LESSON 1

ANATOMY OF A CHART
Let’s look at charts in the three major ways that traders view them. BAR CHARTS
1.) Bar Charts: 30
HIGH
The 4 main parts of a bar: 20
High - Highest Price that market traded
Low - Lowest Price that market traded OPEN
10
Open - First price the market traded CLOSE
Close - Last price the market traded
0
LOW 9:30 12:00 14:00 16:00
What does a bar represent?
A bar represents a specific moment in time. For example, one bar can represent one entire day in that
market. So with the example, of one full day, if the highest price in that day was 30 then the top of the
bar would reside at 30. The dash on the left of the bar would indicate the open or the first price traded
that day. The dash on the right would represent the close or the “last price” traded that day. Finally, the
bottom of the bar would remain at the lowest price traded that day.

Typically, the bottom of a chart would specify the time of day and along the right-hand side would
represent the prices. If you follow the markings on the chart, you can follow the price it was trading at
and at what time.

2.) Candlesticks CANDLESTICKS

Candlesticks are an alternative way of viewing the
same data. High, low, open, and close is still the
data shown. However, the body of the candle
HIGH
represents the price range between the open and
the close. If the price closes lower than it opened
then the body would be “red.” This would CLOSE
represent a market moving lower. The reverse of
that is if the market closes higher than it opened,
then the color of the body would be “green.” This OPEN
would represent a market moving higher.

LOW
Outside of the body block, the “wicks” simply
represent the highest price or the lowest price the
market traveled before it closed.
 LESSON 1

3.) The Footprint

Around 2003 a trader using only bar and candlestick charts said to himself,
FOOTPRINT
“There has to be a better way!” 2690x6517
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I think innovation always starts with ideology like that. This trader wanted to 982x7745 0x18 3736x450 3841x5204
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see what was “trading inside these bars or candles.” In the corresponding 1210x1405 5804x5222 1902x118
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workshop video, we will cover what is shown on a Footprint chart. These 255x1669 121x0
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Footprints are the main tool to mechanically track buyers and sellers inside 1084x638

a candle or bar. This trader took the volume and incorporated it into charts.
1x0

VOLUME
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While bars and candles show price and time, the Footprint begins to
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introduce volume to the equation. Volume can be viewed in so many

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different ways. It can viewed along the bottom, along the side with a profile,
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1x0

or even “inside” the bar or candle.

MARKET AND VOLUME PROFILERS

This can be viewed as both a charting technique and/or theory which start to use volume and time to
understand market structure. It’s well worth mentioning these elements because they have a large
presence in this business.

There are many professional traders using MarketProfile and

VolumeProfile techniques. I would consider this technique important to
understand, at least on the surface. With any skill set you need to be able
to execute it. Many bias creators are not always good bias executors. In
other words, you want to be good at attaching trades to your opinions.
Both volume and market profiling create excellent opportunities to
understand a market, but you still need to qualify it

Edge-ism | Professionals understand volume through the prism of what other traders are doing
 LESSON 2

SUPPORT/RESISTANCE

What Chart Patterns are Important?

Markets can show similar patterns therefore, some traders like to identify a pattern and use it to predict
the next move a price may take. This educational series doesn’t promote many of these patterns unless
the trader knows why they sometimes could work. However, it’s important for the reader (trader) to
relate and understand to what others might be looking for.

Bull or Bear Flags Head and Shoulders Double Tops or Bottoms

Range Consolidation Swing Highs or Lows Crooked M’s & W’s

 LESSON 2

What is Support and Resistance?

Support and resistance are simply prices that a market might respect and bounce away from.

Support: is a price or an area of prices that are below where the market is currently trading.

Resistance: is a price or an area of prices that are above where the market is currently trading.

Many traders use support and resistance. However, the key is to qualify which support and resistances
are good enough to trade, and which ones you should remain away from.
 LESSON 3

EDGE ALERT LEVELS

I can safely say that a common denominator in many traders (both
professional and retail) is looking for support and resistance. Places
ORDER FLOW
where a market might go, stop, and even go the other way. These
levels give us a place to execute or open a position. One common
pain point however, is not taking the trades of the levels that work but
SUPPORT
getting trapped in the trades that don’t work. It brings me to the (GET IN)
“qualifier” or Order Flow which helps traders to miss more losers but
catch more winners. We use support and resistance as well; both to
get in and out of trades. Let’s examine the differences between how RESISTANCE
retail and professional traders use these levels.
(GET OUT)
Many retail traders devise their own levels from mathematical
formulas. The problem with that is that the market doesn’t care for
math. All a market is concerned about is how many traders are long
or short. Edge Alert Levels create a better line in the sand because
they track buyers and sellers. The way to find the best support and
resistance levels, is to find where many other traders are trapped in a
position.

find where many other

Edge-ism | You will never find what you’re not looking for
traders are trapped
in a position
 LESSON 4

EMOTION
Markets move of based on emotion. Price is more likely to move because
traders are exiting positions, not entering them. When was the last time
IN
you exited a losing trade? How did you feel? Imagine if you could spot on a
chart where many other traders have to exit a position and feel the same
way. When many traders are stuck they feel trapped, and that’s the greatest
predictor. We want to get in when many others are feeling trapped,
emotional and HAVE to get out!

Real Life Example

To those traders reading, how unique is the price you trade and open a position. Let’s say you
are long from 31 even and the market did nothing but lower against you since the trade was
opened. Then, it rallies back to where you got in the trade and where all the pain started. Now it
has given you the chance to exit at a break even, what are you going to do? Sell it probably, and
get out because that price is unique to you and you don’t want to feel the pain again of sitting
through a losing position.

After you buy it, you’re a seller.

That’s one of the Edge phrases that resonates most with traders. After you go long you’re a seller.
Knowing that, it’s now your job to find where others might be stuck long or short. Those are the best
support and resistance levels out there. Now, on to our second point of the retail trap. This involves a
poor or non-qualifying process to select what levels to trade and which ones to stay away from. Catch
more winners and miss losers.

What separates professional traders from retail traders is the use of order flow and market relationships,
in real time, when a level or decision comes into play. We look at correlating markets, as helpers, to enter
and exit our positions. It is no different to consumers when qualifying the price they were quoted to buy
a plane ticket, a car, or a house.
 LESSON 4

Real Life Example: Divorce

If you were going to buy a house and you knew the sellers
were getting a divorce and had to SELL, where is price
likely to go? The sellers are emotional and just want OUT!
Just like trapped longs now have to sell to exit that
position.

Edge-ism | It’s not about being right, it’s where others are wrong.

Keep trying to embrace the skill set you already have when valuing prices and remember,
after you buy it you become a seller!
 LESSON 5

TECHNICAL/FUNDAMENTAL
What is Technical Analysis?
Technical Analysis uses technical indicators or tools to try to disseminate future price movement. There
are a myriad of these tools, so let’s list a few of the more popular ones.

FIBONACCI MOVING AVERAGES GANN BOLLINGER BANDS

TREND LINES OSCILLATORS DARVAS BOX FLOOR PIVOTS

TECHNICALS
Technical traders look at the theories and math we touched on previously. They use this list of tools we
explained earlier to predict price direction.

These two camps only base their concepts on what should happen. Professional Traders base them on
what should happen, but doesn’t.

When enough traders put on trades or positions on what should happen and the price doesn’t react like
it should, look out! These are the clues we are looking for to recognize there’s something off. Like your
nine year old son smiling when he says “I didn’t do it!?” Successful traders, like good parents, are
detectives, and with the right techniques stack probabilities in their favor.

Using just fundamentals or just technical’s to shape your bias, ignores the most important element of
all, executing that bias. If everyone thinks the same way, it won’t work. Where can I identify on a chart
where many thought something should happen? Only to find it’s not happening! Where on a chart are
traders stuck trying to implement a technical idea or a fundamental bias? There’s nothing wrong with
many of the theories or techniques used to create an opinion. The problem lies when you don’t qualify
them with the same technique used since price was invented - comparing correlated markets and
tracking buyers and sellers.

Many of these tools are considered “lagging” indicators. Hence, they don’t always aid in the predicative
skills you need to trade successfully.
 LESSON 5

These tools are used more effectively through a qualification

process. Qualifying, is recognizing or confirming that a market
might respect this technical analysis. I am exposing readers to
some of these technical tools so you can grasp how other traders
use these techniques while trying to predict future price action.
Also, how it has become one of the main traps that many fall into.

Building out scenarios is where traders start to create an idea or

bias of what’s going to happen next. They take these seductive
tools that look like they make sense but actually create false hope.
 LESSON 6

FUNDAMENTALS
What Are Fundamentals?
Fundamentals are information that affects and influences price movement based on real life events.
These Fundamentals include:

ECONOMIC NUMBERS COMPANIES EARNINGS TERRORIST ATTACKS

CENTRAL BANK ACTION GOVERNMENT ACTION/INACTION GEO-POLITICAL EVENTS

Fundamental vs. Technical

These two camps only base their concepts on what should happen. Professional Traders base them on
what should happen, but doesn’t.

You need to ask two questions when you begin to decide what analysis is appropriate and sustainable.

Here are a couple of questions to consider:

1. Does it help you follow buyers and sellers?
2. Does it include following what other markets are doing?

These questions bring into play Order Flow and Market Relationships, two techniques which we’ll
discuss in our future sections.

When you begin to weave these professional techniques

into trading it makes other tools more effective. Not many
would debate how you value price in the consumer world.
When was the last time you brought a Fibonacci chart into a
car dealer to show the salesman that his price was too high?

Edge-ism | When was the last time you brought a Fibonacci chart into a car dealer to show the
salesman that his price was too high?
 LESSON 7

TRADING STYLES
What Are Some of the Different Trading Styles?
While there are a few common trading styles, and what you have to understand is that each individual’s
personality can alter how you execute that particular style.

Let’s take a look at a few common trading styles:

Trend
A trend trader is trying to identify if a price of a certain product will continue to keep moving in one
direction.

Counter Trend Trader

A counter trend trader is a type of trader that looks to buy a break or sell a rally.

Scalping
A scalper is a trader who looks to make several trades a day, seeking to make small incremental profits,
in short periods of time

Momentum
Momentum or breakout traders look for just that, “momentum.” Faster
price movements up or down.

Below we go into a deeper explanation of these trading styles.

TREND
A trend trader is trying to identify if a price of a certain product will
continue to keep moving in one direction. In this picture, we will see
what an inter-day “up-trend” looks like on a chart. There are many
different ways to predict how a trend will last but one common
thread we are trying to weave is that a couple of your consumer
skills are the beginning, middle and end to “qualify” the decision.
Trading a trend is two sided, one is identifying that it’s a trend and
secondly, getting into the trade or as we like to put it, getting on the
team.
 LESSON 7

COUNTER TREND TRADER

A counter trend trader is a type of trader that looks to buy a break or sell a
rally. They are always looking for a market to revert back to where it came
from. One of the pivotal moments in our career came about 2 months in,
around June of 2000. We remember looking at a chart and seeing how the
price had rallied. Also, how it rallied so sharply. Then we remember thinking
why would it then go down coming off the highs that it just made. That
question was the “moment of clarity.” Why would it go up and then go down?
I focused on the first part. It went up because there were more buyers than
sellers, right? If there were more sellers, price would not have moved higher.
So the conclusion that there are more buyers than sellers led me to my next
thought. More buyers equal more potential longs and when a market
reaches a point where there are too many longs it must go down.

Edge-ism | After you buy you’re a seller and after you sell you’re a buyer.

Once a long position is open, especially for shorter-term traders, sell orders go into the market, usually
above where the position was opened. However, if the market stops going up that long position still
must be exited. Long positions are exited with sell orders. Let’s recap this moment of clarity.

Sharp rally = more buyers than sellers + more buyers that want to buy but can’t get filled.
More buyers = More long positions
More long positions = More sell orders
More sell orders = Markets having a high probability of going down

This is why many of the techniques used by professional traders are those
that incorporate the notion that markets are easiest to predict when you can
locate where other traders are going to “exit” a current position. A counter
trend style isn’t necessarily contrarian to a trend or opposite of the herd, it’s
trying to locate where that herd or trend is going to turn. Predicting when the
herd becomes too big and using order flow tools (locating buyers and sellers)
creates better locations to execute. Contrarian methods are most popular
because opportunity is born out of where people “have” to exit. Opportunities
are born out of where emotion surfaces. When traders “have” to sell and exit
a long position, and there are a lot of them, look out below!
 LESSON 7

SCALPING
This style is often inappropriately defined. A scalper is typically a trader who makes several trades a day.
They seek to make small incremental profits, in shorts periods of time. Longer time frame traders will
sometimes incorporate scalping to exit some of their positions for smaller profits. This allows a better
overall entry and reduces the trader’s emotional capital. This technique is explained with greater detail
in track 3.

MOMENTUM
Momentum traders look for just that, “momentum.” Faster price
movements up or down. Whether it’s with or against a trend doesn’t
matter as long as it’s fast. Let us tie this into to the previous trader type,
counter trend. Momentum is created by a large collection of trades
exiting the same position, “long or short” at the same time and around
the same price. Stop orders that are collected in the same area is where
momentum becomes momentum and the tempo picks up.

Real Life Example

Let’s say you think the market will go up so you decide open a long position and buy it. After that,
you place a sell order above the market for your potential profit. You also have to protect against
being wrong, so you put a sell stop order below the market. If your sell stop order is at the price
of 12 and there are 100’s of other sell stop orders that are at 10, 11 and 12, then guess what?
There’s going to be a lot of momentum to the downside once the price of 12 starts to trade.
Momentum traders will try to sell right above or into where they assume there could be this
collection of sell stop orders. This strategy is also a breakout opportunity. When a market finally
traps enough traders one way it tends to break out the other way. Traps create turns in the
market. That’s why it’s imperative to identify and track where buyers and sellers are, no matter
what type of trader you become or strategy you implement. Opportunity is always at the turn.

Edge-ism | Markets move because traders are exiting positions, not entering new ones
 LESSON 8

ORDER FLOW AND MARKET RELATIONSHIPS

People often spend too much time analyzing the past to predict the future while ignoring the present.
Order flow and market relationships are the present. We want to underscore a very important element
to successful trading. That is the execution. Executing to get in a trade and executing to get in and out of
a trade.

That brings us to the trader type that yields a technique and a bias all in one. When you finally say, “I’m
using these concepts to execute,” is the moment you should know you are doing the same thing as
career traders.

Here are some examples of professional trader speak based up on trading styles:

“I bought a pullback off the highs “I scalped around the pivot

to hop onboard the uptrend” all morning”
Style = Trend trade Style = Scalper

“I faded that spike right into that “I bought through the top of
resting offer where I seen everyone consolidation figuring that’s where
get stuck long” all the shorts were going to puke”
Style = Counter trend trade Style = Momentum trade

Executing your bias is and will always be more important

than creating one. When talking to a trader, who was trying
to understand these techniques from us, he said. “Man,
you can create, execute and manage a bias from order flow
alone!” At that moment, we knew he got it. He knew the
“why” of why markets moved.

Edge-ism | 5th graders can create a bias but stink at executing it

 LESSON 8

Edge-ism | Markets move because traders are exiting positions, not entering new ones
Order flow is tracking buyers and sellers. More importantly, it’s
tracking who wants to buy or sell, but can’t. Those are the ones who
get emotional.

Real Life Example

For example, if four people went to buy a house and “bid” on

it. It’s safe to assume or predict where the price is going. Up!
Not because four people will buy the house but because four
people want to buy the house. One of the buyers will actually
buy it (get filled). However, the other three were very
influential in the direction of price. Also, by knowing that
there were four “bidders” on the property was instrumental
in predicting where the price was going to go.

That analogy is order flow when it comes to the world of

professional trading. Sticking with the housing market
example let’s now analyze the next step in the process. After
the buyers and sellers agree on price for the house, the
buyer goes and gets financing. The bank comes in and hires
an appraiser to see if the house is worth the agreed upon
price. What techniques does this appraiser use? For the most
part, one. They compare and contrast that house to others
homes in the neighborhood. There is no high tech scientific
method that appraisers use other than that simple
technique.

That analogy is market relationships in the world of

professional trading.

As we continue on the journey to the advanced stage (Edge), we take these two techniques, used in the
consumer world, and make them applicable to the world of professional trading.
 LESSON 9

TIMES FRAMES
Your job isn’t to know when to get in, it’s to know WHY.
Your job isn’t to know why to get out, it’s to know WHEN.

Let’s help piece this puzzle together.

For every concept there’s a technique.
For every technique, there’s a time frame.

Below is a list of time frames traders can be categorized in.

Short = scalping Medium = swing Long = investing

seconds, minutes, hours hours, days, swing days, weeks, months

Scalping a market is typically Swing trading is associated Longer-term trading or what I

defined by short-term with both inter-day trading but would consider investing is a
execution for small profits. It’s also carrying positions time frame that could amass
also connected to making overnight or from one day to several days, weeks, or even
several trades a day/months. the next. months.

Let’s take these three time frames and understand them with what
they have in common, an idea! To commit capital, is to decide to
take action and it all starts with an idea. All trading is based on, is the
decisions that execute ideas. If you think the market is going up in
10 seconds, 10 hours, or 10 months, then you make a decision or a
trade. What happens in an instant is you attach action to the idea.
It’s only an idea to lose weight, however, when you start exercising
than you are attaching action to that idea. That’s why markets move
because so many ideas are being executed, for so many different
reasons, and in so many different time frames. What’s unique and
often unknown is that no matter what your idea or your time frame
they all have one thing in common. They have to be executed in
REAL TIME. They have to be opened and closed in the present.
 LESSON 9

Real Life Example

Do you know what professional athletes prepare for? They prepare for the present! They
prepare to be able to walk up to the line of scrimmage and read the defense, which puts them
in the best position possible to avoid making bad decisions. Professional trading is not about
making great trades it’s about trading out of bad ones. It’s about qualifying in the present,
walking up to the line of scrimmage and qualifying if this support or resistance level will work.

Edge-ism | Homework is for 5th graders, learn how to prepare to analyze the present

So many times people spend too much time analyzing the past to predict the future and ignore the
present. Order flow and market relationships are the present. We want to underscore a very important
element to successful trading. That is the execution. Executing to get in and out of a trade. We’ve been
asked – what’s more important? Our answer is that anytime money is being risked, all facets of the trade
are important. The action of the market after you get in is important. Your emotions, your personality,
your time frame, the market you trade, your trading style are all important. Your ability to fit your
personality to the right market and style will go a long way in your sustainability. Moreover, qualifying
like a professional trader, threads in and out of whatever type of trader you become.
 LESSON 10

COMMON PAIN POINTS & PSYCHOLOGY

Let’s talk briefly about some common pain points in trading:

1. Missing trades that would have worked

and taking the ones that don’t
2. It’s a challenge I can’t lick!
3. Unrealistic goals
4. Family isn’t supportive
5. Stress

Edge-ism | Trading is like shooting fish in a barrel, and sometimes you’re the fish

A great way the Edge helps others, is by sharing what we found to be common among the enemy. We
explain where hesitation comes from. How taking monetary goals alone can lead to inappropriate
strategies. Any time you try to conquer something, you will always have detractors saying, “you can’t do
this.” This creates a certain amount of stress, and the inability of knowing when and when not to trade.
The Edge attaches solutions to these problems.

Too often traders go down the wrong path to understand this business and then when they haven’t
achieved success they figure that it’s all about the psychology. So they read books and learn how the
right side of the brain talks to the left side. They learn breathing exercises aimed at calming them down
when in a trade. The best way to calm yourself down is to know what you’re doing! Know why you’re
doing it and understand that you are supposed to be wrong. As humans, we try and avoid being wrong
at every turn. While some risk management techniques are helpful, you must remember that the best
way to manage your risk is to manage yourself. Manage your emotion. When you trade your “money,”
you will be emotional. Get comfortable being uncomfortable. Know your exits before you entries and
scaling out of profitable trades (as explained in the Edge). All this hones in on managing that emotion
every step of the way.
 LESSON 10

TRADING PSYCHOLOGY

Real Life Example

Say you’re on the operating table and you begin to flat line. Do you want your surgeon to stop
and do breathing exercises so he can calm down before he proceeds? Or do you want him to
know what he’s doing?!?

The best therapy for any professional, in any field, is to talk to others in that field. However, some in that
community should be successful in that profession: Not trying to do it but, doing it. Too often traders get
into groups for the simple sake of community. While community is essential, there is such a thing as a
bad community. No community is intentionally bad for you however, some have many who are
digressing. Spinning their wheels, distracted, faced with too many other people’s thoughts or opinions.
Own your opinion and your trade; just make sure you’re using the right technique when you go to
execute it.
Anytime you start a business you set goals. Even throughout the life of your business you continue to set
and try to attain goals. What if the goals you set were unrealistic? What’s very dangerous in trading is
when we set unrealistic goals but assume others in the industry are achieving them. This is an example
that many fall victim to when they get started and set profit goals that are unrealistic in relationship to
the size they are trading or the market they are trading in. They set themselves up for failure or at the
very least, frustration. Often traders will try to look for too big of winners to meet some unrealistic
monetary goal. They change an entire strategy to chase these unrealistic goals. We created a metric in
the EDGE that gives individuals a ratio of what you can expect to make versus the size you are trading
and the market you are trading. In addition, how different markets yield different risks and rewards.
Less liquid markets typically create more risk and are difficult to trade small. Being in the right market
that fits your personality, trading account size, and other criteria are important to setting accurate goals.
Also, it gives you the best chance to get and stay successful. We offer what we call the Market Finder in
The Edge that helps traders find a good fit and put them in the right market. We also address, in the
Edge, a sizing plan that incrementally grows your trading size. This plan looks at trading stats that are
important and shows you how numbers can lie.
 TRACK

2
LESSON 11

THE APPROACH
What’s needed to succeed in trading is often different than other businesses. Often people come into
trading having conquered and succeeded in a previous career. Only to find this as a challenge they
can’t seem to lick. Instead of laying out all the differences between trading and the rest of the world
let’s explore what is similar.

Those watching this who have achieved ultimate success elsewhere will
relate to this next point. We never arrive. There’s never a moment we
say “I got it, I’m successful, I’m done.” Success means that you found the
technique that allows you to meet the challenges of business every day.
It could be a technique that attributes to a successful relationship or
marriage. If you had a great product but a poor technique in selling it, it
wasn’t a success. In trading, the right concept is the product but the
right technique is the success.

THE PROCESS
There is no beginning, middle or end to trading successfully. It’s a process where there’s never an end
but you can be successful throughout the process if you’re using the right techniques.

When you want to become a doctor or a lawyer, the path is laid out. However, if you want to be a trader,
“which way do you go?”

Try to make sense of the path you choose. Your goal is to see opportunity by predicting which way a
market will go. A successful business opportunity always needs the right technique.

Every trader has different opinions at different times. What makes a market a market is this; the
fundamentals, the technical, and the psychology all wrapped up into one moment, which has people
trying to buy or sell.

What’s going to happen next? Will we rally or break? Am I a short-term trader who wants to trade
short-term price movements? Should I swing trade and catch a larger chunk of a move? Futures, stocks,
or forex, what should I trade?

We cover that, and much more, in the Edge.

 LESSON 11

After reading this material and watching the videos our one question for you to consider is this:

No matter what style of trading you partake in remember the core lesson:
How do you predict and decide where price is going when you buy a car, a house, or a plane ticket?
Take the skills you already have, to value price, and re-apply them to trading like a professional.

Edge-ism | Don’t worry what people are going to do, worry about what they already did!

Now you have the foundations...

Now, it’s time to start trading!
 LESSON 1

WHAT WAS THE FLOOR TRADERS EDGE?

An EDGE: any business requires an edge. In trading you need to see a

market through a different prism than other traders.

What is the “edge”?

Let us outline what the “edge” was on the Trading Floor before electronic
trading.

Successful floor traders weren’t masters using technical indicators to

predict where price was going. They did not have great intuition or a crystal
ball.

However, what they did have was an edge – at least two of them. The great
ones even had three.

Let’s explore the edge and most importantly why it works.

Edge 1: Order Flow

Brokers/Order Fillers did just as their titles indicate: they filled orders that came in, off the floor.

Where – Certain brokers filled orders for specific houses or investment banks. A Goldman broker in a pit
would normally be working Goldman Sachs orders. When that broker yells “3 bid on 2,000!” it was safe to
assume that Goldman was trying to buy 2,000 contracts from the price of 3.

Why – Understand that big buyers and sellers are important to recognize: they influence market
direction. As traders, that’s what we are trying to predict: market direction. When a trader recognizes a
big buyer, the market should go up and usually does.

How – Let’s say you’re thinking of buying the S&Ps and the Goldman Sachs broker is bidding to buy 2000
contracts from the price of 3. As a successful trader, you will bid with him at 3. As you are bidding, you
realize other brokers are trying to buy 3s as well. With that information you may assume that this market
could rally (go up) and that the 4 offer might go bid.

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Edge 2: Market Relationships

Where – Pit traders were typically surrounded by information much like a scoreboard. On that
“scoreboard” were many other markets: it showed what price the other markets were trading at - are
they going up or down?

Why – Now if you were an S&P pit trader and you knew the S&Ps were influenced by the 30 yr. bond (ZB),
wouldn’t it make sense that you were aware of their price movement?

How – For example, a trader wants to buy the S&P, and knows that if bonds go down, his S&Ps will go
up. It would then make sense to buy the S&Ps when the board indicates bond prices are going down.
Then the trader can step out and buy the S&Ps at that moment. Now, the probability is greater that the
trade would go his way (up) sooner after he bought.

The Great Ones

Great traders not only recognize the two previous advantages, they’re also be privy to a third.

Where – The third would be where the “pit” was: were other traders long or short?

Why – Why is this important? You’ll see in later chapters that markets truly move when too many traders
get “stuck” in a losing position. They get too long or too short.

How – When too many pit traders are long, ask yourself: what are they now? They are sellers. At some
point they come to the market with those sells. What happens when there’s a lot of sell orders coming?
We will cover more of this in a later lesson.

Professional Trading Concepts

Now let’s consider the pit scenario as it relates to the electronic environment. These concepts should
always be used to answer this question:

How Do You Execute Your Bias?

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MARKET RELATIONSHIPS & DIVERGENCES

Everyone knows how to use market relationships to find value. However, very rarely is this used to value
markets while trading. Consumers use this every time we buy (or sell) anything with a price.
Let’s discuss a few analogies to clarify the concept.

Cars
VS

When was the last time you bought a car?

If you’re like most consumers, you want the best price, which is most often the lowest price. How did you
value that car? Did you go to buy that new Mercedes-Benz and tell the salesman that the 18-day
exponential moving average crossed through the 200 day and the car is only worth $50,000? Did you
show him a chart?

Of course not, you went on the Internet or visited a few dealerships and compared prices. The
conversation probably ended like this: “Listen, the dealership down the street is at $50,000 for the same
car that you are selling for $52,000. Beat his price right now and I’ll buy it”.

All you did was use the age-old technique of comparing one product to another to find value. In this
example you were able to say one was cheap and the other was expensive.

Websites like Travelocity or Orbitz constantly compare and contrast prices. When booking a trip you
enter your destination and the site lists airlines meeting the criteria. Immediately, you scroll down the list
and identify who is cheap and who is not.

Application

How do you use this very familiar consumer technique to create your edge predicting market direction?

What market do you trade? Or what market do you think you want to trade?

The answer to these questions includes what markets you will also watch.

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For example, if you trade the ES (E-minis) and you only watch the ES and don’t know the activity of other
ancillary or correlated markets, then you’re like a pit trader, alone in a pit with the boards off. You’re not
missing a piece to a puzzle: you’re missing the whole puzzle.

I will list correlating markets to watch later. For now, let’s review what to watch for when you compare
and contrast these markets.

Since the ES future is based on a stock index, we should look at other stock index futures markets. The
NQ (NASDAQ) is a good start. The ES (S&P 500 E-mini) is made up of 500 stocks or companies. Those
companies are weighted and that establishes the price you see on your dome or price ladder. The NQ
(NASDAQ) is 100 companies or stocks that are also weighted and reflect the price you’re seeing on a
dome. It certainly would make sense that
these two markets would trade and chart
alike. As they are both U.S. stock indexes, Nasdaq Futures [NQ] S&P E-mini Futures [ES]
even listing some of the same companies,
it should help you understand why
comparing and contrasting the two is like
comparing two different car dealerships
selling similar cars.

With the help of the corresponding video,

we are going to look at what exactly we are
trying to recognize -- including on charts
when we compare these two markets. The
yellow text on the next video is called the IMD or the Inter-Market Divergence signal .

This arrow marker is just that: a mark on your chart indicating a piece of information, which is that the
ES or NQ is making a high, and the other is not. Or that the ES or NQ is making a fresh low, but the other
is not.

This is the “head scratch” moment. This is the time when you might start to question the strength or
weakness of a market.

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Asset Allocation Comparisons

As mentioned in the next video it makes sense to compare the ES and the NQ with other stock Index or
sector ETFs, however opposite influence is also important.

For example, stocks and bonds have often moved opposite of each other. Whereas, if an investor sells
stocks, he may reallocate those funds into bonds. With that rationale, if the ES moves higher, then
typically bonds and other interest rate products move lower in price.

Real Life Example

You’re long 10 ES and you see the 10 yr. note (ZN) and 30 yr. bonds (ZB) start to move lower, then
you should feel more comfortable with your position. Why? Because when the bond market goes
down, it’s often fuel for the stock indexes to go up.

Don’t obsess with which is leading or lagging. Often they change off those roles or move in exact tandem.
That’s why it’s important to spot certain benchmarks: day highs/lows, POCs, or Alert Levels to gauge
strength and weakness.

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COMPARING SUPPORT & RESISTANCE + MARKETPROFILE

Comparing support and resistance

Another market relationship technique is comparing similar areas of resistance or support. Whether
they are Edge Alert Levels or your own, it’s valuable to know when both are in areas in which you believe
they will rally or bounce out.

Comparing Point of Control (POC)

Many MarketProfile® traders look at point of control [POC]. This is simply where most of the volume has
traded. For example, if most of the day’s volume traded at 1,594.00 then that price would be considered
the point of control [POC].

This example also helps while judging value, to compare two markets to their previous day’s point of
control. For example, if both markets are at those targets then there’s a better bias that can begin to
develop.

MarketProfile vs VolumeProfile

While this isn’t a course on profiling we do want to cover some of the basics. Here is the main difference
between the two. MarketProfile is based on the time a market trades a certain price while VolumeProfile
tracks the amount of volume traded at a certain price. In recent years many traders have embraced VP
over MP. The Edge feels that both time and price are important. One without the other leaves out an
important piece to price discovery. In later sections, we expand on this topic by taking both time and
price and showing you how it creates high probability opinions.

Profiling does give newer traders a nice feel for market structure however, the execution of profile
theory is a weakness. Watch the next video to learn more about some basic, but key profile levels. Also,
consider the power in comparing these levels across correlating markets.

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Real Life Example

If you were bullish in the ES, it would be helpful to see the notes and ES “diverge.” Why? The
notes’ ability to make higher highs should have fueled the ES lower. . . Why isn’t the ES down
there through those lows?

Market Relationships are all about the tell, the clue, or the “head
scratching” instance that allow you as a trader to unveil those
moments that your market is cheap or expensive. Your market is
validating a strength or weakness. You are now in a position to
create a healthier bias about where this market might go next.

At the beginning, you told the car salesman his product was too
expensive. Now you’re telling the market “you’re too expensive”.
You’re beginning to polish the predictive skills you’ve used your
whole life, only now you are using it to trade.

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 LESSON 4

ORDER FLOW: TWO WAYS TO BUY AND SELL

BACK OF YOUR HAND TIP.

Two Ways To Buy. Two Ways To Sell.

Order flow is a “buzz phrase” in the trading industry. Once someone hears about order flow, they quickly
realize it’s “probably important.” The purpose of this manual and trading room is to give readers a sense
of what it is, but also introduce questions to ask yourself when recognizing order flow, or buyers and
sellers.

Order flow, as mentioned in the Trading Floor lesson, is recognition of buyers and sellers in the markets
you’re trading and the markets you’re watching. Bigger buyers/sellers and imbalances are preferred.

Without having features on your chart or the price ladder to recognize these traders, you’re never in a
position to ask this question, let alone help you execute a bias.

MarketDelta®, namely the FootPrint®, is the tool we use that allows us to recognize the real buyers or
sellers quickly in real time. “See inside the chart” is the tagline to MarketDelta®. A traditional candlestick
or bar chart shows limited information - not enough to make directional assumptions.

Rolling the mouse wheel opens up the bar and allows you to see the activity including size of orders,
what price, and time, etc. That information now shows you more of the important elements: actual
buyers and sellers. With that, I’m going to write something that will release some anxiety: you don’t have
to analyze all these numbers. In fact, most of them are to be ignored.

Before we move along, let’s review something I call the “back of your hand.” This must be known like the
“back of your hand”, eventually.

There are two ways to identify buyers and sellers: aggressive or passive. Let’s start with buyers.

Hitting the Bid: To Aggressively Sell Lifting the Offer: To Aggressively Buy

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Two ways to buy

2BUY WAYS
For example, if you think the market is going to come down you then can
be patient, you might place a buy order “in the book” and join the bid. If
you join them with a limit buy order you are a passive buyer. If the market
does trade that price enough, your order or bid will be filled.

If there are 512 contracts on the bid and you place an order to buy “1”, with TO
everything else being equal, the 512 will now look like 513, to reflect your
order.
Now, for example, say your patience is wearing thin and your passive limit order is not getting filled and,
you say “I just want to buy it now!”

You become aggressive and place a “market” order, which by definition will fill you at the current offer.
Your order should be filled at that price and in the last traded quantity will reflect a “1”. You now bought
1 at the best offer, but did it aggressively. You just went to where the sellers were, and if you were on the
floor you would have said, “Buy ‘em!”

When you send in a buy market order you are said to be “lifting the offer.”

Two ways to sell

2SELL WAYS
Again, if you’re passive or patient, you can rest an offer (red) somewhere
with any of the others. For example, let’s say you offer it at the best offer.
In this case, the amount of other resting sell orders is 602. If you were to
join them, and, with everything else being equal, that total will now look
like 603. If enough trade there you would have been filled and sold it.
TO
However, if the market doesn’t fill you and you become less patient and
say, “I just want to sell it!” then you place a sell market order, which says you want to sell to the best bid.
When you do this and get filled, the amount shown as traded will show “1” to reflect you sold one
contract.

When you send a sell market order you’re said to be “hitting the bid.” On the floor in this instance you’d
yell, “sold” to the person bidding.

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This aggressive/passive concept isn’t a theory: it is, however, a straight reality of

how to accurately and objectively identify buyers and sellers. Stay away from
the mindset of every buyer has to have a seller and vice versa. While this is true,
it is important to realize that traders are buying and selling for many reasons.
Your job is to understand where, when, and with how much buyers and sellers
are executing.

Let’s now take a look at the FootPrint® from MarketDelta®. As mentioned in

video 4, most of the chart information can and should be filtered.

This is showing both a past and present reflection on how many contracts
traded at the corresponding price.

Let’s split the FootPrint bar in two: the numbers on the left and right of the bar
are, just for example’s sake, when the market is 2 bid – that’s how many
aggressive sellers “hit the bid” when it’s 3 offer – that’s how many aggressive
buyers “lifted the offer.”

Understanding this aggressive approach, we can now look at where a big trader came in and either hit
the bid (sold) or lifted the offer (bought) this market.

Your chart can also be color-coded to reflect this: buyers are green, and sellers are red on the screen.
Now you begin to understand the meaning of the colors, as you now have a better definition of order
flow. Let’s look at the most important element: the question you need to ask yourself.

A big aggressive buyer should make a market go up. Does it? If not what does that tell you. That’s an
example of an aggressive buyer meeting enough passive sellers that say “no, you don’t”.

Edge-ism | If you punch a guy in the face and he doesn’t flinch…

Order Flow is not just recognizing when and where buyers and sellers come in, but how the market
reacts to them.

Just like on the floor, if that Goldman Sachs broker aggressively went up on the price he wanted to buy,
it’s important to know and more important to watch how the market absorbs or doesn’t absorb it.

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ORDER FLOW: “AFTER YOU SELL IT…”

If I’m in a crowded room and I smell smoke, I would certainly like to know
where the exit is. That’s no different than trading.

Let’s explore another “Back of the Hand” moment.

BACK OF YOUR HAND TIP.

After You Sell It, You’re A Buyer.

When you buy to get long (and you’re a relatively short-term trader) it usually means one thing: you’re
now a seller. Hopefully, you’re a seller at a higher price, but if the market doesn’t go up, you’re still a
seller.

So let’s assume many other traders are also long and exit their position in a relatively short timeframe.
What does that mean? It means there are a lot of sellers coming to this market, creating two dynamics:

1. Many sell or passive offers placed above where the market is currently trading
2. Many sell-stop orders below where the market is currently trading

Let’s assume the market doesn’t rally (go up). Guess what? Look out below. When you identify many
longs you’re also identifying that many sellers are coming.

This is another back of the hand moment because many traders, both new and old, don’t realize that
markets move up or down based on where traders are exiting, not where they’re entering. When people
exit, especially a losing position, they are emotional. When many traders are emotional… markets react
and generally in the direction of their exits.

Edge-ism | Trading is not about being right. It’s about where others are wrong!

Remember the question you should ask after you see a big buyer or seller:

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How does the market react?

Let’s follow that with an example. We use the Edge Alert Levels to trade: what we believe are areas of
support and resistance.

A high probability set-up is when a market is going up into an Alert Level of resistance (Resistance =
where you think a market will stop going up and return lower). Once in that area, we see a big buyer come
in and, unlike before, the market doesn’t budge higher.

Two reasons the market is telling us to “sell:”

1. It’s inside a predefined Target or resistance zone and,
2. An aggressive buyer can’t get the market to go up when it should.

Edge-ism | “It’s not what markets do, it’s what they don’t do.”

In this example, there could very well be a crowded “long” trade --

a crowded room and only one exit.

Successful traders not only know when a market is too long -- they
know where the exits are. So, if we get “stuck” in that room, we can
hang out near the door and be the first out.

Real Life Example

When you open a long position, you’re now a seller. When you open a short position, you’re now
a buyer. So, what if many other traders like you all opened up long positions. The Market will
struggle to rally until those positions are closed out, which means a sell-off could be imminent.

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TRADING PSYCHOLOGY: EMOTIONAL CAPITAL

Many traders, whether they are brand new or have been trading for several years, always face the
question of the importance of trading psychology.

If we had just a few words to answer, we would say . . .

The important aspect in the marriage between the mind and markets is
how to control the emotions. One important element to remember is that
as humans, we are not wired to trade successfully and here’s what we
mean.

There’s an old saying, which is “cut your losses and let your winners run.”
Our reaction:
Great, but how do you do that?

As humans we all hate being wrong, whether it’s a losing trade or an

argument. So, when we hate to do something we tend not to do it. Every
losing trade you have taken or will take is just that: admitting you were
wrong. In many other businesses, it’s easier to admit you’re wrong, just
blame someone else. In trading, you get that thing called a statement every
night that places the blame front and center.

Real Life Examples

Problem
Let’s go back to the cliché, “cut your losses, and let your winners run.” What does it mean? When
you’re in a losing trade, how does it feel? How it feels might be subjective, but realizing that
“you’re not wrong until you exit”, isn’t, and that’s why most traders hang on to losers and many
add to them. All to avoid admitting we are wrong. How about “let your winners run”? Well, you’re
not right until you exit. So it’s easy to “get out” and potentially cut that winner short.

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Solution
Have a plan: by that, we mean a simple one. Know where you’re getting out before you get in.
At least have an idea! In this way, you create less surprise, which means less emotion. Being
wrong is much easier to swallow when you have expected it. In fact, if you’re not wrong, then
you’re not a trader -- you’re a spectator. Baseball players strike out, football players fumble, and
traders lose money. However, it’s about creating a level of certainty about “here’s where I’m
wrong, before I even get in.”

Risk management isn’t cutting your losses… it’s taking them. Once you are comfortable taking
them, you become better at cutting them. But, here’s the most important element to all this:
know what you’re doing. When you use the proper tools to create your bias, then you’ll use the
proper tools to recognize where and when you’re wrong. Many traders try to manage risk by
managing their psychology. We say the best way to manage risk is to know what you’re doing.

Some traders we’ve heard want to remain as calm as possible. While we understand the
concept of “calm in a storm”, you don’t want to ignore fear: as you sink deeper in a losing trade,
the calmer you are, the more delusional you become. Lack of a plan will often spin you in that
direction.

Problem
Adding to a loser: many do it, and some have a problem with it. Now, don’t confuse adding to
averaging. Some highly disciplined traders can average in a position (i.e., buy it at 10 at 8 at 6 so
you’re average is 8). However, that’s almost always a predefined strategy. Many will mask
adding and say they were averaging. To most it’s lack of a trading plan and trouble admitting
they are wrong!

A trader will buy it at 10, and when it doesn’t go their way, they buy more at 8, 6, 4. Now they
have many more contracts in the position than they are used to.

At some point, in this example, “skill turns to hope” there is no more order flow or properly used
market relationship techniques -- in fact, it reminds us of another one of our Edge-isms:

Edge-ism | Sometimes trading is like shooting fish in a barrel . . . and sometimes you’re the fish.

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Solution
Don’t add to a loser! Have an exit strategy with every entry. There’s no breathing technique that
a trading psychologist will give you that works when you’re in a losing position. Would you want
your surgeon to stop and start doing breathing exercises to calm down when you’re dying on an
operating table? Of course not, you want the surgeon to know what he’s doing.

That’s our job, and the best way to calm yourself down is to know what you’re doing. You want to
get to a point where your best trades are losers, because you cut them short.
Now, let’s move on to the more glamorous side of a trade, the winners!

Problem
As mentioned, we tend to chop winners because we aren’t proved right until we get paid and exit
the trade for a winner. So, there’s always anxiety that is filling us up and a voice saying “get out
now, take the money.” We tend to focus on what we lose if we don’t exit. For example, you have
a winning trade that has you up 10 ticks. We often think, should I get out now? But, then we think
what if it goes to a plus 20 tick profit. Our mind always seems to think in the negative, in this case
taking the +10 when it goes to a +20 means we lost 10 or left 10 ticks on the table.

Conversely, if we don’t exit for the +10 and it goes to a +5, we not
only regret not taking the +10, but we look at the trade as losing
5 rather than actually making the +5. Either way, the mind drifts
to the negative. Doctors and psychologists can write about why
this happens: We’ll write the solution of what to do. It doesn’t
include a breathing exercise.

Solution
Not everyone is wired to trade big size, so stay with us on this one. We do strongly believe
everyone is wired to trade more than one contract at a time. Our solution to this mental battle of,
when to get out of winners, includes a scale model, or as we call it in the Trading Room, “paying
for the trade”.

Paying for the trade consists of a trading size of greater than one contract. For instance, 2
contracts, or even better, 3 contracts. Later, we discuss a sizing plan to help get you to a 2 or 3
contract trading size.

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When you’re trading 2 or 3 contracts, you’re now able to trade out of the position in halves or
thirds. With this comes not only flexibility, but most importantly, a solution to the biggest mental
struggle of all: getting out. When you trade 1 contract you’re on the team. When you trade more
than one, you’re on the field!

Emotional Capital

Many traders get caught up in the sex appeal of a chart. Let’s say a market moves sharply higher, 5 ES
points or 20 ticks. A novice thinks “Wow, with a ‘one’ lot/contract, I could have bought it ‘here’ and sold it ‘there’
and made 17 of that 20 tick move”.

People tend to think backwards when introduced to this business. They think of the maximum amount of
reward with the minimum amount of risk. While you certainly don’t want to think in terms of maximum
risk, minimum reward, you have to find the sweet spot.

The sweet spot is defined by the average move for the market you’re trading. Sweet spot of risk is both
the size (number of contracts with which you open a position) and how many ticks you are willing to risk.
The size you trade is covered in more detail in the Sizing Plan section.

Let’s stick to the ES for now. While 15, 20, even 30 ticks of rewards are possible, they are also hard,
remember there’s a difference between charts and reality.

Looking at a chart and a market that moved 20 ticks and wanting to capture most of that seems (and
looks) easier than it is.

Problem
A trader gets long 1 contract at a fictitious price of 12. His profit target is 20 ticks, so in this example, he is
looking to exit at 32. The market goes 10 ticks his way. He feels good, but not out of the trade yet. The
market then goes all the way to 31, one tick from his 20 tick winner. However, it doesn’t fill him and
retreats all the way back down to 12, which is break even.

How do you think this trader feels? How would you feel?

Not good, is our answer. We don’t take to kindly to near winners. But, in fact, this is the reality of going all
in for bigger winners. While in this example, this trader did not lose real capital, he or she lost quite a bit
of what we call Emotional Capital.

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Solution
Scaling
As discussed earlier in this section, not everyone is wired to trade big size, i.e., 20, 50, 100 contracts at a
time. However, we feel everyone is wired to trade more than one at a time. In the problem above, there
is no flexibility to scale out and take advantage of being right to the tune of 19 ticks. Not only has this
trader suffered an emotional capital loss, but s/he also hasn’t made any money even though they made
a great directional prediction. All markets differ regarding their sweet spot or average move. Most of the
time, traders are always outside that sweet spot and spend a lot of emotional capital “swinging for the
fences.”

A good scaling technique, for example, of buying it at 12 and exiting at 18 and 24 on 2/3’s of the position
would have allowed this trader not only to “feel” better, but, also profit from being right. Now he or she
would have made +6 ticks on a third +12 ticks on a third and can now be flexible. You don’t have to start
trading 3 contracts, nor are we advocating it, but when you only trade one contract there is a bit of a
disadvantage.

Edge-ism | Realize that trading successfully isn’t less contracts and more ticks it’s slightly more contracts
and less ticks.

Pay for the Trade

“Pay for the Trade” is one of the most important phrases we use to
help others stay in profitable trades.

What does it mean?

It’s the first part of the scaling we spoke about a moment ago.

Problem
When the previous trader got long at 12, the market eventually went to within one tick of his target.
However, before that, other emotional moments may have occurred. Maybe it went 8 ticks his way, then
back to break even, then 10 ticks his way, then back to break even. At that point a trader will just take the
small winner or break-even /scratch only to see it go the distance up to his/her target. Why? Because we
can only take so much emotion.

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Solution
“Pay for your trade” consists of taking a small profit, maybe on the first third of your trade to reduce the
emotion. Therefore, increase your comfort and focus. Even if you’re a 1 contract trader, you can practice
getting out early for “the sweet spot” exit.

Psychology II
Do not marry your trades whether or not you’ve read this in a trading psychology book or not we can
sum up in a sentence what many write in a book:

Edge-ism | A successful trading career will consist of thousands and thousands of trades, so then why
would anyone trade be that important.

Reduce emotion by knowing when you’re wrong, pay for it by scaling, and devalue the importance of any
one trade.

Many individuals feel that real capital is the only risk, when actually an element of emotional capital
always exists.

How hard do your winners feel? No matter how much money you make, if it feels like you’re walking
through a minefield each day, then it will be near impossible to sustain the effort. Reduce your emotion
by reducing the surprise. Know your exits before your entries. Don’t try to take too much out of your
winners and be perfect.

Edge-ism | More money is made by increasing your size, not your profit targets.

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 LESSON 7

LESSON 7 | SIZING PLAN

This chapter is going to be short and sweet.

The more thought that goes into building your size, the more chance you won’t.

You need the 3 concepts this guide conveys to create a better bias and trading plan. As you need a
trading plan to pick good trades, you need a sizing plan to picking the right size you should be trading.

If you understand you might not be wired to trade 20, 50, or 100 contracts at a time, you should realize
that everyone is wired to trade bigger than “1.” If you want to increase your profits, don’t try to better
your profit target: just slowly increase your trading size.

You probably found the “sweet” spot of how far a market will go once you buy or sell it. Now you need
to find the sweet spot of how many contracts you should trade it with.

Trading Size is risk management: bigger size, bigger risk. Keep this in mind. Also, remember while
building your size, you should never try to go too fast.

Example:
The toughest step to size-building is going from one to two -- it’s the only time you should “double” your
risk.

Every subsequent step should be very incremental: one, by one, by one.

You know you increased size appropriately when 3 contracts feels like 1 contract used to feel.

Then 5 feels like 3, and maybe at some point, 1 contract will feel like sim trading.

Below is a helpful matrix of important statistics to gauge your trading performance.

Record Avg Winner/Loser PNL

# of winners to losers 1 to 1 or better based on your personal goal

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 LESSON 7

The fourth and most subjective is that of Emotional Capital: I use a scale of 1, 2, and 3.

1 = Effortless, pretty much heatless trade

2 = Took a little heat, but only for a moment

3 = More heat than you like, and more time to fill your targets
These numbers are used only on your winning trades, to “qualify” those trades and give you a better
sense of how much emotional capital you spend each trade, each day.

You can also place a number on the the whole day or session: was it a 1, 2, or 3 day of profitability?
Now you have a much better picture of performance, and not just predicated on profits or losses.

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 LESSON 8

THE SET UPS: WHERE THE STOPS STARTED

In the Trading Room, We often say “the market likes to go back to where the stops started.”

This is interesting because this dynamic has everything to do with human

anxiety. Stop orders are generally associated with orders placed by
traders to get them out of a losing position. When a market triggers a
cluster of buy stops and continues in that direction one can assume many
short positions were exited. With follow through, one can further assume BUY STOPS
many long positions (momentum strategies) were executed. Also, one can Covering a short position
safely assume many of those traders stuck with short positions wished (usually for a loser)
they would have exited where the break-out occurred.

With that information, ask:

1. Why would the market be inclined to come back to that point?
2. Why would it have a high probability of that area being support or
resistance?

Answers:

1. If many momentum traders bought a break-out (now got long) and see the market go in their
direction, they are sitting on profits. However, what if they haven’t taken their profits and now see the
market head lower (closer and closer to their entry)? ANXIETY, in a word, is what traders feel when
profits diminish. Shrinking profits feels the same as a losing trade. As that market sinks closer toward
their entry, anxiety builds: “I can’t let this winner turn to a loser.” So they sell it to cover the long position,
a self-fulfilling prophecy as many long positions “feel” the same way and also sell. The selling will usually
abate when the market is sold right down to that common entry. Why? Because most of those long
positions are covered or closed out.

2. Why would this area now hold as support?

Two reasons: first, in the above explanation, most longs closed out of their position. because they
covered, there are less sellers. Basic logic tells us less sellers make it easier for a market to go up.
Secondly, remember the shorts that got stopped out using the buy stops, how about the ones that didn’t

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 LESSON 1

take their losers there? They felt the pain all the way to the top of the move. Now that the market has
come back to the point at which they wished they’d exited in the first place, they often react. They either
buy there or try to buy there because they don’t want to feel the pain again back up to the high of the last
move. This creates more buyers in that area.

This confluence creates support.

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 LESSON 9

SET- UPS: HEADFAKES SHAKE OUT

Markets need to shake out weak traders all the time. A market with more Traders Taking Losers
short-term traders results in a market with more Headfakes.

Headfakes are easiest to recognize after a tight range or consolidation

sets up. Let’s explore this further.
LESS SHORTS
If time does not create more fresh prices, a market consolidates, allowing Less Buyers
us to safely assume that traders are getting both long and short. Neither
are really getting paid or losing money. However, the market will
eventually get one-sided, moving in one direction, causing either longs or
shorts to cover and momentum traders to jump in (watch video).
MORE LONGS
In an example of a market trying to break out of a range to the upside, you More Sellers
will find two conditions: first, those that are short and getting stopped out
or puking their position; second: momentum traders looking for a
break-out will buy it and get long.

What we have now is two merging dynamics:

1. Shorts shook out, meaning they are no longer trying to buy below the market.
2. New momentum (and as is often the case, short-term) longs that just opened that position.

Less shorts mean less buyers. More longs mean more sellers.

So, when a range break-out doesn’t break out and snaps back into the range then a Headfake has
developed . . . Look out below!

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 LESSON 10

SET-UPS: LONG UP/DOWN BARS

Traders often see a big move up or down, feeling the market is now
strong or weak. In some cases, that’s true. However, in others and more
specifically when a big up bar is quickly retraced by the very next bar, it
is invaluable to predict the market’s next direction.

In the Trading Room, We often say “the bulls have the leash”, or “the
bears have the leash”. One technique we use is this back-to-back bar
example.

If a market rallies quite a bit in a short time period, i.e., 10 ES ticks in less
than 5 minutes, it’s safe to assume many traders will look to buy this
market on the way back down. So when they do, and the market keeps
retracing lower and does not bounce, then there’s potential that those
longs are stuck. Often this pattern creates a shift in bias and who’s in
charge. In this case, the bulls give way to the bears.

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 LESSON 11

SET-UPS: BIG LOTS

Big lots or big orders are important to recognize when and where they 2 QUESTIONS
come into the market. The question becomes, what does a market do once
1. Do you recognize
these orders hit? How does the market respond? If big buying comes in and
when big buying/
the market goes up, great, it’s supposed to. That price should be near term
selling comes in?
support. However, if a big buy order comes into the market and prices
cannot rally it provides an even better clue. 2. What should you
ask yourself

Edge-ism | If you punch a guy in the face and he doesn’t flinch – look out!

For example, when a market is supposed to rally and doesn’t, look out!

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