TOOLS AND TACTICS FOR THE MASTER DAY TRADER

TOOLS AND TACTICS FOR THE MASTER DAY TRADER

Battle-Tested Techniques for Day, Swing, and Position Traders

OLIVER VELEZ

GREG CAPRA

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This book is dedicated to my beautiful, ever patient, and supportive wife Brenda, the very best investment I ever made, and to my daughter Rebecca and my son, Oliver Jr., the sweetest dividends I’ve ever received.

This book is also dedicated to my loving parents, Dwight Velez and Louise Velez, who taught me that mastery of life easily follows he who has mastered himself.

O.V.

To my wife Lori, for her love, support, and understanding through this exciting journey.

G.C.

CONTENTS

Acknowledgments

Preface

Introduction

PART ONE

SEEDS OF WISDOM FOR THE MASTER TRADER: Preparing the Trader’s Mind for Greatness

Chapter 1

Initiation of the Master Trader: Understanding the Master Trader’s World

Do You Understand How High the Cost Is?

The Master Trader Requires Only a Few Tools

Seeking Success in That Place Called the Here and Now

Charts Don’t Lie

Tracking the Footprints of Money

Give Me the Technicals, or Give me Death

Don’t Show Up to a Gunfight with Just a Dull Knife

Seek Knowledge First, Profits Second

Short-Term Time Frame: The Master Key to Higher Trading Accuracy

Why the Short-Term Time Frame Is the Safest Time Frame

My Three Greatest Discoveries

Love: The Trader’s Greatest Power

Traders and Fortune Tellers

Chapter 2

Developing the Master Trader’s Mind: Keys to Correct Trading Behavior

Are You Gambling or Trading?

A Win Is Not Always a Win and a Loss Is Not Always a Loss

The Masses Can’t Win For Long

The Bandwagon Theory: A Glimpse at How the Market Really Works

Money Isn’t Everything

The Danger in Asking Why

When Accuracy Becomes a Problem

The Entry is 85 Percent of the Trade

Your Perception Will Become Your Reality

Facts Will Not Make You Money

The Truth Doesn’t Count on Wall Street

You Must Become Inhuman to Trade Successfully

Opportunity Lies Where the Majority Is Afraid to Go

Not a Cloud in the Sky? Watch Out!

The True Measure of a Successful Trader

When No Action Is the Best Action

Standing Still: The Highest Action of All

A Lesson in the Art of Standing Still

Hey Man, Don’t Teach Me How to Think; Teach Me How to Trade!

What Are You Doing with What You Have Today?

Is the Past in Your Way?

Breaking the Cycle of Pain and Pleasure

Sound Techniques Lead to Sound Instincts

A Little Paranoia Is Good for the Soul

A Positive Mental Attitude Makes a Difference

Trading with Attitude

Daily Food for Thought

Chapter 3

Loss: The Prerequisite to Trading Power and Success

The Power of Adversity

Make Your Losses Work for You

Small Losses: The Hallmark of a Master Trader

How the Market Speaks to Us

How to Lose Your Way to Success

Starting Each Day Anew

Learn How to Accept What Can’t Be Changed

Losing Can Be Winning

You Must Learn to Despise Big Losses

The Two Lives of a Master Trader

Growth Is a Flower That Blooms with Time

When Losing Becomes Unbearable

Get the Most from Your Tuition

Chapter 4 Education of the Master Trader: How to Save Yourself from Years of Lost Time and Money

Find a Winner to First Emulate—Then Surpass the Winner

The Character of Your Teacher Matters

Don’t Be Cheap with Your Future

Today, Those Who Can, Do and Teach

Chapter 5

The Seven Deadly Sins of Trading: How to Combat Them and Defeat Them

Deadly Sin #1: Failing to Cut Losses Short

Deadly Sin #2: Dollar Counting

Deadly Sin #3: Switching Time Frames

Deadly Sin #4: Needing to Know More

Deadly Sin #5: Becoming Too Complacent

Deadly Sin #6: Winning the Wrong Way

Deadly Sin #7: Rationalizing

How to Find and Kill Your Deadliest Demon

Chapter 6

12 Trading Laws of Success: Rules the Master Trader Lives By

Law #1: Know Thyself

Law #2: Know Thy Enemy

Law #3: Get Thee Some Education, Fast

Law #4: Protect Thy Most Valuable Commodity

Law #5: Keep it Simple

Law #6: Learn from Thy Losses

Law #7: Keep Thee a Trading Journal

Law #8: Don’t Make Low-Priced Stocks Thy Main Focus

Law #9: Don’t Diversify

Law #10: Realize That No Action Is, at Times, the Best Action

Law #11: Know When to Bow Out Gracefully

Law #12: Don’t Ever Make Excuses—They Never Made Anyone a Dime

Chapter 7

Secrets of the Master Trader: Things Every Trader Should Know, But Doesn’t

Secret #1: There Are No Gifts on Wall Street

Secret #2: Someone’s on the Other Side of Your Trade, and It’s Not Your Friend

Secret #3: Professionals Sell Hope; Novices Buy Hope

Secret #4: Home Runs Are for Losers

Secret #5: Make the Chart and the Crowd Will Follow

Secret #6: All Major Stock Market Averages Lie

Secret #7: Buying After the Open Is Usually Better

Secret #8: It Usually Doesn’t Pay to Take Profits Before the Open

Secret #9: 11:15 to 2:15 EST Is the Worst Possible Time to Trade

Secret #10: It’s Always Darkest Before the Dawn

Secret #11: Wall Street Gurus Will Always Be Wrong

Secret #12: Playing Earnings Is a Game for Novices

Secret #13: Paying Up for Stocks Betters the Odds

Secret #14: The Buy-Low Sell-High Method Is Wrong for Day Traders

Secret #15: Knowing What’s Next Can Make You Rich

Chapter 8

10 Lessons for the Master Trader

Lesson #1: Cash Is King When the Street Gets Bloody

Lesson #2: Time Diversification Minimizes Market Risk

Lesson #3: Buying Versus Accumulating

Lesson #4: The Ultimate Decision-Making Tool

Lesson #5: Selling the Dogs and Buying the Dolls

Lesson #6: Brains or a Bull Market?

Lesson #7: Rating Newsletters and Other Advisors

Lesson #8: Time Equals Money

Lesson #9: Winners Make It Happen; Losers Let It Happen

Lesson #10: Using the Power of Promises

Chapter 9

Final Words of Wisdom from a True Master

Eight Elementary Lessons for Life and Trading—by Mother

PART TWO:

TOOLS AND TACTICS FOR THE MASTER TRADER: Developing the Arsenal of a Master Trader

Chapter 10

Market Timing Tools and Tactics

Market Tool #1: S&P Futures (S&P)

Market Tool #2: NYSE TICK Indicator ($TICK)

Market Tool #3: NYSE Trader’s Index (TRIN)

Market Tool #4: New Lows (NLs)

Market Tool #5: Mighty 5 Index

A Stock Market Quiz

A Final Word on the Market

Chapter 11

Charting Tools and Tactics

Introduction to Charting

A Charting Primer

Charting Tool #1: Narrow-Range Bar (NRB)

Charting Tool #2: Reversal Bars (RB)

Charting Tool #3: Tails

Charting Tool #4: Gaps

Charting Tool #5: Support and Resistance

Charting Tool #6: Retracements

Charting Tool #7: Reversal Times

Charting Tool #8: Climatic Volume

Charting Tool #9: Moving Averages

Charting Tool #10: 3 to 5 Bar Drop

Chapter 12

Execution Tools and Tactics

Execution Tool #1: Electronic Communication Networks (ECNs)

Execution Tool #2: Small-Order Execution System (SOES)

Execution Tool #3: SelectNet (SNET)

Execution Tool #4: Archipelago (ARCA)

Execution Tool #5: SuperDOT

Execution Tool #6: Online Broker

Chapter 13 NASDAQ Level II Tools and Tactics

A NASDAQ Level II Primer

Market Maker Characteristics

Market Maker Evaluation

Determining Who’s the Big Cheese

The Jammin’ Session Play

The Pancake Stack Play

Chapter 14

Entry Tools and Tactics: A Step-by-Step Guide to Entering Stocks Like a Pro

A Proper Entry Is 85 Percent of a Winning Trade

Entry Technique #1: Key Buy

Entry Technique #2: 30-Minute Buy

Entry Technique #3: Late-Day Breakout

Chapter 15

Trade Management Tools and Tactics: A Step-by-Step Guide to Managing Your Trades Like a Pro

Tool #1: The Initial Stop: Your Insurance Policy

Tool #2: The Break-Even Stop: Playing with the Market’s Money

Tool #3: Trailing-Stop Method: Your Stairway to Profits

Tool #4: Time-Stop Method: Time Is Money

Chapter 16

Exit Tools and Tactics: A Step-by-Step Guide to Exiting Your Trades Like a Pro

The Incremental Sale

A Personal Note by Oliver L. Velez

Maximizing Your Gain

Riding the Winning Wave in Three Easy Steps

Knowing the Sellable Events

When Disaster Strikes

How to Handle the Monster Gap Down

Steps to Take When Disaster Strikes

Signs of Impending Danger

PART THREE

LOOKING AHEAD

Chapter 17

How To Put It All Together

How To Put It All Together Using Daily Charts

How To Put It All Together Using Intraday Charts

How To Put It All Together Using Multiple Time Frames

Three Exams for the Master Trader

Chapter 18

ESP: The Future of Electronic Trading Software

A Next-Generation Trading Tool

Automated Trade Identification and Alerting

Automated Stock Scanning and Screening

How It Works

Chapter 19

Conclusion

You Are a Leader

Time Well Spent

You Will Succeed

The Rest Is Up to You

Appendix 1: Stock Indexes

Appendix 2: Glossary

Appendix 3: Trade Types

Appendix 4: Popular Web Sites and Chat Rooms for the Day Trading Enthusiast

Index

ACKNOWLEDGMENTS

We would like to acknowledge all those who, through the years, have placed their financial independence in our hands. You have fueled our desire to write this book and ignited in us a lifelong purpose.

Most certainly we are thankful for the love, guidance, and wisdom of our parents. And for the never-ending sacrifices made by our wonderful wives. Brenda and Lori, we are eternally grateful for your love.

We wish to express our appreciation for Dave Bush’s boundless energy and enhusiasm for this project. His tireless and passionate efforts in helping to organize and edit the material are evident throughout this book. We would also like to thank Mike Campion for lending his extensive knowledge of level II to this work.

Last, but far from least, we wish to give a special thanks to Jeffrey Krames and Stephen Isaacs of McGraw-Hill. Their patience and support during our many delays and setbacks demonstrated a tremendous faith in our ability. We truly would not have finished without their help.

PREFACE

There I was, nearly 6 years ago, sitting in front of what was then a sophisticated trading system, waiting for the market to open. I was anxious to make a trade. It would be my very first as a professional day trader. The opening bell rang. And, instantly, blinking red and green quotes, along with shifting NASDAQ market makers, battled for my attention. They seemed to be using my computer monitor as their terrain. In the midst of the chaotic price quotes, I saw what I thought was an ideal opportunity. I was nervous. The moment of truth had finally arrived, and for the briefest of moments, I doubted. But I was determined to make it as a day trader. With mounting credit card bills, a wife, and a brand new baby, I just had to make it. For an instant, fear wrestled with me, almost begging me to hold off. No, I said to myself. I had to do it. I had to make the trade. I reached for my keyboard and, for a brief second, closed my eyes. Several key stokes later, I was the owner of 4000 shares of Microtouch, Inc. (MTSI), one of the faster moving over-the-counter (OTC) stocks of the day. I was amazed at how fast, how quickly I was able to buy $150,000 worth of stock. Moments later, I was up a whopping $4000. I couldn’t believe my eyes. In several minutes, I was up more money than I could make in 2 full months at my prior job. It felt good, damn good in fact. And life, for the moment, was simply grand.

Then it happened. MTSI stalled. I battled with the idea of taking my swift gain. After all, a $4000 profit was an impressive way to start off the first day of my new life as a day trader. Yes, I told myself. I would sell. I would take the money and go home a hero. Once again, I reached for my keyboard. And before I could act, the bid in MTSI collapsed. My heart stopped. There was nothing but silence. In a flash, my $4000 gain went to breakeven, and at that moment, the fear I so arrogantly dismissed decided to pay me another visit. How could this happen, I asked. I sat back in my chair for a moment. Stunned. Confused. Suddenly, MTSI’s bid took another dive. My god, I shouted. I was now down $4000. What was going on? I quickly looked to the right and left of me to see if any of the 70 or so surrounding traders were watching me. No one was. Judging by the few faces I saw, they had their own problems to deal with. I struggled to compose myself, to somehow regain my mental equilibrium. But MTSI was not finished with me yet. Another $1 drop increased my deficit to $8000.1 could barely breath. My better judgment begged me to take the loss, but there was something stopping me. I couldn’t move. I physically couldn’t move. All I could do is watch, and watch I did.

Over the next 25 minutes, I watched in agony as MTSI took more than $16,000 away from me. Dejected, depressed, and depleted of all hope, I finally mustered up enough courage to kill the trade. It was over. Everything seemed to be over. One more time, I looked on both sides of me. I wanted to see if anyone had witnessed the atrocity that just happened to me. But no one seemed to notice. If they did, they didn’t care. What was I going to do, I silently asked myself. What was I going to tell my wife, my family, and the partners who backed me? Failing to come up with any coherent answers to those questions, I did the only thing I could do. I slowly lowered my head into my hands, and I wept.

* * *

My name is Oliver L. Velez, and this was my first experience as a so-called professional day trader. Many might be tempted to call it my inauguration day, but I have always referred to it as my graduation day. For it was on this painfully dark day that I abandoned the ranks of those starry-eyed day traders who naively think that fast money and easy riches in the market are the norm. I abandoned that novice-filled group forever, and graduated to the more intelligent group of realists who sees and appreciates the art of day trading for what it truly is: one of the most demanding endeavors on planet Earth. There is no doubt that a big part of me died that day, right there in front of that flashing monitor. But in its place, something more splendid, something more grand, came to life. It came in the form of a fierce new determination to make sense of it all. On that infamous day, I became a new man. Out of the ashes of a beaten trader, rose a driven man bent on finding a sensible method, an intelligent approach that went well beyond the fly-by-the-seat-of-your-pants style practiced by the majority of the crowd. On that day, a powerful thirst for more developed. I wanted more knowledge, more discipline, more skill, more direction, and I was determined to get it, at any cost. Fortunately, I did.

Over the ensuing 6 years, I managed to formulate a trading philosophy that made sense. Slowly a trading plan based on this philosophy began to take form, a step-by-step plan that not only sounded good in theory, but actually worked in the real world and made money. The book you now hold in your hands covers a good part of that trading philosophy and the trading plan I put together during those driven years.

* * *

I never did tell my wife what happened in the evening of that devastating first day. But it was quite apparent she knew. She simply allowed me to maintain a measure of self-worth by remaining silent on the issue. Many months passed before I was I was able to open up to her, to verbally explain what happened. By that time, my newfound determination was beginning to bear rich fruit. The account I was trading was up some $250,000, and, for once, my wife was no longer borrowing money from her uncles and charging baby pampers on our overextended credit card. Ten months after that, the account crossed the $1,000,000 mark, and I decided to cash out of the partnership, to go it alone.

Today I can honestly say, I did it. I bagged the elephant, as they say. I beat the market. With great effort and countless hours of study each day and night, I had devised a trading philosophy and a plan that was sensible. More importantly, it made money. Despite the fact that almost all of that money I earned was not mine, I felt content. I felt comfortable. And everything stayed that way, until I met a trader who would help me forge forward into even more splendid levels of trading mastery. His name is Greg Capra, my partner, my brother, and my friend.

* * *

My name is Greg Capra, fellow trader, partner, and dear friend of Oliver L. Velez. It was only a little before the time Oliver was going through his life-changing experience that I had my first taste of serious market play. Prior to this, my market activity was limited to the boring arena of municipal bonds, and the slightly more exciting world of mutual funds. So it was only natural that when I decided to make my first foray into the dynamic world of trading, it was in the most volatile market on the planet: the index options market. To my novice way of thinking, equities didn’t move fast enough for me. I needed action. I wanted something that could score mind-numbing gains all at once, and I wanted it fast. I did not respect the make-a-few-dollars-here-and-a-few-dollars-there approach that I saw so many others trying. That was all behind me. Or so I thought. Besides, I was already earning big money as a successful businessman for over 10 years. By this time in my life, I was well beyond the need to just survive. Nickels and dimes no longer appealed to me, and my thirst to simply do well was already thoroughly quenched. It was the gusto that I was after. Yes. That megabuck. And I wanted it to come to me by way of a rush, by way of a mighty thrill. Index options would provide me with just that, and a great deal more. Well, it was the great deal more that almost ruined my chances of ever becoming the day trader that I am today. With a high-tech satellite feed that spat out delayed quotes and an options account with a major Wall Street brokerage firm, I was armed. A fresh new subscription to one of those get rich quick options newsletters made me dangerous. I was ready. I picked up the phone, speed-dialed my broker, and shot out the command. Buy 200 contracts of March XYZ! There was silence on the other end. Sir, are you sure? What do you mean am I sure, I blurted back. Just do it, now! At that point I hung up the phone and impatiently waited for the customary return phone call informing me of where I bought this sizable number of contracts. The phone rang, and the voice on the other end nervously revealed my entry point. I immediately started watching my delayed quotes. With each tick, my account swung wildly, and a rush of adrenaline gushed through my veins. I was so young at the game of trading that I did not realize that 200 index contracts was almost equivalent to owning 20,000 shares of a very volatile Internet stock, an unbelievable size for a novice. A customer walked through my front door wanting some service. I remember barely being able to pry myself away from my monitor. Ten minutes later I returned to the trading area I set up in the back of my office. And to my horror, I found my account down $26,000. My limbs went absolutely numb. With conflicting thoughts fighting each other to gain dominance in my mind, I managed to press the speed-dial button and immediately got my broker. The phone barely rang which told me that he too was glued to his monitor, watching my money evaporate into thin air. I was silent. Hello! Hello! the broker repeated. I answered his call with a deep moan. Mr. Capra, he said solemnly. Is that you? Again I was silent. I couldn’t speak. For the life of me, I simply couldn’t speak. The voice on the other end of the phone was asking for Mr. Capra. And for the first time in my life, I did not want to be Mr. Capra. More important was the fact that I did not want to do what I knew had to be done. I did not want to make this large paper loss real by selling my position. But I had too. I had been in business long enough to know that cutting my losses was the only smart act possible at this point. My power of speech returned and I meekly mumbled two of the most painful words in a trader’s vocabulary. Dump it, I said. Dump the whole god-forsaken thing! At the market, my broker asked. Yeah I said. Whatever that means. I hung the phone up, closed the door to my office, and cut myself off from the rest of the world.

All in all, I lost over $30,000 on that trade. It was not enough money to hurt me financially, but money was not the thing at stake here. It was my pride and my sense of confidence that were on the line. I had succeeded at virtually everything I ever tried. This was supposed to be no different. I went home that night struggling with the notion of quitting. I was making good money with my business, I told myself. Why did I have to play the market? But quitting was not in me. As much as I tried to convince myself that giving up the hope to become an astute market player wasn’t the end of the world, I could not bring myself to quit. And I didn’t. As unbelievable as it may seem, the very next day I boldly repeated my actions. I arbitrarily bought 200 contracts of the same option. Only this time, I hit pay dirt. In less than one hair-raising hour, I cashed out the trade with a $32,000 profit. Breathing heavily, I sat back in my chair trying to feel good about what had just happened. But the joyous feelings of a winner eluded me. Despite coming out ahead, I still felt depressed. That was because I knew in my heart that I was not a winner. Luck was the only thing on my side that day, and it was not enough to erase my feelings of inadequacy. There was no skill in my actions. Intelligence was nowhere near my approach, and it bothered me. That day, I closed my options account and made a vow to myself that changed the course of my life. I decided that I would take the gift of redemption that fortune seemed to be giving me, and throw myself into a much-needed learning process. That day I decided that, whatever the cost, I would become a professional trader the right way. When Oliver and I met, we found ourselves in similar situations. I am proud to say our ensuing years together brought about a very profitable philosophy of trading, much of which is presented in this book.

Oliver Velez

Greg Capra

INTRODUCTION

Make no mistake about it my friends. We are at the doorstep of a brand new era. If we had to give this era a name, we’d call it the era of self-empowerment, and the revolution that marked the dawn of this era is only in its infancy. A 20-year decline in commission rates, coupled with new order-handling rules, the Internet, and phenomenal technological advancements have helped level the playing field and open the hidden door to Wall Street forever. The old guarded ways, designed to keep the public from true access, are crumbling as we speak, the age-old profit centers once hidden are now being exposed, and a more sophisticated investor is demanding that it stay that way. Never before in history has the complete democratization of Wall Street been so near. And never before has so much opportunity been available to the average individual on Main Street. In the next few years, that opportunity will be even greater. Our question to you is, Are you ready?

We see a day, not too far in the future, when there will no longer be fragmented exchanges in America. The stage is being set right now for one giant, unified U.S. Stock Exchange. Shortly after that, we see a day when there will be one world-wide stock exchange, bringing true capitalism in its purest form to all four corners of the earth.

Shortly after that, or even before that, the day will come when every single computer sold on the planet will come with a preloaded trading platform that provides direct access to this world-wide market, giving individuals the ability to trade anything on earth that moves: stocks, bonds, options, futures, rocks, trees, in-laws. Well, may be not in-laws, but once again, we have to ask, are you ready?

The stage is being set for an incredible drama that will most definitely be played out over the next 5 to 10 years, and those who get prepared today, those who get trained and educated now, stand a good chance of becoming the new titans of the new game on Wall Street.

This is a new day, and those who don’t like it had better get used to it because self-empowered traders are here to stay.

WHAT HAS BROUGHT ABOUT THIS NEW REVOLUTION?

Several significant developments have occurred over the past 10 years to ignite what is, in my opinion, a phenomenal revolution that is only in its infancy:

1. The precipitous drop in commission rates during the last decade has increased the potential profitability as well as the plausibility of short-term trading. Prior to this drop, only institutions and high-net-worth individuals enjoyed bargain-basement commission rates. Today, access to our equity market can be had for pennies.

2. A world-wide collapse in interest rates has made equity ownership participation an absolute must. This change, along with a runaway Bull attitude, lead to a higher level of sophistication and an increasing need for self-empowerment.

3. Mind-boggling technological advancements have helped to bring Wall Street to Main Street. As a result, big and small, rich and poor, novice and pros alike can, with the click of a mouse, directly access the largest markets in the world, right from the comfort of their very own living rooms. These technological marvels have helped level the playing field for the individual. They have removed the barriers to access and, in so doing, have removed much of the unfair advantage enjoyed by the elite members of the club.

4. New order-handling rules have changed the way Wall Street works forever. Not only have recent changes in the way firms handle our orders provided for greater fairness and transparency, they have helped the user in the vehicle that will ultimately change the way the financial world does business: the ECN, better known as the Electronic Communication Network.

5. Last, but far from least, is the advent of the Internet. Not since Alexander Graham Bell’s telephone has something caused such a radical change in the way we think and live our lives. Today, the information gap between source and recipient has been reduced to near zero. Because of the Internet, we have truly become a global society. A local consumer is now a global consumer. A sixth-grade student on Sycamore Drive in North Carolina is now a student of the world, and a business that once dominated its niche in the northeastern part of the United States can work to expand its niche to the world. The Internet will drive the way we think, walk, talk, live, and love in the next millennium, and those who do not embrace the changes it brings will become a part of prehistoric history in years to come.

WHAT IS PROPER TRADING?

Proper trading, in many respects, is a by-product of proper thinking. One of the first things this book will do is create a revolution in your mind. It will change the way you see and think about the markets. For instance, one of the first lessons we teach is that you do not trade stocks, you trade people. Far too many novice market players fail to realize that there is someone on the other side of every single trade they make. Each time you buy, someone is on the other side of the transaction selling the stock to you. Each time you sell, someone is on the other side buying the stock from you. The 64K question is, who’s smarter? Is it you, or is it the person or entity on the other side of your trade? This book will make sure you are the smart one, by training you in the fine art of playing people.

We will show you that successful trading calls for the ability to find two sets of ill-formed individuals: those willing to give up their merchandise to you too inexpensively and those willing to buy your merchandise too expensively.

In other words, and I hope I don’t sound too brash here, successful trading is the art of finding an idiot. This book will make sure you are not the idiot.

We believe that day trading is far broader in its scope than most people realize. Unfortunately, many individuals, in and out of the industry, have erroneously defined day trading as a frenzied, rapid-fire buy-and-sell approach that never calls for taking the position home over night. While that is a form of day trading, it is not the only form.

It is our view that if you are committed to your trades on a day-to-day basis and if you are applying attention and focus to the markets daily, you are, by definition, a day trader. On the other hand, if you practice what we call the Rip Van Winkle approach to the market, which is buying a stock, taking a nap for 5 years, and hoping everything is OK when you wake up, then you are not a day trader.

It is very important to understand that day trading is not investing. In many respects, the two activities are diametrically opposed to each other.

WHAT DOES THIS BOOK SET OUT TO ACCOMPLISH? WHAT WILL I GET FROM IT?

This book is designed to help active self-directed traders gain the knowledge and acquire the tools necessary to approach the markets with intelligence and a well-thought out trading plan. In other words, it will help you know what to do, but that is not where it ends, because knowing what to do is no guarantee that you’ll do it. Because 85 percent of the trading game is psychological in nature, we also help traders deal with some of the psychological and emotional challenges that every active market participant must face.

WHAT METHOD DO YOU USE TO PICK YOUR STOCKS?

Our approach is a technical one. It is based on a number of very reliable chart patterns that represent key short-term shifts in market psychology. There are certain chart patterns that pinpoint when a change in the balance of power between the buyers and sellers have occurred. We will teach you not only how to identify these chart patterns, but also help you to build tactics and strategies that are designed to profitably exploit them.

Charts are the footprints of money. And let me tell you something, they don’t lie. They are like a doctor’s x-ray, which provides deeper insight into his patient. In the trader’s case, the market is his patient.

For instance, we have found that stocks experiencing a great degree of momentum tend to correct (or rest) for 3 to 5 days before they resume their upward moves. This 3- to 5-day decline typically sets up a unique opportunity for the educated swing trader. We teach, through this book and a variety of services, when the trader should strike, where the traders should place his protective stop, and what the trader should look for in the trade.

PART ONE

SEEDS OF WISDOM FOR THE MASTER TRADER

Preparing the Trader’s Mind for Greatness

Trading tactics and techniques will have little to no value if the mind behind those techniques has not been properly prepared. This section is specifically designed to pepper the trader’s mind with bite-sized seeds of wisdom, which over time will germinate and give rise to a heightened state of awareness and a deeper level of understanding. We call this depth. One of the most undiscovered truths of the day is embedded in the fact that the greatest riches of a successful trader lie within his or her thinking, not within the methods used. Sound methods follow the trader who has a sound mind. To state this another way, proper trading is proper thinking. We firmly believe that the trader who reads and digests the following sections will emerge from the experience a more seasoned individual. Each time these pearls of wisdom are digested, they will help bring into being a deeper sense of understanding, heightened mental awareness, and greater emotional mastery. Within these short essays are locked some of the most potent pearls of wisdom known to successful traders. These timeless gems have enriched the trading lives of individuals all over the world via our daily newsletter, The Pristine Day Trader. We are certain they will help provide you, as well, with a richer, fuller life in the markets.

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You are certain to find repetition in many of the following themes, but we have always lent support to the notion that repetition has a great value. What won’t penetrate the various barriers to understanding one way may do so when truth and wisdom is communicated another way. May you enjoy your first steps on the path to trading mastery.

CHAPTER 1

INITIATION OF THE MASTER TRADER

Understanding the Master Trader’s World

DO YOU UNDERSTAND HOW HIGH