The SharePlanner Trading Guide for learning how to trade source

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The SharePlanner Trading Guide for learning how to trade source Powered By Docstoc

              Trading Guide

Teaching You to Plan Your Trade and Trade Your Plan

                 By Ryan Mallory & Matt Walters
                               The Shareplanner Trading Guide

Table of Contents
A Simple Guide To Day-Trading ...........................................................................3
  Understanding Risk vs. Reward ........................................................................3
  Timing is Everything, and I Mean EVERYTHING! .............................................4
  Trading in a Sideways Markets .........................................................................5
  Managing the Position.......................................................................................6
  Trading the Gaps...............................................................................................7
  The Use of Margin on Day-Trades ....................................................................7
  Don’t Do it the Buffett Way! ...............................................................................9
  Know When to Stop Trading ...........................................................................10
  An Example of a Trade in (ICE).......................................................................11
  My Preferred Brokerage ..................................................................................12
  Don’t Ever Watch CNBC…EVER! ...................................................................14
  Final Thoughts on Day-Trading .......................................................................15
The Elements of Swing Trading ..........................................................................15
  Finding the Right Stocks .................................................................................16
  Analyzing Potential Set-ups ............................................................................16
  The Entry and Stop-Loss.................................................................................17
  Position Sizing.................................................................................................18
  Closing the Position.........................................................................................19
  Post-Trade Analysis ........................................................................................19
  The Strategies We Lean On In Various Types of Markets ..............................20
  Don’t Trade Blindly ..........................................................................................21
  Be Careful of Self-Destruction .........................................................................21
  Trading is a Life-Long Journey ........................................................................22
  A. Japanese Candlesticks ...............................................................................23
  B. Understanding Short-Selling .......................................................................23
  C. Better Understanding Rational Analysis with Swing-Trading ......................24
    Market Analysis: Trading with the Broader Market in Mind..........................24
    Technical Analysis: Reading the Charts ......................................................25
    Fundamental Analysis: Stocks with Solid Numbers .....................................27
    Don’t Ignore the Competitors or Industry Performance................................29
    Check Our Gut Instincts...............................................................................29
    Put it All Together and What Do You Got? Rational Analysis ......................30

Copyright 2009 by – All Rights Reserved                                                      Page 2
                       The Shareplanner Trading Guide

                    A Simple Guide to Day-Trading

Understanding Risk vs. Reward

We have had a number of traders ask us to provide them with our understanding
of the Risk-Reward Ratio. As a member of SharePlanner (and it is FREE for
everyone who wants join) you know that we stress the risk-reward ratio in our
day-trades and that our positions and the number of shares we buy or sell all
depends on our calculated risk-reward ratio.

We use a Risk-to-Reward spreadsheet to determine our position sizes. First we
determine what our Risk or "R" (i.e. the dollar amount that we are willing to lose
on a single trade). Then we buy the number of shares up to the amount that will
not allow us to lose more than our pre-determined "R" value. We want our gains
to be in multiples of "R" (i.e. 2R, 3R, 4R, etc.) and our losses to kept consistently
at 1R or less (preferably less). Once we have determined what R is, and the
number of shares that we can buy or short without risking more than "1R", we
place our order and once that order has been executed we enter our stop-loss
(usually as a "first-triggers-all" condition with the original order).

As a matter of note, the tighter the stop-loss the greater the potential to realize
multiple R's on our trades. We are not so much interested in the percentage gain
of the stock itself as we are interested in the "R" multiple on our trade. If our stop-
loss is only 0.25% of the share price and we are willing to risk 0.5% of our
portfolio on the trade, we are able to realize 4R or a 2% increase in our portfolio
value if the stock goes up only 1%. Whereas if our stop-loss is much wider at 1%
of the share price and we are willing to risk 0.5% of our portfolio on the trade,
then we would need to see the shareprice increase by 4% in order to realize the
same return on the value of our portfolio (while we still realize a 4R on this trade
it required that the stock appreciate by 4% versus the 1% in the previous

So in our day trades we seek to find as tight of a stop-losses as possible so that
we may buy more shares to trade with, which will lead to our returns being far
greater. Just remember, the key is not so much the percentage of what the stock
goes up, instead it only matters what our R multiple is on our returns - that is
what determines our profits and our return on our capital. As you can see, we
can achieve returns of 2R, 3R and even 4R or more on trades that only move 1%
- Not Bad At All!

We have provided a similar spreadsheet to the one that we use for determining
position size. You can download it for FREE by becoming a Member of
SharePlanner (which is also Free).

Copyright 2009 by – All Rights Reserved                        Page 3
                       The Shareplanner Trading Guide

Timing is Everything, and I Mean EVERYTHING!

Let’s look at a trade made in DIA. It is a perfect example of what I mean when I
say that timing is crucial to the trade. Some would say that trading with the
market is key and that you have to first have a feel for where the market is going,
but I would say that they are dead wrong. If your timing is right, you can be wrong
on the market direction but right on timing, and benefit in the very short-term from
a move that goes against the general direction of the market. Then there are
others, including myself, that will often trade contrary to the market direction for
the very purpose of taking advantage of overbought and oversold conditions. So
while market direction is extremely important to trading, it doesn’t trump Timing.

With that said, take a look
at the trade in DIA. I had
the market direction right,
but my timing was off. The
market gaped up strongly in
the early AM, followed by
back-to-back           hammer
candles, that are often a
good          indicator     of
bullishness             ahead.
Knowing that the market
was on a tear, I didn't want
to let this opportunity go by.
But looking back on the
trade, the market, with the
huge it had been on as of
late, was bound to close
the gap, and the action that
we got out of those first two
candles didn't quite do the
job at filling it.

It wasn't until the 1pm
candle formed, making a nice spinning top, with a long shadow on the bottom,
did I get the ideal setup. In fact if you saw my twit, you'll realize that I noticed it
right then and there, but unfortunately, I wasn't going to make another trade on
the day (Read the section on Know When To Stop Trading and you'll see why I
hung it up that particular day). When I lose 1R on the day - I'm done! 1R is the
dollar amount I'm willing to lose on a single trade, and it’s the same across the
board, regardless of what stock or ETF that I am buying.

So I lost a full 1R on the DIA trade and I had to stop trading for the day
unfortunately. Sure I could have made up for the losses with the setup I've
already described, but had I been wrong on that, then I would be down 2R on the

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                       The Shareplanner Trading Guide

day, and the last thing I want to do is get in the "desperate" mode, where I start
swinging for the fences. I can recover easily from a 1R down day, or a couple of
days of -1R, but what I can't recover from is losing capital that goes beyond my
comfort zone of risk, and then I start getting antsy and begin throwing down the
cash in hopes for a "big-gainer". I can’t let that happen!

It takes discipline to trade as I do, and years of making stupid decisions to come
to grips with one's own weaknesses, but in the long run, I will remain profitable
regardless of what the market does, so I'm not going to sweat on missing out on
a one-time trade.

Trading in a Sideways Markets

One of the most often asked questions that we get is how to trade and profit in a
sideways market. Profit potential in flat to sideways trading sessions does exist
using day-trading strategies. However, one of the most important aspects of
trading successfully in these types of markets is knowing early on in the trading
session whether the market is trending or trading sideways and knowing this is
often the most difficult aspect.

First, it is important for us to say that unless you are trading to "fill-the-gap" you
are better off not trading at all until about thirty minutes to an hour into the market
session. Our trading strategy requires us to wait at least an hour before initiating
any trades. But during that first thirty minutes to an hour, it is essential to watch
the price and volume - for us that is all we watch in determining the type of
market we are trading in.

Next, determine what type of catalyst is driving the market - is it blowout earnings
from Microsoft (MSFT)? Did the Fed slash interest rates by 100 basis points
overnight in an emergency meeting, is Citigroup (C) announcing $10 billion in
additional and unexpected sub-prime write downs? If so, these are the types of
trading sessions that tend to see 2% to 3% (or more) increases or decreases in
price movement in the general markets. On the other hand if the market is
gapping up 0.5% and there is no major news, then there is a good chance that
the gap will fill and the market will spend much of its day trading sideways. Now
we are not saying that you have to have major, earth-shattering news in order for
the market to trend, instead we are providing you with rock solid examples of
how to recognize a trending market versus a flat to sideways market.

As stated earlier we like to watch what the price action tends to do over the
course of the first hour or so, and if the markets don't show any true conviction,
and volume is relatively low compared to recent market sessions (use 15 or 30
minutes volume bars to determine this), then our trades will be set up to take
advantage of quick price movements. If the market opens up or down around
0.75% to 1% or more and holds it during the first hour, then we know the market
is likely to trend and we will keep our positions open for a much longer duration

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                       The Shareplanner Trading Guide

and even hold our trades until the final minutes of the trading session. In essence
in the trending markets, we will let our positions run to take full advantage of the
day's market strength or weakness.

If the market is showing slight weakness, but the overall market of recent weeks
or months has been showing strength, we will trade long as the general tendency
will be for the market to buy the dip and recover as the trading session matures.

So Let's Recap...

1. Watch the general price and volume action during the first 30 minutes to an
hour of the market session.

2. Scan for whether the market is being driven by substantial market news, or
just market whims

3. If the market opens up strong, is it sustaining and holding on to those gains
(the reverse is true when the market opens down). If so, trade to capture the full
extent of that day's market action. If the volume is low, and price action is
showing little conviction then trade for quick profits.

4. If there is slight weakness in the overall market - trade to the long-side (the
reverse is true in slight strength in an otherwise bear market).

Managing the Position

Now it’s important to remember that with this type of trading that we will only hold
the position through the duration of the market session. Ideally we like to buy in
the morning, and sell before the close at 4pm. Our day-trades are intended to
capture the momentum of a stock during one trading session. Therefore with this
strategy, we will never hold the position overnight.

Once we have a fair amount of gains in hand, we want to lock those gains in by
raising our stop-loss, while giving the stock enough room to still run. Ideally, we
want to get to ‘break-even’ as quickly as possible. However, in order to avoid
being stopped out prematurely, we will give a position one hour before we
consider tightening the stop-loss from where it was originally placed. As we
approach the end of the market session we will tighten the position even more
and within the last 15 minutes of the trading session we will begin closing our
position if we haven’t been stopped out yet. This is in-line with taking losers
quickly and letting winners run as long as possible, because as it continues to
increase its profits we want to continue to capitalize on the price move and
ultimately increase our R multiplier. And with day-trading that means right up until
the very end of the trading session.

Copyright 2009 by – All Rights Reserved                     Page 6
                       The Shareplanner Trading Guide

Trading the Gaps

                                                   Gap Trading is a very
                                                   profitable, simple, and well-
                                                   known form of trading. While
                                                   we don’t use it to any great
                                                   degree at SharePlanner, you
                                                   can use it on your own, with no
                                                   help at all. Let’s look at the
                                                   chart on SPY from 5/28/09 – a
                                                   perfect example – I faded the
                                                   gap up at the open using
                                                   (SPY); the trade emerged so
                                                   quickly, that we were unable to
                                                   send out a trade-alert in time
                                                   for    our     subscribers    to
                                                   capitalize on. But notice once
                                                   the housing report came at
                                                   10am how the market reacted
                                                   negatively to the trade and
                                                   closed the gap. This was
                                                   bound to happen as long as
the report didn't blow away numbers, because the market was up at the open
solely in anticipation of the report which gives us a classic 'Buy the Rumor, Sell
the News' scenario. The risk reward was also favorable at about 1.5 to 1.

So what did we use as our trade parameters? We waited for the first 5 minute
candle to form. After the first candle was formed, you had what we call a doji or
spinning top, which typically means there is indecisiveness by traders as to
overall direction. In this circumstance because the market gapped up, and
showed such a reluctance to further extend the gains, the candle pattern was in
favor of the bears.

Our entry on this trade was a break of the low of the first 5 minute candle - when
that happens, the gap has then started its fill. The stop-loss that we set was just
above the intraday high of the day. So in this circumstance we had a stop loss of
0.40/share (90.31 entry, 90.71 stop-loss). Once the gap was filled (at the dotted
line on the chart) we exit out of the trade for a gain of 0.66/share.

So there you have it - our trade at the open that filled the gap.

The Use of Margin on Day-Trades

I received an excellent question from one of our loyal members in regards to a
short-trade I made in QQQQ and it is as follows:

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                       The Shareplanner Trading Guide

I am having a hard time with the math on how you came up with a $212 profit
using a $50,000 account with your short in QQQQ today. It would take 1927
shares with the .11 gain you stopped out at. With a $36.69 entry you would of
had to commit over $70K to the trade. The only way you could make this trade
was using a margin account.

So here is the breakdown. The one part of this question that has to be answered
right off the bat, whether or not I am using margin on my trades, and the answer
is - Absolutely! While I don't recommend going into margin on swing-trades, for
day-trading it is a huge benefit and carries no where near as much risk -
assuming it is used correctly. Because I have already pre-determined how
much I am willing to lose on a trade, I want to buy as many shares as possible
that will allow me to lose no more, and no less than the amount that I pre-
determine as being "R".

For today's trade, my "R" represented 0.5% of my total portfolio value, or $250. If
I have to go into margin to buy enough shares to equal a $250/0.5% Risk
scenario on my trade, then so be it. In fact, I want to have as large of a position
as possible on the trade. That is why I go after the tight stop-losses, because I
want to turnover my capital as quickly as possible, just like a business wants to
turnover its inventory.

So on today's short-trade on QQQQ I purchased 2075 shares which comes to
$76,131.75 on one trade or 152% of my portfolio value. Which isn't any major
concern for me because I have a stop order in on my position that if it hits 36.81
then I have lost $250 or 0.5% of my portfolio and I am out of the trade all
together. And remember: I don’t hold my trade overnight, so I am not at risk to
overnight fluctuations between the opening price and the previous day’s closing

Second part of the question is how did I come away with $212 on the trade, here
is the breakdown: $0.11/share * 2075 = $228.25 - $16 in commission fees ($8
dollars for each side of the trade) gives me $212.25, which is rounded down for
$212. The SEC fees won't be calculated until tomorrow, at which time I will factor
into the portfolio value.

Margin is very important in day-trading - because you are NEVER holding the
trade overnight, your only risk is the dollar amount between the entry price and
the stop-loss (always, always use a stop-loss in day-trading) multiplied by the
number of shares bought. Remember my concern is with "R" the amount I'm
risking, not how much into margin I am going.

With margin you get 2x your portfolio value for any one trade, and you can trade
up to 4x of your portfolio value in any one day (that's your total buying power).

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                       The Shareplanner Trading Guide

Hopefully this explains things for you. We will use margin in our day-trades (not
so much in our overnight positions or swing-trades). This is what allows us to
bring in such solid gains on price moves that aren't considered all that significant.
Feel free to email me if this doesn't clear things up for you and I'll try to explain it
even more.

Don’t Do it the Buffett Way!

That is a pretty brazen remark isn't it? Heck, some folks may be turned off
enough that they will quit reading this guide all together and never visit
SharePlanner again. But at least hear me out. I have nothing against Warren
Buffet, and I think that he has added more than we could ever imagine to the
world of finance and investing in particular. People follow his stock suggestions
as if he has some kind of omniscience about what stocks will perform incredibly
well in the years ahead. If he buys a stock, that stock will in the short term see
huge buying interest. He's got billions, and I've got something far less, however, I
will say this, that his method of investing does not perform near as well, in today's
market, for the average investor.

Now, I’m not saying that you can’t make money from the style of investing that he
engages in, but you also have to remember that he has incredible control over
the stocks that he buys. Control over support levels, control over management
and control over many other things that we'll never have as members of the
‘Trading Proletariat’. When you can pump millions upon millions if not billions, in
a single stock, you are able to provide that stock with enough support power, that
any attempts by the bears to drive it lower is futile. Let's also consider the fact
that when he invests in a company he practically becomes the majority owner of
that company - just look at Coca-Cola, American Express, and Gillette - all
companies that Buffet has pumped so much money into through Berkshire
Hathaway, his insurance company, and his own personal wealth, that he has
practically owned or at some point has been majority owner of these large-caps.

Being very tiny investors in comparison, we don't have the luxury to wait 20-30
years nor buy major chunks of large cap stocks, and have a large influence over
their operations. Instead, we have to buy a company with the belief that we are
getting in before the big money discovers its true worth and thereby dramatically
increases the value of the stock itself. But how early do you have to be, and how
long should you have to wait, and furthermore, how wrong do you have to be
initially before being right - that is, what if the stock goes against you 50% should
you hold on to the stock because you believe it is a "long-term" investment or
that you are in it "for the long-run"? Tough questions that I don’t ever want to
have to answer.

Value Investing, by holding stocks 5, 10, 20 or more years like Buffet, does not
always yield the results that Buffet's strategy has yielded over time. In fact, the
latest downturn in the economy has shown investors, that a stock like Citigroup

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                       The Shareplanner Trading Guide

(C) is worth no more than what it was worth in the 80's! This is a stock that was
considered a value stock for much of its existence. Had you held on to this "for
the long-term" you lost out on 20-plus years of trading opportunities with that
capital, at a minimum. For Buffet, he can just move his billions on to the next
long-term investment, but for you, who knows what kind of hit that had on your
retirement, or your 401(k), or your ability to pay your child's college tuition.

This section may sound a little bit sporadic, I know. But I can’t help but think
about how trading, with the advent of the internet and low commission fees make
long-term investing second-fiddle to trading in the short term.

Know When to Stop Trading

Let's face it; you are not going to have a good day trading stocks every day. It
just doesn't happen, and those who say it does are nothing but a bunch of frauds.
Every day is its own riddle to unravel and mystery to solve, and sometimes you
just aren't going to be on top of your game. One of the biggest keys to successful
trading is knowing when you are having "one of those days" and shut everything
down and simply stop trading. However, that can be the hardest thing to
recognize and know, because every trade setup out there is easy to believe will
be the one that sets the record straight and turn a losing day into a profitable
one, while reversing a myriad of bad trades.

I've had my share of bad trading days, and have had to learn the hard way over
the years, that when trades are not working in my favor, I'm best off to simply call
it quits. Tomorrow will come, and it will be a new opportunity for trading. My mind
will be a bit clearer, and I will feel a bit fresher, and I’ll have a better take on the
market. Emotions, whether we choose to believe it or not, can and will distort
human logic. If one is going through turbulent financial times, or if there is a
death in a family then our sense of logic and understanding can be greatly
skewed. It’s best that if one is under this type of stress, to just refrain from trading
all together as you are much more prone to add insult to injury.

So knowing that I am prone to bad trading days, as I hope everyone else realizes
about themselves too, I have put in daily, weekly, and monthly trading guards
that tell me when enough is enough.

On a daily basis, I will stop trading all together if I am down 1R or more. That
means I may be down .5R but then trade again and then lose .8R, at that point I
am down a total of 1.3R which breaks the ‘stop-trading’ barrier and I am done for
the day. On the other hand, I may trade just once, lose a full 1R and as a result I
am done also.

On a weekly basis, if I lose more than 3R, then I am done for the week. I'm not
going to allow one week, where my trading is apparently WAY-OFF to wipe out
months of positive returns, or put me in such a hole next week, that it takes a

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                       The Shareplanner Trading Guide

couple of weeks just to get back on solid ground. And then finally, there is a
monthly stop-trading, in which if I am down more than 10R in a given month
(which hasn't happened to-date), I will wait until the next month, spend the time
to evaluate my trading tendencies, review past trades more thoroughly, and
make the necessary changes that are needed. Usually these types of changes
have to do with my mindset, not so much my trading strategy.

So there you have it, these are solid guidelines I believe can help you out in your
own trading endeavors, to help you preserve capital, and keep you in this game
for the long run.

An Example of a Trade in (ICE)

It took me just 45 minutes to rack in gains of over $500 in this particular trade
($494 after commissions and SEC fees).

Let’s take a look at the (ICE) chart below: I got in to ICE at about 1:45pm EST on
                                                         a light pullback that formed
                                                         a nice narrow-range candle,
                                                         great for initiating trades off
                                                         of. After about an hour of
                                                         selling off, the bears tried
                                                         once again to push the
                                                         price of ICE even lower, but
                                                         failed in the attempt, as the
                                                         bulls rallied back strong.

                                                        Once that happened, I
                                                        placed my trade .01 above
                                                        the high of the candle and
                                                        .01 below the low of the
                                                        candle and when my entry
                                                        price was triggered, it was
                                                        off to the races, and 45
                                                        minutes into the trade I took
                                                        gains, even though I usually
                                                        wait at least an hour into
                                                        any trade before making a
                                                        move. I did so in this
specific instance, because 1) the market had already made a strong move on the
day and there was a low probability it would extend much further, 2) the pace at
which ICE's stock price increased in value, was likely unsustainable, so rather
than try to fight against these two variables, I booked gains and called it quits.

Copyright 2009 by – All Rights Reserved                        Page 11
                       The Shareplanner Trading Guide

My Preferred Brokerage

A popular question that I get quite a bit from the traders who follow me on, is what brokerage firm I we use for my trading and why.
SharePlanner trades with thinkorswim (short name is TOS). And I have to say
that I am very pleased with their service. They are by far, the best brokerage firm
that I have used to-date.

In the past I have used Bank of America, TradeStation, TD Ameritrade and
OptionsXpress, and simply put, thinkorswim outdoes them all. Now I'm not saying
this because I am going to be incentivized for doing so. I have no contract with
them (at least not of this writing) and I am under no obligation to do so. I am
simply just trying to provide you with information that will help you trade better in
the stock market.

Recently thinkorswim was bought out by TD Ameritrade, which raised a lot of
concerns for me. TOS is what I call a rogue brokerage firm - they are very non-
traditional, and are a great alternative for those who are tired of being
unappreciated by the larger firms out there. So now the question begs whether
they are being acquired only to be sucked up in to TD Ameritrade and to be
forgotten forever or will they let them stand alone as a separate entity. So far
they have heard the concerns of the TOS traders and they are keeping both firms
separate including the commissions structures.

Here is a letter that I received recently from TOS in regards to the acquisition and
the steps that are being taken:

Today TD AMERITRADE announces the close of the acquisition of thinkorswim.
You've probably seen a few changes since the deal was first announced five
months ago.

Four software releases packed with enhancements including single-click complex
order routing for active traders, complete flexibility on chart windows, over 10
new futures and futures options products, spreads for futures options, new risk vs
return analytics, myTrade Twitter and order routing integration, fast tab access,
and lots, lots more, with more coming soon.

Then thinkorswim Advisors introduced live trading sessions in the Red Option
swimCoach online seminars, taught thousands of students at 50+ free seminars
around the country, and have standing-room only presentations at trade shows.

Does that sound like a company that's "disappearing"? Didn't think so.

The bottom line is that what thinkorswim is best at-delivering powerful, user-
friendly trading technology, supporting active traders over a wide range of
products, and teaching the world a smarter way to seek risk management and

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                       The Shareplanner Trading Guide

spot potential opportunities-isn't going anywhere. In fact, we're pushing further
and faster than we ever have.

What TD AMERITRADE brings to the table are great account management tools,
strong customer service skills [I doubt that], and some features that help fill in the
"gaps" of the thinkorswim platforms. The goal of the acquisition is to redefine and
set a new standard for the online brokerage industry. That's what thinkorswim
has always been about.

The plan is that you'll continue to trade on your favorite thinkorswim platform, at
your current commission rates, and talk to the same people (some new ones,
too) when you need help. All you have to do is find your next trade.

Now the letter doesn't give any assurances that they won't be fully merged into
the TDAmeritrade platform - hopefully not. With TD I was on the phone with them
constantly questioning the execution of my orders, but with TOS I have yet to
ever have to call them about anything questionable.

Another benefit to using TOS is the free software platform and the free web-
based trading platform - neither one will you ever have to pay a fee for. Their
commission structure for stocks are two fold: pay 0.015 per share with a $5
minimum or trade for a $9.99 flat fee. If you make more than 40 trades or 20
round trips in a given month they will also provide you with a $40 discount to help
offset your internet bill - which I get every month!

One more praise on TOS' behalf, and I recommend you trying if you trade a lot of
shares and make a lot of trades: negotiate your commission rate. At one point,
because I trade a large dollar amount with every trade, I was getting killed on my
commissions which could get as high as $30-$60 round trip. You're talking about
a lot of money just to place a trade. And the reason why I was paying so much
was because my style of trading requires that I use "stop-orders" which don't
qualify for the flat fee of $9.99. I was fed up, because it was eating into my profits
so I finally called TOS up, thinking I was going to have to rip into them, but before
I could hardly say a word, they offered my $8/trade no matter the trade type. The
phone call lasted probably all of two minutes! So I am definitely loyal to TOS and
always will be unless they get flaky in the TD acquisition.

So all in all, TOS does everything they can to cater to the trader; their software
platform is by far one of the bests that I have ever used and their executions are
great too. But I'm keeping a close eye on them during this transition period and if
TD tries to goof them up like they did with their own company (I traded with TD
Ameritrade before switching to TOS), then I will hit the road looking for another
brokerage firm to give my business to.

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Don’t Ever Watch CNBC…EVER!

In case you were wondering where I go to get my market information, or who I
rely on for the daily happenings on what's going on in Wall Street, the truth of the
matter is, I don't tune into, or listen to anyone. Frankly, I couldn't tell you when
the last time I watched CNBC, the Fox Business Channel, read the Wall Street
Journal, or picked up an issue of Barron's. When it comes to Jim Cramer, I think
it is almost insanity to even listen to him for even one minute. However, during
the daily 5% - 10% sell-offs we were seeing in the broader market in 2008 and
early 2009, I did find myself tuning in for the humor in watching him completely
melt-down, and explain why his latest bottom call wasn't really a bottom call (from
what I heard he called 3,235 bottoms during 2008 alone!).

So where do I get my information from? Nowhere really. I will go to Yahoo's
Finance page on a daily basis to find out about a particular stock (i.e. what they
do, their ratios, etc.), or find out what the news is that's driving the market. They
also have a nice little section on the left hand side of the page provided by (pretty good website actually) that gives updates at about every 30
minutes or so on the day’s market action, what sectors or industries are
performing well, what stocks are having the most effect on the market, and who
just released their earnings etc. I will also follow a couple of blogs every once in a
while such as Kirk Report (every couple of weeks or so), or TraderMike (maybe
once a week), but that's about it.

Most of the information that I get comes from reading charts, running screens,
and frankly PRICE and VOLUME. This is what I consider the two most important
elements in the stock market, and frankly all of the clowns and goons that rant
and rave on TV and get all excited about nothing, could do themselves a lot of
justice if they simply focused on the basics. By doing so, life becomes much
quieter, relaxing, and simply enjoyable.

My head has to be clear of doubts and conflicting ideas. I must be able to come
up with my own understanding of the market, and the stocks within it, without
letting doubts, courtesy of CNBC, creep in. I can't try to take what Jim Cramer
says, and mesh it with what Fox Business says, and combine that with the
eternal optimists at Motley Fool say (which has become nothing more than a
glorified infomercial of late), and actually expect to have a sound analysis or
rationale for my trades and general understanding of market conditions.

If I tried to do that, I'd probably end up in one of those places where all the walls
are white and people walk around like zombies, or I'd be popping Xanax pills like
there was no tomorrow. Simply put, I can't allow my thoughts and opinions to be
distorted by every Tom, Dick, and Harry that think they are the ultimate authority
on the market. If I am going to be wrong on a trade (or two), and believe me that
happens all the time, I don't want it to be because someone else told me so on

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television or because Joe Schmo' in the WSJ said so. I want to be wrong on my
own accord, so I have no one else to blame but myself.

By the way have you ever wondered why these people argue with each other on
CNBC? What does it honestly matter what another person thinks? It's not like
they are arguing over the superiority of the Miami Dolphins against all other
football teams! You don't have to take their advice or trade on their opinions nor
is anyone forcing you to. If they are wrong, the market will soon show them the
error of their ways, and it will probably hurt them financially too (assuming those
dudes actually know how to place a trade - which is somewhat doubtful). So let
them have their opinions, I could careless what any of them have to say, and
highly doubt I ever will. Heck, after reading this article, you may decide "I don't
need SharePlanner anymore - I'm going to make it on my own!" and you have
every right to do so.

Remember we will always be unfiltered, honest and totally transparent. Believe
me there are times when doing so is painful. For example, on our swing trades,
we never got completely behind the rally that started in March - doubtful most of
the time of its legitimacy and we weren't able to capitalize on it like we should
have - but we aren't ashamed to admit that, and guess what - we'll make up for it
at the end of the day. But these wannabes on all these network stations and
through the written media never admit their wrongs, they change their opinions
daily, and are never held accountable for anything they say or do.

So Turn Off CNBC and Turn On The Cosby Show Re-Runs!!!

Final Thoughts on Day-Trading

As you can see our strategy for day-trading is not a complex strategy by any
means. In fact it is very teachable and understandable. So why doesn’t more
people engage in this type of trading? Because 1) It is not overly exciting 2) On
the surface it appears as overly simple 3) It requires discipline and patience.
Number three is probably the main reason why individuals shy away from day
trading in general and our strategy in particular. While our strategy is unique to
us and developed specifically to our preferences and style of trading, and while
we benefit from our years of experience in trading, watching, and understanding
the broader markets and the stocks within, we are only successful because we
remained disciplined in what we do, we do not deviate outside of our system and
we remain honest to ourselves in regard to our own fallibility, and the inherent
risks that are contained within the markets.

                    The Elements of Swing Trading

The other half of our overall trading strategy is what is commonly known as
“Swing-Trading”. With Swing-Trading, we hold stocks longer than a day-trade,

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but for a much shorter period than a long-term investment. Our approach to
swing-trading will employ the use of both long and short positions. Because the
market over the long-term tends to trend sideways or upwards, overtime our bias
in swing-trading will be to the long-side. However, our main goal is to identify the
current trend in the general markets and to follow that trend in an individual stock
or exchange traded fund (ETF) that has a favorable setup, until the trend breaks,
at which point we will close our current position and possibly even take the
opposite side of the trade.

Swing-Trading goes way back to the late 1800’s and early 1900’s when Jessie
Livermore (often revered as one of the greatest traders of all time) employed its
use by holding numerous stocks for a short period of time to capture quick gains,
while always adhering to a rigorous belief in keeping losses at a minimum.

The trading was made further popular by Nicolas Darvis, the famed dancer in the
1940’s and 1950’s who employed technical analysis to accrue two million dollars
from $10,000. Today this strategy continues in use, being employed by popular
traders such as Steven Cohen and the Turtle Traders, and its variations are
numerous ranging from the futures markets, to trend-following, to forex and

Finding the Right Stocks

Swing-trading is a lot like fishing, initially, the most important aspect of fishing is
to know where to fish or in better terms “where they are biting”. Expecting to
randomly throw a line in the water and expect to catch the “big-one” just isn’t
going to happen. You have to know your surroundings, the habits of the type of
fish you are going after and to have a descent idea in regards to your odds of
success. Simply put, if you don’t think you are likely to catch a fish in your current
spot, you aren’t going to stay there for long.

Finding the rights stocks to go long or short in is much like fishing; instead of
using depth finders, we use stock screeners. We input our criteria into the
screeners as a means of narrowing the field of the thousands of stocks available
to a handful of potential candidates. Using a stock screener we will put in
variables based on fundamental and technical criteria, and therefore save
ourselves massive amounts of time and effort of evaluating hundreds of
thousands of stocks. Once our inputs our entered, we get the results within

Analyzing Potential Set-ups

Once we have the list of stocks from our screeners, we will typically begin
evaluating each one. Many times it takes only seconds to figure out if a particular

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stock is worth going long or short in. On any given day we can evaluate 200-300
charts all the way up to and over 1000 charts. Because we do this so much and
have done it for so long, we have a strong conviction and understanding for what
we are looking for in our swing-trades, and when flipping through the charts, if we
don’t find a trade setup that we are interested in then we will simply move on to
the next chart.

To break down what we look for in a trade setup, there are five factors: Market
Analysis, Technical Analysis, Fundamental Analysis, Industry & Competitor
Performance, and finally subjective analysis, better known as our gut instincts.
Putting all five of these variables together, you have what we term as “Rational
Analysis” (See Section C of Appendix). Rational Analysis is the combination of
the five aforementioned factors that takes into account the various aspects of a
stock and the underlying company it represents, and allows us to reduce the risk
associated with the stock, while positioning us to increase the odds of
maximizing our profits on the trade.

The Entry and Stop-Loss

Our entry on swing-trades is quite different from our entries on day-trades. With
day-trades we look to capture momentum on an intraday basis by buying on the
“up” as the stock breaks out of a narrow-range candle or shorting a stock on the
“down” as the stock breaks down and below a narrow range candle. With swing
trades, we employ the use of areas of support and resistance along with trend
lines and moving averages. Knowing that even the hottest stocks out there
cannot not go vertical, or move without a pull-back of some kind, we will typically
look for those stocks that are pulling back on light volume or beginning new
trends (in either direction), and look for an ideal entry that is near support for long
entries and resistance for short entries.

Often times our entry price may be 5-10% less than current price levels when we
enter our trade order. This is due to the fact that we want our trade to be as close
as possible to the “make-or-break” point of the stock itself. That means we will
only have stop-losses of 4-6% max on a particular swing-trade. This is far less
than what most traders believe to be adequate for their trades, which often
equates to using stop-losses that are in the area of 10-15%. Our trading strategy
tends to shy away from such large losses, so that our “R” is fully maximized to
the upside and minimized to the downside.

If we buy a stock right above a major support area, we will place a stop right
below the support area. This way we will know rather quickly whether we are
right or wrong on the trade. If we are right, we are likely to see rapid price
appreciation, since in most cases, we buy in oversold conditions, which typically
see hard reversals in price action, and secondly, our price basis is often lower,
because we were patient with our entry. The worst thing that can happen is when

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we buy/short into a position outside of any significant support or resistance
areas, and as a result we are captured in “No-Man’s Land” where we limit our up-
side potential while increasing our downside risk.

The same can be said in setups where we are using trend lines, technical chart
patterns (i.e. double-tops and double-bottoms, etc.) and moving averages. We
want to be as close as possible to being wrong, so that if we indeed are, we are
only wrong by a small percentage. Instead most traders want their entries far
away from their stop-loss because they believe that it will take a lot to be wrong,
but when they do wind up being wrong they are wrong by a significant
percentage amount. We are the exact opposite in that we want our entry to be as
close as possible to being wrong so that it has little to no impact on our portfolio.
It also allows for us to be wrong a lot more times than not (should that happen),
and still strike an impressive profit overall in our portfolio.

That is why in the end, it doesn’t matter how often we are right or wrong, but how
well we managed our positions and thereby mitigated the risk.

Position Sizing

Our Position sizing is very similar to that in day-trading. However, we have to
account for the fact that we are holding positions overnight, and so we want to
start small and gradually build our position as it increases in value, so that if there
is a major change in price against our position, we do not want to be overly
exposed to the downside. Instead what ever losses that could occur, we will want
it to be absorbed by the unrealized profits in the position. Therefore, it is wise to
build a position in increments rather than put all of our position to work all at

For example, we want to establish a long position in Stock ABC @ $25/share.
Our stop-loss will be 4% or $24/share. We are only willing to risk a total of 0.6%
of a $100,000 portfolio on this trade which will allow us to risk up to $600 overall
of our capital. Therefore we will purchase up to $15,000, or commit 15% or our
portfolio to this position – but not all at once. Instead we will buy these shares in
increments. Initially, we will buy 150 shares or $3,000. If the stock rises an
additional 3% (25.75), we will add another $3,000. At that point, we will add
another $3,000 if it continues to rise, and do so a fourth time also. At this point
we will be fully committed at 15% of our portfolio’s capital and with profits. It is
also worth noting too, that we may protect our gains by selling calls in order that
we our protected to the downside even further.

To maintain those gains as we continue to add additional capital we will raise our
stop-loss in order to maintain our strategy of not losing more than 0.6% of our
portfolio’s capital. The continual tightening of our stop-loss will also prevent us
from having a winning position turning into a losing position.

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With Swing-trading, our primary goal is to let our winning positions run as long as
possible. Sometimes that means we only realize gains of 10% or 15%. On the
other hand, because we take our profits slowly, what is only expected to be a
10% gain can turn into a gain of 100% or more.

No one can predict with any certainty how much a stock can appreciate in value.
Sometimes it will not increase any at all, and when that occurs, then we cut our
losses and move on to a new position, at other times, it will hit stratospheric
levels, that no one could have anticipated. But most of the time it is somewhere
in between. With that said, we are to manage the capital in such a way, that we
stop losing positions in its tracks, manage with precision, those stocks that rise in
the 10% to 20% average range, and to stay out of the way of those stocks that
rise beyond expectations (let them run).

Closing the Position

No stock can go up forever, and eventually at some point, sentiment will change
and the stock will retrace its gains. Even more so with those positions that we
short, unless they go bankrupt, there will eventually be a bounce, and when they
do, the last thing we want to have happen, is to be caught in a short squeeze. It
is necessary then for us to give stocks enough room to run to their fullest
potential, but to also be cognizant of technical patterns such as the break of a
major trendline, double-tops and bottoms, distribution of the shares on the long
side and accumulation on the short-side, among others, are all clear indications
to us that it is time to close out the position.

Post-Trade Analysis

We hold a firm belief that every trade, whether it is a winner or loser, has a
lesson to be learned – with those trades that finish in the red being the best
candidates. As a result, once a trade, along with the general markets, is closed,
we will dissect and analyze every aspect of our trade from the entry, stop-loss,
and exit price to our thesis, rationale and emotions of the trade itself. Here is a
primer for what we will look for in our Post-Trade Analysis:

   •   Did we break any of our general Day-trading/Swing-trading Rules?
   •   Did we adhere to our stop-loss?
   •   Did we use the correct order type?
   •   Did we tighten the stop-loss as necessary, if not, how should we have
       done better?
   •   Did we exit out of the position correctly?
   •   Looking back at our thesis, was there any major errors in our logic?
   •   Was our rationale flawed?

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   •   Did we allow emotions to dictate our actions (i.e. were we ‘spooked’ out of
       the trade prematurely or did we allow greed to turn a profit into a loss)?
   •   Are there any characteristics about this trade that is similar to those in
       previous trades?

These are the questions that we will ask ourselves after every trade in order that
we might improve our trading efficiency, discover tendencies about ourselves
that may or may not be conducive to our style of trading, as well as analyze
certain chart patterns across a range of trades that we are making that may be
cause for us to modify or change to a certain extent one of our trading rules or

The Strategies We Lean On In Various Types of Markets

By now, you understand that there are two major strategies by which we will
trade: Day-Trading and Swing-Trading.

Each type of strategy has certain types of markets in which it operates the best
in. For swing-trading, the primary market types are trending bull or bear markets.
Markets that are trading sideways can make for a very difficult time in producing
consistent profits (though not impossible). Therefore, when markets enter into
periods of consolidation or sideways trading, we will shy away from taking any
major positions that utilize our swing-trading strategy, but when markets begin
trending up or down, is when we will look to begin establishing long and short
positions respectively.

For day-trading, the ideal market is determined during the individual trading
session. Day-trading provides a great supplement to our swing-trading practices
in that when the markets are trading sideways, and there are not many swing-
trade setups, or simply the market’s behavior is too erratic to get a good
understanding of general market direction, then we will rely more heavily on our

On an intraday basis, the markets that are generally difficult to trade in are those
where the market trades sideways, with a number of intraday reversals. This can
lead to overtrading and getting stopped out of positions. However, this can be
avoided by monitoring the news driving the market in either direction. If pre-
market volume is low, and after 30 minutes to an hour of trading, the market is
still showing signs of uncertainty, then this is when we want to pull our orders for
any trades that we might have. However, if there is a major or unexpected news
driver that comes out before the bell, a company beats earnings, or an economic
report that beats or falls short of expectations, then we can expect the volume to
be strong and the direction of the markets to be clear. This is the best time to
employ our day-trading strategies.

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Understanding the markets, and becoming familiar with the day-to-day
machinations of the S&P, NASDAQ, Dow Jones Industrial, and Russell is key to
deploying the correct trading strategy and to managing the trades appropriately.

Don’t Trade Blindly

Here’s where most hedge fund managers and individuals run into problems and
that is in managing the positions they have on the table. This is also where
psychological rational runs amuck. It’s why it is so important to have a plan going
into the trade so that when conditions start spiraling out of control or out of your
favor, you can rationally manage the position as needed. You may or may not of
heard of the saying, “Plan your work and work your plan”, well in the stock
market, you have to “Plan your trade and trade your plan”. Going into a trade
without a plan is like trying to cook a five course meal blind-folded. It will rarely, if
ever, turnout favorably.

So what goes into managing your plan? For one, it includes much of what we
have already discussed, such as knowing ahead of time what your stop-loss is,
your target price, how you plan on building your position, and knowing
specifically why you are trading in that particular stock. Most people never
consider these things, instead, they hear someone at a cocktail party bragging
how they bought into a “can’t miss” stock and how it’s the “once-in-a-lifetime”
opportunity. As a result that person runs home, calls his broker first thing in the
morning and tells him to buy 1000 shares of a stock they know absolutely nothing
about and then they are surprised and upset when the company goes bankrupt
or is found cooking the books. Even acting irrational by buying another person’s
stock recommendation that they know nothing about, they could at least saved
themselves a lot of heartache simply by having a plan on how they would
managed the position and then sticking to it.

For every stock that we go long or short in, we determine our entry price (usually
done using limit orders), our stop-loss, and our target price, at a bear minimum.
Then we determine how we plan to build our position as mentioned in pervious
sections, and understand exactly what our thesis is for building a position in a
particular stock. When our thesis runs amuck, then we close the position and
move on.

Be Careful of Self-Destruction

The use of margin is a very important tool at the disposal of the trader, but it is
one that must be used carefully (and we mean extremely careful). We have seen
in the past where hedge funds can become overly bearish or bullish on a
particular industry and do what a novice in a hand of poker would do, and go “all-
in”, and like the novice poker player, even ask for a loan from his buddies so that

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he can really capitalize on this “golden-hand” that he has in his possession. That
person may have a high-straight, but what he didn’t know is that the person
sitting across the table is holding a royal-flush. As good of a hand that the novice
or whatever type of “hot-streak” that he has been on, he’s going to lose
everything he has and then some, and then be humiliated in front of all his
friends as he loses all of their money too.

As idiotic as that sounds, this commonly happens in the world of hedge funds.
While we use margin at times, we use it sparingly and do so while we are sitting
on a large portion of profits already, that protects the principle represented in the
portfolio. We also use diversification to spread the risk out among various
securities. But rest assure, that when we are using margin on our trades, we will
always balance the use of margin by establishing positions opposite to the
general portfolio balance (not to mention adhering to our stop-losses).

Therefore, if we are vested 100% to the long side (which rarely happens), and we
are very bullish on the market, so we use margin to increase our exposure to the
long side we will also at the same time buy put options (options that can be
exercised if a particular security decreases enough in value) or we will simply
short a number of stocks in order that our net exposure does not increase
beyond 100%. So in all, our portfolio may be set up to where we are 120% long
and 20% short, which gives us a net exposure of 100% Long (120% Long – 20%
Short =100%) or you may be long 130% but short 30% giving us a net exposure
of 100% (130% Long – 30% Short =100%).

Because of our tendency to mitigate risk we will gradually increase our long or
short exposure over time and never all at once. So if you were evaluating the
portfolio one night, and we were 100% cash, it is extremely improbable that the
next evening we would be 100% vested (i.e. 0% cash waiting to be applied to a
position). Instead we trade in time frames, as the trend strengthens we will add
more to our initial positions and add more positions in general. So that once we
are 100% long, we are already sitting on a hefty amount of profits in the portfolio,
and therefore by dipping into margin at that point, we will have done so with the
market already having moved substantially in our favor.

Trading is a Life-Long Journey

This guide won’t instantly make you more money in the stock market, but it
should provide some fundamental essentials to your trading strategy, that in the
long run will allow for you to maximize your profits while minimizing your losses –
the latter which is far more important. And believe it when we say it, there will be
times where the market becomes unbearable and makes absolutely no sense.

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A. Japanese Candlesticks

B. Understanding Short-Selling

One of the best ways to make a profit in a down market is to short a stock. This is
what is considered the exact opposite of “going long”. This is a means by which
the investor/trader makes money off of the stock decreasing in value.

When executing a short sale, you are selling a stock that you don’t own by
borrowing it from your broker and selling it on the open market. Regardless of
whether the stock goes up or down in price thereafter, you have to eventually buy
back the same amount of shares, of the same stock you sold, on the open
market, in order to settle the debt between you and your broker. Ideally, you want
to buy the shares back for less than what you sold them for, so that you earn a
profit with the difference between the two transactions. Selling stocks short often
carries a higher amount of risk since your exposure is considered “infinite” to the
upside. But keep in mind that there has never been a stock that went to infinity,
nor is it likely that your broker will risk not getting their shares back by letting a
multi-day rally go against a position without issuing a margin call (if it’s

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necessary). But with that said, it doesn’t mean that there isn’t a lot of risk that
goes along with shorting a shock.

The best example of explaining short-selling is by giving an illustration: Let’s say
that you borrow your friend’s iPod, with his permission of course, and while the
iPod is in your possession, a random person on the street comes up to you and
offers to buy it from you for the current price of $300. Knowing the iPod is an
older model, and that it is likely to become obsolete in the next few months, you
gladly sell him the iPod. However, while you made a cool $300 by selling him
something you didn’t own, you still have to return an iPod sometime in the near
future back to your friend. So you go on eBay and find the exact model for $240.
You buy that iPod and you give it back to your friend. In the process you
pocketed $60 even though you never owned anything at anytime (but you did
carry a debt) and everyone goes home happy.

We will short stocks that we believe to be overvalued, or that a catalyst in the
near future will drive the stock lower than its current levels, particularly at the
start or during a bear market. However when shorting, we are not as eager to let
our profits run as we would to the long side. That doesn’t mean that we won’t, it
is just that we take the upside risk very serious as the stock becomes more and
more devalued. This is because the stock market has never remained down, but
instead it has always turned around with strong rallies to the upside both in the
short-term and long-term. As a result, when the market and thereby stocks in
general begin dropping in value, we short with the expectation that the particular
stock we are shorting will not always remain weak at its current levels for the
long-term. That is why we will happily take gains in a short position of 10%, 15%,
and 20% without hesitation.

C. Better Understanding Rational Analysis with Swing-Trading

Market Analysis: Trading with the Broader Market in Mind

General Market direction is extremely important in determining whether we
choose to buy or sell a stock. In particular, if the market is under selling
pressures we will trade “net-short” on the market, and if the market is rallying or
the demand outpaces the supply of stocks, then we will generally be “net-long”.
There are two main indices that we track in making our decisions: The Standard
& Poor and the NASDAQ. While many will wonder why we don’t give much
consideration to the Dow Jones Industrial Average, it is because of the DJIA is
price-weighted instead of being weighted according to the market cap of each
individual stock. This creates a bias towards higher priced stocks, not necessarily
larger companies.

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Another Index that we pay attention to is the Russell 1000, which is comprised of
companies with very small market caps. This index tends to be much more
volatile in nature, and while it is not one of the two primary indices that we follow,
we do monitor it regularly for any leading divergences that may be occurring in
the general markets.

While general market direction has the heaviest weightings (swing-trading), when
we consider whether to go long or to sell-short a stock, we will not always trade
100% long or 100% short depending on the direction of the markets. In fact we
will often times trade contrary to general market direction if the markets become
overheated in one direction or another (best described as over-sold or over-
bought). When we get these types of readings on a technical basis, they can
often lead to very lucrative returns. But in essence, the balance of our portfolio
will skew in favor of the market’s general direction, while tailoring our positions,
as market dynamics change.

Technical Analysis: Reading the Charts

We are technical traders by nature and at, the balance
between fundamental analysis and technical analysis will skew to the latter as
opposed to the former.

Studies of technical analysis come in many packages – both subjective and
objective. Because we are heavily dependent on technical analysis (i.e. reading
the charts), it is important to understand exactly how we conduct our analysis.

Our approach to reading the charts does not entail selecting 25 different
leading/lagging indicators and oscillators to plug into our charts and hope to get
some kind of special message that tells us it is now the perfect time to buy or sell
a particular stock. Technical analysis is not ‘voo-doo’. We believe in keeping our
chart work clean and simple. Our primary read is price and volume. Much of what
we will learn and know about a stock comes from these two components.

We use Japanese candlesticks to read the price action, which show over a
specific time period, it’s high, low, open, and closing prices (Appendix A). The
time-frames in which we will conduct our analysis is in daily and weekly charts
primarily, followed by intraday and monthly charts secondarily (for day trades it is
solely intra-day charts). That means that each candlestick will hold the day’s
high, low, open and close if we are looking at the daily charts. If we are using
weekly charts, the candlestick will encompass the week’s high, low, open and
closing prices, and so on.

Our most used chart is the daily chart. This provides us with each day’s price
action over the course of a period of time (we typically track one-year of stock
prices on the daily chart). The weekly charts provide us with a greater picture of
the current trend in the stock, and a better feel for its overall direction. We will

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also use the weekly chart, to eliminate certain stocks that give mixed signals
between the daily and weekly charts.

When using the intra-day charts we will use it to further evaluate entry and exit
prices, while monthly charts will be used to evaluate long-term trends and long
term support and resistance levels not typically seen on weekly and daily charts.

In regards to what indicators we use, we must first say that there is no one
indicator or group of indicators that can be used solely on their own as a fail-safe
mechanism for reaping huge profits in the markets. Indicators while useful are
often relied on by amateur investors in isolation for buying and selling stocks
which will eventually lead to overtrading.

In essence many traders will spend much of their career and their capital in
pursuit of the “Holy-Grail” indicator. That is why there are so many traders out
there who spend countless thousands of dollars on programs offered on the
internet and television claiming to tell you how you can be financially independent
in days, weeks or months. It is in and of itself a scam that the SEC is unwilling to
fight head-on.

Our indicators are not like those described in the previous paragraph. Instead we
use simple and readily available indicators that are offered with most financial
software packages. We don’t use indicators solely in our decision-making, rather
we use them as a confirmation tool for what pricing and volume is already tells
us, along with the other factors that go into making a “buy” or “sell” decision (i.e.
market direction, fundamental and industry analysis, etc.) Here are a few of the
more important ones that we use.

       Moving Average Convergence Divergence is an indicator that we use that
       takes into account moving averages, specified to our parameters that
       provides us with a trend in a histogram form, allowing for us to better
       analyze each trade and understand the trends prevailing in a single stock
       or index.

       Is an oversold/overbought indicator that can be adjusted for period of
       performance (i.e. 5 day, 10 days, 14 days, etc.). A reading over 80
       signifies that conditions are becoming increasingly overbought, that the
       market’s buying power may be running weak and a pullback may be in
       order. A reading under 20 signifies that conditions are becoming
       increasingly oversold, that market buying power may be running weak and
       that a “market-bounce” may be in order.

These are our two main indicators that are well-known to the public and while we
use others such as “accumulation/distribution” or “relative strength indicators” for

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example, they are used on a case by case basis. Like we said prior, too many
traders rely on indicators to make their decisions solely, when in doing so can
lead to many false signals to buy or sell. As a result it is imperative that when
using indicators, to not inundate the charts with too many of them, and to let
them be used in conjunction with price and volume.

Fundamental Analysis: Stocks with Solid Numbers

While Fundamental Analysis is a criteria that we use for evaluating the stocks in
which we buy and sell in, it is more of a secondary criteria rather than a primary
one. Fundamental Analysis is used heavily in our screening data for finding
stocks that meet certain criteria before evaluating the technical merits of the
stock. But for our style of trading, it’s not wise to buy a stock with a strong
fundamental argument without also having a solid technical approach and vice-
versa with selecting stocks to short, in that we won’t sell a stock with poor
fundamentals without a solid technical setup to the downside. On the other hand
we will short (and selectively at that) if the fundamentals are good and the
technical setup is ideal and vice-versa, we will buy a stock (at times) with bad
fundamentals but with a solid technical setup.

Remember just because a company is performing well operationally, doesn’t
mean that the stock price is going to reciprocate; and just because a company is
poorly managed doesn’t always mean that the company is about to “drop-like-a-
rock”. We have to wait until the technical analysis supports your fundamental
understanding of the company.

At first glance this will cause investors and traders alike to become nervous and
hesitant about this approach, however, our preferred method is to short a stock
with horrible fundamentals and a solid technical setup and go long on stocks with
good fundamentals and a solid technical setup. But nonetheless, there are times
that, when combined with market conditions and other factors, that the
fundamental criteria can be given less weighting for a myriad of reasons; either
the stock has increased/deceased in value to much, in too short of a time frame
or the price action arising out of a stock in combination with volume provides a
solid risk/reward opportunity. In either case, we use these outliers of
opportunities to capitalize on them.

So what are the fundamental factors that we focus on in evaluating a stock?
First, ratios can provide a quick analysis as to how the company is being
managed. But as we have said before, there can often times be a “disconnect”
between how the company is doing operationally, and how its stock price is
performing. A company with incredible growth, rising earnings and margins would
seem like the ideal company to buy, but if expectations are too high, or such
operational performance is already priced into the stock, then there is a good
chance that the stock will trade contrary to the actual company’s performance.
So an old but still effective way for evaluating how a stock will trade relative to its

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company’s operational performance is by evaluating the Price-to-Earnings Ratio
(P/E Ratio), which allows for us to analyze how fast or how slow a company’s
stock price is growing in relationship to its earnings (which is
operational/company growth).

PE Ratios of 40 or 50 in a bear market when the overall market’s PE is only 12 to
15 shows that this company may see a devaluation in its stock price in the near-
term and instead of buying the stock, we may actually short the stock by waiting
for the price and volume along with our selected indicators to confirm on a
technical basis that the company is ready to be sold short. Likewise, the opposite
is true; a company who is beating earnings estimates each quarter and has a PE
of 11 or 12 in a Bull Market, whose P/E is 23 shows that it may only be a matter
of time before Wall Street eventually discovers this opportunity. We will wait for
the price and volume along with our selected indicators to confirm on a technical
basis that the stock is ready to go long in.

Another important indicator is the PEG ratio which is the P/E ratio (as described
above) divided by its growth rate, which provides an extra layer of analysis in
understanding the relationship between the company and its stock’s
performance. If, after running the equation, the PEG ratio is over 1, that means
the stock price is moving faster than its growth rate. This is not all that
uncommon, and not an automatic sell signal. But once you start getting into
ratios of 3 or 4, the stock price is probably running too hard too fast and
tightening the stop-loss may be in order.

Other rations worth mentioning, that we look at is the Book Value per Share,
Cash per Share, Profit Margin, and others. Also worth looking into, is whether the
company is beating earnings expectations or falling short of them, and insider
transactions, which your only focus on this measure is to look at who is buying.
Don’t be alarmed if someone inside the company sells their own stock – they do
it all the time. People’s reason for selling the stock of their own company can be
numerous from diversification, to needing a little extra cash on the side, send a
child off to college, or to buy themselves that dreamed of 70-foot yacht.

Another area, that people get hung up in, is the percentage of shares that are
sold short. Investors can often times get excited about buying a stock long when
they see that the percentage of the outstanding number of shares that are being
shorted is 20%. Knowing that those who are short on a particular stock, have to
eventually buy back that stock, they tend to get very excited about the prospect
of catching those bears in an infamous “Short-Squeeze”.

But it is important to remember that if you are going to play that game, that there
is a large percentage of people (and over 10% of shares being shorted is A
LOT!) betting against the buyers, and it is probably worth knowing something
pretty darn good about the stock before trying to build a position against the

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Don’t Ignore the Competitors or Industry Performance

It’s important to know that you may have a stock that has the perfect setup
technically, and may be strong fundamentally, but may be in a very weak
industry. If that is the case, and you are looking to go long on this particular
stock, then you may not get the return you were originally expecting. While the
aforementioned stock traits are extremely important and even more so than the
industry in which are you trading in, it is still wise to consider the industry in which
a particular stock calls home and how that industry is fairing.

For instance, the housing stocks such as KB Homes, Toll Brothers, and many
others lagged and even declined relative to the performance of the general
market and other industries during 2006–07. Why? Because there was an
industry specific recession taking place in the housing sector that while the
general markets were performing well overall, this industry was being trampled
on by short-sellers. Another perfect example was the financials in 2007 that saw
names such as Bear Stearns (bailed out by JP Morgan), Lehman Brothers
(dropped to $2/share), Freddie Mae and Fannie Mac (Fed Takeover) realize
massive declines due to faulty sub-prime loans that were issued. However the
market overall saw a solid positive return in 2006 and most of 2007.

Even in 2008 we saw for the first half of the year oil skyrocket and as a result
companies specializing in oil exploration and production see their values go
through the roof while all the major indices on average saw declines of up to 50%
or more during that same time period.

The point that is being made is that when trading we don’t look for industries that
are lagging the general markets to the long side or beating the markets on the
short side, so when we trade to the short side we are looking for industries that
are experiencing heavy selling pressure or distribution of the shares of
companies specifically found in those industries. Likewise, when we trade to the
long side, we are looking for companies that are experiencing heavy buying
pressures or accumulation of the shares of companies specifically found in those
industries. Therefore we not only then have a stock that correlates to the general
direction of the markets but meets our fundamental requirements and technical
requirements as well.

Check Our Gut Instincts

One area that some traders and investors will try and avoid is listening to their
so-call “gut-feeling” or that deep inner voice that tends to provide some much
needed advice even though everything else on a potential trade is showing the
exact opposite of what your gut is telling you. Many traders will advocate that
everything in a trading approach should be systematic; that it should avoid
human intuition at all costs and only look for buy/sell signals that are based
purely on objective analysis and not subjective.

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                       The Shareplanner Trading Guide

You will often hear people say that they should sell the stocks that they think is a
buy, and buy the stocks they think they should sell. Why does this phenomenon
occur? Frankly, because most people who participate in the stock market end up
losers (no offense), and only a small percentage can actually match or even beat
the returns of the market on a regular basis.

But no one really does this. Instead the ego would have you believe that you can
outsmart this market on the very foundation that “You’re Smart”. But when this
doesn’t work people look for these computerized ‘buy-sell’ programs that give a
pretty green light to buy a stock and a nasty red light to sell a stock. Thus the
trader believes that by buying this system that he has found the ‘holy-grail’ of
trading. This type of trading behavior is intolerable.

There are others who try to follow the trend by using moving averages and other
fancy indicators – but often times commission and slippage on order fills causes
the trader to lose money in the long-run due to buying and selling too often. This
is not to say that there aren’t legitimate trading systems out there, but those
trading systems take years of development and money and is tightly guarded by
the owners of the system – to keep them from becoming irrelevant.

The point that is being made is that to blindly rely on a trading system can be
foolish even though it may be profitable in the short-term; eventually those
trading systems become obsolete and the trader experiences a horrific
drawdown in the process before realizing that the system no longer is credible.

That is why we believe using intuition and experience is so very important
because you learn so much over time that to ignore those lessons and only “pull-
the-lever” when trading is depriving you of realizing your full trading potential and
frankly it is in most cases, utter foolishness. So we know that even the best of
setups require us to apply our knowledge and understanding to the trade and in
the long term that experience and knowledge can prevent a lot of problems from

Put it All Together and What Do You Got? Rational Analysis

What we have described and written about in the prior sections can all be
accumulated and added up to what we call “Rational Analysis”. We apply a
multitude of factors and elements that we know to affect the general direction of
stocks, and base our analysis on those factors. There is no one single factor that
acts as a trump card on all other parameters, instead everything that we know
and learn about a stock while it is being evaluated for a potential long or short
position, is used prior to us making a final decision. Thus every action that we
take, regardless of whether it is profitable or ultimately a loss was done on a
“rational” basis.

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Description: SharePlanner Trading Guide offers swing trading, day trading and options trading income strategies for investors. Included in its offering is stock screens, technical setups, investment ideas, trader psychology and much more.