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2 Chupicr 2 Tnidc ScteclicHi Throughout the book, I wi!] utilise many iifustrctions k> demonstrate what taikiiig al)out. With wiiat J have discosseJ so far as a background, iefs got down to some trading concepts. Market Anatomy This is a market: Looking aL it carefully, what can bo said aljout liiis market? Wiiat can le seen in uns rnarket? What truth can be lourid i market? lis single [lictograpfi of a Jt can he sairl thoi it opened nt iis fiigfi and ctoiefi near its low. Do(?s it have a higfi? Do(?s it aso have a tow? Is tiiis rnarke in a trading range? Truly it js in a trading range. Its in a trading range behwecn tfie high and the low. Isni. that ;rrjc of all markets? Every market in existecjce is in a trading range fintwoen tne .hlgncst fiigh and the lowest lov iliat ir has ever c4(>eriei>ced. . noted some oiher triJths about this market. It had an opening price and ir fiad a clnsing price. However, tfie open and the close were not necessarily precise, btstoad, tfiey represent a consensus of what die open was and wfiat the closo was. By the time trading closes at the end of a day, the reported open rviay reflect a fcir different price from lhat which was onginally sfiown at the start of trading, Tfie reported close also may chance drastically from wfiere it was sren to exist at the end of trading and horn where the "cfficials" call it after the close oi trading. Aiihough I can sec vhere Ific high and low were f)urported to be, I have no idea about liov many trades were made at eacii of them, or for certain ifiat tfie mark(d ever aciualty traded at those [jrice Ecvels. 1 abiu dnn4 know vv/hrd the volume was for this market, anij I dont know v/hat tiie open mtrrcst was, edfier, I will know tjuifi wfien it is too late to do very much rjtjout it. Yet, ifiese truths, along with tfie trend if there is one, are all 1 have upon which to base a trading dccrsion sfiould I cfioosc to place a trade in this market. f I look at a market anc realize that ii is in a trading range botween the aN-iiiTie fiigft and the all-time low, then 1 cart also realize that wdftin this overall trading rarige there exjsi many lesser trading ranges. Those lesser trading ranges occur over time at virtually evejy level ol price activity that a market has. But lf;ese trading rangts doni usually exist in a vacLium. Normally they are connechMi. the forniations diat cc>nnect tiiem are called trend lines. A arc trading market, cjver lime, has an anatomical structure. VVha ranges, connected by trending formaltons. Tiendlrig formations, in tljrn, are made up of shorter trading ranges gaps, large magnitude moves, and progressively ascending or descending price bars. E;cuse me if all this seems overly simple, but I have to staJt somewhere, Wfini Im attempting to do is to lay out a basic foundation for wfiat is to follow. What Im siiuwing here is tfiat a market can be dissected - divided up into its comjionent anatomical pafis. There are ways to trarJn each of these com jorierd fiarts. There are ways to trade frorn trctt fiere arc ig ranges. ways to trade [irogressively .iscendinif or descending trend formations. There are ways lo uadi irom small conyostion areas. Tliere .are ways to trade trend reversals, Ijreakonts, retracements, and corrections. And there are ways to dayirade niarkels, and they are, in sorne respects, unigue to daykading. This book is about t)ow :o trade the vatious situations that occur in the market place. The methods 1 show in this book are valid in any intraday lime frame in wiiich they can be seen to formi. Many of ifre conrnpis I sfiow are valid in daily or weekly lime frames, tjui the empliasis will be inwards the intraday cfifirts. Trading these intraday cfiarts roc]uires somewfiat ddferent strategies and laciics from those that might be involved m trading daily, weekly or monthly cfiaris. I make a good part of my living based upon using intraday charts. This book and course wjII be based entirely upon intraday charts, and other charts wilf be used only as tJiey relate to ih.o intraday chart, AJihuugh tiiese various formations are able to be traded as individual entities, and can be successfully traded in Ifiat manner, before this book ends, I hope to show tiow I trade tn such a way ss to auiomahcaliy include tht? individual component parts of wliat make up a market. Tfiat technique will be wfiat 1 calf "srigment counting," Some of the thitus ! say in ifus Look v-j\\] [jerinm only ;o th.e cioncepts of intraday cfiart trading, tr.rt i no w:ay ccmflict or coUradirrt the tlnngs 1 said in Trading By Tho Book. There are many vvays in whicfi to start a tjook of ifus type. In Tradinu 3v The Book, f started out with trading the breakoiJt of a trailing range. In this book, I will start ou: with the cane(?pt of trade selection.
Trade Selection For rne. Trade selection consists of two things: sclcctifig market, and selecEing an eniry point. The first is easy; tfie second wiM take a bit more explanatitj?!. Selecting a Time Framie I do not recomriiend trading on anytfiing less than a five minute chart tor most daytraders. To trade anything less tfian a hve minute f:fiart ts !o invite disaster wtien ii comes to execution. IVlosi traders, auhough they fiave a live data Jeed, are iradiruj in such a way that tfiey cannoi f><:jssit)lv rcunpete in the hve mrnute market. Why is this so? The five niiriuie market is to a great e>;h3nt made up of "large" traders, and ex-floor traders now tradmg from a screen, {his group is steadily growing in size, as floor traders are "encouraged" to leave tiie ijits. Many of them have seats on the ext:hange. Virtually all of them call straiglit to the floor. How can tho average trader, witfi low volune and a relatively small account, compete in eiifier tinio or costs? Anoifier large group trading witiiin the five minute chart frarhe are CTAs, Large traders, ex-floor traders, and CTAs are trading at anywiiere fror six to fifteen dollars per round-turn, Tfiey lio not have the time delay diat most traders have to live with. They dont have to call a broker, wfio in turn has to make out a ticket and then call the floor. For many who do not fall into one of the above groufis, there are oven more intermediate steps than that. Even f. a: the low rates I pay aru) with the fast execLrtion 1 get, can barely get proper execution based on five minute chart TorrTiations, Selecting a fylarket ne only markets in which I will daytrade based upon five minute charts are: The currtncies - Yen, Franc. D- , and Pound. The metals - Gold. The stock indices - SiP and NYFE Tfie oils - Crude Oi I do not trade the tionds or tfie EurodoMars on a five rniriuie cfiart because tfiey do not "form up" in the sfioricr time frariies. The markets I do trade all have soflicient liquidity and fVlOST ( , all inttkc excellent trading patterns on a five minute cfiart, I never daytrade foodstuffs, gsains, or reats on five minute charts otfier than to optimize an entry or exit from a onger term trade. Quite often ] have made my money in a cu:rt4icv (jr gold hidnn; rio fil way I can waicfi tl.( SJF V.itlmut liav.ng \o also like to trade the S&P atte; 2 Pfvl, Vdien Stock Fvlarke! i-.vr.:: opens, ijo ar.y:hing tjfsi th.c bond mnifket has closed. ritn.mng is happennig in any t le otht;r markets, I wilf start watching tfio criOc oii in hofjes of son-.e ; ; tlu";rt Crude oil i:-i gre:n (iayirade wiieri it is vnfatile. If 1 fkid to seect Inor m.arkcts in whicfi tu daytrade, ifiey would be SSP 500 [oi rJYFE), goliJ, oik and a currency, Tlie cunency soiocted would be die orie wiifi Ihe greahrt open interest and the greatest vuljme. If I iiad LO seliict wo mark-jts in wfiicii to daytrade, t?iey w43\Jd be S&P and gold, or SP and a cur.ency, Tiie c!i0;ce vaulci be for the two vvitfi die greatest volatility. If I had to daytrade in only one Piarket, ft woLild he a toss up between rfie SiP and a currency as hemg the very best for n-iy style ai daytradioi). If tfie stock market is ;fitn, as it was after tfie 87 crasfn I wctuld trade i currency, gufd, and ni . Selecting an Entry Point My rtuithnds for seecting entry points are ratfier sample and straightforward. My entry techniques are based upon three levels of entry into a market, will goup these as Major, intermediate, and Mmor. Ai: of diem have one tiling in common HRU5T! I do not behove in buynig or sellirig retracements. I do not believe in buying nr soiling witliin a channel or trading range unless a singe leg up or down has sufhcient length to enable execution ol a winning trade. \i a series of trades turns out to be witiiiii a trading range in v tlli[l a cfiarmel, it is purely coincidental and <Jef:Jiitely not because I liave drawn ciiaEinel lines, or in some way have definetl a trading range. The same ihing rs irur? of uptrend and downtrrnd linis. I do not use ifiern otfier tfian for visual perc( Whai would consdtuto a significant event in thjs market? Wfust is the most major thing ihai can tiah[5enf I contend that ifie sii-.gle most signdicant tiling t-hat can happen is a breakout of \Ue high or tow. Why? Because, as I previously pointed out, this market is in a trading range between its hjgfi and low. To that eteru, this market is stagnan Unless £t iiiakes a new fiigti or a new low, it is not really going a:"i vvvh ere. But wfiat d tliis market were to take out the Ijiqh like SU: Couid 1 have made money trading tfic breakout of lhat liigfi? Tfie answer to tiat is yos! And it is one basis for trading the five minute bar cfiaris, Wha; I arn talking nhnuc here is THRUST. For the time being, lets forriei about where hn? market closed. That is of significaru:e wfiatsoover, ! wiK fiave made my money and been out of tho trade long before tfie close. Tho itnportaru th.ing is that the market opened at a certain level, and at some time di.iring Hie day it took out what had been tfie higli at the opening level, whieJt vvas its previous lugh for ihc day When that higfi was taken out, it was a significant event. Profits could have been made. IMPOfTANT! When I am daytrading a five minute chart, I ani intrr(!sted only ai what is haf.ipening today. 1 arri rKJt worried about die close. That is CO to 75 pnce bars avay. 1 am nut worried about tomorrow - tomorrow is a vhole new set of events. I am not worried about what fiappened yesterday - yesterday rs history, except in that wfiat happened yesieriJay, or tfie day before, or the day before that, may be reSaied to what niy actions will be today More of tfiat relationship afiead. Altiiough I will consider turning a daytrade into a position trade ar.:cording to certain rules to be explained later, I must have a rule for my daytrade in and of itsef, and this rule is absolute: unless 1 am considering conversion to a [josilion trade, 1 will NEVER cafry a daytrade overnight! 1 wi ALWAYS be out by the close of trading. That is what niakcs tfie trade a dayirade. It is not tt) be field overnight. I do consider it for holding, it wil hnve lost its siavus as a tlaytrade 1 will have converted it lo a position Irade and wid t/:en beuin fo observe a ddfereni set of rules. TVtC trutlfc a!.>0Lrt niaking money in ttie markets is tfiai most of Efio money to ije niade is made wiien a market "pops" and theri begins io trend h is the connector trends between congestions that offer tfie most profit potenlia The niony i , made hfrf-2, between ttie 1 i nf?F,. Witfi that in mind. I will take in liicir order Major Entry Signals, ntermediate Entry Signals, a;id Minor Entry Signals.
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