TRADING TIPS 'N TRICKS
You can make a nice living by buying higher lows
on the re-test. It's called the "W" or "1-2-3" bottoming pattern. Also, find
out about the chart pattern that forecast the 400 point DOW up move April 18th,
2001. This is the same chart pattern that has occurred 27 times since the
S&P began trading. In each instance, short-term traders were able to
take quick profits. Yes, 27 trades, 27 winners. Just two of the
many trading ideas you will find in my book:
Don't forget that we also have trading rules found exclusively at
Sell your shares the instant they fall a penny. Then buy on an
uptick and hold the stock until the price drops again. The key here
is to not hold on to a losing stock. It sounds obvious, but it seems
to run against human nature. Selling a stock when it starts to fall
requires more discipline than you might imagine.
HEAD AND SHOULDERS
This pattern, and 50% retracement, are the most reliable
reversal patterns there are in technical analysis.
This pattern indicates that shares are being sold by those who bought the
stock at lower levels - perhaps when it was basing. The minimum
downside implication of this pattern is obtained by measuring from the
neckline to the tip of the head and then projecting this distance down
from the neckline.
After forming the head, which can be double by the way, price corrects back to initial support, rallies
but then rolls over, forming the right shoulder of the pattern. When
price falls through the neckline, that zone reverses roles from support to
resistance as traders, fearful of giving back profits or wanting to cut
losses, sell into strength.
The upside-down version of this pattern is an indication of a basing
The peak, or head, of the "Head and Shoulders" pattern is not confirmed by
either momentum or volume, an indication that buying demand is falling
off. Following the formation of the H&S pattern, rallies not
accompanied by a pickup in volume indicate that accumulation of shares is
not taking place. Many rallies into falling moving averages are
knocked over by the 40-day or its 80-day counterpart, suggesting that the
stock is at risk of retesting lower levels.
If volume surges as price drops, this is bearish. If volume drops as
price surges, this is also bearish.
MORE ON VOLUME
Volume is at its highest during the formation of the left-hand part of a
pattern - like a rectangle, for example - and at its lowest at the right
hand. This does not imply that every successive session on a daily
chart is associated with lower and lower volume. We are simply
concerned with the overall trend. In other words, is volume trending
down - albeit with spikes along the way.
When you are reading this next piece, be sure to refer to the section
below called "HORSEBACK RIDING". An upside breakout not accompanied
by increasing volume is suspect because it does not have the buying power
to support a sustainable trend. The actual level of volume does not
have to be spectacular, but a definite change in the previous declining
trend in volume should be readily apparent.
Downside breakouts are a different story. Here, prices can easily
collapse with a lack of bids. Volume can be light or heavy.
Light volume is okay because volume is just following the trend, which is
down. If prices are falling, it is reasonable to expect that volume
will also be contracting. Falling prices accompanied by expanding
volume signals urgent selling. This can also be a precursor to a
AND, EVEN MORE ON VOLUME, PLUS "THE BIG CLUE"
Volatility usually precedes a reversal in direction. The to-and-fro
process eventually leads to upside movement as the underlying asset is
taken away from scared traders and held by longer-term traders - two steps
up and one back, so to speak. Here we have a trading range - pretty
much an even mix of bulls and bears. Swing days, where the undecided
cast their votes, move prices from the bottom to the top of what is hoped
is an even-higher trading range.
near-term top is done on relatively light volume, that usually means that
any pullback will be limited.
If price consolidates as volume spikes, this confirms overhanging supply
as selling stops the advance. Volume is one thing, but On Balance
Volume tells you the whole story - how much of the volume is going into buying versus
selling. You can have lots of volume but you must know
what's driving it. If more of the volume is made up of selling than
buying, price doesn't stand a chance. This is perhaps one of the
most important indicators you should watch. It will give you "The
For all you momentum traders out there, it's easier to ride a horse in the
direction it's going. Just remember that the previous trend is in
force until proven otherwise. A trend is a trend after all.
When you are looking at a formation like a "W" or "1-2-3" bottoming
pattern, for example, you should always assume that it is a continuation
of the previous trend, until the chart tells you otherwise. After
all, pattern failures do occur. The longer a pattern takes to form,
the longer the new trend is likely to last.
A solid breakout is constituted by price closing for two consecutive
sessions above or below the pattern. For day traders, this would
translate to two five-minute or 30-minute bars, etc. By looking for
two consecutive solid closings above or below the pattern, you are in
essence validating the legitimacy of the breakout.
To protect yourself against whipsaw breakouts, you could place a stop
below the previous minor low prior to the whipsaw rally. If that
poses too much risk, then use "the 50% rule".
This entails placing your stop just above or just below the halfway mark
of the pattern, depending upon which way you are playing the pattern -
i.e., going long or short.
I personally like to buy on an upside breakout, wherein I am expecting my
price objective to be met quickly. Oftentimes, however, the price
will experience a retracement move, offering a second chance to buy under
quieter, more controlled conditions than those associated with the
breakout. You can construct a downtrend line by joining the minor
retracement peaks. When this line is violated, this denotes a buy
Be sure to check out "MORE ON VOLUME" above.
TOPS AND BOTTOMS
This is a reversal pattern. The advance that follows a
rally and reaction fails to take the price significantly above the previous
rally high. If the second peak does top out well above its predecessor, then
the double-top call is invalidated. Assuming we have a legitimate double-top
formation in place, the price then subsequently retreats below the previous low,
signaling a trend reversal. In terms of spotting a valid double top, it doesn’t
matter where the second top develops; it can be a little above the first, a bit
below or at the same level. Also, volume on the second peak is substantially
lower than that of the first. This denotes buyers’ lack of interest and makes
the price more vulnerable should sellers persist. What is happening with a
double top is a reversal in the rising peaks and troughs.
A double bottom is the exact opposite. It is pretty
much the same thing happening but here you have two reactions developing at
around the same level and a rally on strong volume (indicating aggressive
buyers) that takes the price above the previous peak – in between the two
bottoms. The first leg of the double-bottom formation usually occurs on
heavy volume. The second leg down is typically characterized by lighter
volume. An air of bearishness sets in as traders get disappointed in
seeing the initial rally of the first low all but retraced in the second swing
down to the second bottom of the formation. For a valid breakout to occur,
volume has to expand as complacency at the second bottom is replaced by
enthusiastic buying and the price breaks out beyond the high point between the
The triangle is constructed from two converging trendlines,
one joining peaks and the other troughs. Breakouts occur when either is these
lines is violated. When one line is declining and the other rising, the
triangle is referred to as a “symmetrical triangle”. When one line is
horizontal, it is called a “right-angled triangle”.
When the other line of a right-angled triangle is
declining, the triangle is known as a “descending right-angled triangle” and it
signals bearishness. When the other line is inclining, you have an “ascending
right-angled triangle”. In the case of an upside breakout, the horizontal line
acts as resistance before the breakout and support afterwards. In the event of
a downside breakout, the horizontal line acts as support until the breakout
occurs and then becomes resistance.
A breakout from a right-angled triangle is usually more
powerful than one from a symmetrical one. A breakout can be a continuation of
the previous trend prior to the formation of the triangle or it can be a
reversal. What happens in some cases is a breakout may in fact be invalidated
if it fails and simply converts the triangle into a rectangle. This, in and of
itself, is not a big deal as the breakout may then occur as a breakout from the
newly formed rectangle.
Sometimes you get a surprise directional move when a
breakout from a right-angled triangle goes in the opposite direction to what you
expected. However, equally noteworthy is the nasty reversal of fortunes when
the unexpected breakout fails. For example, this can occur when the failure to
rally above the horizontal level of resistance leads to exhaustion.
A good way to determine how far price will go after the
breakout is to measure the deepest part of the triangle and use that distance to
gauge how far price will go away from the point of departure.
This contrarian pattern works for day traders and position
traders alike. I'd put on my conspiracy hat and say that the market is “engineered” from within. The
three consecutive cycle days are: the “Buy Day”, the “Sell
Day”, and the “Short Sale Day”. On the “Buy Day”, the
market opens near or at its low prior to a price rally. The market is selling
off as the uninformed sellers sell to the smart-money buyers. In effect, the
market is taken down to create selling. Often, the overnight stops will be hit
and buying absorbs the sell-off. When selling subsides, the market is ready to
rally as new buying enters the market.
On the “Sell Day”, the long positions acquired on the “Buy
Day” are sold at or near the previous day’s high. What is happening here is
nothing more than smart money taking profits where resistance exists. One would
think that the market would now decline – but first it is “engineered” higher.
On the “Short Sale Day”, the market opens higher and rallies. But the rally is
short-lived, and soon after the market declines, closing near its lows. The
appearance of strength has fooled the buyers. After the three-day cycle, the
buying strength has dissipated, and lower prices become the path of least
resistance. Once again, the smart money is on the right side, selling near the
This pattern appears again and again - only to disappear,
and then reappear once again. It may be consistent for four or five weeks and
then disappear. It is most consistent in markets that are not trending.
This setup is very similar to the one above. It involves
waiting for the first higher close following a five percent or better rout over
the past couple of days. The higher close indicates that the selling is
complete, at least for the short-term. Normally, a three-day rally will take
hold as sellers back away and traders perceive bargains are available.
Often, the market will tell you what its direction will
be. A strong signal is a sharp break or rally shortly after the open. All you
have to do is wait for the market to tips its hand. You simply wait for a
pullback (in the case of a rally) or a rally (in the case of a break) to make
your move. Typically, this signal will be short and fast.
Late day momentum in a particular stock, commodity,
currency or the overall market typically carries over into the first part of the
next day. Watch the close for a good idea of the next day's open.
This pattern should be preceded by a sharp up or down price move.
The formation of inside bars without a preceding strong trend generally does not
signal a sudden balancing of supply and demand.
The trading range of the first bar should be wide by previous
standards. This confirms the strong underlying momentum of the prevailing
The trading range of the second bar should be much smaller than
the first, which tells us the balance between buyers and sellers is much more
evenly matched and the balance is tipping. The sharper the contrast
between the two bars, the greater the potential for a reversal.
KEY REVERSAL BARS
Develops after a prolonged rally or reaction. Often, this trend
will be accelerating by the time the price experiences the key reversal bar.
The price opens strongly in the direction of the prevailing trend
– above the previous close.
The trading range is very wide.
The price closes near or below the previous close. A classic
reversal finishes below the previous bar’s low.
Volume should be climactic on the key reversal bar.
The upper end of the bar sticks out like a sore thumb above the
previous two sessions. The price breaks out strongly to the upside but is
unable to hold its gains, and by the close it gives up ground over the previous
Alternatively, the price opens close to its low and closes
higher, in the opposite direction of the prevailing trend.
The extremely high volume is the tipoff that either buyers or
sellers are exhausted and the next trend is likely to be down or up.
The trading range encompasses that of the previous bar. They
develop after both down- and uptrends and represent a strong exhaustion signal.
The opening price is at a higher level than the previous bar’s
close, but the closing price of the outside bar is not only down on the
period, it also closes below the lowest point of the previous bar. If the price
closes down a little, it is not as strong a signal as if it closed down
Alternatively, prices open lower, then go lower still, before
finally closing up on the bar.
If the outside bar encompasses the trading range of three or four bars,
it is likely to be more significant than if it barely encompasses one.
CONTINUATION OUTSIDE BAR
1. As an example,
coming into such a bar in a declining phase, the bar opens on a positive note –
on the high, above the previous close.
Then, for the rest of the period, prices decline and the close develops
at the bottom of the bar.
is definitely an outside bar, but the fact that it closes so weakly
indicates it is not an exhaustion move in the classic sense.
Signals exhaustion. Develops after a prolonged advance or
The first bar of the formation develops strongly in the direction of the
prevailing trend. In an uptrend, we need to see the close of the bar at, or
very close to, its high.
At the opening of the second bar, the price should open
very close to the high of the previous bar.
A change in psychology takes place as the second bar closes slightly
above or slightly below the low of the first bar, indicating a change
To be truly effective, this must be a climactic experience. The
two-bar pattern really needs to be preceded by a persistent trend, and
the two bars in question should stand out as having exceptionally wide
One way of
determining buying pressure is to subtract a price bar’s low from its
close. Likewise, determining selling pressure is achieved by subtracting
the bar’s close from its high.
Tom DeMark goes one
step further and takes into account two consecutive bars in the definition
of his TD DIFF indicator.
If the closing prices
of these two bars are both lower than their respective previous bar’s
close, he compares the difference between each bar’s low and close. If
the difference is greater for the current bar, he suggests that price will
Conversely, if the
closing prices of the last two bars are both higher than their respective
previous bar’s closes, he then compares the difference between each bar’s
close and high. If the difference is greater for the most recent bar, he
concludes that price will have a tendency to decline.
TRADING A BOTTOM
On a clear day, you can see them bare-naked. They give
clues. But first, have a look around. Are prices approaching a previous low or
other significant support area? Is the downtrend stalling out or stabilizing?
Are moving averages or other indicators suggesting an upturn? The key here is
to watch price action.
The market may take off on you in form of a “V” bottom.
Or, it could sag sideways and this is not desirable. Alternatively, prices
could form a “W” or “1-2-3” bottom, as the S&P 500 Index (SPX) did in April,
2001. Let me explain. Prices reach a low point (the number one point) and then
rally. A short rally to a high point (the number two point) is followed by
another decline to the number three point, which is not quite as low as the
number one point. It’s as if the market is checking if this is indeed a low, or
The rally that follows is a little more solid. Prices
traverse the high of the formation – the number two point. This constitutes the
breakout that you should be looking for. In anticipation, you should always
place a “buy stop” just above the number two point. After the breakout, the
market once again tests itself and checks the move to see if it is legitimate –
but does not violate the breakout point just above the number two point.
Every astute trader manages his money wisely. Accordingly,
it is appropriate to place a sell stop just underneath the number three point of
the above formation just in case the trade breaks down. I personally favour a
two percent stop – two percent below your entry point just because that’s my own
One further thing, if the distance between the number two
point and the number three point is extreme, this denotes more risk. The
less distance, the less risk.
ALL-IN-ONE BUY SIGNAL, TREND INDICATOR
AND RALLY CONFIRMATION
The 200-day moving average is the
average daily closing level over the past 40 weeks. When it is breached,
this flashes a "buy" signal, it gives reassurance that the trend is still up,
and it also signals that the rally is intact.
Let me elaborate ... The 200-day (40-week)
moving average facilitates a simple strategy that is 90% to 95% right: Sell a
stock when it falls below its 200-day moving average. If a stock is
clearly in an uptrend above the 200-day moving average, stick with it.
Otherwise, kiss it good-bye.
This strategy will never get you in at the
bottom or out at the top. But, it will get you in for at least 80% of the
move and get you out of a disaster.
Normally, a lasting upward price reversal comes only after the falling
moving averages have flattened out.
IMPORTANCE OF PRICE
The last trade is the sum total of all the
beliefs out there on the Street. Despair, fear, greed and hope are all
bundled up into one common denominator - price. Price is the most
important factor - even more so than an indicator like MACD. If a
downtrend continues even after MACD forms a postive divergence, by making higher
lows with lower price lows, price is the determining factor.
SUPPORT AND RESISTANCE
Support is a level in the past where buyers
were stepping up to buy. A zone of support suggests buying is equal to
selling pressures, and the underlying commodity, currency, market or stock is
being accumulated. Resistance is an area where people can sell and
break even, having had a loss after buying a stock.
Money flow analysis dictates that trades done lower than the transaction before
them are “sales”, and trades done higher are “buys”. There can be net buying of
a stock when the price is dropping, or net selling as it rises. Let’s suppose a
100-share trade moves a stock down US50 cents to US$49.50, and a 1,000-share
trade bumps it back up to US$50. The significance here is that the price is
unchanged, but US$45,050 has flowed into the stock. That’s what money flow
analysis is all about – capturing the “true” trend.
However, most of the time, when a stock is going up, the money flow is going
up. And, most of the time when the stock is going down, the money flow is going
What money flow analysis is is just the modern day version of tickertape
reading. Several decades ago, before the advent of computers or data retrieval
systems, traders would watch “the tape”. They would be watching for any unusual
activity as they studied this trade-by-trade record of transactions of the New
York Stock Exchange.
If you want an iron-clad trading strategy that really works, here it is
... If MACD, Stochastic and the 30-day Moving Average all signal a trade
within three days of each other, buy. If any two signal a sell
within three days of each other, sell.
If you are position trading, be sure to implement a trailing stop loss
that follows your order on its way up. Don't just let your stop rest
at a stationary price than can so quickly fall outside of your trading
strategy. If you are into swing trading, two percent stops will let
you sleep like a baby at night.
Buyers wait for bad news to take the market down, while sellers don't want
to sell. This imbalance between demand and supply is what keeps
prices in "trading ranges". This is the proverbial "wall of worry"
being played out in real life.
LOSSES - "PROFITUS INTERRUPTUS"
When you lose, "It is like when your dog chews on a pair of your leather
shoes. You just put them away and don't think about it. It's
counterproductive." (Lisa LaFlamme)
BUY THE SUN, SELL THE RAIN
Overcast skies depress the markets. Sunny mornings in Toronto and
New York give the markets a lift.
TOO BUSY TO FOLLOW YOUR STOCKS?
Then, run, don't walk, to open an online account at CyberTrader.
Their system allows you to set automatic trailing sell (of, say, 15%)
stops on your stocks. This order means that if a stock moves more
than 15% down on any day, it automatically gets sold with a market order.
And, now for the real cool part. If the stock moves up, the 15% sell
stop automatically moves up with it. You do NOT have to visit your
account every day to re-set the stop. It is on autopilot. Talk about WOW! No other
online brokerage service offers this trailing stop feature to my knowledge.
If you know of any other such service, please let me know at