Bill Poulos - Quantum Swing Trader

Quantum Swing Trader
Copyright © 2006 by Profits Run, Inc. All rights reserved.
Rev 08-20060221
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Run, Inc., 38271 Remington Park, Farmington Hills, MI 48331, 248-741-5939 (fax).
Disclaimer:
Quantum Swing Trader is an impersonal educational stock trading course, and
therefore, no consideration can or is made toward your financial circumstances. All
material presented within is not to be regarded as investment advice, but for general
informational purposes only. Trading stocks does involve risk, so caution must
always be utilized. We cannot guarantee profits or freedom from loss. You assume
the entire cost and risk of any trading you choose to undertake. You are solely
responsible for making your own investment decisions. Hypothetical or simulated
performance results have certain limitations. Past performance is not necessarily
indicative of future results. No stock system or method can guarantee profits. The
risk of loss exists in stock trading. Profits Run, its owners, or its representatives are
not registered as securities broker-dealers or investment advisors either with the U.S.
Securities and Exchange Commission or with any state securities regulatory
authority. We recommend consulting with a registered investment advisor, broker-
dealer, and/or financial advisor. If you choose to invest with or without seeking
advice from such an advisor or entity, then any consequences resulting from your
investments are your sole responsibility.
Copyright © Profits Run, Inc. Page 1 of 123


Table of Contents
Introduction ........................................................................................................... 6
Charting Software................................................................................................... 6
Trading Indicators.................................................................................................... 7
Trading Methods...................................................................................................... 7
Trading Systems ..................................................................................................... 8
Trading Tactics and Money Management .............................................................. 8
The Holy Grail........................................................................................................ 8
Key to Success ........................................................................................................ 9
Stock Trading Basics............................................................................................. 10
Fundamental vs. Technical Analysis..................................................................... 10
Fundamental Analysis ........................................................................................... 10
Technical Analysis .................................................................................................11
Bull Market ........................................................................................................... 12
Bear Market............................................................................................................12
Price Bars .............................................................................................................. 12
The Trend is Your Friend...................................................................................... 14
Time Periods.......................................................................................................... 14
Trends.....................................................................................................................16
Uptrend Line...........................................................................................................17
Downtrend Line......................................................................................................17
Support and Resistance ........................................................................................ 20
Moving Averages ..................................................................................................24
Simple Moving Average........................................................................................ 25
Stop Losses .......................................................................................................... 26
Exiting a Losing Trade.......................................................................................... 27
Profitable Trades .................................................................................................. 28
Exiting a Profitable Trade .................................................................................... 28
Take Partial Profits ............................................................................................... 29
Paper Trading........................................................................................................29
Charting Software ................................................................................................ 30

Introducing Quantum Swing Trader ....................................................................................32

Support and Resistance....................................................................................................32
KLAC...........................................................................................................................33
ECA ............................................................................................................................. 39
DHI.............................................................................................................................. 45
IVGN ............................................................................................................................ 51
OSTK............................................................................................................................ 55
PNRA ........................................................................................................................... 57
SBUX .......................................................................................................................... 59
CAT ...............................................................................................................................61
FFIV ............................................................................................................................ 63
ESRX........................................................................................................................... 65
AZO...............................................................................................................................67
MER .............................................................................................................................69
Trading Rules - Uptrend........................................................................................................71
The Indicators ........................................................................................................................71
Moving Averages...................................................................................................................71
Stochastics .............................................................................................................................71
Setup Conditions....................................................................................................................72
Entry Point .............................................................................................................................74
Initial Stop .............................................................................................................................76
Reversal Point........................................................................................................................77
Exit Strategy .........................................................................................................................80
1. Profit Target Exit…………………………………………………………………..81
2. Trailing Stop 1 .........................................................................................................82
3. Trailing Stop 2 .........................................................................................................83
Trading Rules - Downtrend................................................................................................. 84
The Indicators...................................................................................................................84
Moving Averages.............................................................................................................84
Stochastics ...................................................................................................................... 84
Setup Conditions............................................................................................................. 85
Entry Point .......................................................................................................................87

Initial Stop .......................................................................................................................89

Reversal Point .................................................................................................................90
Exit Strategy....................................................................................................................93
1. Profit Target Exit ....................................................................................................94
2. Trailing Stop 1 ........................................................................................................95
3. Trailing Stop 2 ........................................................................................................96
Trading Rules Summary ...................................................................................................... 97
Search Criteria .................................................................................................................... 98
Master List .......................................................................................................................... 99
Uptrend Trade Segments...................................................................................................100
Downtrend Trade Segments...............................................................................................102
Risk Management .............................................................................................................. 104
Discipline & Psychology ........................................... .......................................................107
Options............................................................................................................................... 110
In-The-Money Call Option ................................................................................................ 110
In-The-Money Put Option ................................................................................................. 112
Conclusion ......................................................................................................................... 116
Glossary ............................................................................................................................. 117
About The Authors ............................................................................................................ 123

Introduction
Welcome to Quantum Swing Trader. I'm excited to have you as a student!
Over the past 30 years, I've developed hundreds of my own trading methods and systems,
and I've spent thousands of dollars trying to learn from other traders. I truly believe that
Quantum Swing Trader is one of the best stock trading methods I've ever developed or seen
anywhere. My goal is to teach you how to easily and effortlessly trade stocks with Quantum
Swing Trader so you can enjoy the results of a robust trading method as much as I have.
To be successful at trading, all you need is a trading method that gives you an edge and the
discipline to trade it. Why then, with the profusion of charting software, trading indicators,
methods and systems, do most traders find it so difficult to consistently trade profitably?
There are numerous reasons. Let's take a look at a few of them and then I'll show you a
step-by-step approach to how you can consistently trade with confidence using Quantum
Swing Trader.
Charting Software
Good (but not necessarily expensive) charting software is a must, but all it does is display
data and information for you to act upon. It does not make trading decisions. Too many
traders let their software dictate how they trade.
What does this mean? For example, some traders become enamoured with their charting
software. Or, they limit themselves by refusing to use any software besides what their
broker offers. Then they find a great trading method that requires some indicators that their
software doesn't have. So what do they do? They often give up on the great trading method
just because "their" trading

software isn't sufficient to handle what is required. This is plain stubbornness and a
sure sign of someone who just isn't serious about trading.
Charting software is just a tool. Serious and professional traders first find a method
that works for them and then find the appropriate software that will help them
execute and trade that method. Amateur "traders" find the software first and then
hope to find a method that fits their software. This is a surefire way to a losing and
frustrating trading experience.
Trading Indicators
At last count there were over 100+ indicators all designed to tell you something
about the market, but none of them are suitable for making trading decisions when
used on a standalone basis. Using only a few indicators in an uncommon way can
give you an edge, while using too many is counterproductive and will only serve to
confuse you into poor decision making.
In general, the more indicators you use and the more complex they are, the less
likely you will achieve success. To be successful, I believe you need a few simple
but powerful indicators that will give you an objective read on what's going on in the
market and where the opportunities are.
Trading Methods
Like indicators, complex trading methods are usually counterproductive as you can
seldom muster the discipline to trade the method consistently. Subjective methods
have the same problem; trader discipline and consistency are rare.
On the other hand, if the trading method is fairly objective, easy to understand and,
of course, effective; the likelihood that you will be disciplined in applying the
method consistently is much greater.

Trading Systems
Trading systems are "black box" mechanical systems that make the trading decisions
for you, and consequently you never learn how to trade the markets yourself. While
there are a few trading systems that have had good results over time, I believe they
are generally disempowering.
When the system is winning, it is easy to follow. When it goes into a drawdown
(and they all do), it is very difficult to stick with the system and the hapless trader
usually bails out at just the wrong time.
Trading Tactics and Money Management

Here is where the game is won or lost. How you enter the market is important, but
not nearly as important as how you exit the market. The right trading tactics will
give you a powerful edge in your trading activities.
Implicit in good trading tactics is good money management. Even with a good
trading method, without good money management, you will most certainly fail. It is
only a matter of time.
The Holy Grail

I made every mistake you can make in trading. I tried, tested, and bought every
quack system, seminar, and trading course known to man. I developed my own
systems (hundreds of them) and quickly became bored and impatient when they
experienced a few losing trades. I, like so many other young and inexperienced
beginners before me, was searching for the illusive Holy Grail of trading. I was
young and thought I was smart, believing that without a doubt that I could "crack the
code" and discover the system that everyone has been looking for since the dawn of
the markets (and this was before the Internet, when all I had to work with was a
pencil, a straightedge, and a calculator).

I'll admit it, I was stubborn for many years, but one day 1 finally got it. I finally "cracked
the code". After spending thousands and thousands of dollars on systems, and an equal
number of hours locked away in my study, I finally learned the most important lesson: the
Holy Grail of trading just doesn't exist! This may be obvious to you by now, but it took me
nearly twenty years to turn off my ego, take a deep breath, and to finally, truly understand
this concept.
I learned the hard way that while it is possible to profit from the markets trading correctly, it
is a near certainty that you will lose money trading incorrectly. So, the elusive Holy Grail of
trading certainly does not exist because any good trading method will indeed incur losses.
The key is to use proper money management principles to limit those losses and in so doing
become a potential net winner.
Key to Success
The key to overcoming these trading pitfalls is to learn a method that is fairly objective,
simple, and at the same time powerful. This will greatly increase the probability that you
will consistently apply the method in a disciplined fashion using sound money management
principles. Quantum Swing Trader, I believe, is by far one of the best stock trading methods
I have ever come across or developed in all my years of trading stocks.

Stock Trading Basics

If you're new to stock trading, you should spend some time reviewing these basic
concepts. My friend and fellow trader, Mark McRae, has written what I believe to be
the best introduction to trading I've ever seen. Much of the material in this section
comes from Mark's excellent Trading for Beginners book.
Only the basic introductory material that you need to understand to trade with
Quantum Swing Trader has been covered. If you require a more in-depth review of
stock trading basics, I highly recommend you read the entire Trading for Beginners
book.
If you're already familiar with stock trading basics, you can skip ahead to the next
section.
Fundamental vs. Technical Analysis

Quantum Swing Trader is a technical trading method. However, you should be
aware of the differences between fundamental and technical analysis.
Fundamental Analysis
Fundamental analysis concentrates on the forces of supply and demand for a given
stock. This approach examines all the factors that determine the price of a stock and
the real value of that stock.
This is referred to as the intrinsic value. If the intrinsic value is below the market
price then there is an opportunity to sell and if intrinsic value is above the market
price then there is an opportunity to buy.
A fundamentalist will often examine the true value of shares in a company based on
its assets, earnings, and dividends. Once they have come up with a number they will
then determine if the share is undervalued or overvalued.

Another example might be an economist who examines a country's currency based

on all the underlying economic factors and purchasing parity to determine the true
value of that currency against another currency.
Once he has come up with his evaluation he can determine if he thinks the currency
is undervalued or overvalued against a given currency.
Technical Analysis
Technical analysis is the study of market action, mainly through the use of charts and
indicators to forecast the future price of a stock. There are three main points that a
technical analyst applies.
1. Market action discounts everything. Regardless of what the fundamentals are

saying, the price you see is the price you get.
2. The price of a given stock moves in trends.
3. The historical trend of a stock will tend to repeat.
Of all of the above points, the most important is the first one, and it is important for
you to understand this point, as it is the basis of Quantum Swing Trader's approach
to trading.
When you look at the price of any financial instrument as a technical analyst you
believe that is the true value of the instrument as the market sees it.
Using a technical approach, you believe that all the factors that affect price,
including, fundamental, political and psychological have all been built into the price
you see.
All this means is that anything that can effect the price of a stock has already been
allowed for by the market participants. Technical analysts look at charts the same

way a doctor would look at x-rays. They examine the charts for information on the future
direction of the markets.
Bull Market
The language of the markets can be confusing in the beginning so the following
explanations may help.
When the buying market is more predominate than the selling market here are some
expressions commonly used: BUYING, BUYING LONG, RALLY - UP, GOING UP,
HIGHER HIGHS, HIGHER LOWS, NORTH, TRENDING UP DAY, BULL, BULLISH
Bear Market
And, here are some expressions used for a bear market, when the selling market is more
predominant than the buying market: SELLING, SOUTH, TRENDING DOWN DAY,
SHORT, SELLING SHORT, SHORTING THE MARKET, DOWN, GOING DOWN,
LOWER LOWS, LOWER HIGHS, BEAR, BEARISH
Price Bars
A bar represents one period of time and is a means of measuring the duration of buying or
selling within the market. The time intervals may be 5 minutes, 10 minutes, 30 minutes, 1
hour, 2 hours, 4 hours, 1 day, 1 week, even one minute if desired. You can use any time
period you want. Quantum Swing Trader uses daily (1 day) bars.
Price Bar

Bullish Bar Bearish Bar
Bar charts are among the most widely used charts in the world today and during our
course we will be using them a lot.
Figure 1 - Bar Chart Example

The Trend is Your Friend

The price chart of a stock may appear like a random distribution, but this is not so.
About 30% of the time a stock will be in a definite trend. The rest of the time prices will
trade more or less in a sideways range. Our job is to recognize trends early, as they emerge
from non-trends or as reversals of prior trends.
We then buy/sell our stock early in these new trends and exit the trade profitably when the
trend ends. This identification of trend, its beginning and end, is the most important thing
we have to do. This is how great fortunes are made.
Time Periods
There is no correct time period to trade, only the time period you feel comfortable in.
If you ask someone to tell you where the trend is in the S&P market they would first have to
find out what time period you were talking about. For a daily trader the trend may be up but
for an hourly trader the trend may be down.
Let's discuss this a little further. All of the charts we will be looking at are day charts; that is
to say if you are looking at one bar that encapsulates everything that happened during that
day. It would have a high for the day, a low for the day, an open for the day and a close.

Day 4Hours 2Hours 1Hours
Figure 2 — Time Frame Examples
If you were looking at a chart made up of 4-hour bars there would be twice as many bars.
Each bar would have its own open, high, low and close (OHLC). These may be different
from the day OHLC bar as the bar is measuring all the price changes inside that particular
time period, in this example, 4 hours.
The same can be said for any other time period whether it is 30 minutes or 1 minute. For
example, it would take five l-minute bars to make up one 5-minute bar. This is why it's
impossible for someone to tell where the trend is in a particular stock unless he knows what
time period you are trading.
It is also why if you were looking at a daily bar and noted that the bar closed at 500, for
example, it does not tell you what happened during the day. If you were trading 5 minute
bars you might have watched it rise most of the day and made money only to see it close
much lower later in the day.
I often see people with little or no experience trying to trade 1 minute bars only to find the
decision making process is far too much for them as they have to make decisions every
minute.

Also worth noting is that there is no one time period that makes more money than another.
The reason you would trade a weekly bar as opposed to a 5-minute is purely a matter of
choice and circumstance.
One of the secrets of trading is to trade in the time period you feel comfortable in.
Trends
A trend is the easiest and the most difficult thing to understand. The difficulty arises
because of the time factor. Whenever we talk of trend it has to be related to the context of
time.
An intraday (relates to action on that particular day only) price chart may show a significant
trend, which is contrary to a trend recognizable on a daily price chart, which may be
contrary to a trend on a weekly chart.
Success depends on recognizing and trading the appropriate trend. Successful investing
depends on recognizing the short, medium or long-term trend and their correction (rallies
and dips) inside the larger trend.
A simple definition of trend is basically the general direction of price movements.
? An uptrend is present when prices make a series of higher highs and higher lows.
? A downtrend is present when prices make a series of lower highs and lower lows.
When prices move without such a discernible series, prices are said to be trading sideways
in a range, or trendless.
Once a trend is discernible then trend lines can be drawn to define the lower limits of an
uptrend or the upper limits of a downtrend.

It is essential that trend lines be drawn correctly. It is the recognition of the trend
line and the violation of this trend line that is your key to successful trading and
fortune building.
Uptrend Line
As you can see in Figure 3, the trend is moving up. To draw a trend line, draw a
straight line from the lowest low of the period to the next lowest low. Make sure
the line does not pass through any bars.
Figure 3 — Uptrend Line
Downtrend Line
As you can see in Figure 4, the trend is moving down. To draw a trend line, draw a
straight line from the highest high of the period to the next highest high. Make sure the
line does not pass through any bars
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Figure 4 — Downtrend Line

The following are examples of the correct way to draw a trend line.

Figure 5 — Downtrend Line Examples
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Figure 6 — Uptrend Line Examples
A break in the trend line is the first indication that the market may be changing course.
Support and Resistance

It is very important to understand the concept of support and resistance. In uptrends, every
time price drops to the uptrend line and then resumes its advance, the trend line has acted as
support to the price uptrend. Support can also be found at prices of previous support or
resistance.

In downtrends, every time price rises to the downtrend line and then resumes its
decline, the downtrend line has acted as resistance to the upward move of market
prices.
Figure 7 — Support & Resistance
Resistance can also be expected at prices of previous support or resistance. Once

levels of support or resistance have been violated then invariably these reverse their
roles, so that previous support becomes resistance and previous resistance becomes
support.
Consider the following. When price action drops to a certain level, the bulls (i.e., the
buyers) take control and prevent prices from falling further. Similar to support, a
"resistance" level is the point at which sellers take control of prices and prevent them
from rising higher.

Figure 8 - Support & Resistance Examples
The price at which a trade takes place is the price at which a bull and bear agree to do
business. It represents the consensus of their expectations. The bulls think prices will move
higher and the bears think prices will move lower.
Support levels indicate the price where the majority of investors believe that prices will
move higher, and resistance levels indicate the price at which a majority of investors feel
prices will move lower.

Figure 9 — Breakout with Ret est
When investor expectations change, they often do so abruptly. Note how when
prices rose above the resistance level they did so decisively. This also happens with
support.
The development of support and resistance levels is probably the most noticeable
and reoccurring event on price charts.
The penetration of support/resistance levels can be triggered by fundamental changes

that are above or below investor expectations (e.g., changes in interest rates,
government announcements, etc.) or by self-fulfilling prophecy (investors buy as
they see prices rise). The cause is not as significant as the effect, so new expectations
lead to new price levels.

As you can see from the charts above, sometimes the price will just keep going through
support and resistance and sometimes it will come back to test its previous support or
resistance line.
Moving Averages
The changing prices of a stock from tick to tick, day to day or whatever time period you are
looking at may seem random, but there are ways to smooth out this randomness. One way
traders look to make sense from this seemingly unpredictable sea is moving averages.
If you are going to trade professionally it is vital that you can identify trading opportunities.
To this end the concept of moving averages is a very useful tool to understand.
A moving average (MA) is a way to try and eliminate or minimize the fluctuations of the
numerical value of price fluctuations we are observing. This will help us identify the
underlying value. Moving averages are generally calculated using the closing price.
What, in effect, the moving average does is to eliminate the fluctuation of price in all time
periods below the number which is chosen for the average. For example, a 4-day or 9-week
moving average eliminates the presence of price fluctuations for periods up to 4 days or 9
weeks respectively.
A 200-day moving average eliminates the presence of daily price fluctuations for periods
below 200 days. This smoothing effect of price change increases as you use longer and
longer periods as the average.
There are four commonly used moving averages: simple, smoothed, weighted and
exponential. Quantum Swing Trader uses only simple moving averages.

Simple Moving Average

This is the most widely used and is simply calculated by adding up a set of values
and dividing the total by the number in the set.
This is the average. Movement of this average is effected by adding the next new
value of the set and subtracting the first value of the set and again dividing by the
same number of values in the set being studied. You repeat this simple calculation
with each new piece of data.
For example, to find the 3 period average of the sequence "5, 10, 8" add the three
numbers together which gives 23 and divide that number by 3 which equals 7.7.
Figure 10 shows price strength is associated with a rising moving average and that
weakness is denoted by a declining moving average.

Figure 10 — Moving Average Example
The shorter the time period calculated, the more volatile the average and the shorter the lag
period but the more frequent will be costly whipsaws. Longer time periods will be less
volatile with fewer whipsaws but the lag period will be greatly increased substantially
eroding profits.
Stop Losses
A stop loss is the level at which you will close a trade on the basis that it has gone too far in
the 'wrong' direction, and therefore negated the reason for being in that trade.
Always use a stop loss when trading. It can be too easy for a $300 loss to become a $5,000
loss. A good trader takes a small loss and goes on to the next trade.

Remember that trading capital is your business. If it burns, there is no insurance. Once you
have entered a trade immediately place a stop. This safeguards you from losing your entire
account.
It is also wise to talk with your broker about how they execute your stop. Some brokers
execute stops differently.
Your stop loss policy can be set in a number of ways. Some use an actual figure (e.g. $100),
and some a percentage figure. For example, they do not want a position to go more than a
certain percent, say 5%, against them.
Others may use technical analysis principles to set stops. This is what Quantum Swing
Trader does.
It's important to insure that your stop is canceled if you close your position. I mention this
as you would not be the first trader which closed a position only to forget that they still had
a stop in the market, which would take you back into a position.
The most important thing to remember, however you approach the decision, is to know
where you will cut a losing position before entering the trade. Set the rules and always
follow them.
Exiting a Losing Trade

The stop loss means that if a stock trades a certain amount below or above where you
entered the market an order is executed to close your position. You may use "programmed"
stops if your broker offers them. Some brokers do not offer this.
You can also at anytime during the trade close the trade by calling your broker or executing
the trade online.

If you are long a stock, you will sell it in order to close it. If you are short a stock, you will
buy it in order to close the position. Think of it like this - when you buy something you now
own it. In order to get rid of it you must sell it.
Profitable Trades
Once you are in a profitable trade, the next challenge becomes when to take profit.
Optimizing profits is the other main aim of trading besides limiting losses.
As a trader you must determine the risk/reward level that is comfortable for you, either on
your own or by discussing it with your broker.
Below are some general exit strategies. Later on, we'll define specific exit strategies for
Quantum Swing Trader.
Exiting a Profitable Trade

Trailing Stop: Once a profitable position has been established, maintain a trailing stop. For
example, sell below the current price if you are long.
Again this can be set in actual dollar amounts, percentage terms, or using technical analysis
principles.
However you approach the stop price, it is a level beyond which you are not prepared to
give up profit, or where a position slips back to breakeven or a small loss. As the price
continues to rise, your stop 'trails' higher in tandem.
As an example, if you were to set a straight forward $300 trailing stop and the stock moved
in your favor by $1000, you could change your stop to be only $300 behind the price and
lock in $700 of profit.

In this way you lock in profits and you are still in the game should the trade continue to go
in your favor. You could also trail the stop until you get another signal as in a trend line
breaking.
Take Partial Profits

Another strategy commonly used is to close, say, half your position when you are
comfortable with the profit level, and let the other half continue to trade. In that event also
use a protective stop, either fixed or trailing, to prevent profit erosion on the balance of the
position.
Paper Trading
Over the years I have trained many traders and I always advise that they spend at least three
months paper trading before they go live with real money.
Even though I advise this, I have never had a student actually do it. They all give up on
paper trading after a few weeks and go live. Why is that? They become impatient and think
they have mastered it or they think they don't need that much time.
There is a good argument for not paper trading first as no matter how much paper trading
you do you will never get the emotional involvement that you have when you have a real
live trade on. The fact remains, however, that you need time to familiarize yourself with
whatever method you are using.
Finding out you don't know how to operate your trading software or you don't know the
correct terminology to use when speaking with your broker on the phone when trading live
is a recipe for disaster. You need time to get used to how to trade your method. Whichever
method you use you must know it inside and out. This is part of trading. It is one of your
main tools and should be taken seriously.

Paper trading is simply using imaginary money with imaginary trades. In the old days you
would look at the financial newspapers and write down the imaginary trades on a piece of
paper, which is where the term comes from.
Virtually every broker now offers a free demo of their trading platform and will fund your
account with an imaginary amount of money. This will let you make trades just like you
would if it were your own money in the account. Their system will also calculate your
profit and loss automatically.
Take this time to experiment with the method you're trading. Make mistakes. Press the
wrong button. Buy when you really meant to sell and so on; it costs nothing at this stage.
One last comment on paper trading: take it seriously. If you can't make money on paper,
then don't even think about using real money. I know too many traders who didn't make
money on paper but for some inexplicable reason thought that if they had real money in the
account they would do just fine.
If you are at all serious about trading, approach it professionally. If you aren't making
money on paper, go back to the drawing board and rethink your plan.
Charting Software
You can use any reliable online charting service you want. Just make sure they provide the
basic analytical tools used by Quantum Swing Trader. Specifically, you'll need these basic
indicators:
? Simple moving averages

? Slow stochastics
Many charting services specialize in only one security. For example, they only provide
charts on stocks.

With Quantum Swing Trader, we'll be trading stocks with daily data. So at a
minimum, you'll need charting software that provides data after the market closes
each day.
Throughout the course, I'll be using Advanced GET charting software. You can visit
the Quantum Swing Trader member's website for more information on other charting
software solutions that I recommend.

Introducing Quantum Swing Trader

Quantum Swing Trader is a highly robust stock trading method that harnesses the DNA of
the stock market by leveraging those price points where the market becomes highly
predictable. These price points are inherent in the behavior of any stock price chart and help
to identify the "signature" of each stock. With this information, we get positioned for the
potential moves that can occur at these points without having to know the direction or
magnitude of the move.
Support and Resistance

Quantum Swing Trader is a swing trading method that aims to capture short term,
intermediate and longer term profits. The method is based on a simple, objective way to
identify support and resistance. It buys at support and sells short at resistance. Countless
ways exist to attempt this approach, but I believe Quantum Swing Trader is one of the best
that you will find anywhere.
You've probably heard of quantum physics before, which, in a nutshell, is about

potentialities from which a single outcome is observed. Likewise, Quantum Swing Trader
is about identifying points in the market where the market has the potential to jump one
way or the other, up or down, but not stay the same. This is very powerful information to
have in order to take advantage of the next market move, no matter the outcome.
Now, here is a secret that few traders know about that is a key component of Quantum
Swing Trader. When the market trades down to a support area, for example, most traders
expect the market to find buying pressure and for the market to go up from there. Well, it
does do that much of the time; but when the market fails to hold at support, it will likely
head much lower. A failure at support is a very good short selling signal and is why you
must use stops when a support or resistance fails.

We will now look at several stock chart examples to illustrate the power of
identifying key support and resistance. Don't worry about learning the specific
trading rules yet; we'll first just get a feel for how Quantum Swing Trader works at a
high level and then dive deep on the step-by-step trading rules later on.
KLAC
Our first example is a daily chart of KLAC (Figure 11). You can see from looking at
this chart that over a 12 month period the stock went up about 7 points but had many
heart-stopping wild swings in between both up and down. Wouldn't it be nice to
have a method to trade this stock and capture a few of these swings?
Figure 11 - KLAC
Figure 12 is the same chart, but with key support and resistance levels identified and
the significant market moves that followed.

Figure 12 — KLAC, with key support & resistance levels
Now what if there was a way to identify these key support and resistance levels
using a very simple common indicator? Well, thankfully, there is. It is the simple
moving average.
Figure 13 shows the same KLAC chart, but now with 3 key simple moving averages
plotted on the chart - a short term, intermediate term, and long term moving average.

Figure 13 — KLAC, with 3 simple moving averages
The aim of Quantum Swing Trader is to use these moving averages together with powerful
trading tactics to enter the market at key support and resistance levels where the risk is well
defined and small relative to the potential gain.
When one of these moving averages is going up, and the market is trading lower down to
that same moving average, and a daily bar straddles that moving average, we have a
potential support level that suggests the market could reverse and head higher; or, after a
brief pause, head much lower.
Likewise, when one of these moving averages is going down, and the market is trading
higher up to the moving average, and a daily bar straddles that moving average, we have a
potential resistance level that suggests the market could reverse and head lower; or again,
after a brief pause, head much higher.

Zooming in on the chart (Figure 14) we see an example of a bar straddling a key moving
average that is going up. When this occurs, the market will usually bounce off the moving
average line; or, after a brief time, trade right on through the moving average line. It will
usually go one way or the other - up or down from that point. Seldom does it stay the same
for very long. This is a very important observation and can be exploited to your benefit.
Indeed, if the support level fails, we would go short. Or if a resistance level failed, we
would go long.
Figure 14 - KLAC
Besides the three moving averages, the only other indicator we are going to use is the Slow
Stochastics as a confirming indicator. Looking again at our chart of KLAC (Figure 15) we
have now added the Slow Stochastics at the bottom of the chart.

Stochastics is an oscillator that indicates when the market is over sold or over
bought; which, of course, are relative terms. But all we need to know is if the
Stochastics is making a significant low or high at the same time as the market is
straddling a key moving average. We will define this in more detail later.
In our KLAC example, the Stochastics is making a significant low at the same time
that the market trades down to the moving average, and a daily bar straddles that
average.
Figure 15 — KLAC, with slow stochastics
When both of these events occur we can be fairly certain that the market will either
bounce off support at the moving average line or, after a brief time, trade right on
through the moving average line and head lower. In this case, the market bounced off
support and moved significantly higher (Figure 16). Indeed, every swing identified
on the chart was signaled by a daily bar straddling one of

the three key moving averages, and at the same time the stochastics %K was making
a significant high (>= 60) or low (<=4o).
Figure 16 - KLAC

ECA
Let's now look at another example. Figure 17 is a daily bar chart of ECA.
Figure 17 - ECA

Unlike KLAC, you can see that ECA has enjoyed a steady move up over a 12 month
period. Nevertheless, there were enough opportunities where the market traded down to
support that would have given us a chance to go long and capture some significant swings
(Figure 18).
Figure 18 — ECA, with key support & resistance levels

Figure 19 adds the three key moving averages that help signal these swings.
Figure 19 - ECA, with moving averages

Figure 20 zooms in on one of those swings showing the daily bar that straddles the
moving average.

Figure 20 - ECA

Figure 21 then adds the stochastics indicator, highlighting the significant

stochastics low at the same time the daily bar straddled the moving average.
Figure 21 — ECA, with stochastics

As in the example with KLAC, the market then bounced off of support at the moving
average and moved significantly higher (Figure 22).
Figure 22 - ECA

DHi
The next example is DHI shown in Figure 23. The market traded up through March
and then traded lower for a month and half before resuming the uptrend, making a
new a high in July. After the July highs, the market traded lower into October.
Figure 23 - DHI
That's quite a different pattern for the 12 month period than either KLAC or ECA.

Nevertheless, we are able to identify several major swings as shown in Figure 24

and again with the moving averages that signaled these swings added in Figure 25-
Figure 24 - DHI, with key support & resistance levels

Figure 25 - DHI, with moving averages
The bar highlighted in Figure 25 that straddles the moving average signaled an up
move.

However, in this case, the up move failed and the market moved significantly lower
as shown in Figure 26. As we said earlier, when support fails, we will reverse and
go short as is the case in this example.
Figure 26 - DHI

Figure 27 shows the stochastics making a significant low, confirming support at the moving
average.
Figure 27 — DHI, with stochastics

49
Figure 28 highlights the fact that support failed and the market move
significantly lower.
Figure 28 - DHI

IVGN
The next example is IVGN shown in Figure 29.
Figure 29 - IVGN

In Figure 30, the three key moving averages are added as is the stochastics indicator at the
bottom of the chart. Can you identify the support and resistance levels?
Figure 30 — IVGN, with moving averages & stochastics

Look at Figure 31 for the answer. All of the support and resistance levels identified
follow the guidelines as discussed in the previous examples except one. And that one is
highlighted in Figure 32.
Figure 31 — FVGN, with support & resistance levels identified
Copyright © Profits Run, Inc. Page 53of 123

Figure 32 - IVGN
So we have an additional guideline to identify support and resistance, in this case

resistance. When both the short term and intermediate term moving averages are
both going down and the market trades up so that at least one daily bar occurs
between them and the stochastics is making a significant high, resistance is likely to
occur and the market could head significantly lower.
Of course, the converse is true. When both the short term and intermediate term
moving averages are both going up and the market trades down so that at least one
daily bar occurs between them, and the stochastics is making a significant low,
support is likely to occur and the market could head significantly higher.
Up to this point, we have covered the method in general terms using guidelines so
that you can become familiar with the concepts behind the method. Next, we'll look
at several more examples for your review to insure your understanding of the
application of the method using the guidelines discussed above.

Following these examples, the specific trading rules for identifying the setup
conditions, entry points, reversal points, profit targets, and trailing stops will be
covered in detail. Be sure to thoroughly review the following examples first before
going on to the trading rules.
OSTK
Figure 33 - OSTK
Copyright © Profits Run, Inc.

Figure 34 - OSTK, with moving averages & stochastics
Figure 35 - OSTK, with support & resistance levels identified


PNRA
Figure 36 – PNRA
Figure 37 - PNRA, with moving averages & stochastics


Figure 38 - PNRA, with support & resistance levels identified

SBUX
Figure 39 - SBUX
Figure 40 - SBUX, with moving averages & stochastics

Figure 41 - SBUX, with support & resistance levels identified

CAT
Figure 42 - CAT
Figure 43 - CAT, with moving averages & stochastics

Figure 44 - CAT, with support & resistance levels identified

FFIV
Figure 45 – FFIV
Figure 46 - FFfV, with moving averages & stochastics

Figure 47 - FFIV, with support & resistance levels identified

ESRX
Figure 48 – ESRX
Figure 49 - ESRX, with moving averages & stochastics
Copyright © Profits Run, Inc. Page65 of 123

Figure 50 - ESRX, with support & resistance levels identified

AZO
Figure 51 – AZO
Figure 52 - AZO, with moving averages & stochastics
Copyright © Profits Run, Inc. Page67 of 123

Figure 53 - AZO, with support & resistance levels identified

MER
Figure 54 – MER
Figure 55 - MER, with moving averages & stochastics

Figure 56 - MER, with support & resistance levels identified

Trading Rules - Uptrend

In this section we will cover the specific trading rules to be used in an uptrend. An
uptrend is simply defined by one of the moving averages going up. These rules will
allow us to take advantage of these explosive moves within well-defined risk levels.
The Indicators
We use just a few indicators with Quantum Swing Trader, but in a powerful and
unique combination.
Moving Averages
? Short term moving average is a 20 day simple moving average.
? Intermediate term moving average is a 50 day simple moving average.
? Long term moving average is a 200 day simple moving average.
These average values are used simply because these are the values that most traders
follow and will see on their charting software as default settings. And that is why
they act as support and resistance - because thousands of traders think they do. It
becomes a self-fulfilling outcome.
Stochastics
■ The slow stochastics uses an 8,3,3 setting and it is the %K value that we
are interested in.

Setup Conditions
There are two independent setup conditions as follows. Only one of these has to occur in
order to have a valid setup. When a valid setup occurs, we refer to the day it occurs as the
setup day.
Setup Condition i, Uptrend (Figure 57)
A Any one of the three moving averages is going up AND
The market trades above the moving average (a minimum of one daily bar
B low > the moving average) and then trades down to the moving average (a
minimum of one daily bar low <= the moving average) AND
A daily bar straddles the moving average (the daily high is > the
C moving average and the daily low is < the moving average) AND
D At the same time the stochastics %K value is <= 40% AND
E No subsequent daily bar high trades below the moving average

Figure 57 — Setup Condition 1, Uptrend
Setup Condition 2, Uptrend (Figure 58)

Both the short term 20 day moving average and the intermediate term
A
50 day moving average are going up AND
The market trades above the 20 day moving average (a minimum of
B
one daily bar low > the 20 day moving average) AND
The market then trades down to and below the 20 day moving
average in between the two averages, so that at least one daily bar
C
high trades below the 20 day moving average and that same day's low
trades above the 50 day moving average AND
D At the same time the stochastics %K value is <= 40%
Copyright © Profits Run, Inc.
Page 73 of 123

Figure 58 — Setup Condition 2, Uptrend

Entry Point
With one of the setup conditions in place, we then place an order for the following
day as follows (Figure 59):
Entry Point, Uptrend (Figure 59)
Buy at the setup day's High + 1/2% of the High Stop

Figure 59 — Entry Point
Ignore inside days. An inside day is one whose High is lower than the previous day
High and whose Low is higher than the previous day's Low. (Figure 60)

Figure 6o — Ignore Inside Days, AEOS
Initial Stop
Cover the long position just below the setup day Low.
Initial Stop, Uptrend (Figure 61)
Sell at the setup day Low - 1/2% of the setup day Low Stop
If this stop is hit, we will be stopped-out with a small loss. This is very important for
a number of reasons. First, we know exactly where to place the stop, second, we
know how many points we intend to risk in the trade, and third, knowing this, we
will have the confidence and discipline to place the trade.

Figure 61 — Initial Stop

Reversal Point
Reverse and go short at the initial stop point only if the stop point is within 10 days
of the current day (Figure 62). If this occurs, we not only will be stopped out of our
long position, but will also reverse our position and go short.
We do this because we know the probability is such that if the support level as
defined by the setup day does not hold, the market will trade right on through that
support level. There are two important points here. First, in this case we surely no
longer want to be long and so it is imperative to cover the long trade at the stop
point. Second, we want to take advantage of the probable continued down move by
going short.

In order to go short, we will place an order at the same price point as the stop order
above as follows:
Reversal Order, Uptrend (Figure 62)

Sell short at the setup day Low — 1/2% of the setup day Low
Stop
If filled on the short, we will call that day the Reversal Day (the day we were filled
on the short order) and the initial stop on that new short position becomes:
Reversal Day Initial Stop, Uptrend (Figure 63)

Buy to cover at the High of the day before Reversal Day +
½% of the High of the day before Reversal Day Stop
Furthermore, after we apply the Reversal Day Initial Stop, we would apply the same
profit target exits as described in the Trading Rules - Downtrend section described
later in the manual.

Figure 62 — Reversal Order, Uptrend

Figure 63 - Reversal Day Initial Stop, Uptrend
Exit Strategy
Our strategy to exit our trades profitably is to scale out of each trade in three steps. The first
step is to exit 1/3 of our position at a predefined profit target and move our stop loss up to
65.00
breakeven on the remaining 2/3 of our position. For the remaining 2/3 of our position, we
exit in two steps, Trailing Stop 1 and Trailing Stop 2.
We follow this strategy for two reasons.

1. First, we take a portion of our position off the table at a profit.
2. Second, since we have moved the stop loss to breakeven, we now have a free trade
for the remaining 2/3 of the position. This is very significant in that we are now in
position to let the market run in our favor with a breakeven stop in place for a
virtually risk-free trade.

1. Profit Target Exit

Exit 1/3 of the position at a 3% profit (Figure 64) and change the initial stop to
breakeven for the remaining position (Figure 65). Do not reverse at the breakeven
point, only at the reversal point (as stated above).
Profit Target Exit, Uptrend (Figure 64)

Sell at Entry Price x 1.03 Limit
Profit Target Exit Initial Stop Change, Uptrend (Figure 65)

Sell at Entry Price Stop
Figure 64 — Profit Target Exit, Uptrend

Figure 65 — Profit Target Exit, Initial Stop, Uptrend
2. Trailing Stop 1
Exit 1/3 of the position at the Lowest Low of the last two days (LL2).
Trailing Stop 1, Uptrend (Figure 66)

Sell at LL2 - 1/2% of the LL2 Stop
When we exit this second 1/3 of our position, we usually can expect a profit greater
than we enjoyed on the first 1/3 of our position and we further reduce our position
size and risk.

Figure 66 — Trailing Stops, Uptrend
3. Trailing Stop 2
Exit 1/3 of the position at the last Swing Low. A Swing Low is a daily bar with at least two
bars before and after whose Highs are higher than the Swing Low Bar High and whose
Lows are higher than the Swing Low Bar Low.
Trailing Stop 2, Uptrend (Figure 67)
Sell at Swing Low - 1/2% of the Swing Low Stop
This final trailing stop is designed to catch the really big moves that often occur by giving
the market some room to correct without shaking us out of the trade.

Trading Rules - Downtrend

In this section, we will cover the specific trading rules to be used in a downtrend (moving
average is down). They are the same rules as the uptrend trading rules, but in reverse.
The Indicators
We use the same indicators for trading the downtrend as we use for trading the uptrend:
Moving Averages
? Short term moving average is a 20 day simple moving average
? Intermediate term moving average is a 50 day simple moving average.
? Long term moving average is a 200 day simple moving average.
Again, these average values are used simply because these are the values that most traders
follow and will see on their charting software as default settings. And that is why they act
as support and resistance - because thousands of traders think they do. It becomes a self-
fulfilling outcome.
Stochastics
■ The slow stochastics uses an 8,3,3 setting and it is the %K value that we
are interested in.

Setup Conditions
There are two independent setup conditions as follows. Only one of these has to occur in
order to have a valid setup. When a valid setup occurs, we refer to the day that that occurs
as the setup day.
Setup Condition 1, Downtrend (Figure 67)

A Any one of the three moving averages is going down AND
The market trades below the moving average (a minimum of one daily bar
B High < the moving average) and then trades up to the moving average (a
minimum of 1 one daily bar High >= the moving average) AND
A daily bar straddles the moving average (the daily Low is < the moving
C average and the daily High is > the moving average) AND
D At the same time the stochastics %K value is >= 60% AND
E No sub sequent daily bar low trades above the moving average

The Simple 200 day Moving Average of today > The Simple 200 day
A
Moving Average of yesterday AND
B The High of today > The Simple 200 day Moving Average of today AND
C The Low of today < The Simple 200 day Moving Average of today AND
D The Slow Stochastics (8,3,3) %K < = 40%

Figure 67 — Setup Condition 1, Downtrend

Both the short term 20 day moving average and the intermediate term
A
50 day moving average are going down AND
The market trades below the 20 day moving average (a minimum of
B
one daily bar High < the 20 day moving average) AND
The market then trades up to and above the 20 day moving average in
C between the two averages, so that at least one daily bar Low trades
D At the same time the stochastics %K value is >= 60%

|
Figure 68 — Setup Condition 2, Downtrend
Entry Point
With one of the setup conditions in place, we then place an order for the following day
as follows (Figure 69):
Entry Point, Downtrend (Figure 69)

Sell Short at the setup day's Low - 1/2% of the Low Stop

Figure 69 — Entry Point, Downtrend
Ignore Inside Days - An Inside Day is one whose High is lower than the previous day High
and whose Low is higher than the previous day Low. (Figure 70)

Figure 70 — Entry Point, Downtrend
Initial Stop
Cover the short position just above the setup day High.
Initial Stop, Downtrend (figure 71)
Buy to Cover at the setup day High + 1/2% of the setup

day High Stop
If this stop is hit, we will be stopped-out with a small loss. This is very important for a
number of reasons. First, we know exactly where to place the stop, second, we know how
many points we intend to risk in the trade, and third, knowing this, we will have the
confidence and discipline to place the trade.

Figure 71 — Initial Stop
Reversal Point
Reverse and go long at the initial stop point only if the stop point is within 10 days
of the current day (Figure 72).
If this occurs, we not only will be stopped out of our short position, but will also
reverse our position and go long. We do this because we know the probability is
such that if the resistance level as defined by the setup day does not hold, the market
will trade right on through that resistance level. There are two important points here.
First, in this case we surely no longer want to be short and so it is imperative to
cover the short trade at the stop point. Second, we want to take advantage of the
probable continued up move by going long.
In order to go long, we will place an order at the same price point as the stop order
above as follows:

Reversal Order, Downtrend (figure 72)

Buy at the setup day High + 1/2% of the setup day High
Stop
If filled on the long, we will call that day the Reversal Day (the day we were filled
on the long order) and the initial stop on that new long position becomes:
Reversal Day Initial Stop, Downtrend (figure 73)

Sell at the Low of the day before Reversal Day – ½% of
The Low of the day before Reversal Day Stop
Furthermore, after we apply the Reversal Day Initial Stop, we would apply the same
profit target exits as described in the Trading Rules - Uptrend section described
previously.

Figure 72 — Reversal Order, Downtrend

Figure 73 - Reversal Day Initial Stop, Downtrend

Exit Strategy
As before, our strategy to exit our trades profitably is to scale out of each trade in
three steps. The first step is to exit 1/3 of our position at a predefined profit target
and move our stop loss down to breakeven on the remaining 2/3 of our position. For
the remaining 2/3 of our position, we exit in two steps, Trailing Stop 1 and Trailing
Stop 2.
We follow this strategy for two reasons. First, we take a portion of our position off
the table at a profit. Second, since we have moved the stop loss to breakeven, we
now have a free trade for the remaining 2/3 of the position. This is very significant in
#310
that we are now in position to let the market run in our favor with a breakeven stop in
place for a virtually risk-free trade.

1. Profit Target Exit

Exit 1/3 of the position at a 3% profit and change the initial stop to breakeven for the
remaining position. Do not reverse at the breakeven point, only at the reversal point (as
stated above). (Figure 74)
Profit Target Exit, Downtrend (Figure 74)
Buy to Cover at Entry Price x 0.97 Limit
Profit Target Exit Initial Stop Change, Downtrend (figure 75)
Buy to Cover at Entry Price Stop
Figure 74 — Profit Target Exit, Downtrend

Figure 75 - Profit Target Exit Initial Stop Change, Downtrend

2. Trailing Stop 1
Exit 1/3 of the position at the Highest High of the last two days (HH2).
Trailing Stop 1, Downtrend (Figure 76)
Buy to cover at HH2 + 1/2% of the HH2 Stop
When we exit this second 1/3 of our position, we usually can expect a profit greater
than we enjoyed on the first 1/3 of our position and we further reduce our position
size and risk.

Figure 76 - Trailing Stops, Downtrend
3. Trailing Stop 2
Exit 1/3 of the position at the last Swing High. A Swing High is a daily bar with at
least two bars before and after whose Lows are lower than the Swing High Bar Low
and whose Highs are lower than the Swing High Bar High.
Trailing Stop 2, Downtrend (Figure 76)

Buy to cover at Swing High + 1/2% of the Swing High
This final trailing stop is designed to catch the really big moves that often occur by
giving the market some room to correct without shaking us out of the trade.

Trading Rules Summary

These are the only trading rules. They are very objective and easy to follow. I would
encourage you to go back and review all of the example charts and apply the rules to
see how the swings identified on the charts could have been traded.
For your convenience, please refer to the Quantum Swing Trader Trading Rules
Blueprint, which summarizes both the uptrend and downtrend trading rules.

Search Criteria
After you understand how to apply the Quantum Swing Trader trading rules, you need to
learn how to easily find the stocks to which you can apply these rules.
There are two great features about the way we search for stock candidates. One is that the
search criteria is very straightforward and easy to implement with most good charting
software packages, including Advanced GET, Trade Navigator, and TeleChart 2005. The
other is that it is not necessary to maintain a lengthy watch list as a stock that meets the
setup conditions described previously will appear on the search list for the next day's order
entry. So, all that is required is to run the search at the close of each day for the next day's
potential trades.
The search criteria is in four segments. There's a segment for the 200, 50, and 20 day
simple moving averages and one for the 50 and 20 day simple moving averages both going
up. Each segment should be run separately from the other and any matches noted before
running the next segment.
You will be running 4 uptrend searches (and 4 downtrend searches) each day when you
wish to trade. This procedure only takes about 5 to 10 minutes to identify the few stock
candidates for the following day from the thousands available to trade.
Before running the four segments, however, we need to do a master search once per year,
and then save the list. It is this master search list that you will be running the four segment
searches against each day. The master search list will identify the high volume stocks that
we will consider trading. This is important because we only want to apply Quantum Swing
Trader to stocks that are being watched and traded by thousands of traders who are using
the 200, 50, and 20 day moving averages in their trading.

Lower volume stocks have less of a following and therefore are less reliable
candidates. Also, for option traders, optionable stocks tend to be the higher volume
stocks and so most of the stocks contained in the master search list will be
optionable.
Master List
The Master List is created once a year and will contain about 500 to 600 Stocks out
of the thousands available to trade. These are the stocks we want to focus on each
day when applying the search criteria segments.
Master List
A Price Range: $10 - $200 AND
B Average Volume of the past 50 days >= 1,000,000 Shares

Uptrend Trade Segments

Here are the search criteria segments for long trade candidates to be applied against the
Master List each day. The term today as used below refers to today's
market after it closes.
Segment 1, Uptrend
A
Segment 2, Uptrend
The Simple 50 day Moving Average of today > The Simple 50 day Moving
A
Average of yesterday AND

Segment 3, Uptrend
A
Segment 4, Uptrend
A
B
C The Low of today > The Simple 50 day Moving Average of today AND
D The High of today < The Simple 20 day Moving Average of today AND
E The Slow Stochastics (8,3,3) %K < = 40%
Copyright © Profits Run, Inc. Page 101of

123
Downtrend Trade Segments

Here are the Search Criteria Segments for short trade candidates to be applied against the
Master List each day. The term today as used below refers to today's market after it closes.
Segment 1, Downtrend
The Simple 200 day Moving Average of today < The Simple 200 day
A
D The Slow Stochastics (8,3,3) %K > = 60%
Segment 2, Downtrend
The Simple 50 day Moving Average of today < The Simple 50 day Moving
A
Average of yesterday AND
D The Slow Stochastics (8,3,3) %K > = 60%

Risk Management
It has been said that risk management is more important than the methodology one uses to
trade, since an otherwise winning methodology ends up losing without proper risk
management, but a mediocre methodology with strong risk management can end up
winning. You hold in your hands a potentially winning methodology coupled with strong
risk management.
I emphatically agree that risk management is the most important success factor. For
example, if you have a winning method that wins on the average 66% of the time, the
probability of 3 successive losing trades is 4%. That means you will lose 3 trades in a row
4% of the time for any series of three trades. Further, to illustrate the point, if you risk 33%
of your initial capital on each trade you will eventually be wiped out. This is a clear
example of a winning methodology undermined by extremely poor risk management.
Much has been written on this subject, its importance, and the means to scientifically
calculate the amount that should be risked per trade, but I have found in order for a good
trader to consistently apply sound risk management principles, that simpler is better.
The technique I use and strongly recommend to you is to simply risk no more than 1 to 2
percent of your trading account on each trade. By risk I mean the amount you are willing to
lose, not the amount applied to make the trade. For a $50,000 account, you would risk no
more than $500 to $1,000 per trade. If on the next trade you bought $10,000 of a stock and
lost $1,000, your account balance would be $49,000, limiting your risk on the next trade to
$980 (2% of $49,000).
Unlike the example above, where 3 losing trades wiped out the account, by limiting your
risk to 2% per trade, your account would be down only $2,940 to

Risk Management
It has been said that risk management is more important than the methodology one uses to
trade, since an otherwise winning methodology ends up losing without proper risk
management, but a mediocre methodology with strong risk management can end up
winning. You hold in your hands a potentially winning methodology coupled with strong
risk management.
I emphatically agree that risk management is the most important success factor. For
example, if you have a winning method that wins on the average 66% of the time, the
probability of 3 successive losing trades is 4%. That means you will lose 3 trades in a row
4% of the time for any series of three trades. Further, to illustrate the point, if you risk 33%
of your initial capital on each trade you will eventually be wiped out. This is a clear
example of a winning methodology undermined by extremely poor risk management.
Much has been written on this subject, its importance, and the means to scientifically
calculate the amount that should be risked per trade, but I have found in order for a good
trader to consistently apply sound risk management principles, that simpler is better.
The technique I use and strongly recommend to you is to simply risk no more than 1 to 2
percent of your trading account on each trade. By risk I mean the amount you are willing to
lose, not the amount applied to make the trade. For a $50,000 account, you would risk no
more than $500 to $1,000 per trade. If on the next trade you bought $10,000 of a stock and
lost $1,000, your account balance would be $49,000, limiting your risk on the next trade to
$980 (2% of $49,000).
Unlike the example above, where 3 losing trades wiped out the account, by limiting your
risk to 2% per trade, your account would be down only $2,940 to

$47,060. On the other hand, as your account grows, you can risk 1 to 2 percent of the
growing account balance which will allow you to grow the account more quickly.
A caveat here is in order. Successful traders with very large accounts will often risk no more
than a half percent (0.05%) per trade to further limit risk. This is contrary to what amateurs
do when they are fortunate enough to make money in spite of poor practices, only to give it
all back by increasing the risk percentage per trade thinking they can do no wrong.
The importance of this simple rule should be self-evident. In order to become wealthy
trading the markets, you need to stay in the game and the 1 to 2 percent risk rule will keep
you in the game to give your methodology the chance to payoff in the long run. Remember,
if you have a winning trading method individual trade outcomes are not important, it is the
outcome from a series of trades that is important, where you know that the more trades you
make the more likely you will be a net winner.
This is, of course, what the casino models are based upon. They don't mind losses up to the
house limit, because they know that the odds are in their favor and when the month comes
to a close, the casino will be a net winner, time and time again. You want to be like the
casino. Work your winning method with sound risk management so that you are not taken
out of the game along the way.
Another important aspect of risk management when it comes to trading stocks or options is
to not get caught with several long positions in a bull market reversal or with several short
positions in a bear market reversal. The following is a way to hedge for this situation, which
will occur sometime in the life of every bull and bear market.
In a bull market, it is always a good idea to have one short position on (only those that
would meet the criteria defined in this course) for every three long positions.

And likewise, in a bear market, it is always a good idea to have one long position on
(only those that would meet the criteria defined in this course) for every three short
positions. When the market reverses, often times unexpectedly, you will be able to
offset a good portion of the loss from the losing trades with the usually exceptional
profit on the one winning trade.

Discipline & Psychology

The key message about discipline is that without it you will lose. It's that simple. So you
think, "I understand that and so I will be disciplined in my trading." But this is where fear
and greed enter into the picture along with an emotional rollercoaster that will truly test
what you're made of. Remember earlier how I said that trading tested the very boundaries of
my emotions? I wasn't kidding! You must master your emotions when trading. If you are
trading a winning methodology and using sound money management practices, you will
eventually have the following experiences:
1. You will win several trades in a row or at least win most trades for a time.
You will then start to feel pretty good about yourself and your trading
ability.
Caution: You may then become reckless in your trading. Increasing the amount of
risk per trade, ignoring stop loss points, or staying in a profitable trade hoping for
more than your profit target. These actions driven by greed will cause your
trading account to suffer.
2. You will have several losses in a row. You will then feel depressed and
think your trading methodology no longer works, forgetting that even good
methodologies will have successive losing trades on occasion.
Caution: You may then become reckless in your trading by increasing the risk per
trade attempting to win back your recent losses all at once. Or more likely, you will
abandon your trading methodology and jump to something else, only to repeat the
cycle at a later date - this is the Holy Grail syndrome. Or you may give up trading
altogether, concluding that it is not possible to win consistently.

3. You will make several trades, but experience a number of winners and losers that
leave your account at breakeven at best. You will become bored and possibly
complacent.
Caution: Again, you may become reckless in your trading; trying to make
something happen that will break you out of your malaise and get back to winning.
This is called forcing the market to do what you want it to, which is never a good
idea.
The emotional reactions to the foregoing set of experiences are precisely why most traders
lose in the markets. They fall victim to one or all of these experiences. Winning traders, on
the other hand, have learned that these experiences will occur, and when they do they stay
disciplined, sticking to their trading methodology and risk management rules without
wavering. This makes all the difference in the world and is the primary reason that winners
are winners. Can you imagine a casino changing its gaming rules after losing several
jackpots in one week or only breaking even for several weeks? Can you imagine a casino
closing down after losing several jackpots in one week? No! Why not? Because, you know
the casino will be a net winner if they simply stick to their methodology which gives them a
winning edge. Winning traders do the same thing as the casinos - they stay disciplined and
win!
Another way to look at this is through personal success coach T. Harv Eker's concept of
your body's thermostat. When your home's thermostat is set to 70 degrees and you open the
windows in the winter, the temperature will drop but eventually the thermostat kicks in and
returns the temperature to 70 degrees. If you open the windows in the summer, the
temperature will go up, but again the thermostat kicks in and brings the temperature back
down to 70. The point is that your body, your mind, and your emotions work the same way.
You've grown accustomed to a certain way of thinking and behaving and reacting - that's
your body's thermostat. When you try to follow a new path, or attempt something that might
seem a little awkward or unnatural at first, your internal thermostat brings

you back to what makes you comfortable. It causes you to revert back to your old
behaviors. To master your emotions with trading, you need to learn to adjust your
thermostat to a new setting and leave it there.

Options
For those traders that have had the appropriate education for trading options, options can be
used to trade with Quantum Swing Trader to apply much greater leverage and profit
potential, but also potentially higher risk. A basic options trading overview is outside the
scope of this course; however, if you are an experienced options trader, here are some
options trading examples with Quantum Swing Trader.
In-The-Money Call Option

One way to trade options with this method is to simply buy a one strike in-the-money call
option with more than 60 days until expiration instead of buying the underlying stock when
a long entry signal on the underlying stock is given.
For example, referring to Figure 77, we zoom in on a chart of NUE, which shows a Setup
Condition 1, Uptrend at the 20 day moving average.

Figure 77 - NUE, Call Option Example
The market traded up through the entry point and would have been a profitable trade.
Following is a summary of the trade by trading the stock.
Planned %Profit
Action Price Quantity Risk Profit / Risk
Buy to go $70.45
Stop 300 shares $2.34 — (3-3%)
Long
Sell to $68.11
300 shares — —
Cover Stop
Sell to $72.56
100 shares $0.00 $2.11 3-0%
Cover Limit
Sell to $82.68
100 shares $0.00 $12.23 17.4%
Cover Stop
Sell to $80.50
100 shares $0.00 $10.05 14.3%
Cover Stop

111
And here is a summary of the same trade, but trading a one strike in the money call
option, specifically the NUE April 65 Call Option, instead of the stock itself.
Planned %Profit
Buy to go $9.20
3 options $1.60 — (17.4%)
Long Stop
Sell to $7.60
3 options — — —
Cover Stop
Sell to $10.70
1 options $0.00 $1-50 16.3%
Cover Limit
Sell to $18.70
1 options $0.00 $9-50 103.3%
Cover Stop
Sell to $16.50
1 options $0.00 $7-30 79.3%
Cover Stop
In-The-Money Put Option

Likewise, you can buy a one strike in-the-money put option with more than 60 days
until expiration instead of selling short the underlying stock when a short entry
signal on the underlying stock is given.
For example, referring to Figure 78, we zoom in on a chart of DNA, which shows a
setup condition 1, downtrend at the 20 day moving average.

Figure 78 - DNA, Put Option Example

The market traded down through the entry point and would have been a profitable
trade and indeed would still be short as of the chart date. Following is a summary of
the trade by trading the stock.
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Planned %Profit
Sell Short $92.84 300 shares $2.80 —- (3.o%)

Stop
Buy to $95-64 300 shares — — —

Cover Stop
Buy to $90.05 100 shares $0.00 $2.79 3-0%

Cover Limit
Buy to $89.14 100 shares $0.00 $3.70 4.0%

Cover Stop
Still Short 100 shares $0.00 $933 10.1%

$83.51
Last Close
And here is a summary of the same trade, but trading a one strike in-the-money Put
Option; specifically, the DNA June 95 Put Option instead of the stock itself.
Planned %Profit
3 options $1.50 — (22.7%)

Buy to go $6.60
Long Stop
Sell to $5-io 3 options — — —
Cover Stop
Sell to $8.30 1 option $0.00 $1.70 25.8%

Cover Limit
Sell to $8.90 1 option $0.00 $2.30 34-8%

Cover Stop
Still Long 1 option $0.00 $6.30 95-5%

$12.90
Last Close

As always, be sure to use the risk management guidelines when trading options. For
the two examples above, the initial planned risk was 17.4% for the Call trade and
22.7% for the Put trade as a percentage of the entry price. But that does not mean
you would risk that much as a percentage of your account. The money management
guidelines presented in this course require that you risk no more than 2% of your
account on any one trade.
The Call trade had a planned risk of $480 (3 options x 100 shares/option x $1.60).
Therefore, an account size of at least $24,000 ($24,000 x 0.02 = $480) would be
required for that trade.
The Put trade had a planned risk of $450 (3 options x 100 shares/option x $1.50).
Therefore, an account size of at least $22,500 ($22,500 x 0.02 = $450) would be
required for that trade.
One last word on options. The preceding examples are intended to illustrate that the
Quantum Swing Trader method can be applied to options trading as well, but these
examples do not constitute a complete education on options. Therefore, be sure you
get the appropriate education on options before trading them.

Conclusion
Congratulations on completing the course. I believe that Quantum Swing Trader is one of
the best stock trading courses that I have ever traded, bar none. With this objective trading
method, it is no longer necessary to wonder and worry about what stocks to trade, when to
trade, how to enter the market, place stop orders, and exit profitably. I strongly encourage
you to paper trade Quantum Swing Trader until you are comfortable that you have mastered
the method.
Quantum Swing Trader can be applied no matter what the general market is doing - up,
down, or sideways - as there will always be individual high volume stocks that will provide
high probability opportunities on any given trading day. The quantum world of
potentialities is alive and well in the stock market presenting us with potential opportunities
waiting for the observer to observe and act accordingly.
Good Trading,

Glossary
BEAR MARKET — A market in which prices are declining over a prolonged period of
time. Someone who believes prices will move lower is called a bear, or is considered
bearish.
BULL MARKET — A market in which prices are rising over a prolonged period of time.
Someone who believes prices will move higher is called a bull, or is considered bullish.
BUY AND HOLD - An investment strategy that promotes investing based on long-term
growth potential. The stability of the invested vehicle is important, rather than the shorter-
term market volatility. For numerous reasons, traders recognize that Buy and Hold is a
losing strategy.
BUYING LONG - The act of buying a security in hopes that it goes up in value in order to
make a profit.
CHART - A price chart for a security showing historical values over a period of time. The
x-axis shows the time frame and the y-axis shows the price.
CHARTING SOFTWARE - Interactive software that allows you to plot charts and overlay
them with various indicators, among other things. Charting Software requires a data feed.
DATA FEED - A source of security price and volume data to be used with Charting
Software. Intraday trading requires a real-time data feed. If you are trading daily bars or
longer, only end-of-day data is required.
ENTRY POINT - The price at which you enter a trade. All good trading systems calculate
a specific entry point.

FUNDAMENTAL ANALYSIS - Fundamental analysis involves the use of economic and

company financial performance data (if trading stocks) to forecast prices. Fundamental
analysis implies that a relationship between this data and the market prices of the security
analyzed can be determined with some accuracy in order to give the trader an edge in
trading the market.
HOLY GRAIL - A mythical trading system that works every time and produces no losing
trades. The Holy Grail of Trading does not exist.
INDICATORS - Mathematical formulas derived from the price data of a trading vehicle
(for example, a stock, futures contract, etc). There are numerous indicators that are used to
do technical analysis on markets in order to forecast future market prices.
INTERMEDIATE TERM - A period of time measured in days and weeks.
LIMIT ORDER - An order to buy a security at or below a specified price or an order to

sell a security at or above a specified price.
LONG TERM - A period of time measured in months and years.
MOVING AVERAGES - There are two commonly used moving averages. One is a simple
moving average which is calculated by adding a series of prices over a specific time period
(for example, 10 days) and dividing that sum by the number time increments (for example,
10). The other is an Exponential Moving Average (EMA) which is calculated in a similar
manner as the simple moving average except it gives greater weight to the most recent
prices in the time period measured. The EMA is a more sensitive average that is more
heavily influenced by the most recent prices than is the case for the simple moving average.
Like trend lines, moving averages are used to help determine the trend of a series of data
over time.

OSCILLATOR - Any one of a number of indicators that measures the ebb and flow of a
market from oversold (too low and ready to rise) to overbought (too high and ready to fall).
OPTIONS - The right to buy or sell an underlying security at a specific price called the
strike price until they expire in the expiration month. A call option is the right to buy an
underlying security and a put is the right to sell an underlying security.
PAPER TRADING - The act of trading a system "on paper" so that you don't actually risk
any real money. The purpose of paper trading is to become familiar with the mechanics of a
system before actually placing real trades with real money.
PRICE BAR - An element on a chart that describes the opening price, high price, low
price, and last price (the close) for the time frame plotted. The vertical length shows the
total price movement for the time frame. The little dash or line on the left side of the bar
indicates the opening price. The top of the bar indicates the highest price. Conversely, the
bottom of the bar shows the lowest price. The little dash on the right side of the bar
indicates the closing price (the last price traded for the time frame you are using).
PROFIT TARGET POINT - The price at which a stop order is placed to take a profit in
an open position.
RESISTANCE - Resistance is a level where prices will find selling pressure sufficient to
stop them from going up further at least temporarily. Resistance levels are defined by old
price highs, old price lows, downtrend lines, downtrending moving averages, Fibonacci
levels, etc.

RISK MANAGEMENT - A strategy to limit the risk to a trading portfolio through the use
of sound money management and stop loss rules.
SELLING SHORT - The act of selling a security short in hopes that it goes down in value
in order to make a profit. You sell short by borrowing the security from a broker and then
selling it. Eventually, you must buy the security back.
SETUP CONDITIONS - According to a trading system, the specific market conditions

that must be met prior to buying or selling a security.
SHORT TERM - A period of time measured in days and weeks.
SIDEWAYS MARKET - A market in which prices are neither predominantly rising nor
declining over a period of time. Also called a choppy market. See Bull Market and Bear
Market.
STOCHASTIC - An oscillator that identifies overbought and oversold conditions in a

market on a scale of o to 100. It measures the position of the most recent close relative to
the recent trading range. It consists of two lines; one is the fast line (%K) and the other is
the slow line (%D). When these lines are at or below 20, the market is said to be oversold.
When these lines are at or above 80, the market is said to be overbought. The most
powerful signals are given when divergence occurs between the stochastics readings and
market prices. Divergence occurs when the trend of price highs and lows goes one way and
the trend of tops and bottoms of the stochastics readings goes the opposite way.
STOCK MARKET - A tradable stock is a certificate of ownership in a company that can

be bought and sold on two major exchanges and several minor exchanges as well as the
OTC (Over The Counter) Market in the United States and several other stock exchanges
worldwide. In the U.S., over 10,000 stocks are traded on the NYSE (New York Stock
Exchange), the AMEX (American Stock Exchange), and the OTC that we all refer to as
the NASDAQ (National

Association of Securities Dealers Automated Quote System). An exchange is a place

where buyers and sellers physically get together on a central trading floor to buy and
sell through a middleman, called the specialist. The NASDAQ, on the other hand, is
an electronic market that automatically matches the buy and sell orders on a best-
price basis.
STOP LOSS POINT - The price at which a stop loss is placed to limit a loss in an
open position.
STOP ORDER - An order to buy or sell a security when a specific price is reached.
Stop orders are used to protect a profit or to limit a loss.
SUPPORT - Support is a level where prices will find buying pressure sufficient to
stop them from going down further at least temporarily. Support levels are defined
by old price highs, old price lows, uptrend lines, uptrending moving averages,
Fibonacci levels, etc.
SWING HIGH - A short term high bar with at least two lower highs on both the left
and right of the high bar.
SWING LOW - A short term low bar with at least two higher lows on both the left
and right of the low bar.
TECHNICAL ANALYSIS - Technical analysis is based primarily on the study of

price patterns and indicators that are derived from past prices to forecast future
prices. Technical analysis implies that patterns and indicators used in such analysis
can give the trader an edge in trading the market.
TRADING - The activity of buying and selling securities, futures contracts, etc. on a
shorter term basis with the intent of capturing short term profits.

TRADING ROUTINE - A specific set of steps to follow when trading a system. All
professional traders follow a trading routine.
TRADING SOFTWARE - Software used to actually place buy and sell orders with a
broker. Some Trading Software is integrated with Charting Software. Most brokers offer
trading software as part of their website.
TRAILING STOP - A trailing stop for a long trade is a Stop Loss point that is moved up
from a lower Stop Loss point and is placed below the market as the market moves up and
becomes profitable. This strategy locks in a portion of the profits as the market moves up
and lets the profits run. The reverse is true for a short trade.
TREND LINE - Trend lines are used to help determine the trend of a series of data over
time and are usually drawn by connecting the higher swing lows in an uptrend and lower
swing highs in a downtrend. When the trend line is penetrated on a closing basis, that
signals a possible change in the trend.
WINNING METHODOLOGY - A trading system or method that produces a Profit

Factor greater than l over time. In other words, a trading system or method that consistently
makes money over time.

About The Authors
Bill Poulos Bill Poulos has been trading the markets since
1974. Over the years, Bill has developed dozens
of stock trading systems and methods. He holds a
Bachelor's degree in Industrial Engineering, and
a Master's degree in Business Administration,
with a major in Finance.
Greg Poulos Greg Poulos has been at the forefront of Internet

technology since 1994, working with several dot
com startups, including an IPO. In 2001, Greg
started a successful Internet development and
marketing company, and was instrumental in
using technology to test and evaluate Bill's
trading systems and methods. Greg holds a
Bachelor's degree in Marketing.

Bill Poulos - Quantum Swing Trader

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Quantum Swing Trader

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Introducing Quantum Swing Trader ....................................................................................32

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Initial Stop .......................................................................................................................89

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Trading Tactics and Money Management

The Holy Grail

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Stock Trading Basics

Fundamental vs. Technical Analysis

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Another example might be an economist who examines a country's currency based

1. Market action discounts everything. Regardless of what the fundamentals are

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Bullish Bar Bearish Bar

Figure 1 - Bar Chart Example

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The Trend is Your Friend

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Day 4Hours 2Hours 1Hours

Figure 2 — Time Frame Examples

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A simple definition of trend is basically the general direction of price movements.

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Figure 3 — Uptrend Line

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Figure 4 — Downtrend Line

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Figure 5 — Downtrend Line Examples

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Figure 6 — Uptrend Line Examples

Support and Resistance

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Figure 7 — Support & Resistance

Resistance can also be expected at prices of previous support or resistance. Once

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Figure 8 - Support & Resistance Examples

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Figure 9 — Breakout with Ret est

The penetration of support/resistance levels can be triggered by fundamental changes

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Simple Moving Average

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Figure 10 — Moving Average Example

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Exiting a Losing Trade

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Exiting a Profitable Trade

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Take Partial Profits

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? Simple moving averages

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