Streaming Level I Quotes
♦ Intraday and Historical Chart Trend lines
♦ Advanced Alert System
♦ News Monitoring
♦ Multiple Portfolios Support
♦ Customizable Portfolio views
♦ Scrolling Ticker Tape
♦ Portfolio Printing
♦ Proxy/SOCKS Support
Figure 9.2 shows a one-minute candlestick chart for AMCC for the period from
10:30 to 12:30. It is used in combination with volume, EMA(12) and EMA(4). Note that
volume bars for the periods when price declined are colored in red and bars for the
periods when the price advanced are colored in green. You can customize size on the
chart as well as the chart periods. (1hr, 2hr, all day…)
Figure 9.2
Some of the Technical Indicators you can choose from:
♦ Real Time Price Chart - line, bar, candlestick

♦ EMA
♦ Volume
♦ Bollinger Bands
♦ MACD
♦ RSI
♦ Stochastics
♦ On balance volume
♦ ECN Level II screen
Quote Tracker is an excellent choice for beginning traders. Even if you choose
another software solution, you can always have Quote Tracker as a backup option. It’s
main drawback is that it doesn’t provide you with Nasdaq Level II. This is why even
more active traders don’t use it as their main software platform.
9.2. Qcharts
http://www.quote.com
Qcharts is a very popular, real time quote feed and charting application. It currently
costs about $80 per month + exchange fees. (These fees usually add up to an additional
$12.) They have an excellent customer support and difficulties with quote feed are very
rare. I would definitely recommend it for anyone doing more than 5 trades per day.
Some of the Qcharts features are:
♦ Live, updated charts

♦ Time and Sales Window
♦ Nasdaq Level II
♦ Technical Analysis Tools
♦ High Reliability
♦ Relatively low cost …
Figure 9.3 is an example of how you can set your screen. At the top window there is
a real time, one-minute candlestick chart together with 4 and 12 minute EMA and
volume. At the bottom two windows we have Nasdaq Level II and Time and Sales
Window.
Figure 9.3
9.3. More Software
Real Tick III
http://www.realtick.com
eSignal
http://www.esignal.com
pcQuote
http://www.pcquote.com
Quicken
http://quicken.com/quickenquoteslive
Chapter 10
Trading Strategy
Now the war has begun, and you should get ready for your first battle. However, you may
want to make a checklist of tools and supplies before you rush into it. Before you go any
further in this course, ask yourself the following questions:
• Are you willing to invest time, money and effort in a profession in which the success
is not guaranteed? Are you comfortable with and aware of the fact that the chances of
failure are high?
• Do you have a comfortable, basic knowledge of the Stock Market in general? Are you
familiar with key concepts and terms as related to stock trading?
• Have you opened an account with an online broker that meets criteria as outlined in
chapter 4? Have you set aside the amount of money that you are willing to risk? (For
the purpose of this course we will be using Interactive Brokers and their TWS
trading platform as an example.)
• Are you set up with the necessary hardware and Internet connection as outlined in
chapter 5 and 6.? It will be assumed that you are using two monitors for the purpose
of this last chapter, if you haven’t installed two monitors yet, you will have to jump
between the screens. Eventually, if you are serious enough about trading, you will
realize that using only one monitor puts you in a huge disadvantage!
• Have you gained a solid understanding of key Technical Analysis concepts as

explained in chapter 8?
• Have you downloaded and installed Medved Quote Tracker? (It is free; there is no
reason for you not to do so. I will assume that you will eventually subscribe to a quote
provider that provides Nasdaq Level II book and Time and Sales Window; for that
reason Quote Tracker will be used as a secondary charting software and as a primary
software I will be using Qcharts.)
To develop an effective plan and trading style, every successful trading strategy should
answer following questions:
♦ What should I trade?
We’ll need to set criteria for choosing stocks that we will trade. The criteria will be based
on assumption of active, medium risk level trading.
♦ When should I enter a trade?
We’ll need to set standards to choose an entry moment either on long or short side. The
entry moment has to be moment of highest probability that stock will move in the
direction of our trade.
♦ When should I exit the trade?
The decision that is crucial to trading success is to choose the right moment to get out of
the trade. Exiting the trade is always mixed with emotions of greed and fear. The main
reason traders fail is their lack of discipline to exit the trade on time.
10.1. What To Trade?
When you enter a battle, you need to understand both the weaknesses and the strengths
of your enemy. You need to understand where to attack. Stocks that are you’ll want to
focus on have the following qualities:
1. High Liquidity. Liquidity is best measured with volume. The higher the
average daily volume is, the higher the liquidity is. High liquidity ensures that at the
moment we want to buy or sell shares; there will be enough sellers/buyers on the other
side. Stocks with higher liquidity tend to have lower spread. This will keep our costs
lower.
We will concentrate on stocks that have average daily volume of over 1,000,000
shares. We will also concentrate on stocks that are traded on Nasdaq because we can have
access to the Nasdaq Level II book, which can be of great help to the short-term traders.
2. Volatility. Volatility is measured by the beta coefficient. This is the measure of the
risk associated with any given security in the market. Beta coefficient is calculated by
dividing a given stock’s historical returns by historical returns of the stock market as a
whole. The higher the beta coefficient is, the higher the volatility is. This is very
important because it ensures that the stock you are trading will provide you with the
highest possible number of trading opportunities. In order to understand the importance
of volatility, have a look at Figure 10.1 and Figure 10.2
Figure 10.1
Figure 10.2
Figure 10.1 is a five-minute chart for Applied MicroCircuit Corporation (AMCC) for a
two-day period. As you can see, those two days have provided numerous trading
opportunities. Experienced and successful traders had several trading opportunities to
catch 3-4 point moves in the stock price. Such trades can translate into high profits. For
example, if you trade 100 shares per trade 4 points move, this means $400 profit. If you
are trading 500 shares, a 4 point move means $2000 profit. Figure 10.2 is a five-minute
chart for Nike Inc NKE for a two-day period. After a closer look, we can see that the best
we could have achieved were a few ½ point moves. As opposed to the AMCC, NKE
doesn’t provide enough trading opportunities to make it an attractive choice for an active
trader. At the time of this writing Beta coefficient for AMCC was 2.63 and for NKE it
was 0.83.
The stocks that we are interested in are those that have Beta coefficient of 1.5 or more.
3. Price of the stock. Price is very important when considering a trade. If the stock has
a small price, even a high percentage move in the price will translate to the small dollar
value of the move. For example, if the stock is trading at $5 per share and if it increases
in value by 10% it is only ½ dollars move. We would have to trade many shares in order
to make it worthwhile. If we trade too many shares (5000) we can’t be sure that we will
sell them on time. If the price of the stock is too high, for example $250, it tends too be
too dangerous too trade. Those kinds of stocks can move $10 per share in minutes. Even
the most experienced traders have trouble reacting on time when trading such stocks.
The stocks that you should be of interested in are those between $12 and $125 per share.
Stocks that we are going to trade have to:
• have an average daily volume of over 1,000,000 shares

• have Beta volatility coefficient of over 1.5
• have price between 12 and 125 dollars per share
• be traded on Nasdaq
Here is the list of a number of such shares that are popular among active traders at the
time of this writing:
Symbol Company name Beta Avg. Volume

CIEN CIENA Corporation 2.38 16,379,681
RIMM Research in Motion Limited 2.33 3,384,636
ALGX Allegiance Telecom, Inc. 1.69 2,030,545
TLAB Tellabs, Inc. 1.82 5,171,272
ADBE Adobe Systems Incorporated 2.01 3,941,727
AGIL Agile Software Corporation 2.42 1,000,000
ARBA Ariba, Inc. 2.20 12,164,181
BRCD Brocade Communications Systems, Inc 2.32 6,308,818
CHKP Check Point Software Ltd. 2.12 4,674,090
ITWO I2 Technologies, Inc 2.99 8,203,545
ORCL Oracle Corporation 2.08 45,943,228
VRTS VERITAS Software Corporation 2.55 10,621,545
ALTR Altera Corporation 2.46 10,069,318
AMCC Applied Micro Circuits Corporation 2.63 16,195,863
BRCM Broadcom Corporation 2.43 10,894,272
INTC Intel Corporation 1.72 53,436,864
AOL AMERICA ONLINE INC 1.70 16,207,590
YHOO Yahoo! Inc. 2.14 16,787,000
CSCO Cisco Systems, Inc. 2.04 55,700,044
JNPR Juniper Networks, Inc 2.51 15,574,863
SUNW Sun Microsystems, Inc 2.16 39,503,000
NTAP Network Appliance, Inc. 2.78 10,925,363
CTXS Citrix Systems, Inc 2.12 4,831,090
SEBL Siebel Systems, Inc 2.54 10,805,363
CMVT Comverse Technology, Inc 2.04 3,239,454
EXTR Extreme Networks, Inc 2,61 7,236,700
EMLX Emulex Corporation 2.46 4,328,363
JDSU JDS Uniphase Corporation 2.66 31,992,590
There are many other stocks that will satisfy this criteria and you may add them to the
list as you please. Every two weeks or so you should check if the stocks on the list still
satisfy the criteria. The best places to check it are:
Go to Investor Tools and click on Stock Screening. You can then customize information
as you please. For our purposes, you should enter the price between 12 and 125 and Beta
factor of over 1.5
http://www.yahoo.com
Go to Finance/Quotes and enter the symbol of the stock. You can get very detailed
information about any stock and specifically for our purposes about average daily
volume.
http://www.globeinvestor.com
Another excellent source of stock quotes, market indexes, reports etc.…
http://cnnfn.cnn.com
Since it would be nearly impossible for a novice trader to monitor all of the stocks on
the above list we will create two shorter watchlists. The lists should consist of fourteen
stocks from specific sectors. Three sectors that I use for trading, due to many trading
opportunities and their mutual dependence, are software, networking and semiconductors.
We will use those two watch lists for our examples thorough this chapter. If there is some
other sector that you would prefer to trade it is very simple for you to create your own
watch list. In each list we will put seven stocks that tend to closely follow each other.
List1 List2
CSCO ITWO
JNPR VRTS
CIEN CHKP
NTAP ORCL
BRCD BRCM
EXTR ADBE
EMLX SEBL
We now need to enter these stocks into the two separate portfolios on Medved Quote
Tracker as well as Interactive Brokers Traders WorkStation TWS that will serve as our
trading platform for this course.
Figure 10.3 shows portfolio List1 on the QuoteTracker as well as TWS.
Figure 10.3
In order to create new portfolio on Quote Tracker you need to go to the Portfolio and
then edit portfolios/alerts and then enter the name of portfolio (in our case List1 and
List2) and enter the stock symbols. Since I can’t know in advance which online broker
and trading platform you will be using, I will not discuss TWS in much detail. I will
assume that you are using a trading platform that lets you create portfolios and enter
market, limit or stop orders.
The only other software that we will use in this chapter is Qcharts because it
provides Nasdaq Level II book and Time & Sales Window. It will make no difference if
you are using some other charting software as long as it is real time and provides Level II
and T&S Window. If you are not yet ready to spend money for such software, you can
use Quote Tracker’s intraday real time chart. Just remember that you will be
handicapped for the lack of Level II and T&S window. As I have already mentioned,
Nasdaq Level II is getting overused by traders, and it is not as powerful trading tool as it
used to be.
You can create as many watchlists as you wish as long as the stocks inside them satisfy
your criteria and are closely related to each other. Some industries that are also of interest
to active traders are Biotechnology, Telephone Utilities and Internet Services. Why do
you need more than one watch list? On some days, some of the companies from your
lists may be scheduled to give earning reports, estimates or some other statements that
may greatly affect not only their stock price but the prices of the whole group of related
companies.
You need to be informed about when financial statements are scheduled. On those
days, avoid trading those stocks. Nasdaq stocks with Beta factor of over 1.5 are volatile
enough even on normal trading days. You won’t need any more volatility. This rule
applies only to beginning traders. When you get more experienced, you will be able to
recognize what kind of statements and news you can use to your trading advantage. You
should make your decision as to which list you will be watching on the night before the
trading day. At the same time you should have a closer look at the charts of the previous
trading day for each of the stocks from the watch list you have chosen. For example, if
you have decided that tomorrow you will trade List1 you would print out charts for each
of the stocks from List1 and determine Support and Resistance levels for each stock.
There is no clear definition of how to determine S/R levels. It is best done by observing
the previous day’s chart. Figure 10.4 is one-minute chart for Check Point Software Ltd.
Figure 10.4
From the figure above, we can tell that during the last three hours of trading for that
day, support was established at around 118 with the formation of a double bottom chart
pattern. Resistance was established at around 121 ½ with the formation of head and
shoulders chart pattern. Why are we using only last three hours of trading instead of the
whole trading day? We do this because the stocks we will trade are very volatile and what
used to be support at 10am usually is not support at 330pm. As you can see in figure
10.4, support is not exactly at 118 and resistance is not exactly at 121 ½. You will always
want to round S/R levels to the closest ½ with stocks of over 75 in value and to the
closest ¼ with stocks of less than 75 in value. It is also very useful to have those chart
printouts handy when you are trading because you can gain better understanding of how
certain stocks behave in different situations.
After you have decided which group of stocks you will trade, you’ll want to decide
which specific stocks to trade that day. This is done in the pre-market and early market
hours (830am – 950am). During this period, one of the stocks from the group usually acts
as a leader. To find out which stock is the leader, observe real time charts for all of the
stocks from the group in order.
In the figure 10.5 we will observe pre-market and early market trading for the six stocks
from the watchlist List2.
Figure 10.5
First you will need to establish the leader. In the example above, we can conclude that the
leader is SEBL. This is because it was the first one to start to decline and the first one to
start the recovery. After you have established the leader, you can choose the two stocks
that are the closest followers. In the example above, the closest follower is CHKP and the
second closest follower is ORCL. Those are the two stocks that we will be trading. We
will not trade the leader. This method is not 100% certain but it is one of the factors that
will give us advantage in the long run.
Figure 10.6.
Figure 10.6. Shows us charts for the same stocks more than 3 hours later. We can observe
that they are moving in a very similar fashion.
10.2. When To Enter The Trade?
After we have established the leader of the group and the two closest followers,
we have now decided which stocks to trade. Using the charts from the previous trading
day, we have seen the support and resistance levels for the last four hours of the trading.
We will use those two values as one of the tools that will give us better understanding of
future price behavior. We will now set our screens as shown on Figure 10.7.
Figure 10.7
On the first screen we will place Quote Tracker portfolio together with Nasdaq
Composite and Nasdaq Trin Indexes. We will also place real time intraday charts for the
leader stock and the two closest followers that we have previously established. We will
also draw the trendlines for each of the stocks. On the second screen, we will place our
trading platform. (In this case, Interactive Brokers TWS.) Below the TWS we will open
Qcharts real time candlestick chart for the follower that has the best chances to be traded
first. We will also open Time and Sales Window and Nasdaq Level II for the same stock.
TA tools that we will put on the real time chart are: Volume, Bollinger Bands, RSI and 4
and 12 minute EMA lines.
Figure 10.8 and Figure 10.9 show screen1 and screen2 respectively in bigger format.
Figure 10.8
Figure 10.9
Now it’s time to determine how to choose exact moment when we will enter the trade.
We also need to decide how many stocks we will buy or short sell. Let’s review the TA
tools that we have at your disposal:
♦ Nasdaq Trin Index

♦ Nasdaq Composite Index
♦ Real Time candlestick chart for the stock we are trading
♦ Volume
♦ Trendlines
♦ 12 minute and 4 minute Exponential Moving Averages EMA’s
♦ 20,2 Bollinger Bands
♦ Relative Strength Index RSI(14)
♦ Nasdaq Level II
♦ Time and Sales Window
♦ Support and Resistance Levels from the previous trading day
♦ Real Time chart for the leader
♦ Freedom/choice not to take the trade
The first tool to look at is the Nasdaq TRIN Index. TRIN plays an important role in
our trading strategy. If the Nasdaq Trin is over 1, we will never enter the trade on the
long side and if it is under 0.5 we will never enter the trade on the short side. If the
Nasdaq Trin is between 0.65 and 0.85 it will not influence our trading decision. With this
we have established our first trading rule:
Trin > 1 --- never go long, very positive short sign

Trin < 0.5 --- never go short, very positive long sign
0.65 < Trin < 0.85 --- don’t pay attention to it
0.5 < Trin < 0.65 --- positive long sign
0.85 < Trin < 1 --- positive short sign
In order to make the trading strategy easier to understand, I will try to simulate the
thought process that leads to the trading decision. We will assume that our monitors have
been set up as shown in the Figure 10.7. If you have only one monitor you will have to
jump between the screens.
First we observe the leader. We are looking for the following signs:
Bullish signs
Increase in positive volume (closing price higher than opening price for the chart
period)
Price bouncing off the support level or moving through the resistance level
Prices bouncing off a trendline after declining or moving through the trendline if
rising
12 minute EMA about to cross 4 minute EMA from above to below
Easily recognizable bullish chart pattern is being formed
Price approaching upper Bollinger Band
RSI is 70 or above
Bearish signs
Increase in negative volume (closing price lower than opening price for the chart
period)
Price bouncing off the resistance level or falling through the support level
Price bouncing off trendline after advancing or falling through the trendline if
declining
12 minute EMA about to cross 4 minute EMA from below to above
Easily recognizable bearish chart pattern is being formed
Price approaching lower Bollinger Band
RSI is 30 or below
After you have spotted 4 or more bullish or bearish signals, you will start to observe
the two followers in order to recognize which one is the better trading candidate. You'll
want to observe them quickly to determine which one has more of the signals mentioned
above. Once we have established which one of the two we will attempt to trade, we now
need to completely turn our attention to the trading candidate.
In addition to the trading signal tools that we have already mentioned we will add the
following tools:
Nasdaq Level II Window

Time and Sales Window
Candlestick chart patterns
All of the technical tools that we have at our disposal will not carry equal weight when
we are making a trading decision.
In order to make your trading decisions become as mechanical as possible, I have
developed a table that assigns different values to the different trading tools. Your trading
decisions need to be made very quickly. Take some time to practice until you master this
strategy.
Entering on the long side (buying)

Nasdaq Trin Index < 0.5 ……………………….. 10 points
0.5 < Nasdaq Trin Index < 0.65 ………………….. 6 points
Nasdaq Composite Index moving up ……………. 6 points
Increasing positive Volume ………………………. 8 points
Price bouncing off the support level
or moving through the resistance level …………. 8 points
Price bouncing off trendline after declining
or moving through the trendline if rising ………. 8 points
12 minute EMA about to cross 4 minute
EMA from above to below ………………………. 8 points
Easily recognizable bullish chart pattern
is being formed …………………………………… 8 points
Price approaching upper Bollinger Band ……… 6 points
RSI is 70 or above ………………………………... 6 points
Bullish candlestick pattern ………………………. 4 points
Counter clockwise movement on the
Nasdaq Level II, noticably more buyers than
Sellers ……………………………………………… 6 points
Orders that are executed at ask or above dominating
The Time and Sales Window, green color ……… 6 points
We will enter the trade if the current score is 50 or more.

Entering on the short side (short selling)
Nasdaq Trin Index > 1 ……………………………. 10 points
0.85 < Nasdaq Trin Index < 1 ……………………… 6 points
Nasdaq Composite Index moving down …………... 6 points
Increasing negative Volume ………………………. 8 points
Price bouncing off the resistance level
or moving through the support level ……………... 8 points
Price bouncing off trendline after rising
or moving through the trendline if declining …….. 8 points
12 minute EMA about to cross 4 minute
EMA from below to above …………………………. 8 points
Easily recognizable bearish chart pattern
is being formed …………………………………….. 8 points
Price approaching lower Bollinger Band …………. 6 points
RSI is 30 or below …………………………………… 6 points
Bearish candlestick pattern ………………………... 4 points
Clockwise movement on the
Nasdaq Level II, noticably more sellers than
buyers ……………………………………………….. 6 points
Orders that are executed at bid or below dominating
The Time and Sales Window, red color …………… 6 points
We will enter the trade if the score is 50 or more.
What kind of order should you use to enter the trade?
Before you act, it is important to remember the consequences of your action. The
only negative consequence you may get from not entering a trade is just that; you haven’t
entered a trade! It is better to miss a trading opportunity than to have your order filled at a
price that is far from your entry target price. You’ll want the opportunity to make money,
not lose it. If you feel the opportunity gap is closing too quickly, simply wait for the next
opportunity to come along. It’s worth it to save your money than risk losing it because
you’ve got an itchy “trigger finger”. To get into the trade, we will always use Limit
orders.
Next we need to know how many shares of any given company we would buy or short
sell. If you are a beginning trader, start with very small amounts. This applies even if you
have substantial trading capital. You need time to perfect your trading techniques. It’s
much better to preserve your capital for later on, when you will be more formidable
market participant. For the stocks 15 – 50 $ in price you can buy up to 100 shares per
trade. For the stocks 50 – 80 $ in price you can buy up to 60 shares per trade. For the
stocks 80 – 125 $ per trade you can buy up to 40 shares per trade.
If you are more experienced trader you should apply the following rule when deciding
how many shares to buy: Always leave at least 30% of your trading capital unused.
10.3. When to get out of the trade?
“Let your profits run, cut your losses short.” Sounds easy, doesn’t it? This is a
blanket statement used when trading. It’s actually much harder than most beginning
traders realize. The majority of successful traders will tell you that proper trade
management, once you are in the trade, is the single most important factor that will either
break you or make you in the active trading business.
In order to understand the essential timing to strike and get out, we’ll define some rules
that will help you make this last trading element as simple as possible.
10.3.1. Cut Your Losses Short
If a price has started moving in the direction that is opposite to what you have
expected, and your pre-determined stop loss has been reached, it’s time to get out.
Because our strategy is short-term oriented, our stop loss will have relatively small value.
This will protect us against severe losses in any given trade.
Remember: When you suffer a loss of 50% of your capital you now need to make
a profit of 100% just to break even. For example, if you have started with $5,000 and lost
50% of it now you have $2,500. You now need to make a profit of 100% just to get to
your starting level.
From this example, you see it is much easier to lose money than to make it back.
Your initial stop loss should be set at approximately 2% of the money that you have in
the trade. For example, if you have purchased 100 shares at $50 per share you have
$5,000 in the trade. Since you are trading on margin you have $2,500 of your capital in
the trade. Your stop loss should be ½ point. To make things simpler, we will make a table
with predetermined initial stop loss values.
Share price Stop loss

12 - 40 1/4
40 - 60 1/2
60 - 100 3/4
100 - 125 1
You can’t cut corners with the stop loss rule. It needs to be followed every single
time without exception. Failure to follow the stop loss rule is the number one reason for
failure among beginning traders. It is true that sometimes price will turn around just after
you get out, but there is no way to know this in advance. This is similar to getting into a
battle, knowing you’re losing, but somehow believing that luck is on your side and a
comeback is in order. It isn’t valiant or heroic to stay in a battle that you are losing. The
logical recourse is to save as much as you can, and return later, when your odds are
stronger.
It only takes a few stubborn incidents to entirely devastate your initial trading
capital.
Reaching your stop loss should not be your only reason to get out of trade without
profit. If a battle is at a standstill, it is better to give up for the night and not keep pushing
forward. Pushing forward wears a soldier out, and if nothing is happening, there may be
something you haven’t prepared for in the works.
If after you have entered a trade, you realize the stock you are trading is moving
nowhere and the reasons you decided to trade are starting to disappear, you should also
get out. For example, if you got in the trade with the score of over 50 and the price didn’t
make significant moves for a while you should calculate your score again.
If it is now at 30 or less you should get out of the trade and look for another
trading opportunity. Always remember that one of your most powerful tools is your
ability not to be in the trade, if there are no valid reasons for it.
10.3.2. Let your profits run
Once you are in the trade and your stock has started moving in your direction, you
need to extract as much profit as possible. Not being able to do so will make you a losing
trader in the long run. How can a trader lose if he only takes small profits at a time? Profit
is profit, isn’t it? Not exactly… Profit of $100 is not the same as a profit of $250. If such
profits are followed by two losses of $75 each, profit of $100 will become $50 loss, while
profit of $250 will become $100 win. Do you get my point? Profits are always followed
by losses and if the profits are small they will not make up for the losses that will
eventually and surely follow.
However, becoming too greedy can turn a small profit into a loss. This will make you
lose money in the long run.
The best solution to resolving these conflicts is to use trailing stop loss.
As the name says, trailing stop loss follows the stock price that is moving in your
direction. For example, let’s say that we have bought 100 shares of company ABCD at
$50 per share. We will automatically put our stop loss at 49½. The price starts to move
upwards and reaches $51. At that point we don’t want in any case to get out of this trade
without profit. We will now move our stop loss at $50 ½, meaning that if the price turns
against us we will hit sell order once the price hits $50 ½ in order to make at least some
profit from the trade. If the price continues to move in the positive direction we will keep
adjusting our stop loss accordingly. If the price hits $51 ½ we will move our stop loss to
$51.
Once we are more deeply “in the money” we can start using our stop loss more
liberally and give the stock price more breathing space. In our example, this means that if
the price hits $53, we could put the stop loss at $52. We are able to do this because we
have already made a decent profit and can afford more risk. We can also do this when the
stock is in a clear upward trend. Small change in the stock’s direction can mean
temporary profit taking, which will be followed by movement in our direction.
What type of orders should you use when exiting the trade?
When entering a trade I would recommend using a limit order because you can afford not
to take a trade at a price that doesn’t meet your standards. When exiting a trade the
opposite is true.
You can’t afford to stay in a bad trade. Therefore, when exiting we will use market
orders, which will get us out of the trade quickly, even though it will cost us an
occasional 1/16 or 1/8.
10.4. Paper Trading - Strategy Testing
All soldiers in war require extensive training, and many armies use mock battles and
other training tactics to make sure they are up to par. The same is true when you enter
daytrading.
If you don’t already have some trading experience, you shouldn’t just jump in into
trading with real money. You will still have many things to learn, even if you think
otherwise. You need to get comfortable with placing buy and sell orders, the idea of short
selling (some people have difficulty contemplating the idea that they can profit from the
decline in the stock price) and trading platform itself. When you are trading for real you
can’t afford to be occupied with any kind of trivial problems. But even those trivial
problems take time to master and should not be underestimated.
Paper trading is a term used to describe the simulation of trading. You can use it
by choosing your entry and exit positions and recording them on the piece of paper. Later
on, you add commissions and spread and calculate how much have you won or lost for
that day.
Most of the online brokers (including Interactive Brokers that we have used for
our examples) provide software that simulates trading to their customers. You should
consistently win for at least 10 trading sessions of paper trading before attempting to
trade for real.
Once you have tried the simulation and found a modicum of success, you are
ready to trade for the long haul. Be careful, watch your finances wisely, and don’t be
afraid to pull out of a trade if you think you might be losing money.
Trading shouldn’t be a gamble. With the right tools, ammunition, scouting and
experience, you’ll be able to make your trading endeavor a success.
Chapter 11
Trading Strategy II – Swing Trading - Short Term

Trading
Another viable trading approach, especially for those of you who have day jobs that
prevent you from closely monitoring your positions during Market hours is called Short-
Term Trading or Swing trading. This is a way of trading in which a trader is holding
his/her positions for a few days/weeks. The most fundamental difference between swing
trading and day Trading is the fact that swing/position traders carry their positions
overnight. Swing trader is trying to capitalize on larger swings in the stock price.
Sometimes swing trader’s time frame is one day, sometimes it is a few days and in the
exceptional situations even a few weeks. Similarity between the two strategies is that in
both cases trader can profit from both rise and decline in the stock price.
As in the previous chapter we will need to make a checklist of our tools and supplies
before we go any further:
- Are you willing to invest your time, money and effort in an endeavor in which the
success is not guaranteed? Are you comfortable with and aware of the fact that the
chances of failure are high?
- Do you have a comfortable, basic knowledge of the Stock Market in general? Are
you familiar with key concepts and terms as related to stock trading?
- Have you opened an account with an online broker that meets criteria for short
term trading as outlined in chapter 4? Have you set aside the amount of money
that you are willing to risk?
- Are you set up with the necessary hardware and Internet connection as outlined
in chapter 5 and 6 ? As it was already mentioned one monitor is all you need for
swing – short term trading.
- Have you gained a solid understanding of key Technical Analysis concepts as

they are explained in chapter 8?
Again, as in the previous chapter we will need to answer the following questions:
Which stocks to trade?
We will need to set a criteria for choosing stocks that we will trade. The criteria will be
based on assumption of short term, medium risk level trading.
When to enter a trade?
We will need to set standards to choose an entry moment either on the long or on the
short side. The entry moment has to be the moment that has the highest probability that
the price will move in our direction.
When to get out of the trade?
We will also need to establish a set of rules that will help us to get out of the trade in such
manner that will maximize our profits from the winning trade and that will minimize our
losses from the losing trade.
11.1. Which Stocks To Trade?
In previous chapter when we were discussing the day trading strategy we have focused
on highly liquid and highly volatile Nasdaq stocks. It was important that stocks were
traded on the Nasdaq because Nasdaq provides greater transparency through it’s Level II
feature and at the same time there is no actual trading floor which makes it equally
accessible to all traders.
In swing trading we are after larger price swings (5-15% in the value of the stock) and
although we are still concerned with getting the best possible price at any given time it is
not of crucial importance as it was in day trading. In our swing trading strategy we will
focus both on Nasdaq and NYSE stocks. Stocks that we will focus on will have following
qualities:
1. Liquidity
Liquidity is most accurately measured with volume. Higher the average daily volume
is, higher the liquidity. High liquidity ensures that at the moment when we want to enter
or what is even more important exit our position, there will be buyers/sellers on the other
side of the trade. In our day trading strategy we have set our minimum average of shares
traded at 1,000,000 because in day trading we have to get in and out of the trade several
times per day. In swing trading liquidity doesn’t have to be necessarily that high. We will
concentrate on stocks that have the average daily volume higher than 250,000 shares as
that will give us plenty of opportunities to get out of our positions in timely fashion.
3. Volatility
Volatility is measured with beta coefficient. This is the measure of the risk associated
with any given security in the market. Beta coefficient is calculated by dividing a given
stock’s historical returns by historical returns of the stock market as a whole. Higher the
beta coefficient is, higher the volatility is. This is very important because it ensures that
the stock that you are trading will provide you with the high number of trading
opportunities. In order to understand the importance of volatility as related to position
trading lets have a look at Figures 11.1 and 11.2.
Figure 11.1.
Figure 11.2.
Figure 11.1. is a 60-minute chart for Ford Motor Company (F) for a period from
March 6, to March 22, 2002. As we can see during that period there was a very limited
number of trading opportunities for a swing/position trader. The most that one could have
hoped for is to catch ¼ to ½ point moves in periods of several days. If we were trading
1000 shares we would be looking for profits of 200-300 dollars in couple of weeks
periods. That is hardly enough to make it a good trading candidate. Ford Motor Company
is not suited for short term trading and for position trading. At the time of this writing
Beta coefficient for Ford was 1.00.
Figure 11.2. is a 60-minute chart for Juniper Networks (JNPR) for the same period.
As we can see from the chart there were several occasions in which it was possible for a
skilled trader to make decent profits. The price was moving 2 to 3 points in periods of
several days. If we were trading 1000 shares lots such moves could have translated into
2000-3000 dollars in periods of week or two. That makes Juniper Networks solid
candidate for position trading. At the time of this writing Beta coefficient for JNPR was
4.08.
The stocks that are suitable for swing trading are those that have Beta coefficient of 1.5
or more.
3. Price of the stock
Why is the stock price important when considering a trade? If the stock has a small
price, even a high percentage move in the price will translate into the relatively small
dollar value. For example, if the stock is trading at $5 per share and if it increases in
value by 10% it is only a $0.5 move. We would have to trade many shares in order to
make it worthwhile effort. If we trade too many shares we can’t be sure that at the time
when we want to sell them, there will be enough buyers on the other side. However, in
swing/position trading it makes more sense to carry larger amounts of stock, since we
will not be buying/selling as often as we would in day trading. If the price of the stock is
too high it tends to be too dangerous to trade. Those kinds of stocks can move 10 points
in the matter of minutes. Even the most experienced traders have trouble reacting on time
when trading such stocks.
Stocks that are of interest to the swing/position trader should have a price of $7 - $75 per
share.
Summary:
Stocks that are suitable for short term swing/position trading have to:
• have an average daily volume of over 250,000 shares

• have Beta volatility coefficient of over 1.5 and less than 3
• have price between $7 and $75 per share
• be traded on Nasdaq or NYSE
There are many, many stocks on Nasdaq and NYSE that would satisfy the criteria set
above. What we now need to do is to find a sector (biochemistry, internet, defense,
semiconductors, networking etc…) that we are most familiar with. You don’t have to be
any kind of expert in any of these fields, as you will see later in this chapter the strategy
that we will use is purely technical. However, being informed about the sector that you
are trading will not hurt you either. Some of the best places to get informed about the
sectors/stocks that you are planning to trade are:
http://www.nyse.com
http://www.globeinvestor.com
http://www.cnn.com
http://www.yahoo.com
For the purpose of this chapter/strategy we will now create our own list of stocks that
we will use to choose our trading candidates. The sector that we will choose in this case
will be Internet Sector. Of course, if you have more affinity toward some other group you
should go for it.
We will now go on http://money.cnn.com -> Markets & Stocks
In the bottom right corner there is “Market Tools” online tool. We will choose “Tech
Stocks” and then we will click on “Internet”.
We are then presented with the following list:
company level change last update

24/7 Media 0.24 0.00 5/28 9:37
@Home Network n/a n/a n/a
AOL Time Warner 18.90 -0.7 5/28 9:40
Amazon.com 19.36 -0.11 5/28 9:40
Ameritrade 5.69 0.09 5/28 9:40
Baltimore Technologies n/a n/a n/a
Beyond.com n/a n/a n/a
CMG Information Services 0.89 0.00 5/28 9:39
Charles Schwab 12.58 0.59 5/28 9:40
Check Point Software 17.91 -0.09 5/28 9:39
Cnet 3.30 0.04 5/28 9:40
CyberCash n/a n/a n/a
Cyberian Outpost n/a n/a n/a
DoubleClick 8.09 0.05 5/28 9:39
E*Trade n/a n/a n/a
EarthWeb n/a n/a n/a
Earthlink 6.94 -0.08 5/28 9:39
Ebay 56.90 -0.39 5/28 9:39
Egghead.com n/a n/a n/a
Exodus n/a n/a n/a
Infospace.com 1.01 0.04 5/28 9:39
Inktomi 2.03 0.03 5/28 9:39
Marketwatch.com 4.55 -0.25 5/28 9:30
NetManage 0.85 -0.04 5/28 9:36
Open Market n/a n/a n/a
Open Text 23.18 -1.13 5/28 9:40
PSINet n/a n/a n/a
Priceline.com 4.25 0.04 5/28 9:39
Prodigy n/a n/a n/a
Real Networks 8.64 -0.11 5/28 9:39
SportsLine USA 1.50 -0.05 5/28 9:32
TMP Worldwide 28.76 0.56 5/28 9:40
Terra Lycos 5.60 0.06 5/28 9:37
VeriSign 10.04 -0.04 5/28 9:40
Veritas 23.65 0.10 5/28 9:40
Verity 9.15 -0.02 5/28 9:37
Versant 1.05 -0.15 5/28 9:30
VocalTec 1.27 0.01 5/28 9:37
Yahoo! 16.89 -0.12 5/28 9:40
iVillage 1.90 0.02 5/28 9:34
As we can see from the list above there are 13 stocks with the price of $7 or more.
They are AOL Time Warner, Amazon.com, Charles Schwab, Check Point Software,
Double Click, Ebay, Open Text, Real Networks, TMP Worldwide, VeriSign, Veritas,
Verity and Yahoo!.
We will now enter those companies in www.nasdaq.com -> Fundamentals to find value
of BETA, and then we will enter them in http://finance.yahoo.com to find out average
daily volume.
NYSE:AOL 1.73 23,576,000

NASDAQ:AMZN 2.27 7,502,681
NSYE:SCH 2.35 4,426,181
NASDAQ:CHKP 2.79 7,931,636
NASDAQ:DCLK 2.11 1,628,363
NASDAQ:EBAY 2.63 5,890,500
NASDAQ:OTEX 1.44 147,090
NASDAQ:RNWK 3.14 948,500
NASDAQ:TMPW 2.46 2,603,818
NASDAQ:VRSN 2.95 9,510,500
NASDAQ:VRTS 3.12 12,619,136
NASDAQ:VRTY 2.14 452,590
NASDAQ:YHOO 2.64 9,575,863
Based on the criteria set earlier 1.5< Beta <3 and Average Volume > 500,000 there are 9
stocks left in our group : AOL, AMN, SCH, CHKP, DCLK, EBAY, TMPW, VRSN,
YHOO
We will now create Daily candlestick charts for those stocks and we will also draw
20 DAY Moving Average (blue line). For the purpose of this lesson we will be using
Qcharts charting software, however you are welcome to use any other software that you
prefer/have. Our goal is to find out if majority of stocks from our group is trading above
or below their 20 Day Moving Averages. If they are trading above the 20DMA we will
take that as a bullish sign for their sector and we will look to enter our trade on a long
side. If the majority of stocks from our group is trading below their 20DMA we will take
that as a bearish sign and we will look to enter our trade on a short side.
Here are the charts:
AOL
AMZN
SCH
CHKP
DCLK
EBAY
TMPW
VRSN
YHOO
From the figures above we can see that 6 out of 9 of the stocks from our group are
currently trading above their 20 Day Moving Average. We will take that as a sign that
Internet Sector is currently bullish and therefore we will look to enter our trade on the
long side.
We will now create a separate chart for each stock from our group. Instead of 1 Day
time interval that we have used in the charts above, we will now use 1 Hour time interval.
1 Hour time interval gives us better look at the movements in the stock price during past
2 – 3 weeks. We will enter the following values into our charting program:
Time Interval : 1 Hour

Chart Type : Candlestick
Volume
RSI (14)
Moving Average (4)
Moving Average (12)
Bollinger Bands (20,2)
We will also draw Support and Resistance lines as well as Trend lines. In our examples
Support is drawn in blue, Resistance in green and Trend lines in red color.
Please note that it takes time and practice to be able to draw accurate S/R lines as well as
Trend lines.
First lets have a look at the 3 companies that are trading below their 20D Moving
Average. As we can see from the charts below their upper trend line has a sharper
downward angle than their lower trend line’s upward angle. We will therefore exclude
those three stocks from our trading candidates group.
VSGN
CHKP
DCLK
That leaves us with 6 remaining stocks. AOL, AMZN, SCH, YHOO, EBAY, TMPW.
We now need to set the criteria for choosing our entry moment.
11.2. When to enter the trade?
AOL
AMZN
YHOO
EBAY
SCH
TMPW
Entering on the long side (buying)
Increasing positive Volume ………………………. 8 points

Price bouncing off the support level
or moving through the resistance level …………. 8 points
Price bouncing off trendline after declining
or moving through the trendline if rising ………. 8 points
12 hour EMA about to cross 4 hour
EMA from above to below ………………………. 8 points
Price is above 20D Moving Average…………….. 6 points
Easily recognizable bullish chart pattern
is being formed …………………………………… 8 points
Price approaching upper Bollinger Band ……… 6 points
RSI is 70 or above ………………………………... 6 points
Bullish candlestick pattern ………………………. 4 points
We will enter the trade if the current score is 36 or more.
Entering on the short side (short selling)

Increasing negative Volume ………………………. 8 points
Price bouncing off the resistance level
or moving through the support level ……………... 8 points
Price bouncing off trendline after rising
or moving through the trendline if declining …….. 8 points
12 hour EMA about to cross 4 hour
EMA from below to above …………………………. 8 points
Easily recognizable bearish chart pattern
is being formed …………………………………….. 8 points
Price is below 20D Moving Average………………… 6 points
Price approaching lower Bollinger Band …………. 6 points
RSI is 30 or below …………………………………… 6 points
Bearish candlestick pattern ………………………... 4 points
We will enter the trade if the score is 36 or more.

What kind of order should you use to enter the trade?
Before you act, it is important to remember the consequences of your action. The
only negative consequence you may get from not entering a trade is just that; you haven’t
entered a trade! It is better to miss a trading opportunity than to have your order filled at a
price that is far from your entry target price. You’ll want the opportunity to make money,
not lose it. If you feel the opportunity gap is closing too quickly, simply wait for the next
opportunity to come along. It’s worth it to save your money than risk losing it because
you’ve got an itchy “trigger finger”. To get into the trade, we will always use Limit
orders.
Next we need to know how many shares of any given company we would buy or short
sell. If you are a beginning trader, start with very small amounts. This applies even if you
have substantial trading capital. You need time to perfect your trading techniques. It’s
much better to preserve your capital for later on, when you will be more formidable
market participant. For the stocks 7 – 15 $ in price you can buy up to 200 shares per
trade. For the stocks 15 – 30 $ in price you can buy up to 150 shares per trade. For the
stocks 30 – 50 $ you can buy up to 100 shares per trade and for the stocks over $50 you
should buy not more than 50 shares per trade.
If you are more experienced trader you should apply the following rule when deciding
how many shares to buy: Always leave at least 30% of your trading capital unused.
11.3. When to get out of the trade?
“Let your profits run, cut your losses short.” Sounds easy, doesn’t it? This is a
blanket statement used when trading. It’s actually much harder than most beginning
traders realize. The majority of successful traders will tell you that proper trade
management, once you are in the trade, is the single most important factor that will either
break you or make you in the active trading business.
In order to understand the essential timing to strike and get out, we’ll define some rules
that will help you make this last trading element as simple as possible.
11.3.1. Cut Your Losses Short
If a price has started moving in the direction that is opposite to what you have
expected, and your pre-determined stop loss has been reached, it’s time to get out.
Remember: When you suffer a loss of 50% of your capital you now need to make a
profit of 100% just to break even. For example, if you have started with $5,000 and lost
50% of it now you have $2,500. You now need to make a profit of 100% just to get to
your starting level. From the above example you can see that it is much easier to lose
money than to make it back.
The main difference between day trading and swing/position trading strategy is the
place where you need to put your stop loss.
In day trading strategy your initial stop loss should be set at approximately 2% of the
money that you have in the trade. If you would put such tight stop loss in your swing
trade you would get stopped out most of the time. Therefore you would put your stop loss
at approximately 8% of the money that you have in the trade. That should be tight enough
to protect you against devastating losses and on the other side it will not have you
stopped out too often. For example, if you have purchased 100 shares at $50 per share
you have $5,000 in the trade. Since you are trading on margin you have $2,500 of your
capital in the trade. Your stop loss should be 2.5 points. To make things simpler, we will
make a table with predetermined initial stop loss values.
Share price Stop loss

7 - 15 0.4
15 - 30 1
30 - 50 1.6
50 - 75 2.5
You can not cut corners with the stop loss rule. It needs to be followed every
single time without exception. Failure to follow the stop loss rule is the number one
reason for failure among beginning traders. It is true that sometimes price will turn
around just after you get out, but there is no way to know this in advance. This is similar
to getting into a battle, knowing you’re losing, but somehow believing that luck is on
your side and a comeback is in order. It isn’t valiant or heroic to stay in a battle that you
are losing. The logical recourse is to save as much as you can, and return later, when your
odds are stronger.
It only takes a few stubborn incidents to entirely devastate your initial trading
capital.
Reaching your stop loss should not be your only reason to get out of trade without
profit. If a battle is at a standstill, it is better to give up for the night and not keep pushing
forward. Pushing forward wears a soldier out, and if nothing is happening, there may be
something you haven’t prepared for in the works.
If after you have entered a trade, you realize the stock you are trading is moving
nowhere and the reasons you decided to trade are starting to disappear, you should also
get out. For example, if you got in the trade with the score of over 36 and the price didn’t
make significant moves for a while you should calculate your score again.
If it is now at 20 or less you should get out of the trade and look for another
trading opportunity. Always remember that one of your most powerful tools is your
ability not to be in the trade if there are no valid reasons for it.
11.3.2. Let your profits run
Once you are in the trade and your stock has started moving in your direction, you
need to extract as much profit as possible. Not being able to do so will make you a losing
trader in the long run. How can a trader lose if he only takes small profits at a time? Profit
is profit, isn’t it? Not exactly… Profit of $100 is not the same as a profit of $250. If such
profits are followed by two losses of $75 each, profit of $100 will become $50 loss, while
profit of $250 will become $100 win. Do you get my point? Profits are always followed
by losses and if the profits are small they will not make up for the losses that will
eventually and surely follow.
However, becoming too greedy can turn a small profit into a loss. This will make you
lose money in the long run.
The best solution to resolving these conflicts is to use trailing stop loss.
As the name says, trailing stop loss follows the stock price that is moving in your
direction. For example, let’s say that we have bought 100 shares of company ABCD at
$50 per share. We will automatically put our stop loss at 47.5. The price starts to move
upwards and reaches $54. At that point we don’t want in any case to get out of this trade
without profit. We will now move our stop loss at $51.5 , meaning that if the price turns
against us we will hit sell order once the price hits $51.5 in order to make at least some
profit from the trade. If the price continues to move in the positive direction we will keep
adjusting our stop loss accordingly. If the price hits $55 we will move our stop loss to
$52.5.
Once we are more deeply “in the money” we can start using our stop loss more
liberally and give the stock price more breathing space. In our example, this means that if
the price hits $56, we could put the stop loss at $53. We are able to do this because we
have already made a decent profit and can afford more risk. We can also do this when the
stock is in a clear upward trend. Small change in the stock’s direction can mean
temporary profit taking, which will be followed by movement in our direction.
What type of orders should you use when exiting the trade?
When entering a trade I would recommend using a limit order because you can afford not
to take a trade at a price that doesn’t meet your standards. When exiting a trade the
opposite is true.
You can’t afford to stay in a bad trade. Therefore, when exiting we will use market
orders, which will get us out of the trade quickly, even though it will cost us an
occasional 0.1 or 0.2 points.

Online Trading

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Online Trading

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ONLINE TRADING

If you do fail who is to blame?

Bad luck? I don’t think so.

Trading success has nothing to do with luck.

Copyright © 2001-2002 All rights reserved.

1.1. Understanding Trading Dynamics ………………………………………………… 7

1.2. Trading vs. Investing …………………………………………………………………… 9

1.3. Trading vs. Gambling …………………………………………………………………. 10

2. 8 Steps That Will “Jump Start” Your Trading Career ………………………………… 12

2.1. Step 1: Understand How The Stock Market Works ………………………… 13

2.2. Step 2: Carefully Choose An Online Broker …………………………………… 13

2.3. Step 3: Use Appropriate Computer Tools ……………………………………. 14

2.4. Step 4: Get A Superior Internet Connection …………………………………. 14

2.5. Step 5: Secure An Adequate Amount Of Trading Capital ……………… 14

2.6. Step 6: Learn How To Properly Use TA Tools …………………………….… 14

2.7. Step 7: Choose Trading Software That Meets Your Needs…………….. 15

2.8. Step 8: Learn How To Utilize A Proven Trading Strategy……………… 15

3. Stock Market Basics ……………………………………………………………………………. 16

3.1. What Is A Stock Exchange? ………………………………………………………. 16

3.2. Understanding Exchange Orders ………………………………………………. 17

3.3. The New York Stock Exchange ………………………………………………… 18

3.4. Nasdaq …………………………………………………………………………………… 20

3.4.1. Small Order Execution System SOES ………………………………… 21

3.4.2. SelectNet ……………………………………………………………………….. 22

3.5. Electronic Communication Networks ECN’s ……………………………… 22

3.5.1. Island (ISLD) ………………………………………………………………….. 24

3.5.2. Archipelago (ARCA) ………………………………………………………… 25

3.5.3. InstiNet (INCA) ………………………………………………………………. 26

3.6. Stock Market Indexes …………………………………………………………….. 27

3.6.1. Dow Jones Industrial Average DJIA ………………………………… 27

3.6.2. Standard & Poors 500 Index SPX ……………………………………. 29

3.6.3. Nasdaq Composite Index COMP …………………………………….. 29

4. Choosing An Online Broker ……………………………………………………………… 33

4.1. Online Brokers ……………………………………………………………………. 33

4.2. 8 Questions To Ask When Choosing An Online Broker …………… 34

4.2.1. Is The System They Use Reliable? ………………………. 34

4.2.2. What Are Their Commissions? ……………………………… 35

4.2.3. How Fast Are Their Executions? ………………………….. 35

4.2.4. Do They Provide Direct Access To

Different Exchanges And ECN’s? …………………………. 36

4.2.5. Do They Provide Reliable, Real-Time Quotes? …….… 36

4.2.6. Do They Provide Free Quote

And Charting Software? ……………………………………… 37

4.2.7. How Is Their Technical Support

4.2.8. What Is Their Account Minimum? ………………………… 38

4.3. A List Of Brokers Are Suitable For Active Trading ………………… 38

5. Choosing The Right Hardware And Equipment ………………………………… 50

5.2. What Kind Of Computer Do You Need? ……………………………….. 50

5.3. How Many Monitors Do You Need? ……………………………………… 51

5.4. What Kind Of Operating System Should You Use? ……………….. 53

6. Internet Connection ……………………………………………………………………… 55

6.2. Cable Connection ……………………………………………………………… 55

6.3. DSL Connection ………………………………………………………………… 56

7. Trading Capital ……………………………………………………………………………. 58

7.2. How To Obtain Startup Capital? ………………………………………… 60

8. Technical Analysis …………………………………………………………………….… 61

8.1. Why Does Technical Analysis Work? ……………………………………. 61

8.2. Price Chart ……………………………………………………………………….. 63

8.4. Understanding Exponential Moving Average EMA …………………. 66

8.5. Using Nasdaq Level II ………………………………………………………… 68

8.6. Time And Sales Window ……………………………………………………… 70

8.7. Nasdaq TRIN ……………………………………………………………………… 71

8.8. Relative Strength Index RSI ………………………………………………… 72