chapter 4 a picture is worth a thousand words

An analysis of price movement will show that stocks and markets

move in distinctive, identifiable trends. These trends exist in multiple

time frames of minutes, hours, weeks, months, even years. The existence

of these trends is what high-probability, profitability traders

and aggressive investors are seeking to identify. Once a trend is identified,

the trader or aggressive investor can quickly evaluate the

opportunity and take action. Your success in trading short- and longterm

time frames will depend on your ability to absorb and process

visual information. For example, when you look at a painting your

mind absorbs vast amounts of visual information: the shape of the

frame, colors, textures, dimension, angles, and more. You observe

and record all of this data within the blink of an eye. Bar charts hold

countless pieces of critical information for the trained eye to see. Successful

traders then translate this information into physical action,

resulting in a buy or sell decision. The problem is that most information

on short-term trading, particularly electronic trading, does not

emphasize the importance of technical analysis. The focus is on

scalping. Most scalpers think technical analysis is not relevant when,

in fact, this is not the case: It is of the utmost importance.

One of the keys to successful short-term trading is an understanding

of bullish and bearish chart patterns and trends. Learning

how to read real-time charts is almost never covered, and it is critical

to your success. In this chapter we are going to examine specific

price movement and information, which will be very new to most of

you. This is because reading and interpreting charts in real time is

different in many ways from classical chart analysis. In some cases,

the traditional interpretation is the exact opposite of what you

would expect. Before I discuss the various patterns and their characteristics,

let me explain why you want and need this information.

Great traders identify trend and stay with it until it reverses.

They do not abandon trend after it moves up 1/16 or 1/8 of a point. In day

trading, for example, trends usually sustain themselves over various

time intervals. The most common time periods for stock trends to

run are 15 minutes, 20 minutes, 35 minutes, and one hour. When

stocks begin a strong intraday run, they will usually trend in one

direction for one of the four time periods. During this trend, there

could be downward movement in one or two of the price bars, but

the trend will usually keep moving upward or downward until the

trend reverses. Because trend is usually of a longer duration, you

have the potential to capture substantial capital in one trade. You

could have a very nice profit and pay little in commission compared

to the scalper who is making a tremendous number of trades. Let us

assume that the one-way commission is $20 for the scalper and for

you. Your total commission is $120, which represents three buys and

three sells. The scalper has a commission of $800, which represents

20 buys and 20 sells. Because the scalper is making far more trades,

the potential to lose money on each individual trade is magnified by

the number of trades. The result could be a loss of thousands of dollars,

which does not include the commission. I know traders who

make only three to five high-probability trades who have a nice

profit at the end of the trading day. Compare this to the scalper who

lost large amounts of capital and paid far more in commissions.

Never be fooled into thinking by taking more trades you will make

more money. I prefer to take three to five high-probability trades

over twenty scalping trades on every occasion. If you think about it,

this is just common sense. When it comes to day trading, it has been my experience that logic and common sense are abandoned for emotional

trading driven by fear and greed. For you to trade with the

trend and use a high-probability entry and exit strategy, you must

know how to read both long-term and intraday charts. Without an

understanding of technical analysis and rigid adherence to the trading

plan, your success in trading will be minimal.

An analysis of price movement will show that stocks and markets

move in distinctive, identifiable trends. These trends exist in multiple

time frames of minutes, hours, weeks, months, even years. The existence

of these trends is what high-probability, profitability traders

and aggressive investors are seeking to identify. Once a trend is identified,

the trader or aggressive investor can quickly evaluate the

opportunity and take action. Your success in trading short- and longterm

time frames will depend on your ability to absorb and process

visual information. For example, when you look at a painting your

mind absorbs vast amounts of visual information: the shape of the

frame, colors, textures, dimension, angles, and more. You observe

and record all of this data within the blink of an eye. Bar charts hold

countless pieces of critical information for the trained eye to see. Successful

traders then translate this information into physical action,

resulting in a buy or sell decision. The problem is that most information

on short-term trading, particularly electronic trading, does not

emphasize the importance of technical analysis. The focus is on

scalping. Most scalpers think technical analysis is not relevant when,

in fact, this is not the case: It is of the utmost importance.

One of the keys to successful short-term trading is an understanding

of bullish and bearish chart patterns and trends. Learning

how to read real-time charts is almost never covered, and it is critical

to your success. In this chapter we are going to examine specific

price movement and information, which will be very new to most of

you. This is because reading and interpreting charts in real time is

different in many ways from classical chart analysis. In some cases,

the traditional interpretation is the exact opposite of what you

would expect. Before I discuss the various patterns and their characteristics,

let me explain why you want and need this information.

Great traders identify trend and stay with it until it reverses.

They do not abandon trend after it moves up 1/16 or 1/8 of a point. In day

trading, for example, trends usually sustain themselves over various

time intervals. The most common time periods for stock trends to

run are 15 minutes, 20 minutes, 35 minutes, and one hour. When

stocks begin a strong intraday run, they will usually trend in one

direction for one of the four time periods. During this trend, there

could be downward movement in one or two of the price bars, but

the trend will usually keep moving upward or downward until the

trend reverses. Because trend is usually of a longer duration, you

have the potential to capture substantial capital in one trade. You

could have a very nice profit and pay little in commission compared

to the scalper who is making a tremendous number of trades. Let us

assume that the one-way commission is $20 for the scalper and for

you. Your total commission is $120, which represents three buys and

three sells. The scalper has a commission of $800, which represents

20 buys and 20 sells. Because the scalper is making far more trades,

the potential to lose money on each individual trade is magnified by

the number of trades. The result could be a loss of thousands of dollars,

which does not include the commission. I know traders who

make only three to five high-probability trades who have a nice

profit at the end of the trading day. Compare this to the scalper who

lost large amounts of capital and paid far more in commissions.

Never be fooled into thinking by taking more trades you will make

more money. I prefer to take three to five high-probability trades

over twenty scalping trades on every occasion. If you think about it,

this is just common sense. When it comes to day trading, it has been my experience that logic and common sense are abandoned for emotional

trading driven by fear and greed. For you to trade with the

trend and use a high-probability entry and exit strategy, you must

know how to read both long-term and intraday charts. Without an

understanding of technical analysis and rigid adherence to the trading

plan, your success in trading will be minimal.