The Night Before the Trade

You are going to find that 90 percent of your money will come from

the analysis you do the night before, not the day you make the

trades. The moment the trade is placed, preparation meets opportunity.

Don't just walk into your trading room the next day, turn on

the computer, and act like a cowboy by shooting off trades at anything

that moves. I tell my students, "Success is directly proportional

to the amount of work you are willing to do that no one else

will." If you become a day trading cowboy, your tombstone could

read:

Here lies the account of a cowboy trading master.

He was fast on the mouse but somebody was faster.

At 7:00 P.M. you turn on your computer and begin to download

your end-of-day data. This task is completed in a few minutes. End50

the strategic electronic day trader

of-day data? Yes, it is this data that you are going to run your filters

on. Analyzing this information is the difference between success

and failure in your real-time trading. Remember, you are looking for

stocks that show momentum acceleration points. These points will

reveal themselves in your analysis. The download now completed,

open up your program and select the specific exploration filters you

wish to apply to the database of 500 securities. These securities are

on various exchanges. You select four screening programs, three

looking for bullish characteristics and one for bearish. The first

screen looks for stocks that have a 5 percent increase in price and a

30 percent increase in volume. The second seeks out stocks that

have just broken above their 12-day exponential moving average.

The third identifies stocks that show a buy signal from the Moving

Average Convergence/Divergence (MACD) indicator. The fourth

shows stocks that close below a 20-day moving average. After running

the four screening programs, you open up each one and look at

the list of securities generated in the report. Figure 3.3 shows your

first filter.

You select a chart from the security list and open the chart for

a quick look. Many times this is all you have to do to eliminate it

from your master list. The master list is generated when you have

made your total selection from all four screens. Understand that

you can have many different screens. I am using four to illustrate

how the process works and how to apply the trading trend quantifier

once the selections have been made. Figure 3.4 shows stocks

breaking above their 12-day exponential moving average (EMA).

A move in momentum accompanied by a close above the 12-

day exponential moving average (EMA) is of importance. My studies

of trend and momentum have shown that if price moves above the

Figure 3.3 5 percent increase in price, 30 percent increase in volume

Chart courtesy of MetaStock®

HMicron Tech

HMicrosoft Corp.

M1Chrion Corp

68.9380 64.0000

92.1880 86.4380

33.0000 31.3750

7.7156

6.6522

5.1793

79252.0000

602060.0000

49150.0000

12-day EMA, very often trend will run for three to five days in the

direction of the breakout. Major trend moves tend to begin when

price moves above or below the 12-day EMA.

The MACD is a trend-following indicator and is one of the indicators

you use to help you make a high-probability entry or exit

decision (see Figure 3.5). Remember, one indicator does not supersede

another. A buy or sell decision is derived by the total score,

which takes into consideration all indicators.

Figure 3.6 is a bearish screen, but it has bullish potential if

stocks rebound off the moving average or support. This screen

needs to be evaluated from both perspectives: bullish and bearish.

Once you have reviewed all four screens, you select several

possible securities that you place in your master list. From this list

you begin the process of elimination. When you view chart data,

make sure you are viewing one year of price information. The steps

Figure 3.5 MACD indicator buy signal list

Chart courtesy of MetaStock®

in this process are listed in order. The securities that remain after

this screen will be further eliminated using the trading trend quantifier.

1. Trendlines: Draw in the major trendlines on the chart. Do

not identify every change in trend, just major trend moves

as shown in Figure 3.7.

2. Support and resistance: Begin at the bottom of the chart

and draw in your support and resistance lines, working

your way to the top of the chart. Remember, the chart must

show one year of price data for you to do your analysis.

(See Figure 3.8.)

After identifying your support and resistance lines, use them to

calculate the next step of the process of elimination: the reward-torisk

Ratio (see Figure 3.9).

Figure 3.7 Trendlines

Chart courtesy of MetaStock®

You will note that you are doing a calculation based on daily

price bars and one year's worth of data. You are looking for a rewardto-

risk ratio of 2.5 or better. Identifying this ratio is very important for

all short-term traders. If the reward-to-risk ratio is 2.5 or greater, then

you will proceed with the analysis. If it is less, then you will eliminate

the stock at once. Don't ever make the mistake of trading a stock just

because the trade has a high probability of success. I have witnessed

many cases where traders lost because there wasn't any money in

the trade to begin with. As a short-term trader, you need maximum

profitability potential on every trade you make. As you know, every

trade is not a winner, so common sense dictates taking only those

trades that have the most profit potential. By doing a reward-to-risk

ratio in this manner you will find trades with the potential to move

several points. If you risk money only when the potential profit is 2.5

times greater than the risk and use strict risk and money management

principles, you will survive while others perish.

If a stock has a 2.5 or better reward-to-risk ratio/you can proceed

with the application of other technical indicators. Each indicatrading

strategies 55

Figure 3.9 Support and resistance

Chart courtesy of MetaStock®

tor has a point system assigned to it. All indicators have a point

value of +1, -1, or 0. By giving all the indicators the same numerical

weight, the stock with the largest point value and reward-to-risk

ratio is first on your list. This eliminates emotional decisions and

personal biases toward any one stock. At this point you input the

information into the trading trend quantifier.

You are going to find that 90 percent of your money will come from

the analysis you do the night before, not the day you make the

trades. The moment the trade is placed, preparation meets opportunity.

Don't just walk into your trading room the next day, turn on

the computer, and act like a cowboy by shooting off trades at anything

that moves. I tell my students, "Success is directly proportional

to the amount of work you are willing to do that no one else

will." If you become a day trading cowboy, your tombstone could

read:

Here lies the account of a cowboy trading master.

He was fast on the mouse but somebody was faster.

At 7:00 P.M. you turn on your computer and begin to download

your end-of-day data. This task is completed in a few minutes. End50

the strategic electronic day trader

of-day data? Yes, it is this data that you are going to run your filters

on. Analyzing this information is the difference between success

and failure in your real-time trading. Remember, you are looking for

stocks that show momentum acceleration points. These points will

reveal themselves in your analysis. The download now completed,

open up your program and select the specific exploration filters you

wish to apply to the database of 500 securities. These securities are

on various exchanges. You select four screening programs, three

looking for bullish characteristics and one for bearish. The first

screen looks for stocks that have a 5 percent increase in price and a

30 percent increase in volume. The second seeks out stocks that

have just broken above their 12-day exponential moving average.

The third identifies stocks that show a buy signal from the Moving

Average Convergence/Divergence (MACD) indicator. The fourth

shows stocks that close below a 20-day moving average. After running

the four screening programs, you open up each one and look at

the list of securities generated in the report. Figure 3.3 shows your

first filter.

You select a chart from the security list and open the chart for

a quick look. Many times this is all you have to do to eliminate it

from your master list. The master list is generated when you have

made your total selection from all four screens. Understand that

you can have many different screens. I am using four to illustrate

how the process works and how to apply the trading trend quantifier

once the selections have been made. Figure 3.4 shows stocks

breaking above their 12-day exponential moving average (EMA).

A move in momentum accompanied by a close above the 12-

day exponential moving average (EMA) is of importance. My studies

of trend and momentum have shown that if price moves above the

Figure 3.3 5 percent increase in price, 30 percent increase in volume

Chart courtesy of MetaStock®

HMicron Tech

HMicrosoft Corp.

M1Chrion Corp

68.9380 64.0000

92.1880 86.4380

33.0000 31.3750

7.7156

6.6522

5.1793

79252.0000

602060.0000

49150.0000

12-day EMA, very often trend will run for three to five days in the

direction of the breakout. Major trend moves tend to begin when

price moves above or below the 12-day EMA.

The MACD is a trend-following indicator and is one of the indicators

you use to help you make a high-probability entry or exit

decision (see Figure 3.5). Remember, one indicator does not supersede

another. A buy or sell decision is derived by the total score,

which takes into consideration all indicators.

Figure 3.6 is a bearish screen, but it has bullish potential if

stocks rebound off the moving average or support. This screen

needs to be evaluated from both perspectives: bullish and bearish.

Once you have reviewed all four screens, you select several

possible securities that you place in your master list. From this list

you begin the process of elimination. When you view chart data,

make sure you are viewing one year of price information. The steps

Figure 3.5 MACD indicator buy signal list

Chart courtesy of MetaStock®

in this process are listed in order. The securities that remain after

this screen will be further eliminated using the trading trend quantifier.

1. Trendlines: Draw in the major trendlines on the chart. Do

not identify every change in trend, just major trend moves

as shown in Figure 3.7.

2. Support and resistance: Begin at the bottom of the chart

and draw in your support and resistance lines, working

your way to the top of the chart. Remember, the chart must

show one year of price data for you to do your analysis.

(See Figure 3.8.)

After identifying your support and resistance lines, use them to

calculate the next step of the process of elimination: the reward-torisk

Ratio (see Figure 3.9).

Figure 3.7 Trendlines

Chart courtesy of MetaStock®

You will note that you are doing a calculation based on daily

price bars and one year's worth of data. You are looking for a rewardto-

risk ratio of 2.5 or better. Identifying this ratio is very important for

all short-term traders. If the reward-to-risk ratio is 2.5 or greater, then

you will proceed with the analysis. If it is less, then you will eliminate

the stock at once. Don't ever make the mistake of trading a stock just

because the trade has a high probability of success. I have witnessed

many cases where traders lost because there wasn't any money in

the trade to begin with. As a short-term trader, you need maximum

profitability potential on every trade you make. As you know, every

trade is not a winner, so common sense dictates taking only those

trades that have the most profit potential. By doing a reward-to-risk

ratio in this manner you will find trades with the potential to move

several points. If you risk money only when the potential profit is 2.5

times greater than the risk and use strict risk and money management

principles, you will survive while others perish.

If a stock has a 2.5 or better reward-to-risk ratio/you can proceed

with the application of other technical indicators. Each indicatrading

strategies 55

Figure 3.9 Support and resistance

Chart courtesy of MetaStock®

tor has a point system assigned to it. All indicators have a point

value of +1, -1, or 0. By giving all the indicators the same numerical

weight, the stock with the largest point value and reward-to-risk

ratio is first on your list. This eliminates emotional decisions and

personal biases toward any one stock. At this point you input the

information into the trading trend quantifier.