Pullback Day Trading

Pullback Day Trading


A stock you follow takes off and trends sharply. But you miss your entry and watch in frustration as it clears one hurdle after another. Finally it stops and reverses. As it pulls back on your 5-min chart and Level II screen, you have to decide whether or not to join the action. Predicting price movement when an intraday trend pulls back requires both skill and patience. Some corrections persist or roll over into ranges that empty trading accounts. But others quickly bounce and take off to new highs. How can you tell which outcome is more likely?
The first pullback from a breakout has high odds of rapidly ejecting in the direction of the new trend. But watch the depth of the correction. If it breaks through several minor support levels before reversing, sellers will likely emerge when price tests the short term high. This common scenario will still produce good trades. With enough reward between your entry and the short-term high, you can place a sell order 1/16th or 1/8th below the top and ride the bounce into a quick fill. Use a 6-Out rule to measure trend pullbacks. Start your count with the first bar lower than the parabolic extension of the trend. Watch for a pullback at the same angle as the trend itself or in a tight sideways pattern. The next trend leg should begin no later than the 6th congestion bar.
Why does this work? Many day traders set their short-term chart indicators to periods that measure 5 to 8 price bars. 6 bar corrections will often reflect short-term support at these common settings. If price does not eject, the next bar can signal a trend change and trigger waves of reflex selling by this fast-finger crowd.

Keep in mind that markets often move in 1-2-3 patterns. Countertrends follow a natural tendency to pullback, bounce and then pullback again before finding support. Traders often fool themselves by jumping on the first bounce rather than waiting for the corrective move to unwind. The deeper a stock corrects, the less likely it will take out the old trend high and break into another wave. For this reason, only tight and small 1-2-3 patterns signal new trend movement.

Use a short-term oscillator, such as Stochastics, to measure an intraday rally's duration. After each price thrust, odds decrease that the trend will continue. Oscillators measure the depth of this overbought condition and provide early warning when a pullback lasts too long. Set these indicators to watch the same signals that other traders use to make their decisions. Then plan your trades to step in front of their reactions.

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10 Common Pitfalls Of Selling Short

10 Common Pitfalls Of Selling Short


A pro recently joked the bear market will end when Joe Sixpack quits his job so he can sell short for a living. Of course, it was Joe who led the charge in the bull's final days, and got his head handed to him for the effort. In other words, it will be time to go long in a big way when the public finally gets around to selling short.
Short selling is the hottest game in town these days, for obvious reasons. But it's still not easy to make money selling first, and buying later. In fact, most of us can look at plummeting charts for hours, and still jump in at exactly the wrong time. This is one of the great truths of short selling.

Let's examine 10 common pitfalls of this classic trading strategy. After you review this list, you'll understand why the practice can cause so much pain. Keep in mind the bear environment actually makes short selling more difficult at times, because the market loves to punish the majority.


1. Choppy Sloppy -- This bear market shows tremendous overlap in daily price range for equities and indices. In other words, pick out today's high and low for a particular instrument, and tomorrow's market will probably trade through a portion of that range. Why is this a problem for short sellers? It undermines logical stop placement, and makes good entry prices harder to find.

2. Duck, Duck, Duck, Goose -- Price doesn't go anywhere most of the time, even in a bear market. The real declines tend to occur quickly, and in sudden bursts. This means you need to wait around for a seller's market to tap you on the shoulder, and/or get burned because your timing isn't perfect.

3. Too Many Bozos on This Bus -- Short selling makes a terrible group sport. Many stocks carry high short interest and attract frequent squeezes, regardless of how rotten the chart looks. And you're the most exposed playing the same tech stocks as everyone else.

4. Misguided Missiles -- So you think you're a wizard when it comes to resistance levels? Well, think again, Merlin. Support-resistance is three-dimensional, and price often goes further than you expect, up and down. This means you'll find yourself shorting into bear rallies that keep on going up, and up, and up. Until you give up and cover.

5. Tummy Bumpers -- Short sellers are their own worst enemies, and your stomach is the culprit. It twists and turns when it sees your short-sale tick up, one penny at a time. This particular agony is not the same as watching an investment take a dive. Our sense of gravity helps us rationalize those events a whole lot better.

6. Monkey See, Monkey Die -- It's often too late to sell short by the time you see a selloff gather steam. Those shorting from higher levels are already looking to cover by the time you think it's safe to sell short. They add buying power to the market when they close their positions. That's why you'll sell the bottom, and get crushed on a short squeeze.

7. Fear of Fleckenstein -- Sure it's the end of the world, but how does the chart look? You may hate a company and think it's going to hell, but you're going to lose money if the chart doesn't agree with you. You can't turn a profit by selling stories short. You need a stock to do that.

8. Tom and Jerry -- That cheese sure looks appetizing, but did you notice the spring-loaded mousetrap? The most obvious selling spots routinely trigger the most violent squeezes. This forces us to find the less-traveled path if we're serious about selling the market.

9. The Unbear Market -- This is a bear market, right? You may not be so sure if you look at the weekly charts. Many stocks and futures have gone sideways for the last 9 months, not straight down. This indicates a balance of buying and selling power, rather than a one-sided rout.

10. Calendar Cramps -- Short sale profits depend on the time of the month. Positions entered around option expiration get burned because of all the put/call unwinding. And buying power can surge near month's end, especially during window-dressing season. This can make a falling market float like a butterfly for a week or two.

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Pattern Failure

Pattern Failure


Patterns appear at the end of thrusting price movements. They are characterized by constricted swings between key support and resistance levels. Pattern development completes when a new trend leg breaks through this wall into directional price change. This new thrust may be in the same or opposite direction as the previous one. A pattern between adjacent price moves in a single direction continues that trend. Alternatively, when a breakout turns and retraces the last trend leg, the intervening pattern reverses the prior move.
You can categorize most patterns by their tendency toward continuation or reversal. This familiar bias underlies the predictive power of these structures. By their repeating nature, a well-marked chart landscape can be drawn to profit from the expected breakout. Use classic observation and well-chosen technical indicators to examine patterns as they develop. Their bullish or bearish nature can often be identified well before completion and exact entry points chosen where new price momentum will likely erupt.
But sometimes patterns won't do what the crowd expects.
One of the most powerful signals in pattern analysis flashes when a setup fails to act according to its tendency. This pattern failure often triggers sharp price movement in the opposite direction from the formation's natural bias. Have a contrarian entry system based on this reversal waiting in your trader's toolbox. But first exercise sound risk management as you recognize this event in progress and wait for ripe opportunity to appear.

Probability underlies all prediction. Through skilled observation or system-driven signals, technicians anticipate future price movement and enter trades they hope will profit from it. But the most common price patterns often fail to act as expected. Look to the edges of these rogue formations to identify trigger points where price signals a break in the low-odds, high-profit direction. One obvious example can be seen in the unexpected Tellabs rally after it drew a recognized reversal formation.

The classic Head and Shoulders reversal has been subject to intensive study over the last century. In fact, one popular investigation discovered this well-known pattern works only 79% of the time. While this figure lies well outside random outcome, it illustrates just how wrong you might be the next time you sell short at the H &S neckline.

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Momentum Cycles

Momentum Cycles


Neophytes quickly fall under the spell of fast moving markets. However, trading momentum is far more difficult than most participants admit. When the emotional crowd ignites sharp price movement, greed clouds risk awareness. The inexperienced trader reacts foolishly and chases positions just behind the big volume, where odds of a reversal quickly increase.
Prices rarely move in a straight line. As shocks destabilize a market, counter force emerges to restrain price back toward its stable state. An inevitable backward reaction follows each forward impulse. Burning the fuel of the crowd's money, markets seek equilibrium before proceeding with the next price thrust. Unskilled traders fail to consider this cycle when entering momentum trades. They blindly execute positions with a common and dangerous strategy: market entries on accelerating thrusts.
Lacking trailing stops and effective risk management, both good and bad positions bleed money as sharp countertrends destroy profits. As these inevitable reactions wind down, losses escalate as blind fear chooses the exact turning point to finally get out.

Consider both action and reaction when developing effective momentum trades. This demands complex planning and detached execution. One successful strategy requires trading opposite to natural bias: entries on counter trend reactions and exits on accelerating thrusts. This aligns positions to the underlying trend but against the current crowd emotion. Entries into accelerating momentum can also work when tight stops are placed and the trader exits into further acceleration. This eliminates risk associated with the inevitable pullback.

Choosing the wrong action-reaction trigger produces frustrating results. Every trader knows the pain of executing a low risk entry, riding a profitable trend, then losing everything on a subsequent reaction. Avoid this experience using clearly defined tactics to minimize emotional momentum trading. Supplement this discipline with multi-trend technical analysis
and cross-verification to identify profitable swing-points and locate natural escape routes.

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Hell's Triangle

Hell's Triangle


The classic Descending Triangle illustrates the painful rollover from bull to bear market better than any other pattern. But why does it work with such deadly accuracy? Most traders don't understand how or why patterns predict outcomes. Some even believe these important tools rely on mysticism or convenient curve fitting. The simple truth is more powerful: congestion patterns in technical analysis reflect the impact of crowd psychology on changes in price and momentum.
Shock and fear quickly follow the first reversal marking a triangle's major top. But many shareholders remain true believers and expect their profits will return when selling dissipates. They continue to hold positions as hope slowly replaces better judgement. The selloff then carries further than anticipated and their discomfort increases. Just as pain begins to escalate, the correction suddenly ends and the stock firmly bounces.
For many longs, this late buying reinforces a dangerous bias that they were right all along. Renewed confidence even prompts some to add to positions. But smarter players have a change of heart and view this new rally as a chance to get out. As they quietly exit, the strong bounce loses momentum and the stock once again turns and fails. Those still riding the issue now watch the low of the first reversal with much apprehension.



The classic Descending Triangle illustrates the painful rollover from bull to bear market better than any other pattern. But why does it work with such deadly accuracy? Most traders don't understand how or why patterns predict outcomes. Some even believe these important tools rely on mysticism or convenient curve fitting. The simple truth is more powerful: congestion patterns in technical analysis reflect the impact of crowd psychology on changes in price and momentum.

Shock and fear quickly follow the first reversal marking a triangle's major top. But many shareholders remain true believers and expect their profits will return when selling dissipates. They continue to hold positions as hope slowly replaces better judgement. The selloff then carries further than anticipated and their discomfort increases. Just as pain begins to escalate, the correction suddenly ends and the stock firmly bounces.

For many longs, this late buying reinforces a dangerous bias that they were right all along. Renewed confidence even prompts some to add to positions. But smarter players have a change of heart and view this new rally as a chance to get out. As they quietly exit, the strong bounce loses momentum and the stock once again turns and fails. Those still riding the issue now watch the low of the first reversal with much apprehension.

Prior countertrend lows present trading opportunities to those familiar with double bottom behavior. As price descends a second time toward the emotional barrier of the last low, short-term traders step in looking for a good DB play. Price again stabilizes near that prior value, encouraging new investors (with very bad timing) to enter final long positions.

By this time, the stock's bullish momentum has slowly drained through the criss-cross price swings. Relative strength indicators now signal sharp negative divergence but price continues to hold up well through this sideways development. Momentum indicators roll over and Bollinger Bands contract as price range narrows.

This double bottom appears to hold as a weak rally draws a third high. But this final bounce fades and traders exit quickly. Shorts now smell blood and enter initial positions. Fear increases and stops build just under the double low shelf. Price returns for one final test as negative sentiment expands sharply. Often, price and volatility then contract right at the break point.

The bulls must hold this line.

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20 Golden Rules for Traders

Want to trade successfully? Just choose the good positions and avoid the bad ones. Poor trade selection takes a heavy toll as it bleeds your confidence and wallet. You face many crossroads during each market day. Without a system of discipline for your decision-making, impulse and emotion will undermine skills as you chase the wrong stocks at the worst times.

Many short-term players view trading as a form of gambling. Without planning or discipline, they throw money at the market. The occasional big score reinforces this easy money attitude but sets them up for ultimate failure. Without defensive rules, insiders easily feed off these losers and send them off to other hobbies.

Technical Analysis teaches traders to execute positions based on numbers, time and volume. This discipline forces traders to distance themselves from reckless gambling behavior. Through detached execution and solid risk management, short-term trading finally "works".

Markets echo similar patterns over and over again. The science of trend allows you to build systematic rules to play these repeating formations and avoid the chase:

1. Forget the news, remember the chart. You're not smart enough to know how news will affect price. The chart already knows the news is coming.

2. Buy the first pullback from a new high. Sell the first pullback from a new low. There's always a crowd that missed the first boat.

3. Buy at support, sell at resistance. Everyone sees the same thing and they're all just waiting to jump in the pool.

4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.

5. Don't buy up into a major moving average or sell down into one. See #3.

6. Don't chase momentum if you can't find the exit. Assume the market will reverse the minute you get in. If it's a long way to the door, you're in big trouble.

7. Exhaustion gaps get filled. Breakaway and continuation gaps don't. The old traders' wisdom is a lie. Trade in the direction of gap support whenever you can.

8. Trends test the point of last support/resistance. Enter here even if it hurts.

9. Trade with the TICK not against it. Don't be a hero. Go with the money flow.

10. If you have to look, it isn't there. Forget your college degree and trust your instincts.

11. Sell the second high, buy the second low. After sharp pullsbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.

12. The trend is your friend in the last hour. As volume cranks up at 3:00pm don't expect anyone to change the channel.

13. Avoid the open. They see YOU coming sucker

14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.

15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.

16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.

17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.

18. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.

19. Bottoms take longer to form than tops. Greed acts more quickly than fear and causes stocks to drop from their own weight.

20. Beat the crowd in and out the door. You have to take their money before they take yours, period.

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What is head and shoulder pattern?

Head and Shoulders


Head and Shoulders patterns resemble the upper part of a person's body, specifically a shoulder on either side of a head. The line connecting the left and right armpit is referred to as the neckline.After a rise in the market, if a formation that looks like a head and shoulders is forming and price breaks through the neckline after completing the right shoulder, this indicates a possibility that a reversal of the price trend may occur.
A head and shoulders pattern can also occur at the market bottom. When it is at a bottom the formation is inverted, like someone upside down.Volume is usually highest during the left shoulder formation. As prices slip back, volume recedes, when a second rally forms, volume is again high, the head of the pattern is formed when surging prices and volumes begin to ease and fall back again. The trough between the head and the right shoulder must be below the peak of the left shoulder for the pattern to be considered a head and shoulder pattern.
The right shoulder is another rally in prices but typically volume is lower than the volume that created the left shoulder and the head. Once the head and shoulders formation is complete, a breakout down through the neckline can be a good indication that the trend of prices will continue in the direction of the breakout.

Price projections are identified by taking the point or percent change (dependent on the price of the security) between the Head and the Neckline. Then, that amount is projecting from the point of penetration of the neckline in the direction of the penetration after formation of the right shoulder. Price projections are only estimates and should accompany other supporting evidence in developing.



Sometimes head and shoulders patterns can be more apparent on indicators than in price action. The pattern is valid when it occurs on an indicator but does not mean a reversal of the price trend will necessarily occur. Momentum indicators like the MACD shown below can diverge from price for some time and so it is strongly recommended to wait for price reversal to occur before making trading decisions.




Source:Some Book

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Today's Tutorial[19-7-08]

How to track a stock??

To track how your stocks are doing, you have to look at stock listings. Stock listings are published in just about every newspaper. The listings look confusing at first, since they look like a mixture of numbers, but can be a very useful tool when tracking your stock's progress. The listings are organized into many columns, including the following information : 52 weeks high and low, company name, symbol, dividend, percent yield, PE ratio, volume, high, low, close and net change.

52 weeks high and low This field is a good indicator about a stocks volatility. Volatility is an indicator of the riskiness and potential for profit that the stock has. The greater the difference between the high and low, the riskier the stock is for loss and gain. If the difference between the high and low is small, then there is little potential for either loss or gain.

Company name - This field is usually abbreviated in the listings, and listed alphabetically.

Symbol - This field is a one to four character symbol used as a sort of nickname for the company.

Dividend - This field is listed in dollar format, and it is the cash amount of money that the company will pay you each year for each stock.

Percent yield - This field is calculated by dividing the dividend by the closing price. It just tells you how much of the price of the stock you will be paid in dividends each year.

PE ratio - The price-earnings ratio calculates the relationship between the price of a company's stock, and the annual earnings of a company. It is calculated by divinding the closing price of the stock by the earnings per share of each stock.

Volume - The volume is the amount of stocks that were traded the day before. This number is given in hundreds, so to get the actual number of stocks traded, multiply the number in that field by one hundred. If a small z is before the number, then the volume is not given in hundreds, and is the actual number of stocks traded.

High, low and close - These are the highest and lowest prices of the stock the day before, and the closing price for the day before. This is an indicator of how much the price of the stock fluctuated throughout the previous day.

Net change - This is the change of the price of the stock from the previous day. This gives you an idea whether the price is dropping or rising.

In addition to the stock listings, stock price charts can sometimes offer a better view of how the stock is doing. The price charts graphically organize the value of the stock over time. The charts can give you information on the company's historical performance, the stock's stability or volatility, the stock's current price relative to the past, and the stock's growth rate.

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Today's Tutorial[28-6-08]

DONT LET UR PROFITS TURN INTO LOSSES.

LEARN TO TIME THE MARKET WELL.

WAIT FOR THE RIGHT TIME TO ENTER THE MARKETS.

KEEP SOME CASH ON SIDELINE SO AS TO ENTER WHEN THERE IS A FALL IN THE MARKET.

DONT LET GREED RUIN UR PROSPECTS.

WHENEVER U BUY ANY STOCK HV A VERY CLEAR IDEA AS TO WHAT TARGET PRICE U R LOOKING FOR(% RETURNS) AND AS SOON AS THE STOCK PRICE REACHES THAT POINT IMMEDIATELY SELL IT.AND LET THE TARGET BE REALISTIC.

IF U KEEP ON WAITING FOR THE STOCK TO MOVE UP FURTHER;IT MAY SO HAPPEN THAT IT MAY FALL BY A HUGE MARGIN AND U WONT GET ANY TIME TO EXIT.

DONT LET ANYONE'S OPINION INFLUENCE UR IDEAS UNLESS U R VERY SURE THAT IT MAY BENEFIT U(I M NO EXCEPTION)

DONT BELIEVE ON THE RUMORS IN THE MARKET.HAVE TRUSTWORTHY SOURCES.

IF U HV LOW RISK APPETITE BE AWAY FROM THE MOMEMTUM STOCKS,THEY SEEM TO BE VERY TEMPTING,MAY EARN UR THOUSANDS BUT ROB U OF LAKHS.

IF U WANT AN ASSURED RETURN THEN MAKE SURE U R INVESTING ATLEAST FOR A SPAN OF 9-12MONTHS.BETTER U INVEST IN A LARGE CAP STOCK.

THATS ALL FOR THIS WEEK FOLKS!!!

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Tutorial 1

As a part of my initiative to educate the newbies and warn the rest abt the realities of Stock Market,i m starting with a new series TUTORIAL.In this i ll be highlighting the basics that hv to be borne into mind while investing.I ll be posting every saturday a new topic with regards to this Tutorial.With out wasting much of time,let me start with the topic for this Saturday.

What is a trading system?
A trading system is a collection of rules that define everything you may do before,and more imp,aft you buy any stock or investment.It is a planned approach that provides structure to your investment activity in the market.

The trading system is basically a plan that not only says how you are goin to trade successfully but what you are goin to do if things go wrong.

Building wealth is just like building a house.You wouldnt build a house without a plan and neither should you attempt to build wealth through trading without a solid trading system.

NEVER PUT ALL OF YOUR EGGS IN ONE BASKET


The most imp rule of investing properly in not to lose the money that you hv started wid,This might seem obvious , but it is amazing how many ppl's trading strategies dont look at ways of managing risks.

There is some form of risk involved in every kind of investment.Risk management means taking action that will significantly reduce the likelihood that you could lose the money u hv invested.

One of the 1st things that u can do to reduce the risk is diversify.You may b familiar wih the term "diversification".When talking abt investment this really means spreading the risk.

If u hv all of ur money in 1 stock u hv more possibility of losing it all.Imagine if that stock unexpectedly goes down.Even bfore u could sell the stocks u own,u may hv lost a major portion of ur investment.

On the other hand if u hd taken the same amount of money and spread it over four diff stocks it is unlikely that all of the 4 stocks will fall dramatically at the same time.This is esp true if you make sure that the stocks are in diff industries.

So how can u put this idea into practise?By creating a simple first rule in your trading plant that limits the amt of investment capital that you will risk in any one investment.

For example,if u hv Rs.10,000 to invest then u may wish to create a rule whereby u nvr put more than 10% into any one share.This means that u wud not invest more than Rs.1,000.That way if a particular stock goes bad,the most u can lose is Rs.1,000.

Whether u know it or not,u hv just introduced the concept of money management into ur trading plan.Money management means using rules to protect ur money regardless of whether the stock market goes up or down.We'll learn more abt money management in the next few tutorials.

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