A BEGINNER'S GUIDE TO SHORT TERM TRADING, 2nd Ed. (Toni Turner)

   This book was a nice trip back to the basics. Solid practice and solid theory behind a lot of Turner's trading advice. I actually wish I had read this book when I was starting out (but I guess they didn't have it back then). Had I, I may have just skipped using OHLC/bar charts altogether. Toni loves candlesticks sand shares her favorite patterns in this book, and that's what I'm going to put here. A few patterns, backed by graphs in the book to hit-them-home. -Enjoy!

SINGLE CANDLE PATTERNS

DOJI

-bears & bulls in deadlock.

-reveals indecision

-usually indicates a shift, or reversal

HAMMER

-may signify downtrend is coming to an end

HANGING MAN

-could signal uptrend is over, but need to verify with following candle

TWO STICK CANDLE PATTERNS

BULLISH ENGULFING PATTERN

BEARISH ENGULFING PATTERN

DARK CLOUD COVER

-appears at top of uptrend

-opens above close of first, then closes low deep in first candle

-indicates a storm is brewing

-opens below, then closes at least half over previous candle

-the greater the second pierces the first, the greater the chance it's a strong reversal

THREE STICK CANDLE PATTERNS

MORNING STAR

EVENING STAR

MORNING DOJI STAR

EVENING DOJI STAR

-Star patterns represent strong and valuable reversal warnings.

-Knowing how to identify strong reversal patterns in the making not only alerts us to potential setups for entries; they also offer efficient profit-taking signals. Because if you are long a stock, and you see a reversal pattern forming that indicates the stock may make a U-turn soon, you can grab your gains quickly, while buyers are keeping the price aloft.

-to qualify for "star" billing, the candlestick should appear at the top (or bottom) of an uptrend (or downtrend), have a short real body, and gap away (open higher in uptrend, or lower in downtrend) from the previous candlestick.

-The co-stars: in the context of an uptrend, the first real body should be long and clear. The third real body should be long and dark, penetrating the real body of the first candle. In a downtrend, the first real body is long and dark; the star appears next. Finally the first real body moves up, well into the first dark real body.

-The Japanese call the first star and evening star and the second a morning star. When the star emerges as a doji, it's an even more powerful warning that a reversal may be impending.

PATTERNS OF INDECISION

NOTES OF CANDLESTICK PATTERNS

-Traditionally, the doji opens and closes at the same price. But if you spot a "near-doji," where the prices are within a few decimal points of each other, it's still a significant signal.

-A doji that appears in a sideways consolidation move, accompanied by other doji and short real bodies, is not a powerful beacon of change. These candles must appear at the top or bottom of a price pattern to emit a strong reversal signal.

-Doji can be viewed as more powerful at stock/market tops, rather than bottoms. This holds especially true when preceded by a long clear candle, such as in the doji evening star pattern. Think: Long, clear real body equals strong bullish opinion. Then, a doji develops. Doji equals indecision by market players to pay a higher price. Result? Possible pullback or profit-taking may soon follow.

-Doji than confirm trend tops or bottoms many times turn into support or resistance areas.

-When a stock in a an uptrend pulls back to support and then forms a doji, it indicates the stock may be ready to turn and resume its uptrend. The same is true of a stock in a downtrend; a rebound to resistance, followed by the formation of a doji, may indicate the stock will drop back to the downside. Notice the operative word here is may. Always wait for the next candle to confirm price direction. 

EXAMPLES

Josh Approves Advances in Technology

Excellent Charting Software

ActiveTick, advanced charting software

   Very recently I tried a new way to track price action and stumbled upon this little guy. ActiveTick offers high quality, real-time, low latency charting for stocks. There are a few features about this guy worth mentioning. First, not only are the first 30 days free, but only costs a meager $20 thereafter!

ActiveTick allows you to custom arrange windows, get advanced quoting, and set chart activity to update on numerous variables; 1 min. 1/10hrs, 1hr. 1/10days, 1 day, 1/10 weeks, 1 week, 1/10 months, etc.

Chart action could also be set to ticks (which updates on volume, instead of time), a must have for intraday traders. I'm not quite there yet, but decided that if ever I am, ActiveTick will be a nice arrow in my quiver.

A Note on Volume

   It is believed that volume should increase in the direction of the price.  If the prevailing trend is up, volume should be heavier on the up days and lighter on the the down days. If the trend was down, volume should be heavier on the down days, with lighter volume on the up days. This makes sense because in an uptrend there should be more buyers than sellers, and in a downtrend there should be more sellers than buyers. If volume should start to diminish, it could be a warning that the trend could be losing steam and that a consolidation or perhaps a reversal could be ahead.  If the trend was up, and now we're seeing more volume on dips than on rallies, it should be an alert that buying pressure is waning and sellers are becoming more aggressive.  The reverse would be true in a downtrend. If volume starts to shrink on the sell-offs and picks up on the rallies, once again, it could be a sign that the trend is in trouble, and buyers are starting to assert themselves. When volume moves in the opposite direction of the price, this is called divergence.

One of the reasons why volume has a tendency to diminish during periods of indecision is for just that reason. During periods of sideways movement, often traders will avoid a market, preferring to commit their funds once a clear-cut breakout is seen.  However, while it's typical for volume to diminish during these times, volume can give clues as to possible future direction by measuring the level of conviction of the buyers and the sellers.  Seeing if there's heavier volume on the up days or on the down days could be useful in getting positioned during a sideways move or a formation of a pattern.  The idea being that if there's more volume on the up days than the down days, the buyers are probably the more aggressive and the market should more than likely breakout to the upside.  The reverse being true if the volume is heavier on the down days, with the market likely to breakout to the downside.

So while it seems as if chart patterns, volume and technical analysis in general all have some forecasting abilities, none are foolproof.  Used together, they can be quite helpful in your trading and investing, but should be looked at more as helpful hints as to a markets bias, more than anything else.

Technical Analysis

In a fly-by-the-seat-of-the-pants operation, I’ve decided to break down the fundamentals of technical analysis to provide an overview as well as a source of reference.

Technical analysis can be broken down into three parts:

I.                    Overlays (things that go over your charts: averages, bands, channels, etc.)

II.                  Indicators (volume, momentum, accumulation, distribution, consolidation, etc.)

III.                Price Patterns (banners, pennants, flags, wedges, etc.)

I. OVERLAYS

Movings averages

Bollinger Bands

Keltner Channels

Parabolic SAR

II. INDICATORS

Accumulation/Distribution Line

Average Directional Index (ADX)

Average True Range (ATR)

Commodity Channel Index (CCI)

Chaikin Money Flow (CMF)

Moving Average Convergence/Divergence (MACD)

On Balance Volume (OBV)

Percentage Volume Oscillator (PVO)

Momentum (MOM) & Rate of Change

Stochastic Oscillator

Triple Exponential Average (TRIX)

Williams %R

III. PRICE PATTERNS

There are many types of patterns. Basic patterns are:

Symmetrical triangles

Ascending triangles

Descending triangles

Head and shoulders

Inverted head and shoulders

Wedges

Flags and pennants

Rectangles

    

Other types of price patterns include:

double top reversals

double bottom reversals

head & shoulders top (reversal)

falling wedges (reversal)

rising wedges (reversal)

rounding bottoms (reversal)

triple tops reversal

bump & runs (reversal)

flags, pennants (continuation)

rectangles (continuation)

measured moves bullish

measured moves bearish

cup with handles

DAY TRADING FOR DUMMIES (Ann C. Logue, MBA)

STOP ORDER: An order to buy/sell a security as soon as it moves beyond current market price.


STOP BUY: Price  set above current market price and used for a short position


STOP SELL: price below current price, and sued to protect profit/loss on stock already owned. i.e; you have stock @ $30/share "stop order/sell stop" @ $29, broker will sell at $29 (AKA: stop loss order).


TRAILING STOP: Flows up.down and stops behind/before with a set percentage ready to buy/sell.


LIMIT ORDER: Order to buy/sell at a specific price.


STOP LIMIT ORDER: Combination of both aforementioned trading apparatuses, but only takes effect after stock reaches a certain price. It's a good way to soften losses. i.e; buy at $30, set "sell 30 limit 29," meaning, if your stock falls to $30, broker starts selling, but if falls below $29, broker stops. So if market price plumets to $10, at least you've saved some of your money from loss.


ORDER CANCELS ORDER: Used with limit & stop, helps protect in volatile market & overides the previous order.


ORDER SENDS OTHER: When one is executed another kicks into effect.


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SWING TRADING: Holding a position for a few days.


POSITION TRADING: Holding for several weeks/months.


CLICHE: But on the rumor, sell on the news (of course you could sell on the rumor when price starts elevating, too).


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LIQUIDITY: Ability to buy/sell without affecting the market (or MARKET LIQUIDITY). 


LEVERAGE: Borrowing money to improve your return.


VOLUME: Amount of security traded over a given period.


-High volume without change in price = equal match of buying/selling.


-High volume with rising price means buyers ounumber sellers.


-High volume with falling prices means sellers outnumber buyers.


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TRADING IN THE SPOT MARKET: Trading currencies directly at exchange rates.


COMMODITIES: are basic, interchangeable goods sold in bulk, and used to make other goods. i.e; oil, gold, wheat, lumber. Good hedge against inflation.


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FIGURING PROBABILITY OF LOSS: Multiply expected return by lilihood and add together (%80x$11)+(%20x$0)=$8.80 -if contract is $10, you would pass. 


Share at $10, %90 chance of getting $11, and %10 chance of $6 = (%90x$11)+(%10x$6)=$10.50


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LIMITED LIABILITY: Only risk loosing amount you put in (while returns are infinite).


STANDARD DEVIATION: Math used for calculating volatility.


OPPORTUNITY COSTS: The return you could get doing something else.


RISK-RETURN TRADE-OFF (or COST RISK): The greater potential reward, the greater risk you're expected to take (in gaining it / to get it).


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TOP-DOWN RESEARCH:


Drawing tread-lines, follow the trend from lowest point to the highest point, revealing your support resistance.


PIVOT POINT: Average high, low, & close for the day. 


-If the day's price closes above the pivot point, that sets new support level. If below, new resistance. 


MOVING AVERAGE: Calculated by adding average of new days while dropping the oldest.


CROSSOVER: When price crosses moving average line.


M.A. is a lagging indicator, because it's an average.


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ACCUMULATION: Where traders get excited and change their position.
MAIN PHASE (AKA CONTINUATION): Line moves along nicely with no usual price action.


CONSOLIDATION (AKA CONGESTION): Stays within trend without hitting higher highs/lows. Stay within trading range. Good for scalpers who make large volume of trades in search o very small profits.


RETRACEMENT (CORRECTION AND PULLBACK): A secondary trend, a short term pullback away from the main trend to the support level.


DISTRIBUTION: Where traders don't think the security can go up in price anymore, so they start selling.


REVERSAL: When trend changes, erecting buy/sell points.


MOMENTUM: To calculate momentum take today's closing price and divided by price 10 days ago, and multiply by 100 = momentum indicator. If it's above 100, it's up. If it's below 100, it's down. 


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FLAGS & PENNANTS: Show retracements, short term deviations from the main trend. In a pennant, support lines will converge. In a flag, support lines run almost parallel. 


-usually found in the middle of the main phase of a trend, and last about two weeks before going back. 


-almost always accompanied by volume.


-if trade volume isn't falling, possibly starting a reversal (a change in trend). 


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HEAD & SHOULDERS


When right shoulder formation reaches price plunges down. 


-an upside down head & shoulders could signify a rise in price at the end.


-a cup handle forms when those who bought at the old high and felt burned fake take their money and get out.


GAP: Causes and adjustment in price & volume. 


-a gap up or down may be signaling a trend in either direction.


FIBONACCI: 0,1,1,2,3,5, 8,13,21, 34. -all the way until "The Golden Proportion," or 618.


JAPANESE CANDLESTICKS: The body shows how volatile a security is, green is up, red is down. The body is the wax part, the wick at the top is the day's high; the bottom is the day's low.


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Momentum is measured with momentum oscillators.


-when positive, overbought


-when negative, oversold.


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TRADING ON THE TICK/TRIN (TRIN = Trading Indicators): Adding all upticks and downticks for difference. 


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FORCE INDEX: Volume x (today's moving average - yesterday's moving average).
-gives a sense as to strength of a trend. Basically, if today's closing price is higher than day before's, that's positive.
-force index scales the moving average moentum oscillator for the amount of volume that accompanies that price change. That way trader has a sense of just how overbought or oversold the security is on any given day.


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ON-BALANCE VOLUME: Running total of the amount of trading in a security. 
-to calculate: look at today's closing price relative to yesterday's and then do one of the following:
-if higher than, add today's volume to yesterday's on-balance volume.
-if today's closing price less than yesterday's, subtract today's volume form yesterday's total. 
-if today's close is same as yesterday's, do nothing!
-reason to track it signals change in demand
-gauge smart money behavior, institutional buying.


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OPENING INTEREST: Number of buy orders submitted before market opens. When open interest high, people like to add shares, meaning stock should rise.
-if open interest is falling, will signal drop in price. 


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AVERAGE TRUE RANGE: Way to measure volatility, or how much occurred in one day. 


-the higher the average is, the more volatile a security is.


calculated by: 
1) the current high less current low. 
2) the absolute value of the current low less the previous close.
3) calculate 3 numbers then average the highest of them with true range for the past 14 days.


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BETA: Beta is convariance (the statistical measure of how much two variables move together) of a stock with the rest of the market (deprived from CAP INDEX PRICING MODEL).


-a beta of one means a security is moving faster than that of the market.
-less one, slower than the market.
-a negative means that the security is moving in opposite direction of the market. 


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THE VIX: stands for Chicago Board Options Exchange Volatility Index. The vis is based on the implied volatility of options on stocks included in the S&P500 index.


-often called the fear index, used to gauge amount of negative sentiment investors have.


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VOLATILITY RATIO: Used to determine whether security is expected to be more or less volatile right now than it has been in the past. 


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MEASURING MONEY FLOW: Money flow can show which way the money's going.


-calculated by change in price X number of shares traded.


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ACCUMULATION/DISTRIBUTION (buying/selling):


accumulation  (close-low)  -  (high - close)       
distribution      (high - low) X  (period's volume)


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MONEY FLOW RATIO & MONEY FLOW INDEX: 


MONEY FLOW: Closing price X flow of shares traded


MONEY FLOW RATIO: Total money flow for days when up from prior days (with positive money flow days) / by total money flow for those days where prices were down from the prior day.


MONEY FLOW INDEX: A single indicator or tracked relative to prices for a given period of time. MFI = 100 -  100 
                               I + money ratio
-if MFI over 80, usually considered over bought.
-if less than 20, considered oversold.


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-money brokerage firms maintain "dark pools" (or dark books, dark liquidity) for large clients. order will be held so as not to affect the overall stock price. 


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SOME STANDARD STRATEGIES


-Many traders develop their own systems after they've been trading for awhile, but they often start with something standardized.


RANGE TRADING (aka CHANNEL TRADING): Starts with recent history of a security. Looking at charts to identify typical highs and lows including price. Trader simply buys low and sells high. When security dips in price the order to buy is placed; when it rises, the order rises, order to sell goes in. 


-in a bear market, you may want your trading strategy to range pattern; in a bull market a contrarian, or momentum one.


-most range traders use stop limits to keep their trading in line with what they see. a stop limits the loss if the security keeps dropping below your entry point, and the limit order gets you out at a profit if the security moves to the top of the range. 


CONTRARIAN TRADING: A contrarian trader looks for assets that have been rising in price and sells them; prefers to buy things that have been falling. The goal is to sell what seems to be over priced and buy what seems to be a bargain.


-may be quick to spot when a trend ends; for example, they may buy on a rumor  and sell on the news; jumping right out when everyone else is ready to jump in.
-contrarian traders believe nothing rises forever, and nothing falls forever.


MOMENTUM TRADING: Buy securities when prices are rising and sell when prices are falling. Momentum trading works best in a bull market. 


NEWS TRADING: Is possibly the most traditional form of day trading.


-doesn't pay much attention to charts; but waits for information that will drive prices.


-this could be: company announcements, general economic announcements, about interests rates or unemployment, or rumors.


-the disadvantage is that good events may be few due to the nature of the media and often the hype is already built into the price before you hear about it.
-difficult to automate; can't place a limit order to buy when a price limit is hit.


PAIRS TRADING: Look for two related assets and goes long on the stronger one and short on the weaker one.
-many traders look for stocks in same industry using this method, like the dollar and the euro, for example.


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When looking at charts, if you have three moving lines, you have three moving averages representing different quantity of days. For example, 5, 10, 15.


A momentum indicator above 100, is expected to keep moving up.


Momentum indicator is a good indicator of a trend. 


BREAKOUTS: When prices passes through resistance or support lines sometimes causing new support and resistance levels. One-time break out may just be an anomoly, or flase breakout.


-pay attention to two or more breakouts.


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Trading on margin can be benefit to day traders in that they close out their accounts daily, both minimizing risk and loss and avoiding interest.


The Financial Industries REgulatory Association defines Pattern Day Traders, as one with a margin account holding at least $25,000, and buys and sells, or sells short then buys the same security on the same day at least four or more times in 5 business days. # of day trades should be more than %6 of the customer's total trading activity for that same 5 day period. 


SHORT SELLING: Borrowing securities and selling them in hopes of repaying a loan, by the shares by buying back cheaper shares later one.


-can't borrow shares if everone already / too many people already short-sold a particular stock.
-wats until shares are lower in price, then buys at bargain. Return shares to broker to pay the loan, and pockets the difference (between what you sold and bought, less itnerest).


-due to "uptick rules" short sell when the last trade was a move up. You can't sell when a stock is moving down.
-must be careful of short squeeze -some good news that drives the stock up.
-some people dislike short-selling, or even blame them, because many are suspected to spread rumors or negativity in order to bring stock cost down. 


In the forex trading on margin for leverage is endless. That's because in the lending industry buy/sell profits are net-neutral. Meaning if you borrow %100 of your worth to buy Euros, the firm/lender sells Euros to buy dollars.


ARBITRAGE: Looks to make profits from small discrepancies in security prices. True arbitrage involves buying and selling the same security, and many day traders use arbitrage as their primary investment strategy; they may use high levels of leverage to boost returns. 


-you sell as much of the high priced asset in the high-priced market as you can, borrowing shares if you need to, and then turn around and buy the low-priced asset in the low-priced market.


SCALPING: Takes advantage of temporary spread between the bid and ask price. 

IT'S YOUR MONEY (Christos M. Cotsakos)

3 WAYS TO TRADE STOCKS:


1) Exchange Markets
2) OTC Markets
3) ECN (Electronic Communications Network).


Examples:


NYSE: Exchange Market (big caps)
NASDAQ (OTC): New technology & internet companies


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MAJOR INDICES: Track the up&down price movements of groups of individual stocks and the market.


DJIA: Oldest - uses 30 blue chip stocks mostly on NYSE.


S&P 500: 2nd oldest - tracks 400 industrial, 60 transport, & 40 financial stocks. 


THE VALUE LINE COMPOSITE INDEX: Tracks 1,700 NYSE, AMEX, & OTC stocks of stocks nearest/dearest to the investor.


THE WILSHIRE 5000 TOTAL MARKET INDEX: Tracks all U.S. headquartered equity securities with readily available price data.


NYSE COMPOSITE INDEX: Tracks every security traded on the "big board" (NYSE).


THE RUSSELL 2000: Tracks performance of small caps after 1rst largest 1,000 companies, tracks next largest 2,000.


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HI-TECH INDEXES:

MORGAN STANLEY HI-TECH INDEX

BLOOMBERG U.S. INTERNET INDEX

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PRICE-TO-SALE RATIO: Monitors stocks value rather than earnings per share


PRICE-TO-SALE RATIO: Evaluates per share value of a stock relative to the company's volume of sales or revenues.


PRICE-TO-BOOK VALUE: Compares current market value of a company to the company's value according to its balance sheet (assets minus liabilities)


if stock is selling below book value, it may be a good buy.


RETURN-ON-EQUITY (ROE): EPS/by book value (an ROE over 20 indicates strong growth. 15-20 is healthy).


BETA: Shows how in-sync a stock is compared to a whole index. %10 indicates in-line. If moved up %1- then down %5 -very volatile stock.


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BASIC CHECKLIST FOR ASSESSING INVESTMENT RISK ON A STOCK:


-Is the company growing?
-Is it profitable?
-Is it making good investments?
-Are they reinvesting?


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3 KINDS OF TRENDS ON INDEX SCALE:


TRENDING: up or down consistency; despite short-term oscillation.


OSCILATION: rapid up down of market value/share price value


PATTERNS: identifiable shapes which can be used to predict future price movements


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3 KINDS OF INDEX SCALES:


1) SIMPLE MOVING AVERAGE
2) EXPONENTIAL MOVING AVERAGE - combines two periods of moving averages (13-20) short, & long (50-120)
3) MOVING AVERAGE CONVERGENCE


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FUNDAMENTAL INVESTMENT TIPS:


-Keep a running list and document every transaction.
-Set goals.
-Make rules and stick with them.
-Develop an investing plan.
-Create a framework for analyzing markets.
-Find good investing strategy to meet specific goals.