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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Many day traders I talk to ask about the wisdom in swing tradingSUMMING UP THE SQUEEZES Squeezes show me when the markets go into quiet mode. The only reason markets go into quiet mode is that they are building up energy for their next major move, I like to be on the alert for this, and of course on the alert for the direction of the move. With the squeeze I have a clear indication of when to take the trade. And once I'm in, I just don't mess with the trade. When it starts to lose momentum, it is pretty clear, and that is the signal I use to get out. Many day traders I talk to ask about the wisdom in swing trading. The biggest question I get involves the risk in being exposed to an overnight position. The most common question is, What if there is another terrorist attack? After trading the markets for nearly 20 years, there is one thing I am absolutely convinced ofthere is always somebody who knows about the upcoming market move and this person is in the process of getting positioned for it. After the crash on 9/11, one of the ways the government tracked down terrorist cells was to look at all the brokerage accounts that showed heavy short selling in the weeks before the attack. This led to multiple arrests, as people who knew about the upcoming attacks had been shorting insurance companies and airlines aggressively. Out of the blue? Let's look at a few market crashes and just see how out of the blue they really were. THE KEY TO GETTING POSITIONED BEFORE A MARKET CRASH 1 don't mean to belittle the events of 9/11 by viewing them as merely a trade setup. I lost friends, and know many people who lost friends and loved ones in ihai attack. The point of this is that the event should not scare us and make us cower in the corner. It should not keep us from taking rUks, whether it involves getting on a plane, visiting another country, embracing people from other ethnicities, or having exposure to overnight positions. Living scared can hardly be called living. Dow Cash IndexSeptember 11,2001 1. This is a daily chart of the Dow Jones Industrials leading up to the terrorist attack on the World Trade Center on September 11, 2001 (see Fig. 10.21). At point #1, we can see that the daily squeeze fired off a short on August 30. 2. The very next day, the markets break through support on a descending wedge pattern. There are now two solid short signals in place. There is no reason to be long this market. 3- Six trading days later it is September 10. The markets make new intraday lows, and the momentum on the squeeze is still strong. There is no reason to be long; there is no reason to cover shorts. After 9/11. the markets were closed and didn't reopen until September 17. The Dow closed at 9605 on September 10, and after the next trading day closed at 8920.70, down nearly 700 points. Again, leading into this, there was no reason to be long in this market. Even though we didn't know what was about to happen, somebody did. The charts do not lie. Dow Cash IndexOctober 19,1987 1. There was another big crash on October 19, 1987 (see Fig. 10.22). This is the year I graduated from high school, and one of my fondest trading memories is having owned puts on IBM during the crash. I wish [ could say that I saw the crash coming, but It was pure luck. 1 had a bunch of calls, read something about hedging, and bought puts on IBM. The puts saved my bacon and then some, If I'd had the squeeze at this time, I would have noted that the daily squeeze fired off a short signal on October 9, 10 full days before the crash. 2. Then on October 14 the markets broke down from a descending wedge pattern. There are now two reasons not to be long in the markets. On October 19 the markets crash. Those who are already positioned for the move have a nice trading day. Those that don't have the squeeze to guide them experience new variations of the meaning of pain. Dow Cash Indexthe Crash of 1929 The crash in 1929 was no picnic, either. [ talked to one trader who was there when it happened. He is over 90 years old now and still actively trades. To him, nothing has changed, and it's all the same game. Remember in the first chapter when I talk about markets not moving because they want to, but because they have to? We talk about TASR in that example. Along these same lines, here is the quick narrative of the crash of 1929: On the night of Monday, October 21, 1929, margin calls were heavy, and Dutch and German calls came in from overseas to sell overnight for the Tuesday morning opening (see Fig. 10.23). On Tuesday morning, out-of-town banks and corporations sent in $150 million of call loans, and Wall Street was in a panic before the New York Stock Exchange opened. The selling was heavy, but the influx of cash staved off a crash. Unfortunately, on Thursday, October 24, 1929, more margin calls hit, and people began to sell their stocks as fast as they could. Sell orders flooded the market exchanges, the ticker was running over an hour behind on price quotes, and the markets sold off hard, but not enough to be considered a crash. The exchange directed all employees to be on the floor since there were numerous margin calls and sell orders placed overnight for the next trading day. Extra telephone staff was also arranged at the members' boxes around the floor. The Dow Jones average closed at 299 that day. On Tuesday, October 29,1929, the crash began. Within the first few hours, the price fell so far that it wiped out all gains that had been made the entire previous year. This day the Dow Jones average would close at 230. This is like the Dow losing 2T400 points in one day today. Between October 29 and November 13 over $30 billion disappeared from the American economyand these were 1929 dollars. It took nearly 25 years for many of the stocks to recover The Dow finally bottomed out in July 1932 at near 40. That is like the Dow going from 10,000 to 1,100 in the year 2005. Coming back full circle, it is important to note that a short squeeze fired off on the daily chart before the 1929 crash. Yes, terrorist attacks and crashes are scary things, but the squeeze is designed to give traders a heads up on which way the markets are going to break, so they aren't caught with their pants down. STRATEGIES FOR THOSE WHO CAN'T TRADE FULL TIME The squeeze on a daily chart is one of the best ways I know to trade part time. This can be used on individual stocks, and there is no reason to scan thousands of charts, [just sort through the 120 or so stocks that trade single .stock futures. These arc all of the bigt liquid stocks with lots of volume, and the list of stocks is available at www.onechicago.com. Once I see a stock fire off, I will place an order for the trade. These types of trades do not need to be managed intra-day. Even though \ watch the markets full time, 1 do not watch my swing trades intraday. There is no point. My parameters are in place, and the only thing I'm going to do by watching my position is try to outsmart it, which never works in the long run. [n addition to individual stocks this can be used for sectors, ETFs. and options on these same instruments. For options, I always go in the money with the premium making up no more than 30 percent of the price. A NOTE ON THE SQUEEZE INDICATOR FOR TRADESTATION AND ESIGNAL Many traders are also good programmers- I am not one of those traders. [ tell programmers what I want, and they make the indicator for me. For those of you who are programmers, you shouldn't have a problem recreating the squeeze indicator from the information Tve provided in this chapter. For those of you who are not programmers and are interested in the squeeze indicator, it is available for purchase at www.tradethemarkets.com for both TradeStation and eSignal. The price is nominal, about the same price a programmer will charge to program it for you. Any upgrades made to the indicator are also free. BRICK PLAYSLETTING THE MARKETS STACK UP USING BRICKS TO CAPTURE INTRADAY REVERSALS IN THE MINI-SIZED DOW My trading partner, Hubert Senters, uses the brick play every day, and he uses it exclusively on the mini-sized Dow. He was very helpful in sending me chart examples of brick plays that he had taken while 1 was working on this part of the book. The best inlraday trades take place when a trader is able to catch the major portion of an intraday reversal. One of the best ways to do this is with a specific price pattern that we call bricks. We call them bricks because the price pattern that is formed looks like a bunch of building blocks that have been placed on top of a regular bar chart, These building blocks are formed on ihe chart because of specific price action. A series of three consecutive higher closes will form an **up brick, and a series of three consecutive lower closes will form a down brick. If you have a hard time pulling the trigger, this is a good play to use with buy stop and sell stop orders, as you will see in a moment. If you don't have a hard time pulling the trigger, then you can just wait for the signal and go in at the market. This is one of those plays that is difficult to explain, but easy to show. In this case, a picture is worth at least 1,000 words, if not more, so let's go through the trading rules and then go over a couple of actual plays. This is a momentum reversal confirmation play. 1. Set up a 24-hour time frame on an intraday chart so that the overnight activity can be accounted for in this indicator setup. This is best used on smaller timeframes, typi cally under five minutes, though it can also be used for swing plays on daily charts. 2. Once a market shifts direction, which is denoted by the bricks changing color, count backwards to the third brick in the formation. 3. Then draw a horizontal line across the top of this third brick back. 4. Once the price action breaks above this horizontal line, go long. 5. Hubert and I use this setup on the mini-sized Dow, and we both manage this trade differently, so [ will go over both of our methods. For Hubert, he places a 10-point stop from the entry. Then when he is up 10 points, he sells half his position and moves his stop to breakeven -3. (So if his entry was 10545, then his new stop is 10542.) If the market goes up another 10 points, he sells a quarter of his position and then moves up his stop six points to breakeven +3. (So if his original entry was 10545, his new slop is 10548.) He then hangs onto his last quarter of the posi tion to exit at his discretion. This typically means that he will hold onto this last part of his position until the bricks signal an opposing sell signal. 6. I will get into the same trade and use a 20-point stop, 1 will exit half my position at +15 points and then stay in the trade until there is a brick thai has formed in the opposite directionan opposing sell signal. 1 don't trail the stops. Both meth ods have worked well for us, and this is a good example of how different traders can take the same setup and modify the trading methodology to fit their own par ticular personality. Let's take a look at some actual plays: Mini-Sized DowMarch 2005 Contract, February 25, 2005 1. On this five-minute chart of the mini sized Dow futures on February 25. 2005* a long signal occurs at around 10:00 a.m. Eastern (see Fig. 11.1). This takes place when the price action reverses and crosses above the horizontal line created by the third brick back in the series. The first brick in the series is the black brick labeled point 1, the second as point 2, and the third as point 3. The entry price is 106%. This horizontal line is drawn in manually. Originally it started on the brick above where the line is currently drawn at point 3. This horizontal line was sitting near 10710. However, as the market continued to push lower, additional down bricks were formed, and the horizontal line was trailed 3 bricks back accordingly. This line, representing the entry point for a long, continues to be trailed down as long as new down bricks are formed. It is only when the markets can cross back above the third brick back in the series that a trade signal occurs. On a color chart, the up bricks are blue, and the down bricks are red. On these charts, the up bricks are light gray and the down bricks are black. 2. In this instance, once the trade is entered, the YM rallies to almost 10790 before rolling over. A reversal signal is generated shortly thereafter at point 4 at a price of 10778, for a total move of 82 points. I want to also discuss three different ways this setup could be played. The first and most straightforward way would be to stay in the entire trade from entry to exit, capturing the entire move. In this type of play, I start off with a 20-point stop and then stay in the trade until the reversal signal occurs. The downside of this is that the market could rally 18 points and then roll over and stop out the trade. Another way to play this is to exit half the position at a purely mechanical price target. This is how Hubert and I play this. We execute this trade slightly different from each other, and the mechanics of each of our styles will be explained shortly. By exiting half of your position at mine or Hubert's predetermined mechanical levels for the first half of the trade, some profits would already have been taken.This can mean ihe difference between a losing trade and a scratch trade. So the second way to play this is to start off with a 20-point stop and then exit the first half of the position at a mechanical level, such as 15 points, and then exit the second half upon a reversal. This is typically how 1 play the bricks. The third way to play this is how Hubert plays it, where he uses a 10-point stop and then starts peeling out of the position almost immediately. In this case he sold half when he was up 10 points, sold a quarter of his position when he was up 20 points, and held onto the rest until the reversal. Note that these exit strategies can be used on all the intraday plays discussed in this book. These are all valid exit methodologies for this setup, [t is important for a trader to recognize that every setup can be played differently and to find the way that best suits his or her own personality. For the rest of the examples, I focus on the actual reversal points as entries and exits. |
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