An Introduction to Intraday Trading a Continue at your own Risk1D) istel Fla aleve * This presentation contains many observations, some of which the author feels are good universal “rules” and some of which merely reflect his current thinking about intraday trading. * The author does not mean to represent that a trading strategy tn A ore VS ela YOULL Tem CeCe The SILT cree * He does mean to represent that he has thought seriously about his subject and understands the fundamentals. * He fully expects that any trading program he may work on (note the logical leap) will be the aggregate of the thinking of many Tr Ae Ue Rb ner ole) 0) om * Fine Print: Trading involves substantial risk of loss and may not be suitable for everyone:a —. Overview = am @ aia ir-(el late) ® Cardinal Rules of Trading ® Key Considerations Sam@lr-lac) ® Going Live ® You Want More?ee —_. On Trading = © Trading vs. Investing © Trading vs. Gambling © On Fundamentals © On Technical Analysis CW ic-lol-1meom Ui lalesiel 4Trading vs. Investing Investors invest in companies; traders trade stock. Investors count years, traders count minutes. It still puzzles this author why investors persist in examining their portfolio’s net worth, DAILY, when or know full well that they aren’t going to act on their fear or greed and that, more often than not, they'll find something to get upset about. Good advice for a trader is usually bad advice for an investor. Investors who begin to think like traders ask for trouble. Investors: stay away, this presentation is not for you!Trading vs. Gambling © Good traders love gamblers, they provide them with their income. e Why most traders lose is they are gamblers; they crave action and trading certainly provides it. © Casino owners are not gamblers, casino players are. Good traders emulate casino owners; they are in it to make a good living, not to get a rush. e On any given trade, the trader may take a loss. The good trader, like the casino owner, is OK with this.On Fundamentals If you “like” a company, DON’T trade it. If you must do anything with a company you like, put it into your (separate) investment portfolio. Don't trade on the News, it was factored into the price days ago by folks closer to it. The only way to play the News is to play against investors, but this is risky because traders, your real competition, determine short- term price more than investors. Tips: ignore them or test them. * If you act on another’s advice, it's your choice and your results.On Technical Analysis e Learn as much as you can; but rigorous Technical Analysis has little place in trading, it’s too fast. * e On the other hand, thinking LIKE a technician has everything to do with succeeding at trading. eT. A. Indicators for the most part describe the past, not TRV e Nonetheless, Technical Analysis “works” because: CU Mel CU Rem Mel maa ML ol% “everyone loves a winner’). Ce een ae aeA Trader’s Mindset e The successful trader learns from other traders; but he cannot be a clone of another trader and succeed. © Traders who need to be “right” don’t win in the market. © The successful trader has a well-defined strategy that he follows mechanically. If it works, he knows what's working; if it doesn’t work, he knows what isn’t working. ee Se mr CK mae mat alice © The successful trader knows the risk he can handle that will let him sleep at night, and he trades within that risk.Cardinal Rules of Trading © Rule #1: Protect Your Capital © Rule #2: Protect Your Capital © Rule #3: Protect Your Capital e Rule #4: Manage Your Money e Rule #5: Trade Smartly e Rule #6: Exit StrategyRule #1: Protect Your Capital © No trade should be greater than 5 - 10% of your trading (er Telit @ = The surer you are about a trade, the more dangerous it may turn reclame en ete Rien Ce Ret ee ain SNe URC Rn Racc RGR UCR eC cs while sometimes a good idea, is a bad idea if it breaks this rule. © Multiple trades intentionally in the same Industry or Sector is PRU a Cn Th RuEUa CNC ec e CMU VES Sen E CRN Che RCO Misia ceeacnRule #2: Protect Your Capital = e Cut your losses: set tight Stops. e More importantly, obey them. © This is called “discipline.” |Rule #3: Protect Your Capital e If today’s trades are going against you, stop trading for the day. e Rethink your strategy and your executions and begin afresh oro Ce Crean © If today's trades are with you, be thankful, and careful. © Being “smart” can cost you dearly.Rule #4: Manage Your Money This one is nearly as important as Protect Your Capital, but it'll cost you to see it. * e No trade should be smaller than 2-3% of your trading eTocs © Diversity can easily slide into futile dilution.Malia eee Do you remember the one about the Dutchman Peter Minuit getting the best of those foolish Indians by giving them $24 worth of trinkets for Manhattan Island? Well, if the tribe's Medicine Man had whipped out his trusty H-P Calculator, and if he had told the Chief to put the tribe's new-found wealth into a C.D. paying 7%, that simple wampum would now be worth more than $8.5 trillion! Even at 6% it would be worth $200 billion, arguably a fair feyiter-m Colm Me) MU E-lalacltt-lakoM a (orl CloRule #5: Trade Smartly Se eae Ie Ole ROR e When a pre-determined set of conditions trigger a pre- determined action, take it. e Cut your losses and ride your winners. * Easy to say, right?Rule #6: Exit Strategy eA trader with a good and disciplined Exit strategy can prevail even with random trades. * e Use Trailing Stops for Exiting positions. * e Be watchful around “magical” Support / Resistance ala e Employ tight Stops; either your timing is right or you don’t want to stay in the trade. * e If you stall (Buyers and Sellers in balance, Supply and Demand equal), Exit your trade.re —_ Key Considerations = © Spreads © Volatility © Liquidity © Timing © Direction DRST-NihCommissions © Did | forget to mention commissions? Too obvious... e Commissions are enough by themselves to sink an Olt aM e lee 0B e Keep commissions low. © That's not low enough! e A$15 flat commission is WAY high for a 100 share trade, not good for a 1000 share trade, and great for a 10,000 share trade. Relativity rules in equity trading too.On Spreads e If you play with low spreads (.01 or .02 max.), you're playing against a casino (51% edge); you have to be smart to win consistently. e If you play with high spreads, you're betting at the track (65% edge); you have to cheat to win at all. e The Swing-Trader is less inclined to heed this advice, to nl mere-iaOn Volatility e Volatility is the short-term trader's friend. e Volatile stocks are an investor's Hell and a trader's tac \Z © Pre-select stocks that are volatile and liquid. © Get in early in the direction you want. The risk of a 2- day bounce is less than that of a 9-day trend. * Se aC modi V ULL VMs e LC aaa) Cela U1 UAT (alesse) [0 Ue is biased toward low priced stocks. If you don't like low priced stocks, keep in mind that a $50 stock that moves $2.00 moves 4% while a $100 stock that moves $2.00 moves 2%. Cheaper means more leverage.om mrortTtelin e It is good to trade a stock whose trading volume will allow you to exit when and where you want to. e If you can find a highly liquid stock with a wide spread (not likely), you can play the spread for a small profit. * eOn Timing e Take account of how the weather and news events affect sleet e Take into account how regular market events affect the Ecce e Take into account how Day of Week and Time of Day affect the markets. e Shun the 1st 45 minutes of the day, or learn to trade cul eo) oeOn Direction e Tend not to trade against a stock's own trend (obviously, trend reversals are a big exception to this). © Tend not to trade against a strong {market's | industry's | sector's} direction. © Look for “Maverick” stocks that go against the market, their industry and their sector; they can be interesting Cy or-Jo) (oa Sm OM ULM AU] (om e Be wary of going Long near Resistance or Short near Support.On Safety e If you crave safety, what are you doing trading? Ce Dake eSATA Ue C0 1) and you'll win in the trader’s game. e Safety can look like good value or support or a good e price or a trend.re —_. (Ohare tats a Se iat-tar-Ue-m Or ar-latwg e What Charts Show OA TETReL Teme Cnn ES Toy e © The Art of Seeing Chart Patterns e Interpreting Charts e Using Charts to WinWhat are Charts? © Charts are 2-D graphical visualizations of Number Series across N dimensions. A Trader’s Charts are visuals of a financial instrument's Price (and Volume) activity, over Time. © Achart's vertical axis (15 dimension) maps price (and volume). Its horizontal axis (2"¢ dimension) maps time. © Static print Charts are the sine qua non of the technical analyst and of interday traders. Dynamic Real-Time charts are the sine qua non of the intraday trader. © Charts portray the past; they do NOT predict the future. While the past cannot predict the future, what else have we to look at? COT a a ee eeWhat are Charts? (2) e Achart's smallest unit of information, one Time period, is drawn by a point, a bar or a candlestick. Points are typically connected by lines to suggest continuity. © A point typically locates the Closing price of the security. A bar typically reveals the equity's (Open, ) High, Low, and Close. A candlestick shows all four prices. © Candlesticks' advantage over bars are their ability to show 2-period relationships more clearly. © Charts with no security name, no price-axis, and no time- axis values, ought to be viewed with suspicion.What are Charts? (3) e Dynamic, computer-based, charts can be customized to the ewe oe © The time-frame (30 years, 1 year, 2 months, 1 day) that a chart maps from end to end is chosen by the user. e The time-interval (1 year, 1 week, 1 day, 1 tick) that is mapped by one period on the chart is chosen by the user. © Only Real-Time charts can display time-intervals less than 1 day. e A trader ought to know what is his time-frame and use charts appropriate to that choice. IOW, one-minute charts are appropriate to the extreme intraday trader, not to swing traders.What Charts Show © Charts show a security's price and volume activity over time. That is ALL they show that is not derived or invented. e HOWEVER, Price/Volume charts ARE often overlaid with all manner of quasi-magical points and lines. e “Indicators” or “Systems” are arithmetic functions of price, volume and time data. They all mean something objectively (their mathematical definition). But it is their subjective meaning that gives them power. Traders make decisions based upon the meaning they give them. Thus, they mean what the trader nla oe USA RR eee a een Mec ae EOE nen UMC eS McCrea ceed CUTWhat Charts don’t Show © On the other hand, “Patterns” are not overlaid on top of a Price/Volume chart. Patterns are “recognized” by the astute trader looking at the raw price/volume data. Thus, a trader will see “trends”, “breakouts”, “reversals” and “consolidations”. © Most traders believe that the chart they are looking at actually shows the patterns they see. However, the pattern(s) a trader sees is much like interpreting a Rorschach inkblot. * e While each pattern is supposed to suggest a trade -- one way or the other, sooner or later -- it is up to the trader to see the pattern and to act on it. The chart will only show what a security WAS doing, not what it will do. St ee me Ce Cae Re Sn eRe SM Ree Cups & Saucers, Triangles, Flags & Pennants (and a host of Candlestick patterns).Art of Seeing Chart Patterns © Clearly, the simplest pattern to see is an “up trend.” Consider: e Asecurity’s price must go up, go down or remain the same. Ifa security's price persistently goes up, it defines an up trend. “Well, duh", you say. © But how long is "persistent"? Several months, days, or just hours? How consistent is persistent? 60% or 80% of price movement? How steep must be the price climb in order to call it a trend? Does the daily chart show a trend and the weekly not? Must it meet all or some of these criteria? Which ones? e Thus, even recognizing a simple pattern like an up trend requires human judgment.Interpreting Charts e In short, while the gift of System interpretation and Pattern recognition are necessary to become a successful trader, it is still an art not a science; and most likely it will be learned over time, at great cost. e The successful trader will concentrate on a small number of systems or patterns to look for, in choosing a security to watch or a time to pounce. Without this discipline, decision-making would be rendered impossible. And the trader would not know what technique to credit or blame SOME SUCUsing Charts to Win e A trader | know likes to say: "Any fool can see that this stock is trending.” But he just talks about it, he rarely acts. Who fails to act on his chart's interpretation is wasting somebody's time. © Personally, | look for long trends (against the market direction), with the beginnings of a reversal showing up over a few days. * e There are thousands of diet books: no diet is for everybody. There are hundreds of books on trading successfully: no method is for everybody. The good trader has his OWN strategy. © Interpreting charts is personal: you'll see what you see. Charts are utterly invaluable. But they are NOT the key to the treasury; the dragon is sitting on that. And the dragon is the trader's own feteThe Holy Grail See ale Mtr-1e le Me oP LOM LaLa Melee ten IVR C6 = 6M) ID is a technique or a strategy, some combination of patterns and ieee cue Mune MUR UCnue cee me aCe al eC MeUCRuC aia calcein mackecnt aoa itm) discover it. Folks who buy black box programs believe this; folks who [oy ole ue CON =U en eto Re ei ae MO ML 1c ane (e aan Cede OLUaR LM Ooe og calat cake Sime umm cect accel doesn’t work for another, what worked for one security yesterday doesn’t work tomorrow, and what works on a weekly chart doesn’t even De mR Mel MUR Roe sh melo UR mC oe © There is no substitute for experience, developing a well-defined and personal strategy, and the ability to adapt to change. Sorry.ee — Going Live = Sa aa WU Lie Cela Cai) 00s) ¢ Pre-selecting Stocks ¢ Entry and Exit Points * Selecting Stocks Real-TimePlaying for Keeps e The only patterns a trader can love are Reversals, Trend Continuations and Breakouts. e The surest way to lose in this game, after bad Exit Cocco tol Arcee am E-ColL ae) eleucoMiT-1Me ela ae) om © Spreads, commissions and slippage are the cost of e alte this game; slow movement can result in a slow lath.Pre-selecting Stocks e® Stocks have personalities: trending, choppy, and trading range. All of these personalities are viable for trading. Do Sula Ceol ol elmer uele MUL Lm eer Lole HE} CONE ea 1-0. © Events that make a stock potentially attractive for trading: Create keg en) Pee aka WaMu este estos Biggest Gainers & Losers Ect a Trend Line Continuation (various types) GOee nroEntry and Exit Points e Support and Resistance points are logical places to be watchful for Entry and Exit. e Onentry, | never bet against short-term tick movement e Fibonacci numbers (if enough traders believe in magic, e you will see proof positive of it in the market every day). eo aSelecting Stocks Real-Time e Sharp moves are often followed by sharp reversals, mild moves often persist. Pe LATA amo r- Ua —r- LL OLed = UUe) Cd od uO cMen- Ul CCM EMMITT CCMOL UMMC LLOLOLA NVA ULe} daily charts. If you wait until they appear to tell the same story, you'll wait too long. e Chose which charts to look at. Daily charts are useless to the 1-minute trader. And 1-minute charts will only aggravate the longer-term trader (let Stops take care of themselves).Really, this game is not THAT hard! * Being a Successful Trader is not difficult, it demands only that you be able to: pick the right stock time it right for a big move get its direction right get in at your price suffer no slippage, small spreads and small commissions and get out with a Big gain OR See ean cySome Random Observations SOR RRC Cee ant Sc Cone Mirae? Bice umole ole URe OM RCo RUM ae MLA Cm Tol UC oe) =) for the best, and be prepared to get out quickly if your trade goes in the rece ieem Sena Rene ue ikeaeuls Sacco Race Rica eee Ve} chiropractic to a patient's ailing back; when he drops the rate a dozen times in a year, he is dosing a very sick patient with chemotherapy. * “Good” news can be disappointing news. Se auEy cane Ceieickas Tun CaSene CUTE ieee Were RTC Tenn me 118 US LeU Aol Te SL CO Cela eS RU Ra Cee Seem al Se CRMC ae love clichés!).More Random Observations Rising earnings support a bullish market, as does higher leeteuiny erie VAL ceCe aOL Sy CNS emcees Mh Mncars oat ime R Unt MU Voth Maha aetl ceca eco Cs Same = Vimeo eel OU a eel TL ed UM a eh RUS a Oe tte Ue * Can we prevent this economic calamity? Sure; but first we have to talk about it and act in obvious but painful (to some) ways. ercole Te UALU-O EC lIRM AL-RSS-N—CO ULM Lc eC UE Ug Well-paid trading gurus talk about “patterns that work.” There is no such thing: what there is is patterns that have worked in the past in a limited way and may continue to work for a time.You Want More? a * Really, this game is not THAT hard (if you are adequately capitalized)! ° But, if you insist... * You want more, here’s how to find me. e David Abraham PAP STS ic5 davidkernabraham@hotmail.com