The Office Day Trading Manual

Jay DeVincentis

How to make profitable day trades in as little as 1 hour a day.

The Office Day Trading Manual

Day trading is not rocket science. Day trading is about understanding the process, your limitations and your goals. You need to know what to look for. For the average person with a day job who sits at a desk, day trading can be done, with a minimal amount of effort. Really. This manual will show you one way how. This is not a professional day trading manual. It is geared towards the intermediate trader or investor who is considering day trading during the morning only, which makes it perfect for someone with a day job with time to watch the market in the morning. Or maybe you have a day off from your job and want to make a day trade. Or you are retired (or in this economy, laid off) and have sufficient capital and want to make some money day trading in the morning, leaving your afternoons for golf, the gym or whatever activity you prefer. Law of Diminishing Returns There is a law of diminishing returns in day trading. The longer you sit at the computer screen, the less likely a trade is to develop and worse, the more likely you are going to try and force a trade onto the market. Day Trading can be most profitable in the morning. The markets open at 9:30 am and you can be done by 10 to 10:30 am. I like to think of it as the 80/20 rule, where 80% of your gains will be made in 20% of the time. And that time is the morning. We will show you how to take advantage of these morning moves no matter your situation. Is Day Trading for you? I will bet you have heard this before, that day trading is not for everyone. Well, the trading itself may not be, but the knowledge of day trading is essential for every trader and even investors. If merely for the improvement of your entry and exit points when getting in and out of trades or investments, over time, this little edge will really pay off. The fact that you are reading this means you are interested in day trading and smart enough to learn before you leap. So yes, day

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trading is for you. The only way to really find out is learn, try and see how you do. You never know, you may have it in you. And if you do, it can really pay off. I suggest setting aside a smaller amount of capital with which to learn. If you lose it, consider it an expensive education and give it up. If after a while, you still have your initial amount, you are learning the most important component retaining your capital. You have got the potential. Lastly, if you have made more money than you could have by simply investing, then you have got what it takes and it is time to step up. How much capital do I need to start? You need to start out with some money. Can you cut it on below $5,000? Probably not. The transaction fees alone are going to eat up your profits. But if you are just starting out, keep your investment capital at a level that you can afford to lose. How much capital do I need if I find I am good at day trading? This is a personal decision based on your situation. I know a lot of day traders. Some with limited capital will utilize options to get more leverage. I am not a fan of this due to the inefficiency of getting in and out of options. Other day traders with extremely large amounts of capital will basically scalp trade, where you look for pennies in profits per trade. This is not for the average person. What I do recommend is stepping up your trading capital over time. Simply put, if you have $100,000 to trade, do not start out trading all $100,000. Step it up by position until you are comfortable getting in and out. Before we go further, we need to have a little discussion about risk. Understanding Risk Most people think that when they are trading $10,000 that all of that money is at risk. That is not the case. How much of the $10,000 is at risk depends on what you are trading. Exchange Traded Funds (ETF), stocks or options - your amount at risk varies for all three. For the ETF, which I prefer and suggest you utilize as well, the amount at risk is what you can lose in a day. Since you are day trading, you can get out at the end of the day.

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Most ETFs, even the leveraged ones, move at most 5% in the average day. So with a $10,000 trade in an ETF, your amount at risk is actually only 5% of $10,000, or $500. Even if the ETF makes a dramatic move of 10%, which is very rare, that is only $1,000 at risk. For stocks, the amount of risk can jump to and even over 50%. So for a $10,000 stock trade, the amount at risk potentially moves to $5,000. Granted that is a very rare move, but you can have 10 to 20% moves in stocks, so your risk compared to that of ETFs at least doubles to $2,000 at risk. Lastly, there are options. The nice thing about options is that for the same trade ($10,000 in an ETF or a stock) you may only have to put up a few hundred to a thousand dollars. Another nice thing is that your risk is limited to that amount if you buy puts or calls. There are two reasons why I say to avoid options at this point. First is the inefficiency of trading them (lack of volume makes for wide bid and ask spreads, meaning you lose a large percentage in both buying and again when selling). You need to be right in a big way to really profit. The second reason is the complexities of options. There are many things you need to know to evaluate what options to buy and that is on top of your most important ability the ability to read a stock chart. One other component of risk that you have to understand is something that my wife and I discuss periodically. She cannot believe that I can take a $50,000 (or more) position in an ETF for a day trade. What she does not realize is that she is thinking in terms of an investor, not a trader. From the traders perspective, she is taking more risk by holding on to her investments, through thick or thin, good or bad. And the market definitely has had some bad times lately. So what happens when the market goes down 30% like it just did? Well, she is now feeling the risk of the investor. To a day trader, the market is closed a lot longer than it is open. While the market is open, the day trader can control that risk. That is why most day traders who trade with significant amounts of capital close their trades by the end of every day. When the market is closed, so many things can happen against their position. So why hold? It is much easier to sleep at night with positions closed.

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Unfortunately, most people become day traders in new bull markets and cannot separate their investor mind from their day trader mind. So when the market rallies 2% and their day trades do not deliver, they wish that they had remained an investor in the market. Usually by the time they give up day trading and buy several stocks or funds as investments, the market tops. As the market declines, they lose a significant amount of money and they sell everything (usually at the bottom) and take up day trading again. It is a terrible cycle, but one I have seen more often than not. Equipment For this, you are limited to what you have available at work. In fact, most work security systems or firewalls will keep you from being able to utilize most all of the software available for traders. The good news is you do not need expensive software just a program or site that will get you to view charts to which your companys security system or firewall allows access. These programs or sites need to be web based - meaning you should not have to download anything on your work computer (since the security system or firewall would prevent that anyway). For monitors, my personal preference is to have two screens. My reason for this is to work on one (you know, keep doing that day job) and to observe the market on the other. It helps if your job is in the financial industry, then you have more of a reason to be observing the financial markets during the day. You may also set up one screen to be your brokerage screen where you set up your orders and the other your charting site, so you can always maintain a view of the trade in action. Professional day traders will use anywhere from 3 to 6 screens monitoring several time frames at once as well as technical and other indicators looking for extreme readings in which to take action. If you decide to trade for a living, I would suggest investing in the appropriate tools. Charts I recommend www.stockcharts.com. They have a real-time service with a 15-second auto refresh screen which allows you to put up a 10minute chart and see what you need to see during the day.

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There are many other possibly better services out there, but you have to download software. If you want a downloadable software option, I recommend Qcharts. You will see charts from both Qcharts and Stockcharts in here. Account You will need to be able to access your investment account during the day. This should not be a problem with most online brokers. The broker should have technology that allows you to make advanced orders and trailing stops. I recommend Fidelity. I also have accounts with E*trade. What to trade For day trading you need to trade a vehicle with sufficient volatility and predictability. There are many measures of volatility, I like to look at Average True Range ATR (5) which will tell you the average daily movement of a stock. For Predictability, I suggest staying with a market related ETF. There are many tools to measuring and predicting the market. Predictability becomes more difficult as you move to stocks. Stocks are subject to an extraordinary amount of risk compared to an index that we will discuss later. If you do day trade stocks, make sure your capital is reduced to reflect the increased risk or that your time frame is shortened to reduce your amount of time at risk. For this report, we shall assume you are trading the QLD and the QID. Why these? The QQQQ are a popular trading stock. The QLD and QID are leveraged to 2 times the QQQQ and allow you to trade both directions of the market and remain on the long side. This means you can do it in an IRA or 401(k) and also for the case that if you are in a cash account, there is no need for margin. Margin allows you to trade more than you have in your account. It also allows you to go short, which is basically borrowing money. Brokerages make money lending you more capital to trade. While it can increase your profits to trade with margin, it can also increase your losses. Granted, when you get good, you will be able to take a smaller amount of capital, throw on some margin, and make more

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profit than humanly possible (ok, we will start with more realistic dreams). How much of your trading account capital to allocate to one position? The amount of capital and amount to allocate to a position is a very individual question. You may have $5,000 in your account and want to trade all $5,000. On the other hand, you may have $100,000 in your account and chose only to day trade $5,000. Of course the risk and reward will be different for every single investor. I will say this. I prefer to trade in 1000 to 2000-share lots, keeping my position size below $50,000. This is in an account with $100,000. I have smaller accounts where I put all the capital to work, to make the position size large enough to get enough profits per trade. Can you make it work with as little as $5,000? Certainly. Just be patient and try not to make too much too soon. Get used to capturing frequent profits. It will add up. The Trade To understand the markets you need to understand that the market is really run by a group of traders - large traders who are looking for the same things. You just need to know what they are looking for and join along. There are many variations of what you are about to learn. This is a process based on observations over years of trading. It is reliable, but only to the extent you can be disciplined enough to follow the rules and not become so greedy that you try to make more profit than you should. The day trading day starts from a premise are you bullish or bearish? It is not critical that you are right. In fact, the market will help you in that choice in the beginning of the day if you are not sure. I made a name for myself by issuing a daily timing indicator giving you a resource with which to start your trading day. It is used by both long-term traders and short-term traders to assist them with their bias. I found in trading, that it is good to have a second opinion. On to the trades

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Trade A: The morning pivot 9:50 to 10:10am Eastern Standard Time (EST) If you are a day trader (or want to be one), you have to know the daily pivots. We will base our trade off the morning pivot.

In this chart, we have the market opening up higher in the morning and immediately trading lower into the morning pivot. The formation of a shooting star gives you an early indication of a reversal, but unconfirmed. The next candle rallies off the 34.25 level and the strength comes in the market right after. Not all trades will be this easy.

The market almost always has an initial move into the morning pivot. Why this happens is not important. Maybe it is a bunch of buy or sell market on open orders being executed simultaneously. Maybe it is some market makers trying to drive prices a certain way to move inventory. Do not worry about the why. Simply accept that the market moves this way and learn how to profit from it.

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In this chart, weve arrowed the 10am Pivot for 3 consecutive trading days to show that not all signals will work. The 7/22 rally up into the time frame means you would switch to a long position in QID. The following day shows a pattern break, but the rally up into the 10am pivot means you would have been stopped out. The July 24th date is a textbook version of trade A.

Your goal is to relax during the first 20 minutes of the trading day. Your trade is in the process of setting up. It is a truly simple trade. Do not over analyze it. Here are your instructions. If the market rallies into the morning pivot, then you would look to buy QID between 9:50 and 10:10am EST. Set your stop below the low of the candles formed during this period and no more than 1/3 of the 5-day Average True Range (ATR). The ATR tells you how volatile a stock, ETF or option is and how many points it is likely to move in a day. Look to hold into either the 10:30am EST pivot, or the close, depending on your ability to participate in the market. If the market drops into the morning pivot, then you would look to buy QLD between 9:50 to 10:10am EST. Set your stop below the low of the candles formed during this period and no more than 1/3 of the 5-day ATR. Look to hold into either the 10:30am pivot, or the close, depending on your ability to participate in the market. Do not forget to look for a bullish candle to signal a reversal before getting into either position at the morning pivot.

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The morning gap Markets gap most every morning, depending on what you are trading. This creates a space in a chart where no trading has taken place. These gaps are likely to get filled and or at least get tested. The longer the market goes without filling or testing a gap, the less likely it is to happen.

In this chart, we have a morning gap lower that bounces into the first 10 minutes. The second candle is a shooting star, suggesting prices are coming lower. And they do, settling into the 10am pivot quite nicely, giving you a good place to enter and place your stop. Not all trades will be this easy.

What causes this gap? Two things. First, the market will respond to news overnight and futures are impacted. This creates an imbalance of orders at the open. Second, with the premarket opening at 8am EST and post market trading from 4 to 8pm EST, the market has already reacted to events such as economic news, stock earnings and world events. You are to stay away from day trading during these periods. Volume is too thin, and action is too unpredictable for you to make predictable returns.

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Point is, ignore the morning gap. There are some who like to trade counter to the gap. Leave that to them. Adding Bias to your trading day If the market rallies into the morning pivot, then you would look to buy QID between 9:50 and 10:10am EST. If your premise for the day is bullish, then you would stand aside, because you should wait for Trade B. If the market drops into the morning pivot, then you would look to buy QLD between 9:50 to 10:10am EST. If your premise for the day is bearish, then you would stand aside, because you should wait for Trade B. As always, you should look for a bullish candle to signal a reversal before getting into either position. Stops Here you have a variety of choices thanks to technology. Below are just a few:

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The ideal stop is placed just below the low that is made at the morning pivot. There is a maximum stop that you should use. We will discuss that in the next section. If you are trading a lot of money and would be happy with a few hundred dollars a day, apply a trailing money stop between 0.10 and 0.15. This will get you out very quickly, usually in the next half-hour to hour. It serves the purpose of preserving your capital and any profits you get in the morning. I know the prospect of making only $300 a day does not sound like much, but after the first year, you could pocket an additional $75,000. Even if you are only right half the time, I cannot think of anyone who would turn down an extra $37,500 for a little work every morning. Average True Range ATR (5) Consider the daily and short term ATR when setting your stop. You can set stops that trail price action. If you want to trail the normal daily movement, look at setting your trailing stop at 1 times the ATR you will be glad you did. There will also be times when what you are trading pulls back for the day. You will get stopped out, and you may miss a larger move higher. Never be upset when you take profits and miss a larger move. Never be upset when you get

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stopped out and miss a large move. That negative mental energy will prevent you from being successful. Where do you get the Daily ATR (5)? It is available on most every chart as an option below the chart. You can find these on stockcharts.com. Targets If you know anything about technical analysis, you can spend some time analyzing the potential target by using support, resistance, pattern projection or even Fibonacci. Brokerages allow you to set contingent, multi-contingent and even one-cancels-the-other type orders where you can set both a stop and a target. The first to get executed cancels the other. This takes a little homework. For the purpose of this trade, the ideal target would be to let the market do what it is going to do during the day and get out near the end of the day. If you get the entry right, you will have the potential of a profit around the ATR (5). That would be a home run, as far as day trading goes. If you are in a trending market, most days in your trend will be in your direction. The days that are not, you will get stopped out or exit with little or no profits. Trade B Trade B is to wait for the markets to settle down as they will normally come back and test the morning high or low. This may not give you as good of an entry price, as retests do not always touch the previous lows, but it may keep you out of a bad trade (that would have been stopped out) and also allows you to set your stop closer and preserve more of your capital (when you are inevitably wrong).

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In this chart, the market pulls back into the morning pivot where you consider going long. The market also does a normal retest of the morning pivot. Volume is light and prices rally off this point. The retest gives you another point to enter. Be patient. Set tight stops. Entry around 32.80 and exit around 33.40 would give you $600 on a 1000 share trade in less than 2 hours.

Look for the retest to occur around the 11am EST pivot. You can set your stops and targets as you did with Trade A. Just make sure it does not break the lows on volume on the retest. That could open the flood gates to the downside. Why? There are traders that are going to position for the break out or break down trade. These momentum type traders will jump in when the initial trading range is broken. Your stop order will keep you protected from experiencing too significant of a loss from this exposure. Trade C: Pattern Recognizing Pattern Momentum Breakouts As each day unfolds, you will be looking on your charts at a few days at a time. Over time, patterns can emerge. I have included a pattern appendix at the back of this manual, but again, it is not rocket

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science; it is merely being able to draw a line at previous highs, noticing a pattern of consolidation and playing the break out.

In this chart, the previous trading day has established a pattern of lower highs and lower lows. Your job is to recognize this pattern and enter on a close over the trend line. This trade had up to 2-points in it, or $2,000 on a 1000-share position. Not bad for a days work.

These are momentum trades. The market builds potential energy as the pattern forms a consolidation. There are a significant number of traders watching the same thing you are. When the pattern breaks, they all rush in to buy. Price rises can be dramatic.

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In this chart, we show you that just two days prior to the momentum/pattern break trade above, we have another one. Talk about opportunity! This trade had another point in it, or $1,000 for a 1000-share position. This would have been a profitable week.

The first hour trade What you need to understand here is that there are traders big time traders that do not touch the market in the first hour. They let the market set this range. Then the big-time traders wait for the market to either break the highs or the lows because that is when the big moves are made. The big time traders can be very patient with their money because they have oodles of it. When they want to put it to use, they do, in a big way. The 10:20-30 am EST pivot This is where the other end of the range is normally made. If the market traded up into the morning pivot, it should trade down into the 10:20-30am EST pivot. This pivot is the ideal place to take profits especially for the office day trader - because trading does take mental energy away from your job. There are no ifs, ands or buts about it. If you need justify taking

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this time to trade and analyze the markets to yourself, just think of your trading time as the time a smoker takes away from their desk to get their nicotine fix. While the smoker is away possibly causing cancer to themselves, you are potentially earning profits. The best part is, a rich employee is a happy employee. There is nothing like the feeling that you do not have to work anymore. That really gives you the freedom to act however you want. Lunch and the 11:50am EST pivot There is not one day trader I know that likes to trade through lunch. Day traders typically take this time as a small daily mental vacation from the markets. Time to eat, walk, maybe even get outside. As the office day trader, you too have to eat, move around or maybe even get outside. Expect the markets to go limp between 12:00 and 1:00pm EST as the pros take some time out. My advice? Take the time out, too. 1:00pm EST back from lunch The market should make another move. It may not be a large move, but it will be a move nonetheless. The afternoon pivots are 1:30, 2:30 and 3:30pm EST. These are less predictable than the morning pivots, just understand that the market will move up and down in little waves. It is not as easy to navigate the afternoon moves other than to look for support and resistance zones, patterns, etc. to establish themselves. Once the support and/or resistance zones and patterns have been established, and you recognize them, you can trade them. Usually volatility and volume will return at one of the afternoon pivots as the trading day comes to a close and large players close their shorts or sell their long positions or begin buying and accumulating. This gives you one last chance for additional profits. As always, I recommend closing your position before the close. You want to get in the practice of day trading and holding overnight is not day trading.

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Beware the fake-out break-out Often prices will try to break out, but are quickly met with a round of selling, dragging prices back down. If what you are trading made a new high, then pulls back, make sure it does not make a new low. If it does, it is more likely broken. If the lows hold and reverse, then you have a green light to try a trade. Losses Knowing that you will sustain losses is important. Losses are as much a part of trading as are gains. Knowing that you will be wrong 50% of the time puts you in the right mindset as to why you need to preserve your capital with protective stops. Trailing stops also serve to preserve your profits for the 50% of the time you are right. Buy Yourself Something The brain needs to be rewarded for all the hard work that goes into trading. So when you have a profitable trade, buy yourself something nice or treat yourself and your family to a nice dinner. Life is short so enjoy it when you can. That is why we trade. Do not trade in a 401k (unless you can withdraw money). I am not a proponent of trading in retirement accounts unless you can take the money out now and use it. Without the brain getting that reward component of trading, it is unlikely going to assist you if you trade in a retirement account because you have no access to the money now to enjoy it. Learn candlesticks! Candlesticks, in my opinion, are the most consistent way to get a read on a stock. The chart will literally tell you when to buy and when to sell. But be patient. You MUST wait for the candle to close before you interpret it this is a very difficult task. A bullish engulfing can become a bearish candle in a heartbeat. If you are looking at 10minute chart, make your decisions every 10 minutes. I will give you my five-minute lesson on candlesticks. At the end of this we have two appendices with almost every pattern you can

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imagine. Learn the basic candlesticks and reversal patterns first. Learn doji, bullish and bearish engulfings, hammer, hanging man, shooting star, inverted hammer, piercing patterns and dark cloud cover. It is not important that you know every single variation. Here is how a candle is drawn and 3 examples of doji candles:

The strongest reversal pattern is the engulfing pattern:

Note in these charts, the thin lines merely represent the trend. A candles name can change depending on the preceding trend. For

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example, a hammer is formed in a downtrend. However, that same hammer in an uptrend is called a hanging man. Note the connotation with the names. If they sound bad, it is probably bearish.

The thin lines at the top and bottom of candles are called shadows. They are indicative of selling and bearish if they are on the top and indicative of buying and bullish if on the bottom.

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The shooting star is warning of a pending change in trend. I can tell you from experience that these candles like to get tested. So be patient you may be able to get entry nearer to the top (if you are going short).

Small real bodies are indicative of a lack of direction or a trend getting ready to pause. You will likely see these in a consolidation and during slow periods during the day.

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How to stay in touch with the market? Remember - you are in an office where you are probably unable to watch television. Maybe you can stream audio and www.Bloomberg.com is your best bet to get streaming live market audio (and some video). Trading Capital Finding your limit You can physically tell when you are trading too much money in one position. Your body will tell you. The funny thing is, you may have $100,000 diversified in 20 stocks or ETFs, and sleep well at night, even though those assets may be correlated and can be subject to volatile movement. Buy too much of one ETF and your body will react a negatively (even though you may be as diversified by the ETF). Nailing it! There is no better feeling than grabbing a stock almost precisely at the morning pivot. The following bounce can make you feel very smug. You may not be out of the woods yet. Most highs and lows tend to get tested during the day. There will be scary moments as your position gets going. It is the markets job to test your resolve. I always talk about courage, confidence and conviction. That is all easier said than done. 10-minute chart versus a 15 minute chart Before I answer this, let me talk about what a fact is. You should be a fact based trader. If you are trading a 10 minute chart, a fact is born every 10 minutes. You should base your trading off of facts, nothing else. Keep in mind that a fact may also include breaking a previous high or a previous low.

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This is what the 10 minute chart looks like. Contrast that to the 15 minute chart below. Fewer bars mean you will be making a decision every 15 minutes, versus 10.

Also note that facts are different to someone trading a 5 minute chart, a 10 minute chart, and so on. Their previous highs and lows will be different. Their facts will look different and they will take different actions from you. You need not worry about anything but your facts. The final fact is volume. When highs and lows are broken, they may or may not be done so on increased volume. This is an important concept to understand. If the market is going down on increased Page 23 of 66

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volume, it should continue going down (even after a bounce). If the market is going down on lighter volume, it will likely reverse. Volume will not tell you when it will reverse, that is left to the 10 minute candle i.e. a hammer candle with a confirmation. I cannot stress this point enough - you need to learn Candle Trading. Yes, there are a lot of candles. I suggest you primarily focus on the reversal patterns and not the continuation patterns. The reversal patterns are signals to get in and out. Other time frames? The majority of day traders trade a very short time frame. Usually shorter than 10-minutes. My recommendation is the office day trader should utilize a 10 minute chart. I have seen some manuals that instruct using 15-minute charts. Whatever you use, understand the implications first and then spend a lot of time looking at charts, since the more you observe, the more you will learn. Keep Records Keep a record of every single trade. This task is not hard and the data is very useful, especially if you show it to another trader or a trading coach. Look at the average profit and average loss to determine your profit to loss ratio. 2:1 or ideally 3:1, but this is more difficult in day trading. If your ratio is 1:1, then the only one making money is your broker. At that rate, you will eventually run out of capital. When I was a trading coach, I could review a trading record and easily identify what the problem was. Whether it was trading too small a position size (some think they can make money trading $500 at a time) or it was a poor profit-to-loss ratio (letting losses run and taking profits to early). There is usually an identifiable problem when you keep records, which is why I recommend and highly suggest it. Trading Manuals There is not one manual that can give you every single set up. Who knows, you may develop your own. Every single trader is different like a finger print. You need to find what works for you and what does not and develop what works into a profitable strategy.

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The strategies you find here are easily modifiable into other strategies. Just make sure to keep clear records and develop plans for every single trade. The trading plan consists of 3 components: when and where to get in to a position; when and where to get out not only if you make a profit; and even more importantly when and where to get out if you are wrong.

If you do not have a plan going into a trade, you will enter a position and then constantly fight with yourself over what to do. That is called flying by the seat of your pants and it is not trading. There is one truth in trading and that is that you will be wrong. And more often wrong than right? The best traders are ones who focus on defense first. Benefits to Day Trading There are numerous benefits to day trading, but one that is overlooked is the practice of getting in and out of the market. The more you do this, the better feel you will get on when and how to place your orders and during what times. This will lead to confidence and confidence is what leads to success. Other benefits include: o o o o o o o o o o o o o Work when and where you want to Structure your day as you choose Work from an office or your home Low initial investment computer, modem and software Live anywhere you want Go flat at any time Sleep well no holding positions overnight Answer to yourself Wear what you want Develop your own style Take days off whenever you want More family time Shop when you want

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Mental Issues You Will Need To Overcome There are a lot of mental issues that you will need to overcome to be a successful day trader. One has to do with being out of the market when it makes a large move. It is admittedly tough to be in cash when the market makes a large several percent move higher. Or even worse is to get stopped out of your positions when everyone else is making money. You need to avoid these emotions as they will cause you to act outside of your plan. This money is earmarked to day trade and that is all you will use it for. Leave investment money for investments. The nice thing is that investments will periodically go through a poor period and during this period you will feel very smart for being a day trader. Another mental issue is isolation. Trading is not a job if you like to hang by the water cooler and chat with coworkers. You sit in front of computer screens, keyboards and televisions for hours on end. At best, you can expect to live in a few chat rooms during the day, conversing only with ID names that you will never truly get to know as people. There are periods of drawdown. For the new trader, drawdown is defined as the period when a good trading system will deliver losses. Often measured in peak to trough performance, i.e. a 20% drawdown means that your $10,000 has now become $8,000. The real issue with a drawdown is that you may not have a good system and the drawdown just may continue all the way to 100%. It is prudent to draw a clearer line in the sand and when your capital drops to 50%. I would suggest moving on. Lesson learned. Do Not Make It Too Complicated The last concept I will leave you with is just to say, keep it simple. There are many complex strategies that you can read about and try to get into and for the most part, they will be a waste of time. The market goes up, the market goes down, if you make money, take it, if you lose money, get out. There are many indicators that you can use, that look like they work perfect, but this is only in hindsight. If you try to trade with these hindsight indicators, you will lose. Learn how to read a basic chart

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and learn how to set up the basic trade. Learn to walk before you can run. You can do this, but it does take time. Your goal as a beginner is to retain enough capital so that by the time you figure it all out, you will have enough money to trade profitably. Run out of money, then you lose the ability to keep learning. Trading is a life long learning process. Enjoy!

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The Office Day Trading Manual Basic Concepts

Previous highs and previous lows When these terms are referenced in this ebook, they are referring to the previous 10 minute candle. One characteristic of trends is that they continue to break the previous high. This becomes a fact whenever it occurs. You do not need to wait for the candle to close out. However, you may or may not want to consider waiting for it to close above a previous high. This will give you greater accuracy, but will also cost you some efficiency in the entry price. Overlap Once one candle is made, the body consists of a range between the high and the low and its open and close. If a new white candle is made (up move) then the next candle will likely trade into the range of the white candle. In a 10 minute chart, this may take place 5 minutes into the forming of a new candle. So to the trader, this new candle will look like a bearish engulfing. You are to ignore the signal from this candle. It is not a fact yet. It becomes a fact (along with its volume) after 10 minutes when the candle is made. However, if the new candle breaks the previous low of a white candle, then this adds a fact to your analysis. This could be a signal that the trend is reversing. Trends There are three trends. Most new traders can think of two - up trends and down trends. So what is this third trend? Sideways. Markets, especially quiet markets, can move sideways in a narrow range, neither breaking highs or lows and do this for several candles in a row during a trading day. The key here is to watch for patterns to emerge. Look for consolidations below resistance and potential pattern break outs. Position your trade accordingly with the 4 components (entry, stop, exit if you are right, and exit if you are wrong). You can establish trends on a daily chart and then transition to a 10 minute chart. You may be coming up to a significant trend in another time frame. This confluence, which means the aligning of two Page 28 of 66

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independent variables is something worth noting and could result in your most profitable positions if played correctly. Previous Swing Highs and Lows These are the peaks and valleys created during the trading day as the market swings higher and lower. Daily High and Daily Low Just as it says, these are the high for the day and the low for the day. First Hour High and Low This is the range established by trading in the first hour of the day. Some futures traders only trade break outs beyond this range.

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Abandoned Baby

Like most of the three day star patterns, the scenarios are similar. The primary difference is that the star (second day) can reflect greater deterioration in the prior trend, depending on whether it gaps, is Doji, and so on. Belt Hold

The market is trending when a significant gap in the direction of trend occurs on the open. From that point, the market never looks back: all further price action that day is the opposite of the previous trend. This causes much concern and many positions will be covered or sold, which will help accentuate the reversal. Breakaway

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It is important to realize what is being accomplished here: the trend has accelerated with a big gap and then starts to fizzle, but it still moves in the same direction. The slow deterioration of the trend is quite evident from this pattern. Finally, a burst in the opposite direction completely recovers the previous three days' price action. What causes the reversal implication is that the gap has not been filled. A short-term reversal has taken place. Concealing Baby Swallow

Any time a downtrend can continue with two Black Marubozu days, the bears must be excited. Then on the third day, the open is gapped down, which also adds to the excitement. However, trading during this day goes above the close of the previous day and causes some real concern about the downtrend, even though the day closes at or near its low. The next day opens significantly higher with a gap. After the opening, however, the market sells off and closes at a new low. This last day has given the shorts an excellent opportunity to cover their short positions. Engulfing

A downtrend is in place when a small black body day occurs with not much volume. The next day, prices open at new lows and then climb to a new two day high. The rise is sustained by high volume and finally closes above the open of the previous day. Emotionally, the

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downtrend has been damaged. If the next (third) days prices remain higher, a major reversal of the downtrend has occurred. Hammer

The market has been in a downtrend, so there is an air of bearishness. The market opens and then sells off sharply. However, the sell-off is abated and the market returns to, or near, its high for the day. The failure of the market to continue the selling reduces the bearish sentiment, and most traders will be uneasy with any bearish positions they might have. If the close is above the open, causing a white body, the situation is even better for the bulls. Confirmation would be a higher open with yet a still higher close on the next trading day. Harami

A downtrend has been in place for some time. A long black day with average volume has occurred which helps to perpetuate the bearishness. The next day, prices open higher, which shocks many complacent bears, and many shorts are quickly covered, causing the price to rise further. The price rise is tempered by the usual late comers seeing this as an opportunity to short the trend they missed the first time. Volume on this day has exceeded the previous day, which suggests strong short covering. A confirmation of the reversal

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on the third day would provide the needed proof that the trend has reversed. Harami Cross

The Harami Cross starts out the same as that for the basic Harami pattern. A trend has been in place when, all of a sudden, the market gyrates throughout a day without exceeding the body range of the previous day. What is worse, the market closes at the same price as it opened. Volume of this a Doji day also dries up, reflecting the complete lack of decision of traders. A significant reversal of trend has occurred. High Price Gapping Play

The High Price Gapping Play is the bullish counterpart of the Low Price Gapping Play, and leads a new rally out of a stalled upward trend. This pattern is an upside window from a high-price congestion band. After a sharp advance the market consolidates via a series of real small bodies near the recent highs. If prices gap above this consolidation it is a buy signal.

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Homing Pigeon

The market is in a downtrend, evidenced by a long black day. The next day, prices open higher, trade completely within the prior day's body, and then close slightly lower. Depending upon the severity of the previous trend, this shows a deterioration and offers an opportunity to get out of the market. Inverted Hammer

A downtrend has been in place when the market opens with a down gap. A rally throughout the day fails to hold and the market closes near its low. Similar to the scenario of the Hammer and Hanging Man, the opening of the following day is critical to the success or failure of this pattern to call a reversal of trend. If the next day opens above the Inverted Hammers body, a potential trend reversal will cause shorts to be covered which would also perpetuate the rally. Similarly, an Inverted Hammer could easily become the middle day of a more bullish Morning Star pattern.

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Kicking

The market has been in a trend when prices gap the next day. The prices never enter into the previous day's range and then close with another gap. Long Legged Doji

The Long Legged Doji has long upper and lower shadows with the open and the close very close or the same. This pattern reflects the indecision of buyers and sellers. The open and the close of the day are very close or are the same. The lower and upper shadows are very long. The low of the day is very low and at the bottom of the trend. Mat Hold

The market is continuing its rise, with a long white day confirming the bullish action. The next day prices gap open and trade in a small Page 35 of 66

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range, only to close slightly lower. This lower close (lower than the open) is still a new closing high for the move. The bulls have only rested, even though the price action surely brings out the bears. The next couple of days cause some concern that the upward move may be in jeopardy. These days open about where the market closed on the previous day and then close slightly lower. Even by the third such day, the market is still higher than the open of the first day (a long white day). An attitude that a reversal has failed develops and prices rise again to close at a new closing high. This fully supports the bulls' case that this was just a pause in a strong upward trend. Matching Low

The market has been trading lower, as evidenced by another long black day. The next day, prices open higher, trade still higher, and then close at the same price as before. This is a classic indication of short-term support and will cause much concern from any apathetic bears who ignore it. Apathetic bears are short the market, and quite comfortable with their short position. If they ignore the Matching Low as a possible trend reversal, it will cause them much concern. Meeting Lines

The market has been in a downtrend when a long black day forms, which further perpetuates the trend. The next day opens with a gap down, then rallies throughout the day to close at the same close as

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the previous day. This fact shows how price benchmarks are used by traders: the odds are very good that a reversal has taken place. If the third day opens higher, confirmation has been given. Morning Doji Star

The psychology behind this pattern is similar to that of the Morning star, except that the Doji Star is more of a shock to the previous trend and, therefore, more significant. Morning Star

A downtrend has been in place which is assisted by a long black candlestick. There is little doubt about the downtrend continuing with this type of action. The next day prices gap lower on the open, trade within a small range and close near their open. This small body shows the beginning of indecision. The next day prices gap higher on the open and then close much higher. A significant reversal of trend has occurred.

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Piercing Line

A long black body forms in a downtrend which maintains the bearishness. A gap to the downside on the next days open further perpetuates the bearishness. However, on the day after, the market rallies all day and closes much higher. In fact the close is above the midpoint of the body of the long black day. This action causes concern to the bears and a potential bottom has been made. Candlestick charting shows this action quite well, where standard bar charting would hardly discern it. Rising Three Methods

The Rising Three Methods pattern is considered a rest from trading. The psychology behind a move like this is that some doubt creeps in about the ability of the trend to continue. This doubt increases as the small-range reaction days take place. However, once the bulls see that a new low cannot be made, the bullishness is resumed and new highs are set quickly.

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Separating Lines

While the market is in an uptrend, the forming of a long black body should be cause for concern, as this is unusual for a strong market. However, the next day opens much higher, in fact, it opens at the previous black days opening price. Prices then move higher for the rest of the day and close higher, which suggests that the prior uptrend should now continue. Side by Side White Lines

The market is in an uptrend. A long white candlestick is formed, which further perpetuates the bullishness. The next day, the market gaps up on the open and closes still higher. However, on the third day, the market opens much lower, in fact, as low as the previous day's open. The initial selling that caused the lower open ends quickly and the market climbs to yet another high. This demonstrates the force behind the buyers, and the rally should continue.

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Stick Sandwich

A good downtrend is under way. Prices open higher on the next trading day and then trade higher all day, closing at or near the high. This action suggests that the previous downtrend has probably reversed and that shorts should be protected, if not covered. The next day, prices open even higher, which should cause some covering initially, but then prices drift lower to close at the same price as two days ago. Anyone who does not note support and resistance points in the market is taking exceptional risk. Another day of trading should tell the story. Three Inside Up

This pattern, being a confirmation for the Bullish Harami, can only show the success of the previous forecast. The Bullish Three Inside Up is a confirmation pattern for the Bullish Harami. Its pattern is defined by the first two days of the three day pattern forming a Bullish Harami, and the third day giving support to the suggested reversal of the Harami, by being a white candle closing with a new high for the three days.

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Three Line Strike

The market has continued in its trend, aided by the recent Three White Soldiers pattern. The fourth day opens in the direction of the trend, but profit taking or short covering causes the market to move strongly in the opposite direction. This action causes considerable soul searching, but remember that this move completely eradicated the previous three days. This surely dried up the short-term reversal sentiment and the trend should continue in its previous direction. Three Outside Up

This pattern representing the confirmation of the Bullish Engulfing pattern, can only show the success of the forecast.

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Three Stars in the South

A downtrend has continued when, after a new low has been made, a rally closes well above the low. This will cause some concern among the shorts because it represents buying, something that has not been happening until now. The second day opens higher, which lets some longs get out of their positions. However, that is the high for the day. Trading is lower, but not lower than the previous day, which causes a rally to close above the low. The bears are certainly concerned now because of the higher low. The last day is a day of indecision, with hardly any price movement. Anyone who is still short will not want to see anything more to the up side. Three White Soldiers

The Three White Soldiers pattern occurs in a downtrend and is representative of a strong reversal in the market. Each day opens lower but then closes to a new short term high. This type of price action is very bullish and should never be ignored.

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Tri Star

The market has probably been in a downtrend for a long time. With the trend starting to show weakness, bodies probably are becoming smaller. The first Doji would cause considerable concern. The second Doji would indicate that there was no direction left in the market. Finally, the third Doji would put the last nail in the coffin of the trend. This is essentially because this pattern indicates too much indecision, and everyone with any conviction would be reversing positions Unique Three River Bottom

A falling market produces a long black day. The next day opens higher, but the bearish strength causes a new low to be set. A substantial rally ensues in which the strength of the bears is in question. This indecision and lack of stability is enforced when the third day opens lower. Stability arrives with a small white body on the third day. If, on the fourth day, price rises to new highs, a reversal of trend has been confirmed.

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Upside Gap Three Methods

The market is moving strongly upward. This move is extended further by another day that gaps even more in the direction of the trend. The third day opens well into the body of the second day, then completely fills the gap. This gap-closing move should be looked upon as supporting for the current uptrend. Gaps normally provide excellent support and/or resistance points when considered after a reasonable period of time. Because this gap is filled within one day, some other considerations should be made. If this is the first gap of a move, then the reaction (third day) can be considered as profit taking. Upside Tasuki Gap

The psychology behind a Tasuki Gap is quite simple: Go with the trend of the gap. The correction day (the third day) did not fill the gap and the previous trend should continue. This is looked upon as temporary profit taking. The Japanese widely follow gaps (windows). Therefore, the fact that the gap does not get filled or closed means that the previous trend should continue.

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The Office Day Traders Manual Bearish Japanese Candlestick Appendix

Abandoned Baby

Like most of the three day star patterns, the scenarios are similar. The primary difference is that the star (second day) can reflect greater deterioration in the prior trend, depending on whether it gaps, is a Doji, and so on. Advance Block

The Advance Block pattern is a derivative of the Three White Soldiers. However, it must occur in an uptrend, whereas the Three White Soldiers pattern must occur in a downtrend. Unlike the Three White Soldiers, the second and third days of the Advance Block show weakness. Belt Hold

The market is trending when a significant gap in the direction of trend occurs on the open. From that point, the market never looks back:

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all further price action that day is the opposite of the previous trend. This causes much concern and many positions will be covered or sold, which will help accentuate the reversal. Break Away

It is important to realize what is being accomplished here. The trend has accelerated with a big gap and then starts to fizzle, but it still moves in the same direction. The slow deterioration of the trend is quite evident from this pattern. Finally, a burst in the opposite direction completely recovers the previous three days' price action. What causes the reversal implication is that the gap has not been filled. A short-term reversal has taken place. Dark Cloud Cover

The market is an uptrend. Typical in an uptrend, a long white candlestick is formed. The next day the market gaps higher on the opening, however, that is all that is remaining to the uptrend. The day after, the market drops to close well into the body of the white day, in fact, below its midpoint. Anyone who was bullish would certainly have to rethink their strategy with this type of action. Like the Piercing Line, a significant reversal of trend has occurred.

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Deliberation

This pattern exhibits a weakness similar to the Advance Block pattern in that it gets weak in a short period of time. The difference is that the weakness occurs all at once on the third day. The Deliberation pattern occurs after a sustained upward move and shows that trends cannot last forever. As with the Advance Block, defining the deterioration of the trend can be difficult. Downside Gap Three Methods

The market is moving strongly downward. This move is extended further by another day that gaps even more in the direction of the trend. The third day opens well into the body of the second day, then completely fills the gap. This gap-closing move should be looked upon as supporting for the current uptrend. Gaps normally provide excellent support and/or resistance points when considered after a reasonable period of time. Because this gap is filled within one day, some other considerations should be made. If this is the first gap of a move, then the reaction (third day) can be considered as profit taking.

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Downside Tasuki Gap

The psychology behind a Tasuki Gap is quite simple: Go with the trend of the gap. The correction day (the third day) did not fill the gap and the previous trend should continue. This is looked upon as temporary profit taking. The Japanese widely follow gaps (windows). Therefore, the fact that the gap does not get filled or closed means that the previous trend should continue. Engulfing (bearish)

An uptrend is in place when a small white body day occurs with not much volume. The next day, prices open at new highs and then quickly sell off. The sell-off is sustained by high volume and finally closes below the open of the previous day. Emotionally, the uptrend has been damaged. If the next third) days prices remain lower, a major reversal of the uptrend has occurred.

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Evening Star

An uptrend has been in place which is assisted by a long white candlestick. There is little doubt about the uptrend continuing with this type of action. The next day prices gap higher on the open, trade within a small range and close near their open. This small body shows the beginning of indecision. The next day the prices gap lower on the open and then close still lower. A significant reversal of trend has occurred. Evening Doji Star

The psychology behind this pattern is similar to that of the Evening star, except that the Doji Star is more of a shock to the previous trend and, therefore, more significant.

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Falling Three Methods

The Falling Three Methods pattern is considered a rest from trading. The psychology behind a move like this is that some doubt creeps in about the ability of the trend to continue. This doubt increases as the small-range reaction days take place. However, once the bears see that a new high cannot be made, the bearishness is resumed and new lows are set quickly. Hanging Man

For the Hanging Man, the market is considered bullish because of the uptrend. In order for the hanging man to appear, the price action for the day must trade much lower than where it opened, then rally to close near the high. This is what causes the long lower shadow which shows how the market just might begin a sell-off. If the market opens lower the next day, there would be many participants with long positions that would want to look for an opportunity to sell. Steve Nison claims that a confirmation that the hanging man is bearish might be that the body is black and the next day opens lower.

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Harami

An uptrend is in place and is perpetuated with a long white day and high volume. The next day, prices open lower and stay in a small range throughout the day, closing even lower, but still within the previous day's body. In view of this sudden deterioration of trend, traders should become concerned about the strength of this market, especially if volume is light. It certainly appears that the trend is about to change. Confirmation on the third day would be a lower close. Harami Cross

The Harami Cross starts out the same as that for the basic Harami pattern. A trend has been in place when, all of a sudden, the market gyrates throughout a day without exceeding the body range of the previous day. What is worse, the market closes at the same price as it opened. Volume of this a Doji day also dries up, reflecting the complete lack of decision of traders. A significant reversal of trend has occurred.

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Identical Three Crows

This pattern resembles a panic selling that should cause additional downside action. Each day's close sets a benchmark for opening prices the next trading day. There is a total absence of buying power in this pattern. In Neck

The scenario is almost identical to the On Neck Line, except that the downtrend may not continue quite as abruptly because of the somewhat higher close. Long Legged Doji

The Long Legged Doji has long upper and lower shadows with the open and the close very close or the same. This pattern reflects the indecision of buyers and sellers. The

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open and the close of the day are very close or are the same. The lower and upper shadows are very long. The high of the day is very high and at the top of the trend. Low Price Gapping Play

The Low Price Gapping Play is the bearish counterpart of the High Price Gapping Play, and leads a renewed fall out of a stalled downtrend. The pattern this forms is a downside window from a lowprice congestion band. After a sharp decline the market consolidates via a series of real small bodies near the recent lows. If prices gap under this consolidation it is a sell signal. Meeting Lines

There exists an almost opposite relationship for the bearish Meeting Line relative to the Dark Cloud Cover pattern. The bearish Meeting Line opens at a new high and then closes at the same close of the previous day, while the Dark Cloud Cover pattern drops to below the midpoint.

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On Neck

The On Neck Line usually appears during a decline. Bearishness is increased with the long black first day. The market gaps down on the second day, but cannot continue the downtrend. As the market rallies, it is stopped at the previous day's low price. This must be uncomfortable for the bottom fishers who go into the market that day. The downtrend should continue shortly. Separating Lines

While the market is in a downtrend, the forming of a long white body should be cause for concern for the bears, since this shows signs of a possible rally. However, the next day opens much lower, in fact, it opens at the previous white days opening price. Prices then move lower for the rest of the day and close lower, which suggests that the prior downtrend should continue.

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Shooting Star

During an uptrend, the market gaps open, rallies to a new high, and then closes near its low. This action, following a gap up, can only be considered as bearish. Certainly, it would cause some concern to any bulls who have profits. Side By Side White Lines

A downtrend is further enhanced with a long black candle line followed by a large downward gap open on the next day. The market trades higher all day, but not high enough to close the gap. The third day opens lower, at about the same open as the second day. Because of the resistance to further downside action, shorts are covered, causing the third day also to rally and close higher, but again not high enough to close the gap. If enough short covering was accomplished and the rally attempt was not very convincing, the downtrend should continue.

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Three Black Crows

The market is either approaching a top or has been at a high level for some time. A decisive trend move to the downside is made with a long black day. The next two days are accompanied by further erosion in prices caused by much selling and profit taking. This type of price action has to take its toll on the bullish mentality. Three Inside Down

This pattern, being a confirmation for the Bearish Harami, can only show the success of the forecast. The Bearish Three Inside Down is a confirmation pattern for the Bearish Harami. Its pattern is defined by the first two days of the three day pattern forming a Bearish Harami, and the third day giving support to the suggested reversal of the Harami, by being a black candle closing with a new low for the three days.

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Three Line Strike

The market has continued in its trend, aided by the recent Three Black Crows pattern. The fourth day opens in the direction of the trend, but profit taking or short covering causes the market to move strongly in the opposite direction. This action causes considerable soul searching, but remember that this move completely eradicated the previous three days. This surely dried up the short-term reversal sentiment and the trend should continue in its previous direction. Three Outside Down

These patterns, representing the confirmation of the Bearish Engulfing pattern, can only show the success of the forecast. Thrusting

Much like the On Neck and In Neck Lines, the Thrusting Line represents a failure to rally in a down market. Because of this failure,

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the bulls will be discouraged and a lack of buying will let the downtrend continue. Tri Star

The market has probably been in an uptrend for a long time. With the trend starting to show weakness, bodies probably are becoming smaller. The first Doji would cause considerable concern. The second Doji would indicate that there was no direction left in the market. Finally, the third Doji would put the last nail in the coffin of the trend. This is essentially because this pattern indicates too much indecision, and everyone with any conviction would be reversing positions. Two Crows

The market has had an extended up move. A gap higher followed by a lower close for the second day shows that there is some weakness in the rally. The third day opens higher, but not above the open of the previous day, and then sells off. The sell-off closes well into the body of the first day. This action fills the gap after only the second day. The bullishness has to be eroded quickly.

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Upside Gap Two Crows

Like the beginning of most bearish reversal patterns a white body day occurs in an uptrend. The next day opens with a higher gap, fails to rally and closes lower forming a black day. This is not too worrisome because it still did not get lower than the first days close. On the third day prices gap to a higher open and then drop to close lower than the previous days close. This closing price, however, is still above the close of the white first day. The bullishness is bound to subside.

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The Office Day Traders Manual Pattern Trading Appendix

Pattern Trading is about recognizing patterns in price and volume action. Patterns represent periods of consolidation or indecision. Patterns are predicated on volume increasing in the direction of price. So patterns should form on decreasing volume and break on increasing volume. Patterns can indicate a reversal or continuation. And based on the size of the pattern and the move that preceded the pattern, you can get quick price projections, which is critical in setting your trade plan price targets. Here are a few of the typical patterns you will see in trading.

Probably the most incorrectly interpreted patterns, it is critical that volume peaks with the left shoulder, and drops at the head and is very low at the right shoulder. The price target will be measured from the break of the neckline and should equal the height of the head to the neckline.

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A very fast move follows these patterns, so theyre worth paying attention to. Wedges tend to at least test the initiation of the pattern.

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The Ascending Triangle is a common pattern, denoted by higher lows and tests of a resistance level. The price target is measured from the break of resistance and should equal the height of the pattern.

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The Descending Triangle is a bearish continuation pattern, denoted by lower highs and tests of a support level. The price target is measured from the break of support and should equal the height of the pattern.

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The Symmetrical Triangle is denoted by higher lows and lower highs creating a downtrend resistance level. The price target is measured from the break of resistance and should equal the height of the pattern.

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Flags are denoted by a declining channel following an uptrend or a rising channel following a downtrend. The price target is measured from the break of trend line resistance in the bull flag (or trend line support in a downtrend) and should equal the height of the pattern. Sometimes you can get a symmetrical measured move equal to the move prior to the pattern if the pattern doesnt retrace more than 38% of the previous move.

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The Rectangle Patter is denoted by a sideways channel with equal support and resistance. The price target is measured from the break of support or resistance and should equal the height of the pattern.

As you can see, patterns are not too complicated and your ability to recognize them will grow overtime as you gain experience in the market. One thing to remember is that if the pattern is widely publicized, the likelihood of it applying will be very low. This will come with experience. One can only guess as to why this happens. And why it happens is not important. Perhaps traders recognize a bearish pattern and position short. The positioning of a large population of traders (and hedge funds) in one direction makes it more likely that the market will move in the other direction. When the crowd leans to the left, your job is to recognize it and lean to the right. Good Trading!

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