10.3 Day Trading Techniques.....

10.3.1 Gap Trading

10.3.2 Continuation Trading

10.3.3 Block Trading

10.3.4 Spread Trading

10.4 The Trading Day................

10.4.1 Before the Bell

10.4.2 The Open

10.4.3 Lunch Hour

10.4.4 The Close

10.4.5 After tlie Bell..............

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207 209 213 215

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216 220 221 221 ...223

Table of Figures

Figure 1.1. Trading Model 6

Figure 1.2. Visual Cues 12

Figure 1.3. Trade Entry 15

Figure 1.4. Trade Exit 18

Figure 1.5. Trade Distribution 20

Figure 1.6. Average Trae Range 23

Figure 1.7. Long Entry at 50-day Moving Average 25

Figure 1.8. Short Entry at 50-day Moving Average 25

Figure 1.9. Ariba Low-Priced Stock Example 26

Figure 1.10. Historical Volatility 28

Flgui-e 1.11. Narrow Range Bars 29

Figure 1.12. Average Directional Index 30

Figure 1.13. Directional Movement Index 31

Hgure 1.14. Equity Curve 34

Figure 1.15. Low Volatility: Cigna 36

Figure 1.16. High Volatility: Ciena 37

Figui-e 2.1. The Spread 41

Figure 2.2. Con-elation Coefficient 42

Figure2.3. Spread Bands 43

ngure2.4. Activision-THQIncorporated Pair 51

Figure 2.5. THQIncorporated-Activision Pair 52

Figure 2.6. Apache-Anadarko Pair 54

Figure 2.7. Allstate-Progressive Pair 55

Figure 2.8. Emulex-QLogic Pair 56

Figure 2.9. RF Micro Devices-TriQuint Semiconductor Pair 57

Figure 3.1. Cobra 63

Hgure 3.2. Hook 63

Figure 3.3. Inside Day 2 64

Figure 3.4. Tail 65

Figure 3.5. Harami 66

Figure 3.6. Fullback 68

Figure 3.7. Test 69

Figure 3.8. V Zone 69

Figure 3.9. Narrow Range Qualifier 71

Figure 3.10. Average Qualifier 71

Figure3.11. Abgenix Pattern 79

Figure 3.12. PMC-Sierra Pattem 80

Figure 3.13. Check Point Software Pattern 81

Figure 3.14. NYFE Index Pattern...............................82

Figure 3.15. CoraverseTechnology Pattern 83

Figure 3.16. Nasdaq Composite Index Pattern

Figure 3.17. Computer Associates Pattern.................

Figure 4.1. Float Box.................................................

Figure 4.2. Float Channel..........................................

Figure 4.3. Float Percentage......................................

Figure 44 THQ Incorporated..

Figure 4.5. Juniper Networks.....

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....97 ,98

Figure 4.6. Ariba..........................................................................................59

Figure 47. Ciena........................................................................................100

Figure 4.8. Checkpoint Software..............................................................101

Figure 4.9. 11.IK Systems............................................................................102

Figure 5.1. Rectangle...................................................................................106

Figure 5.2. AirGate PCS Rectangle............................................................112

Figure 5.3. Rambus Rectangle....................................................................113

Figure 5.4. Electro-Optical Engmeering Rectangle....................................114

Figure 5.5. Multiplicity................................................................................114

Figure 5.6. Double Bottom.........................................................................115

Figure 5.7. Double Top...............................................................................116

Figure 5.8. Triple Bottom...........................................................................118

Figure 5.9. Triple Top.................................................................................119

Figure 5.10. Stealth Triangle......................................................................120

Figure 5.11. PECS Stealth Triangle............................................................121

Figure 5.12 SEAC Stealth Triangle...........................................................121

Figure 6.1. Linear Regression Line, Point 1................................................124

Figure 6.2. Linear Regression Line, Point 2...............................................125

Figure 6.3. Linear Regression Curve...........................................................126

Figure 6.4. Microsemi Corporation Volatility............................................129

Figure 6.5. Veritas Software Volatility.........................................................131

Figure 6.6. webMethods Volatility..............................................................132

Figure6.7. SeaChange Volatility,................................................................132

Figure 6.8. Biotechnology Index Volatility..................................................133

Figure 6.9. Computer Associates Volatility.................................................134

Figure 7.1. Range Ratio................................

Figure 7.2. ID2 Example............................

Figure 7.3. IDNR Example........................

Figure 7.4 NR25 Example...........................

Figure 7.5. NRIO Example...........................

Figure 7.6. NR%5 0

Figure 77 Nasdaq Composite Index..........

Figure 7,8, Securities Broker/Dealer Index,, Figure 7,9, Analog

Figure 7,10. Taro

Example

Devices.....

Pharmaceutical,,

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.............145

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Figure 7.11. Multimedia Games.........................................

Figure 81. Systems Model for QQQ.................................

Figure 8.2. Volatility Index (VIX)......................................

Figure 8.3. VLX Mirror Image............................................

Figure 8.4 Put/Call Ratio Peak........................................

Figure 85. Put/Call Ratio Trough.....................................

Figure 8.6. New Highs......................................................

Figure 8.7. New Lows........................................................

Figure 8.8. Arms Index, or TRIN......................................

Figure 89. Bullish Consensus............................................

Figure 8.10. Public to Speciahst Short Sales Ratio.............

Figure 8.11. Short Sales Ratio............................................

Figure 8.12 S&P 500 Index (09/01 - 02/02)....................

Figure 8.13. S&P 500 Index (12/01 - 03/02).....................

Figure 8.14 S&P 500 Index June 1998..............................

Figure 9.1. Tyco Daily Chart............................................

Figure 9.2. Tyco Intraday Chart........................................

Figure 9.3. Nasdaq Composite Index Reversal...................

Figure 9.4. Boise Cascade Position Open Orders...............

Figure 9.5. Handspring Position Open Orders..................

Figure 9.6. Engineered Support Systems Entry Order......

Figure 9.7. Business Objects Entry Order..........................

Figure 9.8. Overture Services Entry Order........................

Figure 9.9. CACI Entry Order,.........................................

Figure 9.10. Engineered Support Systems Update.............

Figure 9.11. Business Objects Position.............................

Figure 912 Overture Services Update..............................

Figure 9.13. CACI Open Position....................................

Figure 9.14. Rent-a-Center..............................................

Figure 9.15. Corporate Executive Board..........................

Figure 10.1. Level Window...........................................

Figure 10.2. Level Snapshot 1.......................................

Figure 10.3. Level II Snapshot 2......................................

Figure 10.4. Level II Snapshot 3.......................................

Figure 105. ImClone Intraday..........................................

Figure 10.6. ImClone Daily...............................................

Figure 10.7. Comverse Technology,..................................

Figure 10.8. OSCA Inc....................................................

Figure 10,9, Daily Money Flow..................

Figure 10.10. Intraday Money Flow..........

Figure 10,11, Ciena Opening Range

Figure 10,12, Panera Bread Gap Confirmation

.........151

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........m

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.........191

.........192

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Breakout.............20S

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XX Contents

Figure 10.13. Acambis News Continuation Figure 10.14. Rambus Breakout Continuation.. Figure 10.15. Ciena: November 12 2001 Hgune 10.16. Ciena: Februan- 5, 2002 Figure 10.17. M Tops with BoUinger Bands Figure 10.18. W Bottom with Bollinger Bands. Figure 10.19. Cepheid

.212 .213 .219 .219 .222 .222 .224

1 Introduction

Millions of human hands atwork, billions ofminds... a vast network, screaniing with Uje: an organism. .A natural organism.

Max Cohen, P;the Motion Picture

In the movie Pi, Max Cohen is a brilliant number theorist tiying to detect hidden order in the chaos of the stcck market, an infinitely long string of numbers scrolling through the universe. During his relentless pursuit of the answer, he is stricken with migraine headaches, confronting powerfijl antagonists along the way. His singular obsession exemplifies the never-ending search for the ultimate solution - a master key to the market.

An avid student ofthe market maybe compelled to translating license plates into stock symbols or composing phrases from symbols, e.g., EYE LUV U. The market can easily become an obsession as one jumps from one trading system to another without gaining a single insight and losing capital during the process. Immersion in technical analysis is a cornerstone of success, but managing risk and temperament are equally important.

In this book, we do not follow the path taken by Max Cohen. Instead, we present a diversity of trading systems as an integrated, scientific approach to professional stock trading. The elements of portfolio management, position management, and trading system have been synthesized into a practical blueprint. Some would claim that trading is as much art as science, and we agree. Our main point is that inspiration is built into the trading model and reflected in the design ofthe trading system. Such an accomplishment frees the trader to focus on just executing trades.

Trading is insight through observation. A professional trader exploits two or three unique insights to consistently pull money out of the stock market. Over time, the trailer builds up a portfolio oftrading systems and techniques, just as a

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