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“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
Introduction ………………………………………………………………………………………….. 5 1.1. Understanding Trading Dynamics ………………………………………………… 7 1.2. Trading vs. Investing …………………………………………………………………… 9 1.3. Trading vs. Gambling …………………………………………………………………. 10
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
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. 4.2.2. 4.2.3. 4.2.4. Is The System They Use Reliable? ………………………. 34 What Are Their Commissions? ……………………………… 35 How Fast Are Their Executions? ………………………….. 35 Do They Provide Direct Access To Different Exchanges And ECN’s? …………………………. 36 4.2.5. 4.2.6. Do They Provide Reliable, Real-Time Quotes? …….… 36 Do They Provide Free Quote And Charting Software? ……………………………………… 37 4.2.7. How Is Their Technical Support And Phone Service? ……………………………………………. 37 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. 6. What Kind Of Operating System Should You Use? ……………….. 53
Internet Connection ……………………………………………………………………… 55 6.2. Cable Connection ……………………………………………………………… 55 6.3. DSL Connection ………………………………………………………………… 56
Trading Capital ……………………………………………………………………………. 58 7.2. How Much Trading Capital You Should Start With? ……………… 58 7.2. How To Obtain Startup Capital? ………………………………………… 60
Technical Analysis …………………………………………………………………….… 61 8.1. Why Does Technical Analysis Work? ……………………………………. 61 8.2. Price Chart ……………………………………………………………………….. 63
Rounding Tops And Bottoms ……………………………….. 91 10. 66 8.4. Paper trading …………………………………………………………………….22.214.171.124.1. 78 8.3.2. Medved Quote Tracker …………………………………………………….8.3.7. When to get out of the trade? …………………………………………….10. What to trade? …………………………………………………………………… 92 10. Trendlines ………………………………………………………… 82 8.3.. Head And Shoulders ………………………………………….2..4.112 11.11.116 11.3. 79 8. Trading Strategy II Swing Trading – Short-Term Trading……………….11. Let your profits run ……………………………………………….2. Nasdaq TRIN ……………………………………………………………………… 71 8.2. Time And Sales Window ……………………………………………………… 70 8.3. 109 10. Candlestick Patterns ………………………………………………………… 83 9..4.11. 76 8. 9.2. When to enter the trade? …………………………………………………. Using Nasdaq Level II ………………………………………………………… 68 8. Understanding Support And Resistance …………………………….1. 114 11. Which stocks to trade? ……………………………………………………. Trading Software ………………………………………………………………………… 84 9.. Double Tops And Bottoms …………………………………. 9.128 . Chart Patterns And Trendlines …………………………………………. Cut your losses short …………………………………………… 109 10.. 10.3.111 10. 80 8. 85 Qcharts ……………………………………………………………………………88 Other Software …………………………………………………………………89 Trading Strategy …………………………………………………………………………. Volume ……………………………………………………………………………… 65 8..1.11.9. Relative Strength Index RSI ………………………………………………… 72 126.96.36.199. 78 8. Using Bollinger Bands ………………………………………………………… 74 8. Understanding Exponential Moving Average EMA …………………. When to enter the trade? …………………………………………………… 101 10.
134 11. Cut your losses short …………………………………….188.8.131.52. When to exit the trade?………………………………………………. Let your profits run…………………………………………135 .3.133 11.11.
and strategies effectively. The most important tool that you will need to get by in the stock trading world will be your brain. Without the proper tools. Stock trading is not a skill that people are born with. but the payoff can be very rewarding. Once you have acquired these skills and learned how to employ them successfully. . One of the benefits of becoming a stock trader is independence. your chances of success are small. scouting devices. you’ll be able to generate an exciting new means of income. this course will greatly improve your chances of success and it will transform you into a competent stock market combatant.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. and the fact that you are making an adequate living while depending on nobody else will be the true measures of your success. Whether you’re a beginner or a more experienced trader. Successful traders learn to use their tools. skills. Successful stock traders only work for themselves. Entering the stock trading field may be similar to entering a war zone. This takes time and effort. Your profits. ammunition and strategy.
When you don’t understand the market and don’t have a set strategy. That’s fine. but it’s also not as hard as you may think. If you went by their standards. 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 hardearned money. A serious business that needs to be seriously approached. there are huge drawbacks if you jump in without the proper understanding and training. The reason for such high percentage of losers is that most of those traders don’t take stock trading for what it is. Maybe after several months you’ll decide that you are not cut for trading or that you are not making enough money.000 and expect to lose money for several months. 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.Because stock trading is a skill. you’ll have more experience and knowledge in future trading endeavors. But there is no reason for you to lose your hard-earned money just to find out that trading is not for you. The actual number of novice traders who can relate to that kind of experience is ninety five percent. stock trading can become a very painful and expensive experience. Many books on the subject of active stock trading say that it is normal for beginners to lose money at first. The road to trading success is not easy. not a talent. 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. Broadway Trading tells beginners that you should start with at least $75. .
Choose a proven strategy that suits your personality. 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. 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.1. They may think that even if they randomly choose stocks to buy at any given point in time. several times a week to several times a day.) 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. this generalization misleads many people to believe that the odds are always on their side. on the average. market tendency is upward. profitably. they will make a profit this way. This might work for people who buy stocks only few times a year and hold onto them. Become proficient in implementing the chosen strategy Don’t be afraid to win. (This may sound strange but most people are afraid of success. . The odds for randomly-generated success decrease in this way.It can all be summed up in the following phrases: • • • • Equip yourself with the right knowledge and tools. active traders may experience the opposite effect. stock trading sounds easy. However. Understanding Trading Dynamics From a historical perspective. The general direction of the stock market has traditionally been upwardly mobile. Unfortunately. weeks) and to implement it you don’t have to sit in front of computer during market hours. Fear of success is one of the most common reasons for the lack of it. 1. They also believe that on the average. Active traders make trades.
For example.50. Many traders will reduce number of trades after initial losses. similar to playing random lottery numbers. you lose. This story is little exaggerated for illustrative purposes. and some days they will stay out of the market completely. You are left with loss of $156. you also have to pay commission of approximately $10 when you buy and $10 when you sell which is $20. you are forced to rely only on the stock market’s upward trend. Those 50 trading days will become 100 trading days or . Now.5.5. On top of this difference. which equals $ 12. After 50 trading days like this one you will be left with about 20% of your starting capital or approximately $2000. that is only in case if you don’t trade that day. you are already down 1/8 times 100. that is the advantage that historical upward trend of stock market gives you. subtract those $6 profit. you will get $99 7/8. 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. but you get the idea. When you play the stock market this way.) By playing the stock market this way. However. If you buy 100 shares of company ABCD at $100 per share. Inexperienced traders that try to use this method will give up at this point and try to forget this unpleasant experience.5 + $20) * 5 which equals $162. If you trade like this 5 times a day you will loose ($12. what if the stock market on average appreciates 15% per year? There are approximately 250 trading days per year. (It’s also called the difference between bid and ask.06%. Your daily expected return would then be 0. If you have a capital of $10K you would expect to make $6 on any given trading 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.) By trading this way. (“Randomly choose” means that you have no relevant information that justifies your entry in either direction. then you turn around and sell it. The 1/8th difference is the spread.
The main difference between them is the time period of holding the assets. Such approach can be very dangerous. a trader is trying to profit exactly on those short-term price fluctuations.000.2. Such devastating losses can occur if “buy and hold” strategy is literally followed. 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. All the active trader needs to make a comfortable living is . This is the analytical method of predicting long term prospects of the given asset. Trading vs. Two years later they are worth $20 per share. two years later his holdings would be worth $20.000 . it is about making money. Investing Many people confuse trading with investing. An investor is not concerned with short-term fluctuations in the asset’s price. Investing should not be about weathering storms together with your “loved” company. in many cases minutes. In making an investing decision. On the other hand. rely solely on hunches or the historical direction of the market. The most popular approach among long term investors is called “buy and hold”. If that person had invested $100. Who will get the profit.maybe even a few months. an investor relies mostly on Fundamental Analysis. Holding periods for active traders and day traders are very short. You will lose all or most of the money from your account. even seconds. It means that you buy shares of some company and forget about them for a long time. What’s the difference? In reality. even devastating in the extremely volatile market such as today’s Nasdaq. and is generally more oriented toward long-term appreciation in the value of his holdings. This is the time period that “experts” from your online brokerage firm said you should be losing. the end result will be the same. Let’s consider someone who bought shares of Amazon. If you trade often and when choosing your entry positions.com at their peak value of around $100 per share at the beginning of year 2000. these two terms are very far apart.
• 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.3. • 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. If you start with $10.to catch 1-2 point move in the stock price on any given day.scalping is a form of day trading that has the shortest holding timeframe. There are very. and play 100 hands a day. day traders rely mostly on Technical Analysis. In their decisions. 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. It is also viable approach especially in the clear bull or clear bear markets. Scalper is trying to profit from very small movements in the stock prices such as ¼ or even 1/8. placing bets of $100 per hand. This is very popular and viable trading approach especially in markets that do not clearly trend in either direction. He or she only takes those trades that have the highest probability of success. Trading vs. a form of market analysis that is trying to predict shorter-term price directions. Is this really the case? For example. very few traders who are able to scalp successfully. The most popular forms of active trading and day trading are: • Scalping . • 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. 1. let’s take a look at Black Jack. Gambling Many people think that trading is similar to gambling. how long will you last? .000 gambling capital. Scalping is profitable only for brokerage houses and therefore I do not consider it as a viable trading option. The most powerful tool in the hands of active stock trader or a day trader is his ability not to take a trade.
You’ll need tools.000. After that.5 % in the long run over the player. we’ll need to get the odds on your side. Active stock trading is a war. What are we waiting for? Let’s get started! . you’ll need to choose your battles wisely. The similar odds apply to stock market. and a set. That means that such player playing 100 hands per day and average hand being $100 could double his gambling capital of $10. the casino has a built-in advantage of 1.5 per any $100 he bets with. proven strategy to multiply your chances for success.5% per hand over the House in the long run.000 in less than 50 days. a good “scout”. That means that on average. That’s very similar to the previously described trading scenario. After 100 hands.In the game of Black Jack. The objective of this course is to help you bring those odds on your side. and by using them to your advantage. A skilled counter can obtain advantage of up to 1. with more potential for profit and less chances of being kicked out of a casino. 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. These are factors that you have control over. a player will lose $1. Starting with a capital of $10. on average he’ll be down $150. with Las Vegas Strip rules. In such case. ammunition. We want to ensure that you are not wasting your time and money in a battle that is lost before it has started. you’ll be ready to enter the day trading war zone. In order to make it work for you. a player could last about 67 gambling days.
Stock trading is more attractive to the average person because success doesn’t require any physical talents. 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. Only the top 5% of people who actively trade make money. If you feel that you can be a day trader and live off of talent alone. Both businesses reward competent and successful participants with great amounts of money. These professions are similar in this sense. but wouldn’t dream of jumping into a pro basketball career. you’ll need to be among those top 5%. tall or short doesn’t make any difference. . What makes the difference in success and failure is discipline and focus. “How hard can that be?” they ask themselves. 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. An average stock trader is a loser. Their reasoning is that all you need to do is to buy stocks at a lower price and sell them at a higher price. So is stock trading. But what happens to you if you are an average trader? You will lose your shirt. To make a living off of active stock trading. You’ll do fine as an average salesman. 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. You can make your living as an average car mechanic. And. hard work. Young or old. And only then you can afford the luxury of being average.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. of course.
If you are a beginning trader. market indexes… In Chapter 3. Step 1: Understand How The Stock Market Works Before you begin trading. If one “link” is not up to standards. These are the steps: 2. you could lose 20% of your capital in minutes. Go to your local public library and get several books on Stock Market in general. 2. think of each step as a link in an eight link chain. you should follow these steps in the order they are presented. 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. order executions. your chain will break. Read as much as you can about history of the markets. you need to gain solid understanding of Stock Market in general and the driving forces behind it. You’ll lose money. you’ll never become competent trader without this understanding.1. 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.2.We have devised an eight-step program that will gradually transform you into a competent stock market participant. Chapter 4 which deals with . you will find information that you can start to build your knowledge on. Even though it may seem to you that some of this information is not directly related to your trading. The chain is only as strong as its weakest link. If you have some trading experience you will probably concentrate more on the areas that you feel need improvement. After couple of weeks of reading you will notice big improvement in your knowledge. Your trading success depends on each of those eight elements. To understand the importance of each element.
2. Step 3: Use Appropriate Computer Tools Your computer will be one of the main tools of your profession. . Step 4: Get A Superior Internet Connection Active trading requires high bandwidth. How do you find what’s right for you? Chapter 6 will show you how to find the best Internet connection possible. 2. Chapter 7 will answer all your questions regarding trading capital. 2.6. 2. high performance and reliable Internet connection.choosing an online broker has all the information you will need to find a decent broker that will meet your requirements.4. Chapter 8 will show you which TA signals you should follow. 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.5. 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. Chapter 5 will help you choose the right equipment. (trust me. 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. the war is over. 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. Step 5: Secure An Adequate Amount Of Trading Capital If you do look at day trading as a war.3.
such as active stock trading. Chapter 7 will help you choose the software that meets your needs. Step 7: Choose Trading Software That Meets Your Needs Without reliable and comprehensive trading software. . data feed. an active trader won’t be able to make informed trading decisions. When should you enter the trade?. Step 8: Learn How To Utilize A Proven Trading Strategy Once you have decided that you are willing to invest your time. charting software and it can be a difficult task to choose one that is right for particular style of trading.2. money and effort in the profession with a low success rate. 2 . you will be confronted with three simple but hard to answer questions: What should you trade?.8. There are a great number of companies that provide trading platforms.7. and therefore can’t trade successfully in the long run. When to exit the trade? Chapters 10 and 11 will supply you with answers to those questions.
amex. Section 6 Of Securities exchange act of 1934 requires National Securities Exchanges to register with the Securities and Exchange Commission.1. You are probably familiar with a few names of the traditional floor-based National Securities Exchanges. What Is A Stock Exchange? “Stock market” is a term used to describe business activities that are transacted through a stock exchange. bonds or any other types of securities are purchased or sold.nyse. The over-the-counter market.com American Stock Exchange AMEX http://www.com Philadelphia Stock Exchange PHLX http://www.Chapter 3 STOCK MARKET BASICS 3. A stock exchange is a place where stocks.com . They are: New York Stock Exchange NYSE http://www. The organized securities exchanges 2.phlx. The United States securities market is divided into two classes: 1.
com Boston Stock Exchange BSE http://bostonstock.com/electronic/index. A market order is an order to buy or sell at the best price currently available. Order size doesn’t play a role in the priority of its execution.com Chicago Stock Exchange CHX http://www. The way in which they provide market liquidity. Second in the priority queue is a limit order. A limit order is an order that is executed.cme. Different market orders are prioritized based on time of their placement. the specified limit price is reached. A stop order is an order that becomes a market order once the stock has traded at a specified stop price. An order whose limit price is closer to the market price gets a higher priority. A stop limit order is a combination of a stop order and a limit order.2. There are two main differences between the NYSE and Nasdaq: 1.pacificex. Types of securities traded.chicagostockex.nasdaq. the priority of its execution will be based upon its type. 2. only after a . The priority of different limit orders is determined by specified limit price. Understanding Exchange Orders When an order is placed to buy or sell shares. It is executed at a specified price or better.com GLOBEX – the electronic trading system of the Chicago Mercantile Exchange CME http://www.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.Pacific Stock Exchange PSE http://www. Market orders get first priority. when and only when. 3.com The two major screen-based Securities Exchanges are: Nasdaq http://www.
A Specialist is the broker to the other brokers. if it is a smaller order it can be filled using an electronic system called the Designated Order Turnaround (DOT). Coca Cola (KO). . 3. Stock trading on the NYSE functions as an auction that is executed by NYSE members. If there are no current sellers for his stock. liquid and continuous. The person who manages the auction process has the title of “Specialist”. All of these order types apply to both NYSE and Nasdaq. Spread is the difference between current “BID” and “ASK”. Each listed security is assigned only one Specialist. If there is no current buyers for his stock he has to buy it. who is responsible in keeping the market for his stock fair.3. This works to ensure a great deal of liquidity.given stop price has been reached. All buy and sell orders for any given listed stock meet at a single trading post that is assigned to it. he has to sell it. BID is the current highest price someone is willing to pay for a given stock. blue chip companies with a long term record of steady earnings. In doing so he makes his profit by keeping spread. You get the idea? The Dow Jones Industrial Average (DJIA) is the most closely followed market index in the world. The role of a Specialist is crucial in understanding how NYSE operates. DJIA is composed of 30 NYSE securities. Philip Morris (MO). or. The order flow is usually “funneled” to a single location. Some of the companies traded on NYSE are: General Motors (GM). The buy or sell order can be brought to the Exchange floor by a floor broker. The members act as agents for private or institutional investors. The New York Stock Exchange Securities traded on NYSE are usually large. and McDonalds (MCD). 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. NYSE Average Daily Stock Volume for the period of January – November 2000 was 1. Knowing that the average price per share traded at NYSE is $42.025 NYSE listed companies was worth more than $16 trillion. Orders that can be transmitted either by computer or by telephone are then stored and routed to a broker’s booth. he tries to improve the price for the customer and then makes the trade. Brokerage firms then adjust the customer’s account accordingly and send a trade confirmation to the customer. 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. Citigroup Incorporated (C). the brokerage firm receives the transaction report. Exxon Mobil Corporation (XOM). Pfizer Incorporated (PFE). A trade starts when an order to purchase or sell shares of a NYSE company is placed by an investor. directly to the trading post specialist. Their combined Market Capitalization Value in November 2000 was 2. American International Group (AIG). the Gross Domestic Product of Europe’s major economy Germany in 1999 was 1. SBC Communications Incorporated (SBC). Wal-Mart Stores (WMT). or. To understand the size of NYSE Market Capitalization. After the trade is completed. The order is then transmitted to the NYSE trading floor by a NYSE member brokerage firm. If the order was routed directly to the Specialist.027 millions of shares. International Business Machines Corporation (IBM) and EMC Corporations/MA (EMC). The Combined Market Capitalization of all of 3. (GE). 483. 864 billions of US dollars. Merck & Company (MRK). .8 billions of dollars. 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. if specified otherwise.
2 trillion in 1999. ECN’s became part of Nasdaq in 1997. They commit their own capital and compete for the other investor’s orders. The Nasdaq Stock Market has approximately 5000 listed companies that are divided on the larger Nasdaq National Market and The Nasdaq SmallCap Market. All of the trading on the Nasdaq is done through an advanced computer and telecommunications network. The third type of Nasdaq Market Participants are Electronic Communication Networks (ECN’s).4. Nasdaq’s total market capitalization was $5. They execute orders for their customers at the best possible price. compared to NYSE’s $16 trillion. Order Entry Firms and Alternative Trading Systems that include Electronic Communication Networks (ECN). Market Makers participate on both sides of the market simultaneously. markets compared with NYSE’s 44%. In 1999. Nasdaq The Nasdaq Stock Market was introduced in 1971 as the world’s first electronic stock market. An Order-Entry Firm enters customers orders into the Nasdaq system but they do not commit their own capital. Market Makers have a different role. 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. While the NYSE functions as an auction. As we already know. the Specialist’s role on the NYSE is to provide orderly trading of the stock he is assigned to. The second type of Nasdaq Market Participant are OrderEntry Firms. Nasdaq surpassed NYSE in the market share of dollar volume capturing 54% of the total dollar volume of the primary U.3. The fact that Nasdaq is capturing greater market share of dollar volume and .S. All Nasdaq participants have equal access to all of the market information because quotes are simultaneously broadcast over computer screens. on the Nasdaq liquidity is provided by Market Makers. There are over 475 independent firms that act as Nasdaq Market Makers.
SOES execution is automatic which means that it locates Market Maker with the best displayed price and automatically executes it. Users can route their orders through the Small Order Execution System (SOES). Such securities attract more traders and investors due to their increased potential for profit. the NYSE specialist has to be on the both sides of the market and provide continuity of the trading. and Yahoo. SOES was designed to guarantee that all orders are executed at the best available price when they order is placed. This system can execute orders of up to 1000 shares in five minutes intervals. 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. It is the difference between the best bid and best ask among all market participants trading one stock. SOES rules were tightened after 1987 Market crash in order to protect smaller investors and help provide them with more liquidity. reflect the inside spread.S. This is due to the more speculative nature of the securities listed at Nasdaq. Juniper Networks. 3. Nasdaq companies tend to be younger technology and growth-oriented companies such as Sun Microsystems. As you learned in the previous section. SelectNet. One of the reasons of Nasdaq is capturing larger and larger portion of market share of U.1.at the same time has three times smaller total market capitalization value than NYSE may confuse you.4. and Electronic Communication Networks (ECN’s). Nasdaq’s inside spread is the equivalent of the NYSE spread. During 1987 Market crash many Market Makers refused to pick up the phone and execute orders from . dollar volume is that it offers to its participants several different ways to route their orders. The Small Order Execution System SOES All Market Makers are required to participate in SOES. and usually doesn’t. without the Market Maker a choice of taking somebody else’s order instead. This means that Market Makers’ spread doesn’t have to.
Subscribers to ECN’s can be Market Makers.panicking investors.4. Selectnet is an order routing option available to all Market Makers and to the investors with direct access to the Nasdaq. 3. other than crossing systems”. IL 60606 1-888-514-7284 . The order type of choice in most ECN’s is limit order. SelectNet SelectNet was designed to make life easier for Market Makers.ARCA 100 South Wacker Drive.L. SOES has become one of the most important cornerstones of small investors confidence in the Nasdaq Stock Market. Suite 2012 Chicago.C. 3. Since the rules have been tightened. Electronic Communication Networks (ECN’s) Electronic Communication Networks are trading systems that take orders electronically and match buy and sell orders at specified prices. SelectNet trading takes place through screen. A Market Maker who receives an order through SelectNet has the option to accept or counter it. you have to have an account with a registered broker in order to route your order to a specific ECN. 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.5. They have to register with Securities Exchange Commission as brokers/dealers. institutional investors and other brokersdealers. As an individual investor.based negotiation. This is why SelectNet is favorite routing option for Market Makers. Currently registered ECN’s are: Archipelago. as is the case with SOES. A SelectNet order is not automatically executed. L. ……………….2.
NY 10022 1-212-310-9500 http://www.com Island ……………………………….NY 10022 1-212-310-9500 http://www..com Attain ……………………………..com The Brass Utility.http://www.attain. 6th Floor New York.BTRD 499 Park Avenue New York. L. NY 10004 1-212-231-5000 http://www.INCA 875 Third Avenue New York .blomberg.L.C……………BRUT 1-212-952-0280 http://ebrut.com Instinet Corporation ………………. ATTN 160 Summit Avenue Montvale.com .island.instinet.ISLD 50 Broad Street.com B-Trade Services L.tradearca.L..C……………. NJ 07645 1-888-328-8246 http://www.
3. NY 10271 1-212-433-7000 http://www. the system is searched to find out if there is a matching order. for free during market hours at Island’s web site (www.nextrade.com. Island has been founded in 1996 and has experienced phenomenal growth ever since.1. FL 33756 1-727-423-5495 http://www. Island (ISLD) More investors than ever.marketxt. The BookViewer. If it exists. the order is immediately . Island ECN is popular because it is both inexpensive and easy to use. Missouri Avenue Clearwater.island.) When a trader places an order to Island.NTRD 301 S. Archipelago and Instinet. NY 10005 Fax: 212-777-7676 http://www.com NexTrade ………………………….redibook.5.com The ECN’s that provide the greatest deal of liquidity are Island.. Let’s take a look at them. 6th Floor New York. Leeds & Kellogg ……………REDI 120 Broadway. It provides investors with an open and fully accessible market place. Anybody can view its open order book. look to Island ECN as the first routing choice for their trade order. both institutional and retail.org Spear.Market XT …………………………MKXT 100 Broadway New York.
Figure 3. Securities that can be traded on Island are Nasdaq’s NMS and SmallCap securities as well as any security that is listed on NYSE.5. If the matching order doesn’t exist. Non-Displayed orders are limit orders that are not displayed on either on Island order book or on Nasdaq quote. Display orders are limit orders that are displayed both on Island’s order book and on the Nasdaq quote. They are not displayed on a Nasdaq quote. Priorities of execution are based on price and time. Size of the order is not relevant when determining execution time. it depends on your brokerage if you will be charged commission on one or more orders. NonDisplayed orders have lower priority of execution than Display and Subscriber only orders. 3.2.1 Only Island’s best limit orders are posted on Nasdaq. Archipelago (ARCA) . Subscriber only orders are limit orders displayed only on Island’s order book.executed. Figure 3. Limit orders are the only kind of orders accepted by Island and there are three types of limit orders on Island: Display order.1 is an example of the Island’s order book. the order is placed at the BookViewer until someone places an order that will match it. If an Island order results in number of partial fills. Subscriber only order and Non-Display order.
Archipelago’s order book is not freely available to everyone like Island’s. SmallCap and Listed securities. The main drawback to InstiNet is that it is not usually not accessible to individual investor. Although it may seem like substantial advantage market order can be extremely dangerous during volatile periods.5. for example.3. This may be a problem if your order has been partially filled on some other ECN. ARCA accepts only round lot share orders. 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. and you have been left with 47 shares. Its order book is not available to public. It is available only to those who have access to the Archipelago. InstiNet (INCA) Instinet was founded in 1969 and today it is the world’s largest agency broker. it will be given preference over other market participants. ARCA accepts both market and limit orders. The same problem applies if you are trying to sell the stock. In doing so it uses the SmartBook software. Securities than can be traded on Archipelago are Nasdaq National Market. 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.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. If the order can’t be matched with other ARCA orders. 3. Unlike Island. which is based on proprietary routing algorithm. anonymity and transparency. which accepts only limit orders. 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. . InstiNet also allows customers to place orders by telephone with one of its trading desks. INCA’s philosophy is based on neutrality. but some orders can be viewed at Nasdaq’s quotes under symbol INCA.
. blue chip companies. For example. 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. It is therefore important to know what index is representative of stock you are trading. prices on the InstiNet are usually less attractive than those of other exchanges.6. It tracks the performance of 30 large. 3. Dow Jones Industrial Average (DJIA) Popularly known as the “Dow. Indexes can provide a quick snapshot to see how a specific group of stocks performs compared to other groups of stocks. Unlike most stock market indexes that are market capitalization weighed. InstiNet will not be your exchange of choice. Because performance varies greatly from one sector to the other. It is still primarily used by large institutions. Companies are added on the list and subtracted from the list based on their importance and influence in the specific sector. 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.During regular market hours.1. 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. Today it is the best known and most widely followed market indicator in the world. 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. Combined with the fact that it is not easily accessible.” this index was created in 1896 as a 12 stock average. it is not realistic to expect stock ABCD to perform greatly outside of scope of index it is part of.6.
Johnson & Johnson (JNJ). From the list above you can conclude that with selection of this 30 stocks. The other four important Dow Jones Averages are: Dow Jones Transportation (DJTR) Average of 20 railroad. IBM. Companies that are currently represented in the DJIA are: Alcoa (AA). Intel (INTC). SBC Communications (SBC). Boeing (BA). 3M Corporation (MMM). Caterpillar Incorporated (CAT). International Paper (IP). American Express (AXP). Wal-Mart (WMT). Citigroup (C). United Technologies (UTX). gas and electric companies. McDonald’s (MCD). Dow Jones Composite (DJCP) Average of all 65 companies in the three previous averages. Honeywell International (HON). Coca-Cola (KO). trucking and airline companies. Dow Jones Utilities (DJUT) Average of 15 power. Merck & Company (MRK). Hewlett-Packard Company (HWP).2 Figure 3. Microsoft (MSFT). General Electric (GE). Philip Morris Co. AT&T Corp (T). Du Pont (DD). JP Morgan (JPM). Disney (DIS).Figure 3. . Home Depot (HD). (MO). Eastman Kodak (EK). Procter & Gamble (PG). Exxon Mobil (XOM). DJIA attempts to capture market as a whole. General Motors (GM).2 shows performance of DJIA from September to the late December of 2000.
Dow Jones Internet Services(DJSVC) Average of 25 Internet-service-oriented companies Some other important market indexes are: 3. It is calculated by multiplying outstanding shares by stock price of 500 stocks that are traded on NYSE.3. It includes 400 industrial companies.3 shows performance of S&P 500 Index from September to the late December of 2000. Figure 3.6.6. Figure 3. Nasdaq Composite Index (COMP) If Dow Jones Industrial Average is the most popular index for general public and recreational investors. Nasdaq and AMEX. S&P 500 Index is followed more by large institutional investors than by average public that is more informed about much publicized DJIA. 40 financial and 20 transportation companies. Nasdaq Composite Index is by far the most important index for . 40 utilities.2. S&P 500 is capitalization-weighed index. 3.3. Standard & Poors 500 Index (SPX) S&P 500 consists of a very broad base 500 stocks. The benefit of capitalization weighing is that each company’s influence is proportional to its market value.
It began on February 5. Figure 3. It began on November 1. It begun on November 1. 1971 with a base of 100. The market value. and is related to the total value of the Index. It measures all Nasdaq domestic and foreign stocks.4 Figure 3.active investors and day traders. it is market capitalization weighed.4 shows performance of Nasdaq Composite Index from September to the late December of 2000. 1971 with a base of 100. Like S&P 500 and unlike DJIA. the last sale price multiplied by total shares outstanding. 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. . Nasdaq Biotechnology Index IXBT It consists of 202 companies involved in biomedical research and development. Nasdaq Computer Index IXCO It consists of 906 computer hardware and software companies and companies that produce computers. is calculated during market hours. office equipment and electronic components. 1993 with a base of 200. 1993 with a base of 200. Nasdaq Composite Index began on February 5.
it’s simply the opposite of buying. It began on November 1. Nasdaq Telecommunications Index IXTC It consists of 386 telecommunications companies. 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. 1971 with a base of 100. 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. It begun on Nevember 1. property. 1993 with a base of 200. security brokers. Nasdaq Insurance Index INSR It consists of 73 insurance companies including life. and holding investment companies. It began on February 5. It began on February 5. exchanges and dealers. construction. services and public administration. 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. brokers.7. When you buy a stock you hope that price will go up. 1971 with a base of 100. health. mining. Short selling is very simple concept. manufacturing. Nasdaq Transportation Index TRAN It consists of 97 transportation companies of all types. The average person is not always . casualty. 1971 with a base of 100. real estate. When you short sell you hope that price will go down. It began on February 5. 3. Many novice traders have difficulties with short selling because it is a concept that goes against human nature. 1971 with a base of 100.297 companies that are not classified in any other Nasdaq sub indexes and areas of their business include agriculture. Nasdaq Other Finance Index It consists of 153 credit agencies.Nasdaq Industrial Index INDS It consists of 2. agents and related services.
After losing your own share of money in this way. You’ll need to play by them as well.comfortable profiting from somebody else’s troubles. you’ll very quickly realize that stock market goes by its own rules and games. . however.
They are only not happy if you lose your money too quickly. There are two types of stock brokerage houses: full service brokers and discount brokers. Discount brokers don’t usually offer any trading advice to their customers. If you’re not happy with the service you receive from your broker. The broker you’ll most likely work with is the discount brokerage house. only to find that your broker’s server is down? By the time they fix the problem you might be out of 100’s. This is why many daytrading brokers give advice or even hold courses on scalping.Chapter 4 CHOOSING AN ONLINE BROKER 4. It is not worth the time or money investment to be loyal to somebody whose service isn’t working for you. What happens if you try to sell your position because its value is depreciating quickly. because they won’t make the kind of profit from as they would like. 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. When you choose your broker. Choosing the right broker is a critical link to success in your trading career.1. Every trader I know has at least one horror story about his or her broker. even the best traders may have a limited chance for success. Scalping is a form of . you’ll need to take several factors into account. The main function of a discount broker is to execute trades on your behalf. They receive a commission for the services they provide. While it is not in the interest of your broker to cause you to lose money. Online Brokers Online brokerage companies facilitate trades between buyers and sellers. you need to remember that your broker makes his commission whether you win or lose. or even 1000’s of dollars. Without a reliable broker. you should look for a new one.
so try to do everything in your power to make sure you get it right the first time. With 200 shares. How much does an average scalper pay in commissions per month? If he trades 50 times a day. and his commission is $10 per trade. Usually the opposite is true. By choosing your broker carefully. Scalpers are closely monitoring Nasdaq Level II screen. Another tip: Just because a broker is heavily advertised doesn’t mean that he or she is the right broker for you. sometimes you will lose. They attempt to catch small movements in the stock price and as soon as the trade turns against them they immediately get out. 8 Questions to Ask When Choosing an Online Broker 4. but for the brokers it is the most profitable way of trading.day trading in which a trader makes up to a couple of hundred trades in one day. It is becoming more and more known that scalping is the surest way to lose money in the long run. 4.2. In the long run it should have . he will pay $11.000. Sometimes you will win. take the time to get informed about several prospective brokers. When it’s time to choose your broker. There is nothing worse than being disconnected from your broker’s server while you are in the middle of the trade. waiting for buying or selling pressure on the stock of their choice. you will save valuable time and money. it can be a frustrating experience. Find out how often the system they use is down. scalping is slow death. Those kinds of brokers usually have very high account minimum so that your money can last longer. Although you can always change your broker. 000 a month in trading fees. Some brokers will say that there is equal probability that stock will move in either direction while system is down. 22 trading days per month.2. Is the System they Use Reliable? System reliability is the most important factor to look for when choosing a broker. There are literally hundreds of brokers that you can choose from.1. For most traders. (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. that can mean a loss of over $1.
after you have gained experience and are ready to trade in 500 to 1000 share lots. ($2. What are Their Commissions? To an active trader.2. even if they meet all of your other criteria. 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. e. If you have small or relatively small initial capital.3. I strongly disagree.2. the value of commissions is a factor that can not be underestimated. 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.2. This is especially true for market orders. With a $2.500. 4. you are limited to buying 50 share lots of stocks that are under $50. you can always switch to some other broker later on. As a beginner. If you are using mostly limit orders you may have trouble getting them filled at all. If the broker is down too often you should definitely stay away.no effect on your trading success.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). It would not be possible to profitably trade under such conditions. Look for brokers that provide quick confirmation of executed orders. no matter how much initial capital you have. The most powerful weapon in the hands of direct access trader is his/her ability to control losses. 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. it won’t be possible for you to actively trade with $20 commissions. You need a move of 1 point in the price of that stock just to break even. you should not be trading in more than 100 share lots. If you lose 50% of your account (i. This also applies for beginning traders. In such cases.500 in your margin account. Under . 000 to $5. If you are starting with $2. If you have a larger initial capital. your account goes from $10. 000) you now need to increase your account by 100% just to break even.000 $10. The importance of commissions depends greatly on size of your initial account investment.
SOES. Your market orders are also affected by volume. During these high-traffic times. SuperDot for NYSE trading. Brokers that normally provide fast executions occasionally take longer to fill your order. round lot orders from 100 to 1000 shares should get filled in a few seconds time or less. Some online brokerages let you place the orders through your browser.2. where they attempt to locate the best possible price for your order. Make sure that your broker is not selling your orders. you are most likely to lose money and have your executions fall through the cracks. so you’ll want to avoid passing the blame to him. 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. but many of them are often unreliable. There are stories of deep discount brokers selling their order flow to other institutional investors. Exercise caution when using this option. (everybody is buying/selling at the same time) and there may not be enough sellers/buyers on the other end. look for another broker. If this is not the case. because this could prevent you from getting the best possible price. Do They Provide Reliable. The direct access routing options that you should look for are: Island.5. however.2. Archipelago. 4.regular market conditions. InstiNet. Some brokerages offer a “best execution option”. A Broker can make this possible by providing you with direct access to major exchanges. Accuracy and real-time delivery problems can arise due to several . and when prices move quickly your limit orders may become outdated. High trading volumes affect the speed of their execution. It may not be your broker’s fault.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. Real-Time Quotes? Most brokers provide basic real-time quotes to their customers. 4.
you have a definite advantage. There are many ways to obtain second quote provider for free (we’ll discuss this in more detail later).2. you need someone available to answer the phone quickly.2. Some of the free or discounted software that brokers may provide are: Real Tick III. Nasdaq level II book. If your broker provides it for free. Technical support should be there to help you with any problems you may have regarding your order executions. Unfortunately. 4. That’s not their job. I actually use three different quote providers because I’ve had situations when two of them are not functioning at the same time. order confirmations. you’ll want to get help fast. and sometimes the original quote provider experiences technical problems. Technical support is important because when a broker experiences a technical problem. Esignal.factors. You should look for a broker that is able to operate with reasonable efficiency at such times. It is up to you to estimate if your broker’s quote delivery is preventing you from trading efficiently. By using two quote providers. Do They Provide Free Quote And Charting Software? Charting software is a “must” for active traders. Sometimes problems arise due to brokers’ servers. all the traders will call at the same time. One bad execution can cost you six months worth of Qcharts or Esignal subscriptions! 4. . and you need to get out of your trade. You should also NEVER rely solely on your broker’s quotes. If your Internet connection is broken.6. Don’t expect them to give you any investing advice. your broker will always say that fault is somebody else’s.7 Do They Provide Technical Support and Phone Service? If you’re in trouble. trading platform etc. you’ll be able to trade safely. Qcharts. lost orders. This can create a situation where no one will answer your call when you need him or her the most. Be aware that value of free software is not enough to compensate for some other flaws your broker may have. sometimes there is an “Internet traffic jam”.
75 on eligible Nasdaq NMS stocks Excellent ***** Good *** Very Good **** . including direct connections to the electronic option markets.preferredtrade. This is why you should find a broker with reasonable commissions and a reasonable account minimum. 000) is that it is not possible for you to succeed with less money. No hidden fees I'm aware of. 4. Select-Net or discounted routing. For stock trades. “ Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $5. you must trade in 1000 share lots in order to compensate for high commissions. They say that in order to be profitable. this unique front end provides unprecedented speed and dynamically updates information similar to professional trading systems. Because it does not require a browser. For example. they are right. choose from ECN. A List of Brokers That are Suitable for Active Trading PreferredTrade http://www.3. In this case.com Preferred trade is a custom electronic order entry and real time account access service for selfdirected. Integrates with several quote providers. 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. Customer’s comments: “Fastest direct access with routing choices to all option exchanges. $7.8 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. Beware of brokers with no account minimum. it helps you determine if it is an OTC stock priced in various ways for routing to the various ECN's or SelectNet. $25. active traders.e. 000 $ 15 per trade. Those who cater to active traders tend to have better speed of execution and more routing options for your orders. or if it is a stock or index option.2. See option quotes on all exchanges and send your order to the exchange of choice. because are often unsuitable for active trading. They will tell you that reason for high account minimums (i.4.
and information provided by truly knowledgeable people. Customers comments: “ One great thing is that when you call.14. They also offer a 60 day reduced commission rate at $5 per trade. very little to complain about. but it is not very customizable.tradescape. Instinet and Achipelago book.MB Trading http://www. REDI and BTRD. One would be hard pressed to find an equal. 000 (margin account) $9. . Due to their low commissions they are very good choice for a trader who trades blocks of 100 – 300 shares. They also offer direct access to INCA. ISLD. Its features include real-time quotes time and sales data.com The “MB Trader” gives its users the full capabilities of RealTick III and the ARCA system.com Tradescape has an impressive Nasdaq execution system. SelectNet. MBTrading provides access to SOES.95 . They offer charting software. They claim it is the Nasdaq but other secondary providers do not experience the delay.95 per trade depending on number of trades per month Excellent ***** Excellent ***** Very Good **** Tradescape http://www. 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. let alone a better service. dynamically updating portfolio tracking and Nasdaq Level II with integrated order entry.” “ As a long time customer I have had very.” “ The one sore spot has been quote delays at the opening bell.mbtrading. phone is answered immediately. which gives you fast execution with two clicks of the mouse. intraday and historical charting with technical studies. Island.” Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $ 10.
It includes all of the most important order types such as limit. Trading platform is great if it works but is prone to disconnect. no frills.com . $1. It will cost you only $1 to buy and 1$ to sell 100 shares. LLC offers extremely low commissions and is probably one of the best choices for novice traders. 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.. Their Traders Workstation software provides a simple and effective trading platform..015 per share..Customer’s comments: “Order entry is superior and commissions are cheap if you trade less than 500 shares. Since there were people ahead of me and I had to wait in line!” Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $10. Customer’s comments: “Low commissions and control of execution are great. Customer service is staffed with beginners and their work is hit or miss. 000 $0. 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.... stop and stop-limit orders. “ Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $3.cybercorp.01 per share. just execution..interactivebrokers. $1 minimum per trade Excellent ***** Very Good **** Fair ** Cybercorp http://www. market..500 margin account $0..5 minimum per trade Very Good **** Good *** Good *** Interactive Brokers LLC http://www.com Interactive Brokers. you get what you pay for.
The only drawback is that it uses web browser-based. 000 $9. customer response well meaning but mixed in terms of some of their people's knowledge. software.” Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $10. and their fees high because one is cautioned to trade 100 share lots until profitability comes. but only if you use third-party software like Quotetracker or Daslinger. Customer’s comments: Datek Direct is excellent for trading and has low fees. direct access trading and execution technology. not stand alone.but to pay from $10 to $18 for 100 share lots is tough going for any number of trades. It is a wholly owned subsidiary of The Charles Schwab Corporation.CyberCorp is an electronic trading firm focused on real-time. CyberCorp offers an array of platforms to meet the trading needs of the individual investor.datek. Otherwise the default interface is too cumbersome.95 .95 per trade Excellent ***** Good *** Very Good **** . Customer’s comments: I found their software good to excellent. .95 per trade (depending on number of trades per month) Fair ** Very Good **** Excellent ***** Datek Direct http://www.$14.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. Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support None $9. .
which is competitive if the year is 1998. Watley http://www.95 per trade and one of the lowest margin rates schedules on the Internet. great rates and executions. but closed it when I discovered that there is almost no liquidity at that time.” Minimum Deposit $2. they offer nothing that any other cheaper Real Tick broker doesn't offer.com A. 2 level 2 boxes & a couple other features.95 per trade ( depending on number of trades per month) Very Good **** Very Good **** Very Good **** Suretrade http://www. For experienced traders only. dynamically updating data. real-time quotes. portfolio and life planners.015/shr for every ECN except ISLD.suretrade. They're also $. stock and mutual fund screeners. Customer’s comments: “ Poor phone service. As far as I know. 000 (margin account) . but one chart. “ Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $10. all while offering commissions as low as $7. I opened an account with them because they offer trading with ISLD before 8AM.com Suretrade offers a wealth of free research. 24-hour online broker-assisted help.abwatley.95 – 23. 000 $18. B. B.) And then only if you don't trade very actively. Watley offers two “Ultimate Trader” services: FREE and PRO. news.A. charting. Customer’s comments: “The only reason I can think of using Watley is to get free software (not the complete Real Tick. Both services are engineered for active traders relying on real time. They start out at $24/trade.
execution method.nobletrading. Customers comments: “These guys are honest and straight forward.95 $14. They assign an account rep to each customer so I talk to someone who really knows me and I know them. .com Equity Trading provides a powerful version of RealTick software that enables customers to route their orders to different markets.5 and Level 2 direct access trading packages which both come equipped with the intelligent order routing feature. 000 $5 per trade for first 60 days after that $9. No hidden costs.equitytrading.95 per trade Very Good **** Excellent ***** Excellent ***** Noble Trading http://www. and order route.Commissions Execution Speed and Reliability Range of Services Support $7. It scans the market in real-time in search of the best possible price.com Noble Trading offers the NobleTrader Level 1. “ Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $ 5. I like that personal touch. It offers access to all Electronic Communication Networks.95 per trade Very Good **** Good *** Good *** Equity Trading http://www.
90 per trade ( depending on number of trades per month ) Very Good **** Excellent *** Very Good **** RJT http://www.rjt." Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $5. The guys at Noble really care about you and really try to give you the best deal.95 .95 per trade (depending on number of trades per month Very Good **** Good *** Good *** RML Trading http://www. All of the Real Tick III packages have real time data and the same order entry box.com RML Trading offers four different packages for all levels of traders and two different quote providers (PC Quote or Townsend Analytics data feeds). Nobletrading has given me the best deal.com .$19.” Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $10. 000 $9. No other direct access broker came close.$14.rmltrading. Customer’s comments: "Good Firm using RealTick software.000 $9.90 .Customer’s comments: “Talk about stretching your dollar. Excellent training & support.
” Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $10. I enjoy their camaraderie as well. SourceTrade provides immediate order routing via ARCA and ISLD and utilizes ISI for the execution of listed securities Customer’s comments: “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. including the duration of the event. but occasionally lags. $5 trades are great. Service is almost always up. the nature of the problem.com SourceTrade provides the RealTick and ARCA systems.msiebert. 000 (margin account) $5. 000 $16.RJT is the first on line broker to prominently display system availability on its home page. All system downtime is displayed.com .$19.sourcetrade.00 per trade ( any number of shares) Excellent ***** Good *** Very Good **** Source Trade http://www.” Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $2. Customer service answers quickly and is friendly and helpful.00 .00 per trade ( depending on number of trades per month ) Good **** Good *** Very Good *** Muriel Siebert http://www. Customer’s comments: “Quote & execution speed is usually good. ARCA is an electronic order routing system which gives the client excellent order execution. and the steps taken to ensure that the problem does not recur. They have been very reliable.
and streaming real time quotes.” Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $10. excellent customers service.net .com Terra Nova Trading.stocktrade.SiebertNet offers after-hours trading. execution can be really slow sometimes.$15. real time portfolio updates. Customer’s comments: “Very low margin rates. Helped me to understand the difference between trading and investing. charts. integrated software application that electronically routes orders via the Internet.L.C. market indices.00 per trade (depending on number of trades per month) Very Good **** Very Good **** Very Good **** Stock Trade Network http://www.00 . up to a year of account statements and 1099s online.95 per trade Good **** Very Good **** Excellent ***** Terra Nova Trading http://www. L. Point and click to electronically route your order. and intraday balances. Customers comments: “Good place to trade.terranovatrading. offers a highly sophisticated.” Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support No minimum $14. This enables you to track live orders and positions while watching the markets move. 000 $10. Zacks Signature series.
extended hours trading after market close. It is also real easy to customize hot keys etc. Real time P & L screen with net long and short positions.95 per trade Good *** Excellent ***** Good *** Fidelity http://www.03 . priority access to a dedicated team of trading specialists. 000 $29.com Schwab provides active traders with Velocity trading software for powerful online trading. Customer’s comments: “Good support..15 per share depending on number of shares per month Excellent **** Good *** Good *** Charles Schwab http://www. Customer’s comments: “The Redi Plus execution system is extremely fast. After-hours trading on Island and Redi ECN’s. 000 $0. access to wireless trading.$0.. “ Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $25. but cost too high for what you get.com . & REDI book.Stock Trade Network offers direct links to the AMEX/NYSE/Nasdaq via their private LAN network (no Internet lag).fidelity.schwab. especially with the ISLD.” Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $5.
market summaries.ameritrade.All OK” Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $2. charts and independent news. customizable charts. response was helpful.” “I am satisfied. 000 $8. .95 per trade Good *** Good *** Good *** Ameritrade http://www. .Some [reps are] rude and unhelpful [but others] are really nice and helpful. 000 $14. Reuters. Usually quick executions but not always. automatically updated watch lists. They provide current financial news from Business Wire™. got replies in two days. Customer’s comments: "Okay for online buying.Fidelity offers a Powerstreet Pro trading workstation that caters to their most active customers.00 market orders $13. and PR Newswire to help you make your investment decisions.com Ameritrade offers free real-time quotes. Powerstreet Pro provides integrated design display with centralized real time quotes. . It also provides real time Nasdaq Level II quotes. including company profiles and earnings estimates. but not trading.telephone was answered in a minute or less. I have e-mailed questions. . Customer’s comments: "Customer service can be spotty but keep complaining and eventually someone will listen. .” Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support $5. . and research tools.00 limit and stop orders Good *** Very Good *** Good *** .
AF Trader http://www.aftrader.com AF Trader provides to its customers easy accessibility to a wide variety of investment products and resources. Customer’s comments: “I never get put on hold.” “No response from AF Trader one month after I sent my application in.” Minimum Deposit Commissions Execution Speed and Reliability Range of Services Support No minimum $9.95 per trade Very Good **** Good *** Good *** .
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. monitors and operating systems that are suitable for active stock traders. A successful trader is usually knowledgeable about computers. then you’re out of luck. advances in computer speed and power happen almost on a weekly basis. though! Because the key to his profession is reliable technology. Unfortunately. In addition to making you a more successful trader. You should also spend some time at gaining some general knowledge about computers and operating systems. What Kind Of Computer Do You Need? As we all know. he is forced to become knowledgeable. Think of your computer as one of the main tools of your profession. There are two main computer components that are of importance as related to . It’s impossible to give you precise advice that can hold for more than a few months.1. If you were a gunfighter.Chapter 5 Choosing the Right Hardware and Equipment In this chapter we will discuss computer hardware configurations. 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 15” monitor and a Windows 95 OS. it will also make your life a lot easier in the future! 5. You want to make a living out of online trading. if you think that you can get by with an outdated computer system. He doesn’t learn about computers for the fun of it.
if you are looking for used one: eBay Inc http://www. Active day traders should go for 128 .com ….com Inc 1-203-615-7000 http://www. 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.com . Short term/swing traders will need at least 64 MB RAM. Here are links of some of the best places on the Net to find affordable computer components: Computers4SURE.dell.or.ebay.com Dell Computer Corporation 1-800-WWW-DELL http://www.computers4sure.effective trading: microprocessor and RAM. At the time of this writing (March. Spend your hard drive money on buying more RAM.256 MB RAM. The size of your hard drive is not relevant.
You as a novice trader would probably not be able to simultaneously follow and interpret real time information from four screens. find out if it supports multiple monitor display. How Many Monitors Do You Need? Short term/swing traders will need at least one 17” . The card will allow you to view your running applications at the same time without clicking between windows. Save yourself the trouble. As far as the difference between 19” and 21” monitors goes. For active day trading one monitor is just not enough. 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. You’ll end up buying 19” monitors anyway. If you already have a decent (16MB or more) graphics card. you will need to buy one more compatible card.microsoft. One card that is gaining . it depends how far away from them are you sitting.21” monitors. Multiple monitor graphics cards let you increase the virtual size of your desktop by adding additional monitors.2. but it is much tougher on your eyes. Some of you who are short on startup capital will probably try to pass by with two 17” monitors. For the 19” monitors your display resolution should be 1024 x 768. you will need access to a great deal of real time information and it can not fit on one screen.5. If it does. Why two monitors? As we’ll discuss later. Active day traders will need at least two 19” monitors. Experienced and successful traders usually use three to four 19” . It is possible to trade with two 17” monitors.com/windows2000/guide/professional/ The easier. 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. To find out if your card supports multiple monitors go to: http://www.19” monitor. Invest your money in four monitors only when you can do so by using your trading profits.
You can find more about it at: http://www. when running several applications at once.matrox.3. The bad news? You are probably using Windows 98 or Windows ME.more popularity due to of its relatively low price and solid performance is Matrox G450 Millennium. You second best choice is Windows NT 4.0 Workstation. The most important factor in choosing an operating system is its stability. but it is getting more and more difficult to find compatible drivers for different devices you will be using. you can visit them at: http://www. The operating system of choice at the time of this writing is Windows 2000 Professional.com/products/jeropro.html 5. If you have an adequate amount of RAM. tends to freeze up very often. Windows 98. Although they are good enough for short term/swing trading their stability is not adequate for active day trading. 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.appian.com Another popular but more expensive multiple monitor graphical card is Jeronimo Pro. To see the different versions. it can run for weeks without freezing up. Windows 2000 Server . If you were in the middle of the trade your winning position can quickly turn into losing one. It is stable and fast. It is even more stable and robust than Windows 2K. You will need to manually restart it.
If you are thinking about using Linux OS for your trading. Most of the trading software is written for Windows based OS’s only.computing.about.msn. Some of the best places to get help when experiencing problems with your OS are: http://www.org/ . you’ll also need more powerful processor and more RAM.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.and Windows NT 4.net/ http://computingcentral. You should only use them if you need two or more people to be able to use your computer at the same time.com/compute/windows2000/mpboards.com/topics/windowsnt/ http://windows2000. In that case. you should probably wait until there are enough Linux users out there and more compatible software. and you’ll have to take that fact into account.linuxhelp.htm http://www.
it is possible. 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. The two new reasonably priced Internet connection alternatives are: Cable Internet service and DSL Internet service. you should be happy if you get 1Mbps. Realistically.1. there are now several alternatives.Chapter 6 Internet Connection Active day trading requires high bandwidth. Dial-up connections are suitable for short-term/swing trading. Several years ago. T3 and ISDN connections. Their high cost (over $1. the only alternatives that you had to the regular dial up connection were T1. it is not recommended. Theoretically. They say that you can get a speed of up to 5Mbps compared to 50 kbps dial-up speed. On top of that you don’t need delays in your real time data feed because that can cost you money. Thanks to the huge amounts of money being pumped into high speed Internet access divisions of main cable and phone companies. Dial-up connections are sometimes slow and unstable.500!) was the main reason that stopped them from becoming widespread. Both of those connections have their pros and cons. you will have to redial at least a few times during one trading session. If you are a TV cable subscriber you will probably be . This is still more than enough for your trading needs. If you use them. high performance and reliable Internet connection. however although it is possible to day trade using regular phone line connection. 6.
In theory. 6.$150. The drawback of cable access is that it is shared by people in one neighborhood. They have this trouble because it’s difficult to hire skilled employees while maintaining high growth levels. between 9:30 am and 4:00pm. DSL connection A Digital Subscriber Line (DSL) is the other reasonably priced high speed Internet access choice. DSL connections use your regular phone line at different frequency. To reduce the risk you can install firewall protection software. As the distance increases. At the moment costs range from $30 . Fortunately. because your DSL connection is not shared with other users. Because cable lines are shared. One of the problems with some DSL companies has been poor technical support. You can test your Internet connection speed at following sites: http://dslreports. most people are working. it makes it easier for someone to hack into your computer. meaning that if more people are on at the same time.2. allowing you to use your telephone at the same time. it is not as fast as cable. Depending on your distance from the provider’s central office. its performance is equal to that of a cable modem.mybc. Cable modems also create security concerns.$50 per month including cable modem rental. The main benefit of cable modem is that it is always on. it can perform at even higher speeds. You’ll also pay installation charges that run from $50 . the slower your connection becomes. At the extremes of distance limits you can have a speed far below promised maximum.com/stest http://speedtest. the signal quality decreases and reduces the connection speed. This is the time period that Stock markets are open for trading. In practice. DSL connections have faster download speeds than upload speeds.com/ .charged for your cable Internet service on the same bill. The security of DSL service is greater than that of cable. which means that they work faster when receiving data than sending data over the Internet. there is no need to dial every time you want to connect to the Internet.
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.
000 in a margin account.000 worth of stock. but not enough money to fund your ambitions? Many traders that have success in paper-trading find themselves ready to trade. “Better safe than sorry. You can auction them on the Ebay.000 you would be able to purchase only a 50-share lot. This will reduce the percentage value of the transaction fee cost. It’s too risky and the costs are too high. If you have $5. Having a margin account doubles your purchasing power. You will pay much less in interest and there is no minimum payment other than the accumulated interest for each month.000 in your trading account it is possible for you to purchase up to the $10. How Do You Find Startup Capital? What if you have confidence in your abilities. If you lose. You’ll want to avoid borrowing off of your credit cards.2.com. this amount may be around $5. Obtain the money you need with the minimal amount of risk. and other items you may own but very seldom or almost never use. you can buy a 100-share lot. you’ll have to repay that money with 18 – 20% rate of interest. . don’t do it. the best way to do so is to use personal line of credit. gadgets. If you can’t afford it without risking your daily expenses. If you are using a margin account.” is the mantra you’ll want to follow when weighing your startup capital risks. One of the best ways to obtain some quick cash is to sell some of your “toys”. but without the ammunition to enter the battle. and a few days later you may have a few hundred extra dollars that you didn’t count on. 7. If you have decided to borrow money for your startup trading capital. For example if stock ABCD were trading at $89 per share with your $5.For the average beginning trader.
more or less consistently lose in the stock market game. In other words. Market efficiency means that all the available information is already calculated in the stock prices. Active stock traders usually use technical analysis to determine the risk factors involved. 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. This will help you plan your strategy successfully. and that you can only guess how will the price behave in the future. 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. These traders use technical analysis as their main tool. technical analysis is not an exact science. Why does technical analysis work? Once you’re got your ammunition.1. and successful traders are able to predict how other people will react on the different TA indicators and signals. you’re no better off than someone who chooses those positions randomly. Unfortunately. you’ll need to know what kind of odds you’re up against. while the . if you use TA to find your entry positions. TA works because many people use it. Technical analysis describes different ways of predicting the future of the stock market based on its history. Many prominent scientists label it as “voodoo science”.Chapter 8 Technical Analysis 8. They claim that due to market efficiency. 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. Many successful traders don’t want to share this secret.
This results in them spending more than they can afford. (EMA’s) many investors sell that stock to protect themselves against additional losses. that this new bull will never stop because unlike in previous bull markets fundamentals are now much stronger… Out of fear. They start to enter positions on the buy side and more often than not price starts to reverse. There is no reason why you cannot emulate their success. The winning traders buy the stock because they understand that the fluctuation was temporary.losing traders are using TA to determine their trades. accurate signal. the winning traders are winning because they know how the losers are going to react based on this data. successful traders realize that most of the current price action was created artificially. However. The losing traders have already sold their stock based on the TA tools. For example. This creates a domino effect as the price continues to decline. By doing so. No TA tool by itself will give you reliable buy or sell signals. 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. and they seize the opportunity based on the losing trader’s reactions. Technical Analysis is similar to studying history. However. that this time there is new technology. at this point. the past repeats itself. The same thing happens with stock market. when a stock price goes below one of the key exponential moving averages. History proves that people historically behave in the same manner in the similar situations. the combining the right group of TA indicators with discipline and adequate trading capital has been the road to fortune for many traders. Every time there has been a long lasting bull market. Prices continue the downward trend. Some may even borrow money to be able to play . people start to invest more so they don’t get left out of the boom. Historians are usually able to make the most accurate predictions of future and outcomes of events. new experts come from the woodwork claiming that this time it is different. Great empires start to fall when everybody starts thinking that they are invincible. Usually. forcing traders who were long on that stock to sell their positions because it is going below their stop limits. There is no holy grail or magic black box that will give you the perfect.
In this chapter we will examine most important TA indicators and how can they be effectively used in predicting future movements in stock prices. Figure 8. If investors who were among last to join the party looked at the charts of previous bull markets. Then comes the bear market. Its horizontal axis indicates time and the vertical axis indicates price. 8. It is the most simple price chart because it doesn’t show price behavior inside the one hour intervals. it has to start to feed of itself. When you’re unprepared and unaware of historical facts.stock market. When there is no more fresh money to feed this beast.2. Price Chart The price chart is a basic TA tool. before previous bull markets were close to the end. they would have noticed that many technical indicators were behaving similarly as they had in the past. If you learn it while in battle. your chances of success will most likely be lost. not beforehand. This is the last lesson you want to learn the hard way when entering the daytrading battle. history is doomed to repeat itself.1 shows a one-hour line chart covering the period from mid-December 2000 to early January 2001. Figure 8.1 .
it is also possible to tell at what volume the stock was trading at different price levels inside specified interval.2 shows one-hour bar chart. We can see price at the start. In addition. Figure 8.3 .2 The price chart that is most widely used among active traders is the candlestick chart. Bar chart shows us more information than line chart since it is possible to see approximate price behavior inside one hour intervals.Figure 8. price at the end. Figure 8. highest price and lowest price of each one-hour interval. It reveals basically the same information as a bar chart.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.
4 .3. Volume Volume is simple. yet single most important indicator of the current stock trend.4 we can see how the changes in the stock price and changes in the volume are closely related Figure 8.8. From figure 8. Volume measures quantity of shares of given stock that changed hands during a specific time period.
You should never use these signals if they are not confirmed with a number of other signals. Understanding Exponential Moving Average (EMA) Unlike simple moving averages. In our example we will use 4 and 12-minute EMA intervals. EMA gives equal weight to each price point and where the oldest price data is removed from average. In this case it is a strong buy signal. This is confirmed bya decreased volume and bearish candlestick pattern. EMA crossovers are used in many trading systems as buy or sell signals. but it has less impact on the EMA than the more recent price.4. exponential moving average assigns a weight to the price data while calculating the average. A sell signal occurs when longer-term EMA’s cross shorter-term EMA’s from below to above. This is because it is confirmed by a very high increase in volume and a very bullish candlestick pattern. The oldest price data is not removed from the calculations.8. A buy signal occurs when longer term EMA (12 minutes) crosses shorter term EMA (4 minutes) from above to below.5 is an one-minute candlestick chart for AMCC. Figure 8. . 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). Usually. At 10:38 am. combinations of two or three EMA intervals are used. we can observe very strong sell crossover signal when the longer term EMA crosses shorter term EMA from below to above.
For the purpose of this course we will be using two EMA crossover method since it eliminates much of the market noise. Notice that those crossovers occur at approximately same times as two EMA crossovers but they also occurred several other times thus creating false signals. longer term EMA. .5 Another popular way of observing buy and sell signals is by using single.Figure 8. 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.
6 shows Level II screen for AMCC at 12:19 pm. volume.8. Level II quote displays all the current bids and offers of market participants in a specified stock. A trader has to know who the important market makers are for a stock he is trading. high price and low price of the day.5. 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. On top of the information provided in the Level I quote. Another buy signal is when an important market maker (axe) enters with a large order on a buy side. lowest ask. . Level II and Level III. Using Nasdaq Level II Nasdaq market provides three levels of quotes. last sale price. a trader can also determine what the best routing option is for this trade. Level III quotes are accessible only to market makers. Classic buy signals are increased volume on the bid side. Information provided in this level is in no way superior to the information provided in the Level II quote. Level I is also called the “inside market” and is provided with almost any real time software. Figure 8. Level I provides information about current highest bid. By observing the Level II screen. Level I. Nasdaq’s Level II is a very powerful tool in the hands of skilled trader due to the abundance of information it provides.
High of the day so far was 66 11/16. Although Level II is an important technical tool. . 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. its significance has been reduced recently. short-term indicator. current bid or offer. size of the order and the time order was entered respectively.6 we can observe that AMCC opened at 64 3/8. Each line on the bid and the offer shows market maker ID. It is used too often by active traders. We can also observe increased volume on the bid side. Low of the day was 63 ½. Last trade was at 65. This is a bullish. The volume so far was 17.500 shares.6 From the information provided in the Figure 8. When the Level II screen was first introduced.214. Current price was 8 3/8 lower than previous day’s close.Figure 8.
6. On the other hand. This is because a majority of the trades are taking place at the ask or above. last trade was at 14:02:12 when 100 shares changed hands at 113 ½ per share. at a speed higher than usual. this is considered a bearish sign. . As we can observe. Red means that sellers are not able to sell their stocks at current bid prices and are forced to sell them for even less. if a trader observes that the speed of trades is increasing and majority of trades are red.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. 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. If a trader observes that majority of trades flying by on the screen are green.7 shows Time and Sales window of Junniper Networks JNPR. Figure 8. Figure 8. this means that traders are starting to chase the stock and are offering prices that are even higher than the current ask. at 14:02 pm.8. it is used as a bullish sign.
8 shows a one-minute candlestick chart of the Nasdaq TRIN from open until 14:00. If the TRIN is low. TRIN has an inverse relationship with the market.75 market is considered bullish. Decliners is number of issues declining.7. we can observe that most of the time TRIN was above 2. TRIN is never used as a buying/selling signal by itself but is . During this period.25 market is considered bearish and when the TRIN is below 0. market is usually bullish. which is a very bearish indicator. Advancing volume is the volume of advancing issues and declining volume is the volume of declining issues.8 When the value of the TRIN is above 1. This can be confusing for the beginning traders. If the TRIN is a high. Figure 8. market is usually bearish. Nasdaq TRIN Nasdaq’s TRIN is an indicator that traders use to detect overbought and oversold levels in the market. TRIN is calculated based on the following formula: TRIN = ((advancers/decliners) / (advancing volume/declining volume)) Advancers is number of issues advancing.8. Figure 8.
It is an indicator that measures a stock’s price relative to itself. it looks at the overall picture and eliminates much of the marketplacenoise. 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. 8. RSI is usually used in combination with other indicators.8.9 .a very important indicator when used in combination with a number of other technical tools. Relative Strength Index (RSI) Relative Strength Index is a momentum indicator. Therefore. RSI value of 30 or less is generally considered as buy signal and RSI value of 70 or more is considered as sell signal. Figure 8. It usually moves ahead of price. shorter-term movements in a stock’s price. It is not affected by sudden.9 shows a one-minute candlestick chart for Junniper Networks (JNPR) together with 14 minute RSI from open until 14:04. Figure 8. The values that it can have are between 0 and 100.
it is very likely that price is about to change direction. .The values of RSI are represented by blue line. 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. 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. which is most of the time moving between two straight parallel lines.
current trend will most likely reverse. current trend will most likely continue.10 shows a one-minute candlestick chart for AMCC from 11:25 until close. Figure 8. when the price touches the upper band and RSI is above 70 or when the price touches lower band and RSI is below 30.8. Price that is rising within the upper band and prices that is falling within the lower band represent continuation of current trend (convergence). One tool that produces excellent results when used in combination with Bollinger Bands is RSI. middle (average) and upper. You will need to use it in combination with other technical tools. Price that is rising within the lower band and prices that are falling within the upper band represent change of current trend (divergence). There are three bands in the standard Bollinger Bands inputs (20. If the price is crossing the center from below to above it is signifying increase in strength.9. When the price touches the upper band and RSI is below 70 or when the price touches lower band and RSI is above 30. . Using Bollinger Bands Bollinger Bands are technical tools in a form of envelopes that surround stock price on a chart. If the price is crossing the center from above to below it is signifies an increase in weakness. On the other hand. Bollinger Bands cannot be used alone as a technical tool when looking for buy and sell signals.2): lower.
.Figure 8. 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.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.
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.
This is therefore a bearish indicator. It returned to the pre head low. a new high was established at the second shoulder level. . It is created as the price falls to the support level two times and is not able 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. An inverse Head and Shoulders formation is recognized as one of the most widely used bullish price patterns. It is created as the price climbs to the resistance level two times but is unable to breach it. Double Tops and Bottoms A double top is a price pattern that signals the beginning of a downward trend. 8. Figure 8. Instead. This signifies the end of the upward trend.We can observe that first shoulder was created in the spring 2000.2. it would have been an excellent shorting opportunity.14 shows one-day candlestick chart for BRCM for the period from mid 1999 to mid2000. It was followed by a reversal that did not reach pre-first shoulder low level. Price was able to hang on to the new high for a brief period of time and it was followed by swift decline. 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).11. When the price started to fall from the second shoulder level. The new advance ensued but was not able to reach previous high (head).
Double bottom was established and the new advance of stock price ensued. we can see the first top was met because the price wasn’t able to move through resistance level of 250. 8. a double top pattern was established and it was followed by sharp decline in the stock price. Being unable to do so for the second time. the price couldn’t fall through level of support at 120 price was able to recover for a brief period of time. When the new bottom was established at 120.14 By looking at the chart above.Figure 8. 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.11. It was followed by the decline that for the second time ended at the level of support of 120. .3.
Figure 8. .15 shows a five-minute candlestick chart for AMZN.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. Figure 8.
4. trading tools.8. 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.16 shows one-day candlestick chart for AMCC together with the two trendlines of different direction. but very powerful. Trendlines are a simple. Figure 8. and continues to fall it is a very strong bearish signal. Trading on such signals is called swing trading.11. crosses the trendline. Trading on such signals is called breakout trading. touches the trendline and starts to reverse it is considered a very strong bullish signal. If the price declines.16 When the price declines. . Figure 8.
bullish bearish neutral .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.8.
Volume…) . Without seeing the moves your competition is making. If you generate lots of income for your broker by trading often. Such software is essential in watching and establishing patterns. Bollinger Bands. you may even be able get it for free. If you have already chosen your broker based on factors that we discussed earlier. and because they greatly vary from broker to broker. you may miss the chance to make your move. data feed. In some cases. calculate your portfolio and provide you with Level I data feed for the stocks of your choice. take it! You can always change your software later if you find that it is not up to your standards. A trade execution platform provided by your broker usually lacks decent charting and TA tools that are necessary to your trading success. comprehensively and up-to-date. It can difficult to choose one that is right for particular style of trading. If he offers it. and charting software. you may be able to get this software from your broker at discounted price.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. There is a great number of companies that provide trading platforms. you’ll want to look for: ♦ reliability of data feed ♦ number of real time TA indicators (EMA. These software solutions are provided to you at no cost. find out if he offers a cheaper alternative to get the software you need. we will not discuss such platforms in more detail. Such platforms. When choosing your TA and data feed software. What you will need to understand is the value of third party data feeds and charting software. in most cases. let you execute trades.
However. Every data feed software sometimes experiences technical problems. We will discuss two such programs in more detail: Medved Quote Tracker Qcharts from Quote.1. the reliability of a software’s data feed is the most important factor. Medved Quote Tracker http://www. Ask about its scalability. 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. the cost Make sure the software you choose can be integrated with your trading platform.♦ Nasdaq Level II ♦ And. It also has one more very positive characteristic: It’s free! .com 9. and last prices at any given time. it is impossible to trade. You’ll need to have accurate information on bids. this should be a rare occurrence. The TA indicators your software should provide will depend greatly on your trading style. offers.quotetracker. When scouting out trades.com Medved Quote Tracker is a very reliable and resourceful TA software. of course. Without reliable information.
Etrade. Quote. You can fill your portfolio with as many stocks as you please.com. the data provider is Datek. In the picture above. To get started. but only a limited number will fit on a single screen.1 shows an example of how you can set up your screen if you are using QuoteTracker as your primary TA tool.1 Medved Quote Tracker does not provide a quote feed of its own. however. compatible with many popular quote providers such as Yahoo. If you are wondering how such . It is. Figure 9. You can register for free on their web site. you’ll need register with one of those providers and then specify which one you have chosen to Quote Tracker. Datek. Fidelity.When I first downloaded this excellent trading tool I found it hard to believe that it was completely free. Figure 9. which doesn’t require you to be their customer.
EMA(12) and EMA(4). 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. Quote Tracker has many users so it can charge more money from its sponsors. 2hr. Because it is free. (1hr.reliable software can be free.2 . Here are some of the services Quote Tracker provides: ♦ Multiple simultaneous. 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. all day…) Figure 9. You can customize size on the chart as well as the chart periods. It is used in combination with volume. the answer lies in advertising.
2. I would definitely recommend it for anyone doing more than 5 trades per day. Qcharts http://www.Some of the Technical Indicators you can choose from: ♦ Real Time Price Chart . It’s main drawback is that it doesn’t provide you with Nasdaq Level II. real time quote feed and charting application. updated charts ♦ Time and Sales Window ♦ Nasdaq Level II ♦ Technical Analysis Tools ♦ High Reliability ♦ Relatively low cost … .line. Even if you choose another software solution. Some of the Qcharts features are: ♦ Live. you can always have Quote Tracker as a backup option. candlestick ♦ EMA ♦ Volume ♦ Bollinger Bands ♦ MACD ♦ RSI ♦ Stochastics ♦ On balance volume ♦ ECN Level II screen Quote Tracker is an excellent choice for beginning traders.quote. (These fees usually add up to an additional $12. It currently costs about $80 per month + exchange fees.com Qcharts is a very popular.) They have an excellent customer support and difficulties with quote feed are very rare. 9. bar. This is why even more active traders don’t use it as their main software platform.
Figure 9. one-minute candlestick chart together with 4 and 12 minute EMA and volume.Figure 9.3 is an example of how you can set your screen.com .esignal.3. At the top window there is a real time. At the bottom two windows we have Nasdaq Level II and Time and Sales Window. More Software Real Tick III http://www.3 9.realtick.com eSignal http://www.
pcQuote http://www.com/quickenquoteslive .pcquote.com Quicken http://quicken.
and you should get ready for your first battle.) • Are you set up with the necessary hardware and Internet connection as outlined in chapter 5 and 6. you may want to make a checklist of tools and supplies before you rush into it. 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? .Chapter 10 Trading Strategy Now the war has begun. you will have to jump between the screens. if you are serious enough about trading.? It will be assumed that you are using two monitors for the purpose of this last chapter. Eventually. Before you go any further in this course. 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. ask yourself the following questions: • Are you willing to invest time. if you haven’t installed two monitors yet. However. 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.
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. ♦ 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. The criteria will be based on assumption of active. You need to understand where to attack. medium risk level trading. The entry moment has to be moment of highest probability that stock will move in the direction of our trade. there is no reason for you not to do so.1. High Liquidity. the higher the liquidity is. Stocks that are you’ll want to focus on have the following qualities: 1. I will assume that you will eventually subscribe to a quote provider that provides Nasdaq Level II book and Time and Sales Window. Liquidity is best measured with volume.) To develop an effective plan and trading style. you need to understand both the weaknesses and the strengths of your enemy. High liquidity ensures that at the . The main reason traders fail is their lack of discipline to exit the trade on time. 10.• Have you downloaded and installed Medved Quote Tracker? (It is free. The higher the average daily volume is. Exiting the trade is always mixed with emotions of greed and fear. ♦ When should I enter a trade? We’ll need to set standards to choose an entry moment either on long or short side. for that reason Quote Tracker will be used as a secondary charting software and as a primary software I will be using Qcharts. What To Trade? When you enter a battle.
2 Figure 10.000. the higher the volatility is. We will concentrate on stocks that have average daily volume of over 1. 2. We will also concentrate on stocks that are traded on Nasdaq because we can have access to the Nasdaq Level II book. Volatility is measured by the beta coefficient.1 . Beta coefficient is calculated by dividing a given stock’s historical returns by historical returns of the stock market as a whole. there will be enough sellers/buyers on the other side. Volatility. Stocks with higher liquidity tend to have lower spread. The higher the beta coefficient is.1 and Figure 10.000 shares. which can be of great help to the short-term traders.moment we want to buy or sell shares. have a look at Figure 10. This is very important because it ensures that the stock you are trading will provide you with the highest possible number of trading opportunities. This is the measure of the risk associated with any given security in the market. In order to understand the importance of volatility. This will keep our costs lower.
2 is a five-minute chart for Nike Inc NKE for a two-day period. for example $250. a 4 point move means $2000 profit. Stocks that we are going to trade have to: • • • have an average daily volume of over 1. The stocks that you should be of interested in are those between $12 and $125 per share. As you can see. The stocks that we are interested in are those that have Beta coefficient of 1. if you trade 100 shares per trade 4 points move.000. Price is very important when considering a trade. Experienced and successful traders had several trading opportunities to catch 3-4 point moves in the stock price. this means $400 profit. Figure 10. If the stock has a small price. If the price of the stock is too high. Such trades can translate into high profits. NKE doesn’t provide enough trading opportunities to make it an attractive choice for an active trader.5 or more.2 Figure 10.63 and for NKE it was 0. we can see that the best we could have achieved were a few ½ point moves. 3. 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. Even the most experienced traders have trouble reacting on time when trading such stocks. At the time of this writing Beta coefficient for AMCC was 2.1 is a five-minute chart for Applied MicroCircuit Corporation (AMCC) for a two-day period. We would have to trade many shares in order to make it worthwhile. After a closer look. If we trade too many shares (5000) we can’t be sure that we will sell them on time. it tends too be too dangerous too trade.5 have price between 12 and 125 dollars per share . those two days have provided numerous trading opportunities. even a high percentage move in the price will translate to the small dollar value of the move.Figure 10. As opposed to the AMCC. Price of the stock. For example.83.000 shares have Beta volatility coefficient of over 1. Those kinds of stocks can move $10 per share in minutes. If you are trading 500 shares.
925.04 2.38 2.72 1.203.12 2.044 15. Inc Siebel Systems.42 2.55 2.621.195.454 7. Inc. Volume 16.363 3.805.943.894.700 4.14 2.com .000.590 16. Inc Sun Microsystems.992.69 1. Inc Check Point Software Ltd.63 2.308.46 2.636 2.04 2. The best places to check it are: http://www. Inc Emulex Corporation JDS Uniphase Corporation Beta 2.090 10.379. Citrix Systems.000 12.66 Avg.239. Brocade Communications Systems.545 5. Inc.01 2.787.436.181 6.831.069.99 2. Inc.727 1.16 2.681 3. Juniper Networks.328. Inc Comverse Technology.864 16.51 2.818 4.33 1.54 2.000 55.nasdaq.863 39. Cisco Systems.32 2.46 2. Inc Extreme Networks.236.12 2.941.43 1. Inc Network Appliance.70 2. Inc. I2 Technologies.863 10.000 10.61 2.090 8.228 10.030. Every two weeks or so you should check if the stocks on the list still satisfy the criteria.363 4. Adobe Systems Incorporated Agile Software Corporation Ariba.272 3.318 16.78 2.08 2.384. Inc.272 53. Tellabs.545 10.363 31.674.82 2.• 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 CIEN RIMM ALGX TLAB ADBE AGIL ARBA BRCD CHKP ITWO ORCL VRTS ALTR AMCC BRCM INTC AOL YHOO CSCO JNPR SUNW NTAP CTXS SEBL CMVT EXTR EMLX JDSU Company name CIENA Corporation Research in Motion Limited Allegiance Telecom.545 45.207.590 There are many other stocks that will satisfy this criteria and you may add them to the list as you please.20 2.700.171. Inc Oracle Corporation VERITAS Software Corporation Altera Corporation Applied Micro Circuits Corporation Broadcom Corporation Intel Corporation AMERICA ONLINE INC Yahoo! Inc.503.164.574.
Three sectors that I use for trading.… 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.com Another excellent source of stock quotes. are software. We will use those two watch lists for our examples thorough this chapter. due to many trading opportunities and their mutual dependence.yahoo.5 http://www. you should enter the price between 12 and 125 and Beta factor of over 1. reports etc. market indexes. http://www.globeinvestor. If there is some other sector that you would prefer to trade it is very simple for you to create your own watch list. For our purposes. networking and semiconductors.Go to Investor Tools and click on Stock Screening. You can then customize information as you please.com Go to Finance/Quotes and enter the symbol of the stock. List1 CSCO JNPR CIEN List2 ITWO VRTS CHKP . In each list we will put seven stocks that tend to closely follow each other. You can get very detailed information about any stock and specifically for our purposes about average daily volume. The lists should consist of fourteen stocks from specific sectors.
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.NTAP BRCD EXTR EMLX ORCL BRCM ADBE 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. I will not discuss TWS in much detail. Figure 10. I will . Since I can’t know in advance which online broker and trading platform you will be using. Figure 10.3 shows portfolio List1 on the QuoteTracker as well as TWS.
Some industries that are also of interest to active traders are Biotechnology. This rule applies only to beginning traders. you will be able to recognize what kind of statements and news you can use to your trading advantage. and it is not as powerful trading tool as it used to be.5 are volatile enough even on normal trading days. 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.assume that you are using a trading platform that lets you create portfolios and enter market. . Nasdaq stocks with Beta factor of over 1. Nasdaq Level II is getting overused by traders. you can use Quote Tracker’s intraday real time chart. avoid trading those stocks. 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. You need to be informed about when financial statements are scheduled. Figure 10. Why do you need more than one watch list? On some days. 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. Just remember that you will be handicapped for the lack of Level II and T&S window. If you are not yet ready to spend money for such software. limit or stop orders. Telephone Utilities and Internet Services. It is best done by observing the previous day’s chart. You should make your decision as to which list you will be watching on the night before the trading day. For example. The only other software that we will use in this chapter is Qcharts because it provides Nasdaq Level II book and Time & Sales Window. There is no clear definition of how to determine S/R levels. some of the companies from your lists may be scheduled to give earning reports. 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. When you get more experienced. As I have already mentioned. 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 won’t need any more volatility.4 is one-minute chart for Check Point Software Ltd. On those days.
support was established at around 118 with the formation of a double bottom chart pattern. support is not exactly at 118 and resistance is not exactly at 121 ½. one of the stocks from the group usually acts as a leader.4 From the figure above.Figure 10.4. . 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. During this period. 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. observe real time charts for all of the stocks from the group in order. To find out which stock is the leader. As you can see in figure 10. 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. This is done in the pre-market and early market hours (830am – 950am). we can tell that during the last three hours of trading for that day. After you have decided which group of stocks you will trade. you’ll want to decide which specific stocks to trade that day.
5 we will observe pre-market and early market trading for the six stocks from the watchlist List2. In the example above. This method is not 100% certain but it is one of the factors that will give us advantage in the long run.In the figure 10. you can choose the two stocks that are the closest followers.5 First you will need to establish the leader. the closest follower is CHKP and the second closest follower is ORCL. After you have established the leader. This is because it was the first one to start to decline and the first one to start the recovery. In the example above. We will not trade the leader. we can conclude that the leader is SEBL. . Figure 10. Those are the two stocks that we will be trading.
6. we have now decided which stocks to trade. Shows us charts for the same stocks more than 3 hours later. .Figure 10. We can observe that they are moving in a very similar fashion.6. When To Enter The Trade? After we have established the leader of the group and the two closest followers. we have seen the support and resistance levels for the last four hours of the trading. Using the charts from the previous trading day. 10. Figure 10.2.
Figure 10. TA tools that we will put on the real time chart are: Volume. Interactive Brokers TWS. We will now set our screens as shown on Figure 10.9 show screen1 and screen2 respectively in bigger format. Figure 10. On the second screen. Bollinger Bands.8 and Figure 10. .) 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 use those two values as one of the tools that will give us better understanding of future price behavior. (In this case. RSI and 4 and 12 minute EMA lines. We will also draw the trendlines for each of the stocks. We will also place real time intraday charts for the leader stock and the two closest followers that we have previously established.7. We will also open Time and Sales Window and Nasdaq Level II for the same stock.7 On the first screen we will place Quote Tracker portfolio together with Nasdaq Composite and Nasdaq Trin Indexes. we will place our trading platform.
8 .Figure 10.
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 .9 Now it’s time to determine how to choose exact moment when we will enter the trade.Figure 10.
positive short sign In order to make the trading strategy easier to understand.positive long sign --. With this we have established our first trading rule: Trin > 1 Trin < 0. If the Nasdaq Trin is between 0.♦ 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. 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 10.65 < Trin < 0.85 < Trin < 1 --.65 0. very positive short sign --. 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 . very positive long sign --.5 we will never enter the trade on the short side.85 0. If you have only one monitor you will have to jump between the screens. First we observe the leader.don’t pay attention to it --. If the Nasdaq Trin is over 1. TRIN plays an important role in our trading strategy. we will never enter the trade on the long side and if it is under 0.7.85 it will not influence our trading decision.never go long.never go short.5 < Trin < 0.65 and 0.5 0.
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 .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. Once we have established which one of the two we will attempt to trade. 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. we now need to completely turn our attention to the trading candidate.
In order to make your trading decisions become as mechanical as possible... Easily recognizable bullish chart pattern is being formed …………………………………… Price approaching upper Bollinger Band ……… RSI is 70 or above ……………………………….. Counter clockwise movement on the Nasdaq Level II. Price bouncing off trendline after declining or moving through the trendline if rising ………. green color ……… 6 points 6 points Orders that are executed at ask or above dominating 8 points 6 points 6 points 4 points 8 points 8 points 8 points 10 points 6 points 6 points 8 points We will enter the trade if the current score is 50 or more.5 ………………………. 12 minute EMA about to cross 4 minute EMA from above to below ……………………….. Price bouncing off the support level or moving through the resistance level ………….65 …………………. Increasing positive Volume ………………………. 0. Entering on the long side (buying) Nasdaq Trin Index < 0. noticably more buyers than Sellers ……………………………………………… The Time and Sales Window. Bullish candlestick pattern ………………………. Your trading decisions need to be made very quickly.5 < Nasdaq Trin Index < 0.All of the technical tools that we have at our disposal will not carry equal weight when we are making a trading decision. Nasdaq Composite Index moving up ……………. Take some time to practice until you master this strategy. I have developed a table that assigns different values to the different trading tools. .
.. You’ll want the opportunity to make money. The only negative consequence you may get from not entering a trade is just that. 8 points Price approaching lower Bollinger Band …………. Easily recognizable bearish chart pattern is being formed …………………………………….. simply wait for the next opportunity to come along. It’s worth it to save your money than risk losing it because 8 points 8 points 8 points 6 points 6 points 8 points .. Price bouncing off trendline after rising or moving through the trendline if declining ……. red color …………… 6 points We will enter the trade if the score is 50 or more.Entering on the short side (short selling) Nasdaq Trin Index > 1 …………………………….. 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. 6 points RSI is 30 or below …………………………………… 6 points Bearish candlestick pattern ……………………….. Increasing negative Volume ……………………….85 < Nasdaq Trin Index < 1 ……………………… Nasdaq Composite Index moving down …………. 12 minute EMA about to cross 4 minute EMA from below to above ………………………….. it is important to remember the consequences of your action. 10 points 0.. not lose it. Price bouncing off the resistance level or moving through the support level ……………. If you feel the opportunity gap is closing too quickly. What kind of order should you use to enter the trade? Before you act. 4 points Clockwise movement on the Nasdaq Level II. 6 points Orders that are executed at bid or below dominating The Time and Sales Window. noticably more sellers than buyers ………………………………………………..
you’ve got an itchy “trigger finger”. . It’s actually much harder than most beginning traders realize. and your pre-determined stop loss has been reached. For the stocks 80 – 125 $ per trade you can buy up to 40 shares per trade. If you are a beginning trader. our stop loss will have relatively small value. 10. once you are in the trade. When to get out of the trade? “Let your profits run. we’ll define some rules that will help you make this last trading element as simple as possible. This will protect us against severe losses in any given trade. For the stocks 15 – 50 $ in price you can buy up to 100 shares per trade. Cut Your Losses Short If a price has started moving in the direction that is opposite to what you have expected. For the stocks 50 – 80 $ in price you can buy up to 60 shares per trade. In order to understand the essential timing to strike and get out. it’s time to get out. It’s much better to preserve your capital for later on. 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. The majority of successful traders will tell you that proper trade management. This applies even if you have substantial trading capital. 10. Next we need to know how many shares of any given company we would buy or short sell.3. cut your losses short. when you will be more formidable market participant. start with very small amounts.1.3. we will always use Limit orders. doesn’t it? This is a blanket statement used when trading. You need time to perfect your trading techniques.” Sounds easy. Because our strategy is short-term oriented. is the single most important factor that will either break you or make you in the active trading business. To get into the trade.
Pushing forward wears a soldier out. and if nothing is happening. Failure to follow the stop loss rule is the number one reason for failure among beginning traders. and return later.Remember: When you suffer a loss of 50% of your capital you now need to make a profit of 100% just to break even. Since you are trading on margin you have $2. Your initial stop loss should be set at approximately 2% of the money that you have in the trade.500 of your capital in the trade. For example. If a battle is at a standstill.500. it is better to give up for the night and not keep pushing forward. To make things simpler. you see it is much easier to lose money than to make it back. You now need to make a profit of 100% just to get to your starting level.000 and lost 50% of it now you have $2. It only takes a few stubborn incidents to entirely devastate your initial trading capital. when your odds are stronger. It isn’t valiant or heroic to stay in a battle that you are losing.100 100 . if you have purchased 100 shares at $50 per share you have $5. we will make a table with predetermined initial stop loss values.40 40 . The logical recourse is to save as much as you can.125 Stop loss 1/4 1/2 3/4 1 You can’t cut corners with the stop loss rule. there may be something you haven’t prepared for in the works. It needs to be followed every single time without exception.000 in the trade. but there is no way to know this in advance. knowing you’re losing. Reaching your stop loss should not be your only reason to get out of trade without profit. but somehow believing that luck is on your side and a comeback is in order. Share price 12 . Your stop loss should be ½ point. This is similar to getting into a battle.60 60 . For example. . It is true that sometimes price will turn around just after you get out. From this example. if you have started with $5.
let’s say that we have bought 100 shares of company ABCD at $50 per share. you should also get out. 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. How can a trader lose if he only takes small profits at a time? Profit is profit. We will now move our stop loss at $50 ½.2. Let your profits run Once you are in the trade and your stock has started moving in your direction.3. If such profits are followed by two losses of $75 each. you need to extract as much profit as possible. At that point we don’t want in any case to get out of this trade without profit. The price starts to move upwards and reaches $51. 10. while profit of $250 will become $100 win. trailing stop loss follows the stock price that is moving in your direction. Not being able to do so will make you a losing trader in the long run. We will automatically put our stop loss at 49½. Always remember that one of your most powerful tools is your ability not to be in the trade. becoming too greedy can turn a small profit into a loss. As the name says. you realize the stock you are trading is moving nowhere and the reasons you decided to trade are starting to disappear. 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. profit of $100 will become $50 loss. isn’t it? Not exactly… Profit of $100 is not the same as a profit of $250. For example. If the price continues to move in the positive direction we will keep . For example. if there are no valid reasons for it.If after you have entered a trade. If it is now at 30 or less you should get out of the trade and look for another trading opportunity. 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. This will make you lose money in the long run. The best solution to resolving these conflicts is to use trailing stop loss. However.
Therefore. when exiting we will use market orders. which will be followed by movement in our direction. You need to get comfortable with placing buy and sell orders.adjusting our stop loss accordingly. we could put the stop loss at $52. Small change in the stock’s direction can mean temporary profit taking. When you are trading for real you can’t afford to be occupied with any kind of trivial problems. We are able to do this because we have already made a decent profit and can afford more risk. Paper Trading . In our example. . You will still have many things to learn. But even those trivial problems take time to master and should not be underestimated. If you don’t already have some trading experience. even if you think otherwise. even though it will cost us an occasional 1/16 or 1/8.Strategy Testing All soldiers in war require extensive training. The same is true when you enter daytrading. 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. When exiting a trade the opposite is true. If the price hits $51 ½ we will move our stop loss to $51.4. and many armies use mock battles and other training tactics to make sure they are up to par. 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. 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. you shouldn’t just jump in into trading with real money. You can’t afford to stay in a bad trade. this means that if the price hits $53. which will get us out of the trade quickly. We can also do this when the stock is in a clear upward trend. 10.
. Trading shouldn’t be a gamble. You can use it by choosing your entry and exit positions and recording them on the piece of paper. With the right tools. you are ready to trade for the long haul. You should consistently win for at least 10 trading sessions of paper trading before attempting to trade for real. and don’t be afraid to pull out of a trade if you think you might be losing money. Once you have tried the simulation and found a modicum of success. you’ll be able to make your trading endeavor a success. watch your finances wisely. Later on. Most of the online brokers (including Interactive Brokers that we have used for our examples) provide software that simulates trading to their customers. Be careful. you add commissions and spread and calculate how much have you won or lost for that day. ammunition.Paper trading is a term used to describe the simulation of trading. scouting and experience.
Chapter 11 Trading Strategy II – Swing Trading . 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. This is a way of trading in which a trader is holding his/her positions for a few days/weeks. 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? .Short Term Trading Another viable trading approach. Sometimes swing trader’s time frame is one day. Similarity between the two strategies is that in both cases trader can profit from both rise and decline in the stock price. Swing trader is trying to capitalize on larger swings 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. sometimes it is a few days and in the exceptional situations even a few weeks. The most fundamental difference between swing trading and day Trading is the fact that swing/position traders carry their positions overnight. especially for those of you who have day jobs that prevent you from closely monitoring your positions during Market hours is called ShortTerm Trading or Swing trading.
1. .- 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. 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. medium risk level 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 entry moment has to be the moment that has the highest probability that the price will move in our direction. 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. 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. The criteria will be based on assumption of short term. 11.
Higher the average daily volume 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 our swing trading strategy we will focus both on Nasdaq and NYSE stocks.000 shares as that will give us plenty of opportunities to get out of our positions in timely fashion.000. Stocks that we will focus on will have following qualities: 1. 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. Volatility Volatility is measured with beta coefficient. there will be buyers/sellers on the other side of the trade. In order to understand the importance of volatility as related to position trading lets have a look at Figures 11. In swing trading liquidity doesn’t have to be necessarily that high. higher the liquidity. We will concentrate on stocks that have the average daily volume higher than 250. High liquidity ensures that at the moment when we want to enter or what is even more important exit our position.1 and 11.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. Liquidity Liquidity is most accurately measured with volume. This is the measure of the risk associated with any given security in the market.2.000 because in day trading we have to get in and out of the trade several times per day. higher the volatility is. In our day trading strategy we have set our minimum average of shares traded at 1. . 3.
is a 60-minute chart for Juniper Networks (JNPR) for the same period. Figure 11.2. At the time of this writing Beta coefficient for Ford was 1. is a 60-minute chart for Ford Motor Company (F) for a period from March 6. As we can see during that period there was a very limited number of trading opportunities for a swing/position trader. If we were trading 1000 shares we would be looking for profits of 200-300 dollars in couple of weeks periods. Figure 11.2. The most that one could have hoped for is to catch ¼ to ½ point moves in periods of several days. As we can see from the chart there were several occasions in which it was possible for a .00. That is hardly enough to make it a good trading candidate.1.Figure 11. 2002. Figure 11.1. to March 22. Ford Motor Company is not suited for short term trading and for position trading.
Even the most experienced traders have trouble reacting on time when trading such stocks. in swing/position trading it makes more sense to carry larger amounts of stock. 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. there will be enough buyers on the other side. Price of the stock Why is the stock price important when considering a trade? If the stock has a small price.000 shares • have Beta volatility coefficient of over 1. We would have to trade many shares in order to make it worthwhile effort. The price was moving 2 to 3 points in periods of several days. Summary: Stocks that are suitable for short term swing/position trading have to: • have an average daily volume of over 250.skilled trader to make decent profits. If we were trading 1000 shares lots such moves could have translated into 2000-3000 dollars in periods of week or two. since we will not be buying/selling as often as we would in day trading. If we trade too many shares we can’t be sure that at the time when we want to sell them. Stocks that are of interest to the swing/position trader should have a price of $7 . The stocks that are suitable for swing trading are those that have Beta coefficient of 1. That makes Juniper Networks solid candidate for position trading.5 or more.08.$75 per share. At the time of this writing Beta coefficient for JNPR was 4. if the stock is trading at $5 per share and if it increases in value by 10% it is only a $0.5 and less than 3 • have price between $7 and $75 per share • be traded on Nasdaq or NYSE . However.5 move. For example. 3. even a high percentage move in the price will translate into the relatively small dollar value.
defense. many stocks on Nasdaq and NYSE that would satisfy the criteria set above. Some of the best places to get informed about the sectors/stocks that you are planning to trade are: http://www.nyse. networking etc…) that we are most familiar with.yahoo.nasdaq.There are many.com . internet.com http://www. You don’t have to be any kind of expert in any of these fields.globeinvestor. as you will see later in this chapter the strategy that we will use is purely technical. being informed about the sector that you are trading will not hurt you either.com http://www.cnn. However.com http://www.com http://www. What we now need to do is to find a sector (biochemistry. semiconductors.
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.18 n/a 4.89 12.03 4.09 0. Of course.05 1.com Prodigy Real Networks SportsLine USA TMP Worldwide Terra Lycos VeriSign Veritas Verity Versant VocalTec Yahoo! iVillage level 0.10 -0.01 -0.90 n/a n/a 1.09 n/a n/a 6. The sector that we will choose in this case will be Internet Sector.04 0.com NetManage Open Market Open Text PSINet Priceline.11 -0. We will now go on http://money.05 0.60 10.04 n/a -0.59 -0.06 -0.55 0.03 -0.cnn.13 n/a 0.com -> Markets & Stocks In the bottom right corner there is “Market Tools” online tool.25 -0.69 n/a n/a 0.11 0.com Inktomi Marketwatch.24 n/a 18.7 -0.com Exodus Infospace.00 n/a -0.65 9.94 56. We are then presented with the following list: company 24/7 Media @Home Network AOL Time Warner Amazon.01 2.04 23.90 19.15 1.04 n/a -1.25 n/a 8.04 n/a n/a 0.50 28.15 0.12 0.08 -0.30 n/a n/a 8.com Ameritrade Baltimore Technologies Beyond.89 1.56 0. We will choose “Tech Stocks” and then we will click on “Internet”.85 n/a 23. if you have more affinity toward some other group you should go for it.76 5.58 17.91 3.36 5.05 n/a n/a -0.90 change 0.02 -0.com CMG Information Services Charles Schwab Check Point Software Cnet CyberCash Cyberian Outpost DoubleClick E*Trade EarthWeb Earthlink Ebay Egghead.02 last update 5/28 9:37 n/a 5/28 9:40 5/28 9:40 5/28 9:40 n/a n/a 5/28 9:39 5/28 9:40 5/28 9:39 5/28 9:40 n/a n/a 5/28 9:39 n/a n/a 5/28 9:39 5/28 9:39 n/a n/a 5/28 9:39 5/28 9:39 5/28 9:30 5/28 9:36 n/a 5/28 9:40 n/a 5/28 9:39 n/a 5/28 9:39 5/28 9:32 5/28 9:40 5/28 9:37 5/28 9:40 5/28 9:40 5/28 9:37 5/28 9:30 5/28 9:37 5/28 9:40 5/28 9:34 .64 1.04 0.00 0.09 n/a n/a 0.27 16.39 n/a n/a 0.
For the purpose of this lesson we will be using Qcharts charting software. Ebay.931. however you are welcome to use any other software that you . YHOO We will now create Daily candlestick charts for those stocks and we will also draw 20 DAY Moving Average (blue line).yahoo.818 9. Real Networks.619.64 23.27 2.63 1. VeriSign. EBAY.603.79 2.090 948. They are AOL Time Warner.14 2. SCH. TMPW.590 9.181 7. AMN.com -> Fundamentals to find value of BETA.863 Based on the criteria set earlier 1.12 2. VRSN. and then we will enter them in http://finance.95 3. Check Point Software.44 3.nasdaq. Open Text.510. Charles Schwab.As we can see from the list above there are 13 stocks with the price of $7 or more.73 2.500 12.com to find out average daily volume. TMP Worldwide.35 2.500 2.575. Double Click.500 147.628.14 2. DCLK.000 there are 9 stocks left in our group : AOL.com.46 2.363 5. CHKP.636 1.11 2.502.000 7. Verity and Yahoo!. We will now enter those companies in www.136 452.890.576. Amazon. Veritas.5< Beta <3 and Average Volume > 500.681 4. NYSE:AOL NASDAQ:AMZN NSYE:SCH NASDAQ:CHKP NASDAQ:DCLK NASDAQ:EBAY NASDAQ:OTEX NASDAQ:RNWK NASDAQ:TMPW NASDAQ:VRSN NASDAQ:VRTS NASDAQ:VRTY NASDAQ:YHOO 1.426.
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:
Instead of 1 Day time interval that we have used in the charts above. In our examples Support is drawn in blue. Resistance in green and Trend lines in red color. We will now create a separate chart for each stock from our group. 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 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. .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 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.
VSGN . 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. First lets have a look at the 3 companies that are trading below their 20D Moving Average.Please note that it takes time and practice to be able to draw accurate S/R lines as well as Trend lines. We will therefore exclude those three stocks from our trading candidates group.
CHKP DCLK That leaves us with 6 remaining stocks. YHOO. AMZN. TMPW. SCH. AOL. EBAY. We now need to set the criteria for choosing our entry moment. .
11.2. When to enter the trade? AOL AMZN .
YHOO EBAY .
Price bouncing off the support level or moving through the resistance level …………. 8 points 8 points .SCH TMPW Entering on the long side (buying) Increasing positive Volume ……………………….
Price is above 20D Moving Average……………. 8 points Price is below 20D Moving Average………………… 6 points Price approaching lower Bollinger Band …………...Price bouncing off trendline after declining or moving through the trendline if rising ………. 12 hour EMA about to cross 4 hour EMA from below to above …………………………. Bullish candlestick pattern ………………………. 4 points We will enter the trade if the score is 36 or more.. Easily recognizable bullish chart pattern is being formed …………………………………… Price approaching upper Bollinger Band ……… RSI is 70 or above ………………………………. Price bouncing off trendline after rising or moving through the trendline if declining ……. Price bouncing off the resistance level or moving through the support level ……………... 8 points 8 points 8 points 8 points . 12 hour EMA about to cross 4 hour EMA from above to below ………………………. 6 points RSI is 30 or below …………………………………… 6 points Bearish candlestick pattern ………………………... 8 points 6 points 6 points 4 points 8 points 6 points 8 points We will enter the trade if the current score is 36 or more.. Easily recognizable bearish chart pattern is being formed …………………………………….. Entering on the short side (short selling) Increasing negative Volume ……………………….
cut your losses short. It’s worth it to save your money than risk losing it because you’ve got an itchy “trigger finger”. You’ll want the opportunity to make money. If you feel the opportunity gap is closing too quickly. we’ll define some rules that will help you make this last trading element as simple as possible. The majority of successful traders will tell you that proper trade management. doesn’t it? This is a blanket statement used when trading. When to get out of the trade? “Let your profits run. Next we need to know how many shares of any given company we would buy or short sell. It’s actually much harder than most beginning traders realize. For the stocks 15 – 30 $ in price you can buy up to 150 shares per trade. To get into the trade. If you are a beginning trader. . simply wait for the next opportunity to come along. The only negative consequence you may get from not entering a trade is just that. 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.What kind of order should you use to enter the trade? Before you act.3. once you are in the trade. This applies even if you have substantial trading capital. 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. start with very small amounts. is the single most important factor that will either break you or make you in the active trading business. You need time to perfect your trading techniques. when you will be more formidable market participant. For the stocks 7 – 15 $ in price you can buy up to 200 shares per trade. it is important to remember the consequences of your action. 11. In order to understand the essential timing to strike and get out. It’s much better to preserve your capital for later on. we will always use Limit orders. 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. not lose it.” Sounds easy.
5 You can not cut corners with the stop loss rule. It isn’t valiant or heroic to stay in a battle that you . It needs to be followed every single time without exception. This is similar to getting into a battle. we will make a table with predetermined initial stop loss values. Your stop loss should be 2. From the above example you can see that it is much easier to lose money than to make it back.50 50 .000 and lost 50% of it now you have $2. For example. Failure to follow the stop loss rule is the number one reason for failure among beginning traders. Cut Your Losses Short If a price has started moving in the direction that is opposite to what you have expected. knowing you’re losing.75 Stop loss 0. Remember: When you suffer a loss of 50% of your capital you now need to make a profit of 100% just to break even.11. Since you are trading on margin you have $2.30 30 . if you have purchased 100 shares at $50 per share you have $5. it’s time to get out. if you have started with $5. You now need to make a profit of 100% just to get to your starting level. and your pre-determined stop loss has been reached. Share price 7 . The main difference between day trading and swing/position trading strategy is the place where you need to put your stop loss.000 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.500.1.500 of your capital in the trade. but somehow believing that luck is on your side and a comeback is in order. To make things simpler. but there is no way to know this in advance.15 15 .6 2.4 1 1. 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.3. It is true that sometimes price will turn around just after you get out. In day trading strategy your initial stop loss should be set at approximately 2% of the money that you have in the trade. For example.5 points.
you need to extract as much profit as possible. there may be something you haven’t prepared for in the works.are losing. becoming too greedy can turn a small profit into a loss. Not being able to do so will make you a losing trader in the long run. you realize the stock you are trading is moving nowhere and the reasons you decided to trade are starting to disappear. it is better to give up for the night and not keep pushing forward. Let your profits run Once you are in the trade and your stock has started moving in your direction. The logical recourse is to save as much as you can. How can a trader lose if he only takes small profits at a time? Profit is profit. when your odds are stronger. This will make you lose money in the long run. 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. profit of $100 will become $50 loss.3. If such profits are followed by two losses of $75 each. isn’t it? Not exactly… Profit of $100 is not the same as a profit of $250. and if nothing is happening. If it is now at 20 or less you should get out of the trade and look for another trading opportunity. However. while profit of $250 will become $100 win. Reaching your stop loss should not be your only reason to get out of trade without profit. 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. The best solution to resolving these conflicts is to use trailing stop loss. For example. If after you have entered a trade. Pushing forward wears a soldier out. you should also get out. It only takes a few stubborn incidents to entirely devastate your initial trading capital. 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. 11. If a battle is at a standstill. and return later. .2.
let’s say that we have bought 100 shares of company ABCD at $50 per share.1 or 0.As the name says. when exiting we will use market orders.5 .5. which will be followed by movement in our direction. We will now move our stop loss at $51. 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. At that point we don’t want in any case to get out of this trade without profit.2 points. You can’t afford to stay in a bad trade. 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. We are able to do this because we have already made a decent profit and can afford more risk. For example.5. we could put the stop loss at $53. trailing stop loss follows the stock price that is moving in your direction. this means that if the price hits $56. When exiting a trade the opposite is true. If the price hits $55 we will move our stop loss to $52. 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. We will automatically put our stop loss at 47. The price starts to move upwards and reaches $54. even though it will cost us an occasional 0. which will get us out of the trade quickly. . Therefore. We can also do this when the stock is in a clear upward trend. In our example. Small change in the stock’s direction can mean temporary profit taking.
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