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MASTER TRADERTM

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Disclaimer
This publication and the accompanying materials are designed to provide accurate and authoritative information in regard to the subject matter covered in it. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional opinions. If legal advice or other expert assistance is required, the service of a competent professional should be sought. Reproduction or translation of any part of the information contained herein, in any form or by any means, without the written permission of the owner is unlawful.
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Disclaimer
Stock and Options trading have large potential rewards but also involve large potential risks. One must be aware of the risks and be willing to accept them in order to invest in the stock and options markets. Any decisions to place trades are personal decisions that should be made after thorough research, including a personal risk and financial assessment. The companys products (including but not limited to training and coaching materials and newsletters) are for training and/or illustration purposes only and are provided with the understanding that: (i) the company is not engaged in rendering legal, accounting, or other professional opinions; (ii) no solicitation and/or recommendations to buy or sell any stock and/or options is made herein; and (iii) no representation is being made that any of the accounts or trades mentioned in this presentation or training materials will or is likely to achieve profit or losses similar to those shown or are appropriate for your personal account. Virtual trade transactions are performed with delayed data. The company and employees, subcontractors and alliances may own, buy, or sell the assets or options discussed for the purpose of trading at any time. No express or implied warranties are being made with respect to company services and products. If legal advice or other expert assistance is required, the service of a competent professional should be sought. The company is not liable in any form. You must receive a copy of the publication Characteristics and Risks of Standardized Options (ODD) prior to buying or selling an option. Copies of the ODD are available from your broker, at , or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. Access to software features subject to maintaining a valid data subscription. 3

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Disclaimer Websites
Any list of websites or website resources is provided solely for training purposes and as a convenience to you and does not imply our sponsorship, endorsement or approval of any website, its sponsors, products and/or services offered therein, or by any advertiser therein. The company does not maintain the site(s) or assume any responsibility for the accuracy, content and current status of any information provided. Please note that the locations of the site(s) can change without notice.

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Testimonial results are not typical, as each customers success depends upon the unique skills, time commitment and individual effort of each customer. The customers sharing their stories have taken various advanced trainings, each at a cost of approximately $4,990, to achieve these results. Discounts are offered for courses purchased as a package. The customers may have been reimbursed for travel and lodging expenses but not otherwise compensated. The training program provided today is not designed or intended to qualify customers for employment. It is intended solely for the avocation, personal enrichment and enjoyment of customers. The companys products (including but not limited to training and coaching materials and newsletters) are for training and/or illustration purposes only and are provided with the understanding that the company is not engaged in rendering legal, accounting, or other professional opinions. Please note that investing involves risks. Any decision to invest in either the real estate or stock markets is a personal decision that should be made after thorough research, including a personal risk and financial assessment.

Thank You!
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Course Learning Objectives


Understand basic market principles Learn the Model for S.U.C.C.E.S.S.TM Understand essential building blocks of technical analysis & price action Understand practical application of price & volume analysis Learn & apply secondary indicators Learn to apply the Model for S.U.C.C.E.S.S.TM as it pertains the Master Trader bullish trading models Learn to apply the Model for S.U.C.C.E.S.S.TM as it pertains the Master Trader bearish trading models Understand the application of personal trading rules & discipline Develop a 30-day action plan
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Chapter 1: Know the Market Essentials

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Chapter 1: Learning Objectives


Identify common pitfalls and mistakes Understand the odds of probability Identify and outline personal goals Understand how to outline a basic-trading plan Recognize the importance of developing a playbook Learn the Model for S.U.C.C.E.S.S.TM Know the essential market functions Understand basic-market structure

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Know What Drives the Markets


Core human emotions drive the markets.

Fear

Greed

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Understand How Emotions Affect the Decisions Market Participants Make Fear
Fear is a primal human emotion that expresses itself in many forms.
Fear can cause people to
panic close out of a trade instead of holding hold on to a trade instead of closing lose money take inappropriate position sizes etc missed opportunity losing money being wrong leaving money on the table making mistakes etc

Greed
Greed is a primal human emotion that expresses itself in many forms.
Greed can cause people to
hold instead of close close instead of hold fail to take profits hold on to losing trades trade on impulse be stubborn take too large of a position risk too much make poor decisions become euphoric and irrational etc

Fear of

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Understand the Plight of the Emotionally Reactive Trader/Investor


Greed - Holding instead of closing This stock is going to the moon! Greed/Fear - Hope that it goes back up Fear/Greed If I sell now it will just go back up.

Fear Hesitation What if I lose money?

Fear - Frozen like a deer in the headlights

A moment of clarity

I NEED A PLAN!

Fear of a missed opportunity Hey did you see XYZ it is hot.

Fear What if people find out? Greed/Fear -It is only a loss on paper. It is a good company, theyll be back. FEAR There wont be anything left if I dont get out.

Greed

- $#*!

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Identify Common Mistakes


Trading on emotion Failure to develop a plan Entering a position without assessing and understanding the potential risk and reward Falling in love with a stock Failure to plan or stick with a stop loss Exiting a position too soon Staying in a position too long Putting too many eggs in one basket Inappropriate positions size Risking too much money Disproportionate risk tolerance Basing decisions on impulse and emotion Failure to properly analyze and correct mistakes

We all make mistakes. It is a wonderful part of the human experience that everyone shares in common. The success minded individual will learn from mistakes.
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Avoid the Prediction Trap


New traders often develop the misconception that they have to be able to predict the future in order to make money in the markets. The truth is, one does not need to be prophetic to profit. Successful traders do not need to own crystal balls. The business of trading is based on probabilities, not predictions. The successful market participant recognizes the importance of analyzing and understand the odds of probability.

Stans Stock Picks 100% Guaranteed.


*Guaranteed not a guarantee.

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Understand the Odds of Probability


Gambling patrons oftentimes willingly place wagers with complete disregard for the odds The game of roulette is a perfect example of how the odds work in the favor of the house Some patrons will bet on red or black, believing that they have a 50-50 chance of winning The house will gladly take that wager The roulette wheel has 38 numbers 1-36 alternate between red and black 2 green spaces 0 and 00 shift the odds of probability into the favor of the house 5.26% is the basic edge that the house holds on a simple red/black or odd/even bet
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The profitability of the casino & gaming industry is based on a clear understanding of statistics & odds of probabilities.

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Realize that Trading is Not Gambling!


The first rule of trading is to protect your capital A wise trader will take measures to control the odds and mitigate exposure to risk Asset allocation is the first line of defense
Diversification is an age old money management technique Unfortunately too many people equate trading with gambling. The common sentiment that the markets are too risky keeps many would-be traders sitting on the sidelines. The reality is that most traders spend the majority of their time and effort managing the odds and controlling risk. After all without risk there would be no reward!

Position sizing is the second line of defense


Too many eggs in one basket is never a good idea

Protective stop losses and many other strategies can be implemented to effectively manage exposure to risk Favorable Reward to Risk Ratios are a must
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Understand Risk of Ruin

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Identify Past Mistakes

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Learn from Your Mistakes

True or False
Making mistakes is a normal part of learning to trade True False

True or False
Learning from mistakes is critical to successfully learning to trade True False

As a group, share and discuss some of the mistakes that have been made Recognize that the most common mistake made by individual is the lack of careful planning

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Build a Trading Plan


A failure to plan is a plan to fail.

Understand what it takes to build a successful trading business. Knowledge is essential to success
Plan a course to further pursue knowledge and education

Maximize your efforts


Analyze personal goals Design a personal plan Develop winning strategies Implement the strategies & game plan Evaluate personal progress

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Evaluate the Objective & Set Goals


Identify a source of personal motivation. Define primary objectives
(personal goals, financial goals etc) Develop specific trading strategies that can help you reach your goals
Develop a playbook of high probability strategies that can profit in any market The disciplined execution of the game plan is requisite Trades dont plan and place themselves

Implement the game plan


Design a plan that will help you meet those goals and objectives.
Goals need to be realistic and measurable Long-term financial goals can be defined in dollars and broken down into smaller more specific goals Design and develop a daily, weekly and monthly plan of action

Evaluate and adjust the goals from time to time


Every good plan needs to be assessed and adjusted as needed Keep a journal of your goals

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Break Long-Term Objectives into Short-Term Goals


Joe would like to generate an additional 25k per year to help him reach his retirement goals How can Joe break down his financial goal down into a realistic and measurable goal?

Annual goal 25k


During a typical calendar year, the market is open on average 252 days per year 21 days per month $25k goal can be broken down into a more manageable goal. $25k 252 days = $99.20 $99.20 = est. daily goal

Joe determines that this goal seems realistic and manageable

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Make Certain that Goals are Realistic


After some careful planning, Joe has decided...
To use careful money management in order to protect his 50k in working capital
Predetermines a maximum asset allocation of 10 percent of the account balance per trade Predetermines a personal maximum risk tolerance of 1 percent of the account balance per trade

Joe determines that he needs to trade stocks that


can potentially yield $99.20 per day require less than 5,000 capital for the position can provide a risk profile under $500 when coupled with a protective stop loss

Joes money management rules are an important part of his plan


His current account balance & personal rules allow Joe
A $5,000 maximum position size or asset allocation A $500 maximum risk exposure
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Use Good Business Sense


Using MachTraderTM Joe identifies a stock that can potentially meet his short-term goal XYZ is only $35.50 per share XYZ stock has a statistical average daily range of $1.30 Joe estimates that purchasing 100 shares could meet his short-term goal and keep his personal money management rules 100 x $35.50 per share = $3550 A protective stop loss at $33 dollars will give him a $2.50 risk profile
$2.50 risk x 100 shares = $250 Plus $10 in round trip commissions = $260 estimated risk profile

Careful planning of the trade provides Joe with a clear understanding of risk.

Now that Joe has estimated his risk profile, he proceeds to estimate the potential reward

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Use Good Business Sense


XYZ has a statistically probable A position size of $3550 is less average daily expectancy range of than his maximum asset $1.30 allocation rule of 10 percent and $1.30 x 100 shares = $130 5k. A potential yield of $130 per day is An estimated risk profile of $260 possible assuming that the trend is much less than his 1 percent persists maximum risk profile of $500.
Joe factors in that same $10 in round-trip commissions Quite satisfied with the estimated reward compared to the estimated risk, Joe determines to proceed with the plan Does Joes trade match his personal rules?

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Remember, Every Market Participant Is Unique.


Financial goals and objectives will also be as unique and varied as the market participants themselves
Educational needs will vary Personality types are different and financial risk tolerance will vary. One size fits all trading plans are impractical and less effective Trading plans need to be compatible with individual personality type and financial goals

Evaluate personal goals Analyze personal and financial objectives Customize a game plan that is compatible with your unique circumstances
Personal goals Financial goals Capitalization Personality type Risk tolerance Time frame etc

Like snowflakes, no two people are the same. Therefore, no two trading plans will be the same. Take the time to evaluate your personal goals and analyze your financial objectives. Then design and develop a personalized game plan that can be implemented.

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Design & Outline a Sample Game Plan


Take a few moments to identify and write down some personal goals.
Identify and write down a personal financial objective

Estimate and write down the financial goal in dollars

Estimate and write down a realistic time frame in which to achieve that goal

The individual with a professional mindset finds a way to make things happen.

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Crunch the Numbers


Estimate the number of trading days within the time frame selected
252 days in an average year 21 days in an average month

Break down the financial goal into a daily goal


Do the math
Divide the estimated dollar amount by the estimated number of trading days
Write down the estimated daily goal
*This exercise is designed to illustrate breaking a large objective into an attainable shorter-term goal and is for training purposes only.

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Think in Percentages
Albert Einstein
Special Theory Of Relativity
E = MC2

Once also theorized that the most powerful force in the universe is compounding interest. Trading accounts can grow percentage point by percentage point.
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%
Getting too caught up in dollars and cents can often times overshadow the power of a simple percentage growth in a trading account.
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Practice Making Personal Rules


Youve just inherited $72,000 after taxes and opened up a new trading account Practice making money-management rules Determine both Maximum asset allocation per position
In percent first then convert into $

Maximum risk tolerance per position


In percent first, then convert into $

Calculate these numbers and write them down. Be sure to express the values in both percent and $.

Maximum asset allocation per position

%
Maximum risk profile per position

$ $ $
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% %
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Write down the reason you chose those percentages and figures.

Develop a Strategic Playbook


A good trading playbook will focus on
Identify high-probability trading and investing opportunities Devise Strategies that are compatible with personal and financial objectives Draft specific rules to help implement the designated plan
Trade identification that is structured, consistent and repeatable Multiple strategies are required

Practice the plays from the playbook.


Practice, practice, practice! Use a virtual trading platform Be prepared for live action in the market requires practice and preparation

Journal and review all of your practice trades


Identify what needs improvement Identify what is working well

Now that examples of how to develop a basic-game plan have been outlined, it is important to recognize the need to develop systems and strategies that are consistent and repeatable. A rock solid playbook based on high probability setups and theories is essential to success.
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Know the S.U.C.C.E.S.S. ModelTM

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S U C C E S S

Study charts of all of the major market indices.


S&P 500
Index $SPX = Index SPY = ETF

Dow Jones Industrials


$INDU = Index DIA = ETF

NASDAQ
$COMPQ = Index QQQQ = ETF

Russell 2000
$RUT = Index IWM = ETF

Study charts of Sectors & Industries in a top down approach.


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S U C C E S S

Find trading & investment opportunities using the MachTraderTM toolbox.


Run SeekerTM scans. Keep & check watchlists. Perform research.
Technical Fundamental News Etc

Check economic calendars. Check earnings dates. Etc

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S U C C E S S

Choose the appropriate or desired tradeable instrument to match your market bias and trading strategy.
Master Trader
Long Stock Short Stock

Cashflow Options
Long Options Short Options Covered Calls Calendar Spreads Etc

Spread Trader
Credit Spreads Debit Spreads Advanced options combinations

Etc

Use the price quotes and risk graphing tools provided in MachTraderTM to help you make intelligent business decisions.
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S U C C E S S

Calculate and analyze the potential risk vs. reward


Risk Reward Risk/Reward Ratio Asset Allocation Risk Tolerance Position Size Etc

Document the trading plan Use the tools of the Master Trader
MachTraderTM Risk Graphs Trade P.R.E.P. Calculator Create your own system

P.R.E.P. every trade. Price Trigger Entry Realistic Targets Exit Stop Loss Position Size
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S U C C E S S

Implement the trade according to the predetermined game plan


Place the order
Practice placing the order in a virtual platform until the order-entry process has been mastered Trade live when ready

Master Trader Trick of the Trade


Place the protective stop loss order at the same time the entry order is placed

Use appropriate order types for the strategy


Practice virtually trading with various order types until mastered

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S U C C E S S

Supervise the trade according to plan


Supervise the trade & make the proper trade adjustments
Swing trade example
Check the trade daily after the market is closed Adjust stop loss according to pre-determined rules Cancel existing stop loss order Place the adjusted stop loss order Take profits if objective is met Remember to update your trading journal Etc
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Your trading business will require regularly scheduled maintenance Different trading styles have different maintenance requirements Choose a trading style that matches your goals and personality

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S U C C E S S

Journal & Review each and every trade Use the Master Trader Journal or create your own journal to help you
Track overall performance
Income Trades vs. Expense Trades Win Loss Ratio Profit Factor
(size of income trades compared to size of expense trades)

Track equity curves (equity over time) Make notes Identify strengths Diagnose potential problems Etc

Make journaling a part of your daily routine

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Understand the Power of the S.U.C.C.E.S.S. Model


Which of the following is NOT a part of the model for S.U.C.C.E.S.S.?
Survey the Market Use MachTraderTM to Identify & research potential trades Choose the Tradable Instrument Carefully plan & prep the trade Execute the trading plan

Joe developed a simple and realistic game plan which fits the Model Write down some of the ways in which the Model for S.U.C.C.E.S.S. can help you implement your own game plan

Evaluate the position Supervise the trade Systematically Journal & Review

The Model for S.U.C.C.E.S.S. will help you develop a regular & consistent routine
True False

A disciplined routine is critical to the success of your trading business


True False

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Know the Market


Order Routing Exchanges & Electronic Clearing Networks Order Types Buying Long vs. Selling Short Choosing a Brokerage Market Organization and Classification Top Down Vs. Bottom Up Analysis

Knowledge must come through action; you can have no test which is not fanciful, save by trial.
Sophoclese (496 BC - 406 BC)

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Understand the Transaction


Buyer
Takes delivery of the security, typically will pay the asking price Charged a commission by their broker

Seller
Delivers the security typically at the bid offer Charged a commission by their broker

A market maker is typically a firm that quotes both a buy and a sell price. The market maker is hoping to make a profit on the Bid/Ask spread. The profits yielded from the difference between the Bid/Ask spread is often referred to as the turn.
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Understand the Bid & Ask


BID
An indication by an investor, a trader or a dealer of a willingness to buy a security or commodity The price at which an investor or trader can sell to a broker-dealer

Bid Ask Spread


The difference between the bid and the ask prices of a security An unavoidable cost of trading for the retail participant

ASK
The lowest price anyone is willing to sell a specific stock or commodity at a given moment in time Also called the offer

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TRADER

Conceptualize Order Flow


CLEARING FIRMS: Independent and market owned Electronic Clearing Networks (ECN)

NASDAQ

NYSE

INTRODUCING BROKER CBOE


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AMEX

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Know the Core Entry & Exit Order Types

Entry Orders
Buy To Open (BTO)
Market Limit
Stop Orders Stop Market Stop Limit

Exit Orders
Sell To Close (STC)
Market Limit
Stop Orders Stop Market Stop Limit

Sell To Open (STO)


Market Limit
Stop Orders Stop Market Stop Limit

Buy To Close (BTC)


Market Limit
Stop Orders Stop Market Stop Limit
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Define Primary Order Types


Market Order
Will fill at the next available price Buy Market Sell Market
Market Orders typically take precedence over Limit Orders and are used for rapid execution.

Stop = Trigger
A stop is a trigger that will route either
A Market Order
or a

A Limit Order

Buy Stop
Triggers a Buy Market or a Buy Limit Order when price trades at and above the stop price

Limit
Buy = at or below the specified limit price Sell = at or above the specified limit price
Limit Orders offer some control over the entry/exit price.

Sell Stop
Triggers a Sell Market or a Sell Limit Order when the price trades at and below the stop price
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Market Order Example


The Buy or Sell Market Order is placed while the Market is trading @ $32.23 Market is trading @ $32.23

Moments later the order gets filled @ the next available price $32.17 .06 cents lower

The Market Order


Ideal for instant execution in a liquid market. Can potentially get filled at an undesirable price. This is called slippage.

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Buy Limit Orders

Market is trading @ $32.23

Buy Limit @ $32.15


Buy Limit Order will execute @ $32.15 and lower

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Sell Limit Orders


Sell Limit Order will execute @ $32.40 and higher Sell Limit @ $32.40

Market is trading @ $32.23

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Understand Stop Orders


Stop = Trigger
A Stop Order is a trigger order that has a specific price rule or contingency.
Can be coupled with a Market or a Limit Order. Enter a bullish position
Upon price condition being met Upon price condition being met

Buy Stop
Close or cover a bearish position

Sell Stop
Enter a bearish position
Upon price condition being met Upon price condition being met

Close or cover a bullish position

Trailing Stops
A Stop Order that will trail price by a predetermined and fixed $ or percent amount Typically used to help traders lock in profits Can be coupled with a Market or a Limit Order.

New traders can often be confused by the Stop Order. A simple memory trick can be used to clear up the confusion. What do you do at a stop sign? stop? go? or both stop & go?

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Buy Stop Orders


Buy Stop Order Will execute @ $32.36 and higher. Buy Order is sent as a Market Order unless specified otherwise. Buy Stop @ $32.36

Market is trading @ $32.23

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Sell Stop Orders


Market is trading @ $32.23

Sell Stop @ $32.06 Sell Stop Order will execute @ $32.06 and lower. Sell Order is sent as a Market Order unless specified otherwise.

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Buy Stop Limit Orders


Buy Limit @ $32.50
Buy Order is sent as a Buy Limit and will execute at $32.50 and below. Buy Stop Order will execute @ $32.36 and above.

Buy Stop @ $32.36

Market is trading @ $32.23

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Sell Stop Limit Orders

Market is trading @ $32.23

Sell Stop @ $32.13


Sell Stop Order will execute @ $32.13 and below. Sell Order is sent as a Sell Limit and will execute at $31.95 and above.

Sell Limit @ $31.95

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Understand Time in Force


DAY ORDER
An order to buy or sell stock that automatically expires if it can't be executed on the day it is entered.

GOOD 'TIL CANCELED


Sometimes simply called "GTC," it means an order to buy or sell stock that is good until you cancel it. Brokerages usually set a limit of 30-60 days at which time the GTC expires if not restated.

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Practice with Order Types


Buy _______________$32.50
Filled @ $32.50 and ______________ Triggered @ $32.35 and ___________

Buy ______________$32.36

Market is trading @ $32.23

Place a Buy Stop Limit Order


1. 2. 3. Identify and label the Stop order. Identify and label the Limit order. Correctly describe the price action (e.g., @ and
above or @ and below)

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Practice With Order Types


The Position is trading @ $32.23

1. Sell __________________$32.05 2. Will execute a market order @ $32.05 and higher lower Place the appropriate order type for a protective stop loss below support.
1.
2.

How long should a stop loss order be enforced?


Good for the day? Good Until Canceled?

Identify and label the order type


Correctly describe the price action

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Identify the Correct Order Type


Sell @ or above = ________________________

Buy @ or below = _______________________

Trigger a Buy @ or above = ____________________

Trigger a Sell @ or below = ____________________

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Understand Long vs. Short


Long A position that requires the price of the underlying instrument to rise in value Short A position that requires the price of the underlying instrument to fall in value

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Understand Long Orders Entry & Exit


Choose an order type & follow the arrows. Limit
Trigger

Market

Limit
Trigger

Market

Buy Stop

Sell Stop

Buy To Open
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Sell To Close
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Understand Short Orders Entry & Exit


Sell To Open
Sell Stop
Trigger

Buy To Close
Buy Stop
Trigger

Limit

Market

Limit

Market

Choose an order type & follow the arrows.


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Get Shorting!
SHORT
1. The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value. A short sale of stock is initiated by choosing a SELL TO OPEN entry order. Upon execution money is received for the sold security. Gains or losses are not realized until the borrowed security is returned to the introducing broker through a BUY TO CLOSE exit order. Brokers charge round-trip commissions. The Broker Call Rate is the interest rate that banks charge brokers to cover the short sold security positions.
a) Brokers typically up-charge approximately 1 to 2 percentage points above the federal funds rate. 61

2. 3. 4.

5. 6.

Dont sell yourself short. Markets go up, down and sideways. Learning to trade all three-directional biases will help a trader profit in any market.

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Be Aware of Rules and Regulations Regarding Short Selling.


Short selling is not allowed in an IRA or cash account. A margin account is required to sell short. Theoretically, there is unlimited risk.
Stocks can go up forever, but can only fall to zero.
With proper risk management this concern is mitigated. Many ways to protect a short position with stock and options strategies.

The Up-Tick rule has been eliminated by the SEC as of July 6, 2007. There is a small amount of interest charged for borrowing the stock.
This is called the Broker Call Rate Check with your broker for specific details. The Introducing Broker is required to have an appropriate inventory available.
Check with your broker for a list of securities that can be sold short.

Not all stocks can be short sold.

Maintenance Requirements
The minimum amount of equity required in the account to maintain an open position if trading on margin
Consult with your broker about margin and maintenance requirements.
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The Introducing Broker can call in the shorts.


A Buy In or short squeeze can possibly occur where your broker demands the return of the borrowed shares.

For more information visit http://www.sec.gov

62

Know How To Choose an Introducing Broker.


What instruments do they trade? Stock, Options, Futures, Forex, etc Basic interface vs. sophisticated interface User friendly? Customer Service Industry Accolades Commissions Execution Analytics Tools and gadgets Do they offer Mobil Trading from a wireless handheld?

As a group discuss how to identify a good Introducing Broker. Full Service vs. Discount Web Based vs. Direct Access Insured? SIPC, FINRA, NFA, etc

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63

Know What an Active Trader Looks for in a Broker


Great virtual trading platform that translates into a quick and easy to use order entry platform for real money orders
(i.e.)Virtual trading platform that is identical to live trading platform is preferred.

Availability of order-types and combination orders


Stop - Limit orders used in a "one triggers other" relationship to an attached protective stop loss

Stock and Option order templates


Make sophisticated orders easy to implement.
Bracket Orders Options Templates like spread trades etc

Live support for the beginning trader Competitive commission structure Excellent history of speedy execution with minimal slippage Trade options, futures, stocks, forex from one account

High ratings and accolades for online discount brokerage firms. from reliable sources
(i.e., consumer reporting services like JD Powers and associates, or independent reviews from within the trading community.

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64

Know the Principal Types of Individual Accounts


CASH ACCOUNT
An account in which the customer is required by the SEC's Regulation T to pay in full for securities purchased not later than two days after the standard payment period set by the NASD's Uniform Practice Code.

MARGIN ACCOUNT
An account leveraged in which stocks can be purchased for a combination of cash and a loan. The loan in the margin account is collateral by the stock and if the value of the stock drops sufficiently, the owner will be asked to either put in more cash or sell a portion of the stock. Margin rules are federally regulated but margin requirements and interest may vary among broker/dealers.

INDIVIDUAL RETIREMENT ACCOUNT (IRA)


Traditional and Roth IRAs are established by individual taxpayers who are allowed to contribute 100 percent of compensation (self-employment income for sole proprietors and partners) up to a set maximum dollar amount. Contributions to the Traditional IRA may be tax deductible depending on the taxpayer's income, tax filing status and coverage by an employer-sponsored retirement plan. Roth IRA contributions are not tax-deductible.

Many Traders Have Multiple Accounts and Account Types.


Simply put, it is not wise to day trade the IRA. Active traders enjoy the flexibility that margin accounts can offer.

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65

Individual Action Plan


List three things that you can do to help ensure that the broker you choose meets your individual needs.

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66

S U C C E S S

Understand How Securities Are Classified & Organized in MachTraderTM


SECTOR A market sector is an accumulation of industrial groups with similar macro business characteristics. INDUSTRY An industry is the category describing a company's primary business activity. The largest portion of revenue usually determines this category. To screen for companies in a particular industry, select the industry from the drop down menu.

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67

S U C C E S S

Understand a Top Down Approach to the Market

Top Down Start by looking at broad market index charts.


Import market sector lists into an MachTraderTM quote sheet. Link to a chart and proceed to identify the broad market trends. Determine market posture.

Identify which sectors have the strongest trends.


Import major-market sector lists into an MachTrader quote sheet. Link to a chart and proceed to identify which sectors best support the broad market trend.

Identify which industry groups are leading the sector.


Import the corresponding market sector lists into an MachTrader quote sheet. Link to a chart and proceed to identify the industry group with the best looking trend and technical setups.

Use the SeekerTM to identify trading opportunities for stocks from within the appropriate Sector/Group.

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68

Seek Trades in Specific Sectors & Groups

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69

Practice Using MachTraderTM


Perform each of the following tasks.
Open up a stock chart Look up a security's ticker symbol Open up a fundamental analytics sheet Tile the chart and the fundamental window vertically Link the two windows together Change the security

Perform each of the following tasks


Open up a quote sheet Right click and import the Market Index list Open up a chart Select symbol group one for both the quote sheet and the stock chart Click on each index and briefly study each index chart Click on file in the top left corner and save this layout as practice layout. Close all of the windows and the click on file select open page and then select the file you saved as practice layout.

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70

Chapter 1 Quiz
Trading is high risk, high reward
True False

Which of the following is true about stop orders?


Used to trigger an entry order Used to trigger an exit order Can trigger a market order Can trigger a limit order Can be used to protect capital All of the above

Trading is a lot like gambling


True False

A Buy Limit Order will fill at the limit price or


Higher Lower

It is important to have a plan & to Pre-determine position size & risk tolerance
True False

A Sell Limit Order will fill at the limit price or


Higher Lower

How many trading days are there in a year?


365 252 267 21

Which of the following statements is true about the top-down approach?


Choose only the most fundamentally sound stocks from the top of the list Start with broad market indices & sectors to identify trending sectors & indices

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71

Chapter 2: Introduction to Technical Analysis

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72

Chapter 2: Learning Objectives


Understand the essential building blocks of technical analysis of price
Recognize chart types Identify and label price

Understand Volume
Learn how to read the volume histogram

Shed light on Candlestick analysis


Define and label Candles Recognize key patterns
Continuation Reversal

Understand Pivots Classify and Rank Pivots Learn to read trends


Direction

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73

A Stock Chart is a Cartesian Graph that Measures Price Over Time

Y AXIS = PRICE

X AXIS = TIME
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74

5 Pieces of Data Are Reported for Each Period: Open, High, Low, Close & Volume.

Locate the data at the top of the chart or in the data window O = Open H = High L = Low C = Close or Last Price Net: 1.40 = net change in price for the period Vol:1024393 = number of shares transacted for the period

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75

Choose a Chart Type


Select a chart type. Select a time frame then click on the load button.

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76

Understand How to Read a Bar


Western Bar
High
Opening price is marked on the left. High = the top of the bar. Low = the bottom of the bar. Closing price is marked on the right. Net change = the positive or negative distance between the open and close of the period.

Open

Close

Close

Open

Low
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77

Understand How to Read a Candle


Japanese Candle
High
Upper Shadow
Filled Candles Open > Close Hollow Candles Close > Open Highs are marked by the upper shadow. Lows are marked by the lower shadow. Real Body marks the price between the open and close. Net change = the positive or negative distance between the open and close of the period.

Open
Real Body

Close

Close
Lower Shadow

Open

Low
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78

Know How to Read Bar and Candle Charts


High Open Close Low Low Open Close High

High Close Open Low Open

High Close

Low

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79

Identify Candle Range


Candle Range is the difference between the high of the candle and the low of the candle. High Low = Range Range is a very simple measure of price movement over time.
High = 23.50

High Low = Candle Range $23.50 $22.50 = $1.00 This Candle has a $1.00 range. Low = 22.50

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80

Know How to Interpret Candle Range


Expanded Range Candles indicate an increased level of movement in price over time. Narrow Range Candles indicate a decreased level of movement in price over time.

Expanded Range Candles


(ERC)

Narrow Range Candles


(NRC)

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81

Basic Bar & Candle Quiz


Identify and label
The Open The High The Low The Close

Identify and label


The Open The High The Low The Close

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82

Circle & Label Both Narrow & Expanded Range Candles

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83

Understand Volume
Volume is tracked and charted using a simple histogram. The volume histogram tracks and reports the transaction data series into an easily interpreted visual. The volume histogram registers the total number of shares transacted on the number scale to the right.
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84

Read and Interpret Volume


Volume is a measure of participation. Indicates the number of shares or contracts that a security has traded during a specified period of time. Every transaction that is registered has both a buyer and a seller.

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85

Understand the Importance of Liquidity


5 minute chart on a liquid stock

5-minute chart on an illiquid stock


Notice the holes in trading action on the illiquid stock.

A wise trader chooses to trade liquid instruments. Avoid stocks with low average daily volume.
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86

Know How to Apply Volume to a Chart Right click on the chart Select
Add Study from the edit menu that appears

Select
Volume from the Indicator menu that appears
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87

MachTraderTM Volume Indicator


The volume indicator has several settings that can be changed or applied in order to display the desired features Change the color settings for
Price Up Price Down

Change thickness settings for desired visual effect Master Trader trick of the trade
Check the display moving average box and apply a moving average of your choosing Try the 20 or 50 period moving average. Select the color and thickness setting desired to the moving average

A simple moving average can help determine if the volume is high or low when compared to the running average

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88

Customized Volume Indicator


Close > previous day close
Volume Green

Close < previous day close


Red Volume

50 period moving avg.


Blue line = 50 SMA

The volume is decreasing on average as price runs higher. The noticeable decrease in participation is
Identified by the drop in average daily volume A possible sign of a weakening trend A potential warning sign of pending reversal
89

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Practice Reading & Interpreting Volume


How much volume was reported today?

How does todays volume compare to historical volume levels?


Average Above average Below average

What do you think could be the cause of this abnormal spike in volume?
Unexpected news A scheduled earnings report A technical trading reaction to a key price level Any of the above

Volume is high because there are more buyers than sellers.


True False

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90

Understand the Pressures on Price


The Float
The total number of shares publicly owned and available for trading The float is calculated by subtracting restricted shares from outstanding shares. The total available number of shares.

Supply
Individuals and institutions willing to sell a specific instrument at a specific price range Price is moved by the constant ebb and flow of supply and demand. Price can move on both high and low volume caused by shifts in supply and demand. Price can move very little when supply and demand are balanced.

Demand
Individuals and institutions who want to buy specific instrument at a specific price range

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91

Understand How Supply & Demand Affect Price Price Trend


Uptrend
Demand outweighs supply

Pivots
Key price points or thresholds defined by the market during open trading Mark where supply and demand shift
Demand > Supply Supply > Demand

Downtrend
Supply outweighs demand

Trendless
Supply and demand are balanced
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92

Understand Pivots Points


A pivot point on a price chart represents a shift in supply and demand
When demand out weighs supply, price will pivot and run up. When supply out weighs demand, price will pivot and run down.

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93

Pivots in Price Are Peaks & Valleys


A pivot occurs when there is a shift in Demand < Supply
ppl y

Su

> Su

Dem and

Supply < Demand A pivot occurs when there is a shift in

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De ma nd
94

>S

up pl y

pp ly >
nd ma De

Su pp ly >
nd ma De

Pivots Define Support & Resistance Zones


Resistance Zone

Support Zone

Demand = Support
If the market supports the price level...
Demand will increase. Demand will drive the price higher.

Supply = Resistance
If the market resists the price level
Supply will increase. Supply will drive the price lower.
95

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Understand Pivot Confirmation


Pivots start out small with minor changes in sentiment.
A minimum of three Candles are required to form a pivot
Preceding Candle Pivot Candle Confirmation Candle

If the change in sentiment persists


A directional swing can develop from the initial pivot. A trend can be established if sentiment continues to persist.

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96

Understand Pivot Confirmation


Pivots start out small with minor changes in sentiment.
A minimum of three Candles are required to form a pivot
Preceding Candle Pivot Candle Confirmation Candle

If the change in sentiment persists


A directional swing can develop from the initial pivot A trend can be established if sentiment continues to persist
97

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Practice Pivots

Identify and label support and resistance pivots


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98

Test Your Knowledge


Select one
A support pivot is caused by a positive shift in what market force? Supply Demand A resistance pivot is caused by an increase or shift in what market force? Supply Demand

True or False A swing low pivot can be labeled as support. True False Resistance is a pivot that happens at the top or looks like a price peak. True False

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99

Understand Minor Pivots


Minor pivots mark minor shifts in supply and demand. Occur within trends minor

minor

minor

minor

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100

Understand Intermediate Pivots


Intermediate pivots mark intermediate shifts in supply and demand.
Intermediate

Intermediate

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101

Understand Major Pivots


Major pivots mark major shifts in supply and demand. Are typically the beginning and ends of major cycles

Major

Major
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102

Pinpoint & Label the Pivots

Identify and label


Minor Pivots Intermediate Pivots Major Pivots
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103

Check Out the MachTraderTM Mach II Pivot Feature


Right Click

Add the pivot study to any chart and allow MachTraderTM to do some of the heavy lifting.
104

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Know That Pivots Define Trend


Uptrend = Higher pivot highs and higher pivot lows
Demand drives price higher Minor, Intermediate, Major

Trendless = Failure to establish higher pivot highs or lower pivot lows


Supply and demand are balanced Minor, Intermediate, Major

Down Trend = lower pivot lows and lower pivot highs


Supply drives price lower Minor, Intermediate, Major

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105

Test Your Knowledge


What is the major pivot trend?
______________________

What is the current minor pivot trend?


____________________________

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106

Understand Price and Psychology


The typical movement of price driven by people
Action Reaction Overreaction Correction

Basic demand can cause


General buying pressure A shortage of current supply An overreaction of greed and fear drive price too high Price is now overbought New supply at a higher price

This action/reaction is cyclical and can behave like Basic supply can cause General selling pressure a pendulum

An increase in current supply An overreaction of greed and fear drive price too low Price is now oversold New demand at a lower price

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107

Understand Overbought & Oversold

Price has run to an extreme


Potentially too far in price up Potentially too much time up

Price has run to an extreme


Potentially too far down in price Potentially too much time down

What could potentially happen next?


a) b) c) d) Price will continue to run up Profit taking is likely to occur Nothing/We cant tell Supply is likely to increase at the higher price e) Both b and d

What could potential happen next?


a) b) c) d) Price will continue to run down Shorts are likely to take a profit Nothing/We cant tell Demand is likely to increase at the lower price e) Both b an d

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108

Shed Light on Market Psychology with Candles A firm grasp on Candle patterns can help illuminate the potential formation of a pivot The various sizes and shapes of Candles can provide clear indications of market psychology and pressure

The names of Candle patterns are helpful memorization tools Understanding the story a Candle tells is more important than memorizing the catchy name
109

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Understand the Market Yin & Yang


Candles Tell Stories About Supply & Demand, Buyers & Sellers
Pay attention to the relationships between...
Candle Ranges Real Bodies Shadows or Wicks

The shadow knows


Shadows can tell a story about a sharp shift in price during that trading session. Can indicate a shift in supply and demand.
Long upper shadows indicate an introduction of supply. Long lower shadows indicate an influx of demand.

Real Bodies
Give the overall market consensus for that period. Closing price is particularly important to traders.
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What story can these two Candles Shadows tell us?


110

Recognize High-Energy Candles

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111

Recognize Low-Energy Candles

Narrow Range Candles and clusters of lowenergy Candles can signify.


Stagnation Loss of momentum Indecision Potential change in sentiment
112

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Recognize Bullish Reversal Candles

Bullish Doji

Morning Star

Bullish Hammer

Bullish Harami

Bullish Engulfing

Piercing Line
113

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Recognize Bearish Reversal Candles


Bearish Doji Evening Star Hanging Man

Bearish Harami

Bearish Engulfing

Dark Cloud Cover

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114

Identify and Label these Candle Patterns

1.)

2.)

3.)

4.)
115

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Explain the Candle Story

What does the final Candle indicate?


_________________________

What does the final Candle indicate?


_________________________

What is likely to happen next?


_________________________

What is likely to happen next?


_________________________

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116

Understand Price Volatility


Volatility is the measurement and study of price range over time. High Volatility = Large movement in price for the specified time frame Low Volatility = Small movement in price for the specified time frame. A study of volatility can help one understand Expectancy (risk/reward) Statistical probabilities Shifts in volatility
Increase or decrease in volatility can be indicative of change
117

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As a Group, Discuss Picking Stocks with Volatility Profiles that Match Individual Personalities & Financial Goals

Gauge your personality on a scale from 1 to 10


1 being the lowest risk and 10 the highest risk.
_____________________________________________________ 118

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Practice Using MachTraderTM


Perform each of the following tasks
Open up a stock chart. Change the chart style.
Line Bars Candles Daily Weekly 15 minutes Identify the time and price at which a pivot occurred Point curser at a selected candle and identify the O,H,L,C for that time frame. Identify the difference between a logarithmic and linear chart. Turn it off and freely move the chart around. Turn it back on and automatically scale the chart.

Click on the make bars thicker button.


Increase Candle/Bar thickness.

Click on the make bars thinner button.


Decrease the Candle/Bar thickness

Change time frames.

Click on the increase bar spacing button.


Increase the spaces between candles

Click on the Cross Hairs. Click on the data window. Click on LOG. Click on the auto scale button.

Click on the decrease bar spacing button.


Decrease the spaces between candles.

Click on the show current bar button.


Identify what happens .

Click on the reset button.


Identify what happens.

Click on and manipulate both the X and Y axis of the chart.


X axis Increase/decrease time displayed. Y Axis Increase/decrease the price displayed.

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119

Chapter 2 Quiz
Candlesticks are used to graph which pieces of data?
Open High Low Close Volume

A pivot marks a shift in short-term supply & demand.


True False

Candle patterns can be helpful when identifying the potential formation of a pivot.
True False

A histogram is used to measure


Price Volume Sentiment

Which of the following is not a classification of a pivot?


Major Intermediate Minor Double

When the closing price is lower than the opening price the Candlesticks real body will be
Green Hollow Filled Expanded

Which price point is more noticeable on a price chart?


A minor pivot A major pivot

When volume is green, that means that there were more buyers than sellers
True False

Trends are defined by what?


Moving averages Trend lines Pivots

After an extended price run, a Doji Candle pattern could signify


The stock could go up The stock could go down The stock could stay the same That the pressures of supply & demand are relatively balanced and a change in direction is possible.

Volatility is what?
Scary Not for me A measure and study of price movement over time. Exciting

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120

Chapter 3: Master Technical Analysis of Price and Volume

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121

Chapter 3: Learning Objectives


Understand the practical application of price and volume analysis
Refine our understanding of support & resistance
Recognize the catalysts for support and resistance Minor Intermediate Major Trendlines and trend zones Trendlines as catalysts for support & resistance Motive waves Corrective waves Estimated Duration Recognize potential for continuation of trend Recognize potential for reversal of trend Double tops and bottoms Heads and shoulders and inverted heads and shoulders

Understand Trends.

Understand the application of trend studies.


Identify basic-swing cycles.


Identify and label increasing momentum.


Identify and label slowing momentum. Identify and label essential reversal patterns.

Read and interpret volume. Recognize types of gaps and the potential implication of gaps.

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122

Respect Support & Resistance Pivot Zones


Support & Resistance is defined by the market. Once established Support & Resistance
Will be a significant price point for traders Will be referenced by traders placing new orders Can be tested by traders
Resistance Zone Confirmed Resistance Zone

Support Zone

Support Zone Confirmed


123

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Know What Happens When a Pivot Zone Fails


When a resistance pivot fails this establishes and confirms the beginning or continuation of an upward trend in price.

Resistance Zone

Support Zone

Support Zone Confirmed


124

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Know What Happens When a Pivot Zone Fails


Resistance Zone

Support Zone

When a support pivot fails, this establishes and confirms the beginning or continuation of a downward trend in price.
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125

Know that Old Resistance Can Become New Support The upward trend is confirmed as price establishes a higher swing pivot low.
Resistance Zone Old Resistance is a Catalyst for the New Support Zone

Support Zone
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126

Know That Old Support Can Become New Resistance


Resistance Zone Old Support is a Catalyst for the New Resistance Zone

Support Zone

The downward trend is confirmed as price establishes a lower swing pivot high.
127

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Remember a Key Concept


Wait for pivot confirmation. Support is not established until price is forced higher by demand.
Remember, all other expressions of technical support are theoretical until confirmed. (e.g., moving averages, trend-lines, etc.)

Dont assume support or resistance zones will hold. Always wait for confirmation of a pivot.
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Resistance is not established until price is driven lower by supply.


Remember, all other expressions of technical resistance are theoretical until confirmed. (e.g., moving averages, trend-lines, etc.)
128

Understand that the strength of pivots directly


correlates to the strength of historical support & resistance zones

Major Res.

Intermediate Res.

Minor Sup.

Intermediate Sup. Minor Res.

Major Sup.
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The bigger the pivot, the more difficult pushing price can become.

129

Understand a Support & Resistance Re-Test


When support/resistance zones are retested
The market can strengthen the opinion of the price zone and hold. The re-test can weaken the price zone which can lead to a future failure of the zone.

Resistance is re-tested three times and fails under the pressure of demand.

Support is re-tested three times and holds as a major price zone.

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130

Practice Plotting Support & Resistance Studies

Hold the shift key to plot the lines straight

The best way to develop a solid understanding of support & resistance is to practice using the powerful tools inside of the MachTraderTM software.
131

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Understand Trends
Life Cycle of Trends
Motive Waves Corrective Waves

Trends are defined by pivot points. Strength of Trend


Minor Intermediate Major
The old stock market saying is that the trend is your friend. Learning to properly identify and read trends is an essential skill every trader must know. Learning to trade with the trend is the next step on the path to success.
132

Forecasting Trends
Trend Studies

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Understand the Swing Cycles in Trends


W av e

Corrective Waves

M ot iv

M ive ot

W av e

e av

M ot iv

eW tiv Mo

Corrective Waves
Uptrend
Price is driven by bullish motives. Motive waves are longer than corrective waves. Trends on all time frames follow this general pattern.

e av

Downtrend
Price is driven by bearish motives. Motive waves are longer than corrective waves. Trends on all time frames follow this general pattern.

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133

Recognize the Life Cycle of Trend


Bullish example of a macro or major uptrend

Uptrend occurs in longer waves or cycles of accumulation (buying) and shorter cycles of distribution (selling) Can you spot the various cycles? Downtrends are comprised of similar bearish cycles in an upside-down mirror image of the bullish cycles.
134

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Learn to Use Trend Studies


Understand that there are trends within trends
Major Intermediate Minor

Identify the trends


Major Intermediate Minor

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135

Use the Trend Studies

Select the desired trend study from the toolbar Plot the trend study on the chart The key to successfully using trend studies is practice, practice, practice
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136

Understand How to Properly Plot a Trend Study


Forecasted Trend Zone

Forecasted Trend Zone

Connect a minimum of two pivots and project the line to the right into the future. Trend zones can be catalysts for changes in price. Watch for confirmation of trend with formation of a pivot in the trend zone.

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137

Recognize Trend Zones as Catalysts for Support & Resistance


Trend zones can help cause traders to make decisions concerning a security. Decisions to buy and sell influence other traders. Trend zones can be strong catalysts for changes in the direction of price. Notice the price channel or trend channel during the down trend. Notice the pivot on the top side of the trend line after the breakout.

Tr

en

dS up

po r

tZ

on e

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138

Recognize Trend Zones as Catalysts for Resistance & Support


Trend zones can act as catalysts for resistance. Notice the uptrend channel.

d en Tr ne d o ste e Z ca anc re t Fo esis R

F or e c Res asted Tr istan e c e Z nd one

Notice that this is the same security trading into minor trend resistance and major downtrend resistance. What is likely to happen next?

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139

Test Your Knowledge


Trends are defined by moving averages.
TRUE FALSE

Trend lines are support.


True False

Which type of pivots define the strongest trends?


Major Intermediate Minor

When trading in a trend zone, it is important to wait for pivot confirmation.


True False

Trading with the trend will improve your odds.


True False?

Trend zones can be catalyst for both support and resistance.


True False

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140

Practice Plotting Trend Studies

Use a straight edge and hand draw some support/resistance trend lines.
Major Intermediate Minor

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141

Understand Pivots and Momentum


Momentum measures price movement over time. In essence, Momentum is the rate of change. Meaningful information can be derived from the acceleration or deceleration of price.
Increasing Momentum is
An acceleration of price movement over time. A strong indication that a trend is likely to continue
A clear understanding of momentum can help traders and investors make more intelligent decisions when money is on the line.

Slowing Momentum is.


A decrease in in price movement over time. A strong indication that trend is weakening and potentially ready to reverse.

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142

Recognize Slowing Momentum The distance between pivots is the purest measure of momentum. $3
$1

$2

This trend is losing momentum as the rate of change decreases.


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143

Increasing Momentum Up
Easy to identify Holds true in both directions up/down Reliable on all time frames Easy to calculate
(R1 R2) > (R2 R3)

R1 = resistance 1 R2 = resistance 2 etc

Trend has strengthened and price likely to continue the upward trend
144

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Increasing Momentum Down


Easy to see Holds true in both directions up/down Reliable on all time frames Easy to calculate
(S2 S1) > (S3 S2)

S1 = support 1 S2 = support 2 etc

Trend has strengthened and price likely to continue the downward trend.
145

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Slowing Momentum Up
Easy to see Holds true in both directions up/down Reliable on all time frames Easy to calculate
(R1 R2) < (R2 R3)

Trend is losing momentum and may fail


R1 = resistance 1 R2 = resistance 2 etc

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146

S1 = support 1 S2 = support 2 etc

Slowing Momentum Down


Easy to see Holds true in both directions up/down Reliable on all time frames Easy to calculate
(S3 S2) > (S2 S1)

Trend is losing momentum and may fail

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147

Recognize Momentum in Candlesticks


Slowing Increasing

Candle range, patterns and shadows are often a good indication of pivots forming on a smaller time frame.

Slowing
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Increasing
148

Verify Your Understanding

This stocks upward momentum is


Increasing Decreasing
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This stocks upward momentum is


Increasing Decreasing
149

Verify Your Understanding

This stocks downward momentum is


Increasing Decreasing
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This stocks downward momentum is


Increasing Decreasing
150

Identify Candles & Momentum

Pay close attention to the proximity of the candles. The distance between the tops and bottoms of candles can be a clear indication of momentum on smaller time frames.

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151

Understand Essential Reversal Patterns


Identifying Key Reversal Patterns
Double Tops Double Bottoms Head and Shoulder Tops Inverted Head and Shoulder Bottoms
Traffic signs help alert drivers to the driving conditions ahead. In a similar fashion, reversal patterns alert traders and investors to the possibly changes in market conditions ahead.

Slowing momentum can help a trader anticipate the forming of these classic reversal patterns.

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152

M Stands for Murder Because Double Tops Can Confirm the End of an Uptrend

A failure to make a new high Resistance holds Failure of support Also watch for triple tops

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153

W Stands for Win Because Double Bottoms


Can Confirm the End of a Downward Trend

A failure to make a new low Support holds Resistance fails Also watch for triple bottoms

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154

Head and Shoulders Top


Head Left Shoulder Right Shoulder

Neckline

Classic reversal pattern that can signal the end of a trend Failure to make a new high Violation of neckline Failure of support

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155

Head and Shoulders Bottom


Classic reversal pattern that can signal the end of a trend Failure to make a new low Violation of neckline Failure of resistance

Neck Line

Left Shoulder Head


156

Right Shoulder

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Understand the Power of Essential Continuation Patterns


Bullish Continuation Patterns
Bullish Retracements High Base Breakouts Cup and Handle Breakouts Ascending Triangles Symmetrical Triangles

Bearish Continuation Patterns


Bearish Retracement Low-Base Breakdowns Inverted Cup and Handle Breakdowns Descending Triangles Symmetrical Triangles

Learn to harness the power of continuation & breakout patterns.

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157

Bullish Retracement

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158

High-Base Breakout

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159

Recognize a Cup & Handle


The ability to spot a forming cup and handle can create tremendous opportunity.
Resistance Zone

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160

Recognize an Ascending Triangle


The ability to spot a forming ascending triangle can create tremendous opportunity.

Resistance Zone

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161

Recognize Symmetrical Triangles

Symmetrical Triangles have the potential to break up or down. The consolidation in price can lead to an explosive breakout.

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162

Bearish Retracement

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163

Low-Base Breakdown

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164

Recognize an Inverted Cup & Handle


The ability to spot a forming inverted cup and handle can create tremendous opportunity.

Support Zone

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165

Recognize a Descending Triangle

Support Zone

The ability to spot a forming descending triangle can create tremendous opportunity.
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166

Recognize Symmetrical Triangles


Symmetrical Triangles have the potential to break up or down. In a bearish trend, the consolidation in price can lead to an explosive breakdown.

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167

Know How to Interpret Volume


Price & Liquidity
Adding Liquidity Subtracting Liquidity

Volume & Pivots Increasing Volume Decreasing Volume Volume & Price Breaks Volume generated by news.
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Institutional & individual market participants affect price by


Adding to liquidity of a security Subtracting from the liquidity of a security
168

Adding Liquidity
Liquidity was added to the market in the $19 price range.
An increase in the available supply Price drops as a result of the increased supply The increased activity among traders is indicated by the above average volume.
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Increased liquidity

169

Subtracting Liquidity
Liquidity was subtracted from the market as price dropped into the $28 to $25 price range.
A decrease in the available supply Price runs as a result of the decreased supply The increased activity among traders is indicated by the above average volume.

Decreased liquidity

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170

Understand Volume & Pivots

Above average volume often accompanies the formation of pivots.


Indicative of either an addition of liquidity or a subtraction of liquidity.
Above average vol. can precede the pivot. Above average vol. can occur with the pivot candle. Above average vol. can accompany the pivot confirmation change in direction.
171

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Recognize Increasing Volume


Increasing volume
Increased demand Increased liquidity Demand > Supply
Not enough liquidity Price increases as a result

High volume is indicative of strong participation in the trends motive waves.

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172

Recognize Decreasing Volume


Decreasing volume
Decreased demand Decreased liquidity Lower-average readings on histogram Negative slope on moving average

Low volume is indicative of decreasing. participation in the rising trends motive waves. Waning Volume can warn of pending reversal.

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173

Understand Volume and Price Breakouts


Bullish Breakouts in price subtract liquidity from the market as demand consumes supply.

Resistance

Subtracting Liquidity

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174

Understand Volume and Price Breakdowns

Support

Bearish Breakdowns in price add liquidity as supply floods the market.

Adding Liquidity

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175

Know that News Can Cause Volume

4th Quarter Earnings Report

1st Quarter Earnings Report

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176

Volume Activity
Mark only true statements
What can the volume tell us about the price run up?
Increased participation Decreased participation More stock was purchased than was sold

What can volume tell us about the price correction?


Increasing participation Decreasing participation More sellers

What can the moving average on the volume indicate?


Increasing participation Decreasing participation Above or below average participation The stock will go up
177

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Understand Gaps
What are Gaps and what causes them?
A break between prices on a chart that occurs when the price of a stock makes a sharp move up or down with no trading in between Gaps can be caused by various factors. Gaps can occur under regular buying or selling pressure or can be caused by the introduction of new information such as news, earnings, analyst recommendations etc

What do they mean?


Types of gaps
Common Runaway Breakaway Exhaustion Catastrophic

Gaps present both opportunity and risk.

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178

Common Gaps
Gaps commonly occur on daily charts. Can be caused by a variety of events
Typically caused by an imbalance in inventory

Common Gaps have a tendency to fill as inventory shifts & price corrects.
179

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Breakaway Gaps
Price breaks out of a trading range Have explosive volume Can signal the start of a new trend or continuation of an existing trend Often coupled with a continuation chart pattern
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180

Runaway Gaps
Price is already in a trend Increase interest in stock suddenly occurs Gap continues in the trend without a retracement Volume spikes with gap due to increased interest
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181

Exhaustion Gaps
Can occur at the end of a good up or down trend Gaps from the previous days close Typically accompanied by above average volume Gaps tend to fill as the supply and demand shifts at the new price level Can easily be mistaken for a runaway gap After the initial gap fills, a new trend direction is established

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182

Catastrophic Gaps
Bad news Stock price drops dramatically over night Heavy volume created by news
Example
Drug company announces new wonder drug trials prove ineffective

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183

Chapter 3 Quiz
Which of the following is Support?
An upward movement in price The 20 period moving average A trend line drawn on a chart Candlesticks can express slowing momentum on a smaller time frame.
True False

Which of the following is not a catalyst for support/resistance pivots?


Trend Zones Moving Averages Historical support/resistance zones A Stochastic

There is a buyer & a seller for every transaction registered by the exchange.
True False

A reversal pattern can signal the potential end of a trend.


True False

Slowing Momentum is when the vertical distance between pivots


Increase Decrease

Gaps always fill.


True False

Which of the following is not a continuation pattern?


High Base Cup & Handle Head & Shoulders Ascending Triangle

Minor trends are drawn on what type of pivots?


Minor Intermediate Major

Major pivots are what type of catalysts for price change?


Major Intermediate

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184

Chapter 4: Learn & Apply Secondary Indicators

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185

Chapter 4: Learning Objectives


Learn & Apply Secondary Indicators
ATR
Understand the statistical significance & power of the ATR

Moving Averages
Understand popular moving averages Differentiate between simple and exponential moving averages
13 exponential, 20 simple, 50 simple, 200 simple Relationship to price Crossovers

MACD (Moving Average Convergence Divergence)


Understand: the MACD main line, the trigger or signal line and the center based momentum oscillator characteristics.

Stochastic
Understand: overbought/oversold indications, the 20 & 80 lines and the signal line.

Relative Strength Index


Understand how to read the slope of the indicator and identify overbought and oversold conditions. 186

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Learn About the Average True Range

Average True Range


An indicator that measures the average candle range over a user specified time frame The default setting is 14 periods.
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How to Read Average True Range (ATR)


The running average is reported in price on the scale to the right. The above example reads 2.7184 dollars This security has an average range of $2.7
187

Add Average True Range (ATR) to a Chart

Right click on a chart.


Select Add Study. Select Average True Range (ATR). Keep default setting or make personal adjustments. Select OK.

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188

Understand Which Stock Moves More


$33 Stock $0.80 ATR

$33 stock $1.98 ATR


ATR can provide an understanding of potential price movement. ATR can also be used to help determine Potential Average Yield for day trading purposes Placement of protective stops Daily Volatility Estimates

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189

Understand ATR & Potential Short-Term Yields

Which stock could potentially provide the highest percent daily yield?
XYZ = $31.72 stock $1.84 ATR
$1.84 $31.78 = .057 or 5.7% $4.11 $101.59 = .040 or 4.0%

PDQ = $101.59 stock $4.1One ATR Which stock could provide a better bang for the buck?
XYZ PDQ

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190

Understand Moving Averages


Popular form of basic-technical analysis Essential types of moving averages
Simple (SMA) Exponential (EMA)
weighted

User defined parameters


Popular Moving Averages
13 exponential 20 simple 50 simple 200 simple

Common applications
Assist in interpreting trends
Minor, Intermediate, Major Violations and Crossovers Overbought, Oversold. As potential catalysts for change

Assist in determining changes in trend Assist in interpreting price action Assist in trade identification

A savvy technician can use a moving average in many different ways when applied to a chart.

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191

Understand Simple Moving Average (SMA) Calculation


Lets assume we have 10 periods of data.
3, 4, 5, 6, 7, 8, 9, 9, 9, 8

Lets calculate a 5 period Simple Moving Average (SMA).


Last 5 points of data
8 + 9 + 9 + 9 + 8 = 43 43 5 = 8.6

The Moving Average calculation is re-tabulated & plotted on the chart with each new point of data that is introduced. Notice that even a 5 period moving average is lagging.

5 periods of data calculated & then plotted on the chart

Price data is plotted in red. Moving average calculation plotted in blue.

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192

Understand Simple vs. Exponential


An exponential moving average is weighted.
The closing price of the two most recent candles is emphasized in the calculation of an exponential Moving Average. Exponential Moving Averages are more sensitive to changes in price trend because the most recent data is more heavily weighted.

the blue EMA the red SMA

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193

Understand that Moving Averages Do NOT Define Trends


Moving averages are lagging indicators.
Price clearly changes from trending up, turns sideways, & then drops. The moving average still measures an upward slope.

Price defines trend & market sentiment.


Moving averages are secondary lagging indicators that reflect where a stock has been, not where a stock is going.
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Using only 5 periods of data the price has changed direction but the moving average is lagging. Even fast moving averages are lagging.

194

Understand How Moving Averages Can Assist in Reading Trends


Pivots Define Trend .
Moving averages can serve as secondary confirmation.

Price remains below the 200 SMA.


Helping to confirm that this stock is still in a major pivot downtrend

Price has moved above the


13 EMA, 20 SMA, 50 SMA Helping to confirm that this stock is in a minor to intermediate pivot uptrend

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195

Understand Who Watches What


Different types of market participants value different moving averages.
Short-term traders
Fast moving averages
13 EMA & 20 SMA

Long-te rm

Longer-term participants
Slow moving averages
50 SMA & 200 SMA

Not all participants choose to use the same moving averages.

m er t-t or Sh erm d.-t tme in

Moving averages are only of value to those people who choose to use them and actually apply them on charts.
196

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Understand How Moving Averages Can Assist in Confirming a Change in Trend


Violations occur when price closes on the other side of the moving average. Moving Average Crossovers occur when fast moving averages cross slower moving averages.

Price close above MAs can help confirm change in trend.

MA crossovers can help confirm change in trend.


197

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Understand How Moving Averages Can Help Identify Overbought & Oversold Conditions
Price has moved too far away from the average & is likely to revert to the mean.

Price has moved too far away from the average & is likely to revert to the mean.

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198

Understand that Moving Averages Can Be Catalysts for Change


Moving averages can be a catalyst for change. However, it is important to wait for pivot confirmation.

Moving averages can be a catalyst for change. However, it is important to wait for pivot confirmation.
199

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Verify Your Knowledge


True or False
Moving averages define trends.
True False

Choose the correct answers.


A moving average crossover is
always a good time to buy always a good time to sell a secondary confirmation of change in trend no good

Moving averages can be secondary confirmation for trends.


True False

Stocks always bounce off of moving averages.


True False

An exponential moving average is


weighted better than a simple more sensitive to price and momentum

Moving averages can be catalyst for change.


True False

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200

Master the MACD


(Moving Average Convergence Divergence)
Developed by Gerald Appel The MACD was developed to help determine overbought or oversold conditions in the market. The MACD Line is the difference between the long-and-short exponential moving averages of the selected security. The Signal Line is an exponential moving average of the MACD Line. Signals are generated by the relationship of the two lines. MACD is a Center or Zero Based Oscillator and is particularly good at reading momentum and displaying indicator divergence. The MACD with Histogram is a zero-based oscillator.

MACD Line Signal Line Histogram


201

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Understand the Histogram

0.7322 - 0.8517 = -0.1195

The Histogram measures the difference between the MACD Line & the Signal Line. This measure determines if the lines are convergent or divergent.

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202

Recognize MACD Buy & Sell Signals


The Master Trader technique is to consider the textbook signals as secondary confirmation only Textbook MACD Sell Signals

Textbook MACD Buy Signals

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203

Recognize MACD Indicator Divergence

Bearish Divergence

Bullish Divergence
204

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Verify Your Knowledge


Which condition best describes this MACD indicator?
Bullish Divergent A good time to sell

What does the MACD histogram indicate about momentum?


Slowing or decreasing Expanding or increasing

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205

Examine the Stochastic


Developed by George Lane The Stochastic Oscillator compares the current close relative to the price range over a user defined time period. The Main Line called %K is a percentile of the price range over the specified time period that will range between 0 and 100. The Signal Line called %D is a user specified simple moving average of the main or %D Signals are generated by the relationship of the two lines and the overbought/oversold zones.
The 80 Line represents the top 20% of the specified period range and can be considered over bought. The 20 Line represents the bottom 20% of the specified period range and can be considered oversold.

above 80 overbought

Main %K Line Signal %D Line

below 20 oversold
206

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Recognize Stochastic Buy & Sell Signals


Recognize classic buy signals.
Main Line %K crosses above the 20% line Main Line %K crosses above the Signal Line %D
Signal line cross can be prone to whipsaws

Recognize classic sell signals.


Main Line %K crosses below the 80% line Main Line %K crosses below the Signal Line %D
Signal line cross is prone to whipsaws

sell signals

Master Trader technique suggest only using the stochastic oscillator as secondary confirmation.
buy signals
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207

Recognize Stochastic Indicator Divergence

Bearish Divergence

Bullish Divergence
208

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Verify Your Knowledge


Which statement best describes the condition of this Stochastic Indicator?
Oversold Overbought Buy signal confirmation Sell signal confirmation
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209

Read the RSI (Relative Strength Index)


Developed by Welles Wilder RSI is a price-following oscillator that ranges between 0 and 100. Designed to read overbought & oversold conditions, as well as provide strength of trend readings over a user specified time period. The RSI Line measures and compares the magnitude of upward price change to downward price change. The RSI reads Overbought & Oversold Conditions.
Above 70 is overbought Below 30 is oversold

above 70 overbought

below 30 oversold RSI Line Overbought > 70 Oversold < 30


210

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Customize the RSI


Trick of the Trade
Customize the setting on the RSI to achieve a strong visual indication of overbought & oversold conditions Select Lines with Bands and Shading Customize the band color Overbought & oversold conditions will pop off of the screen

above 70 overbought

below 30 oversold

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211

Recognize Relative Strength & Weakness


Relative Strength Relative Weakness

RSI Line Over 50 Under 70 Positive Slope

RSI Line Under 50 Over 30 Negative Slope

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212

Recognize RSI Indicator Divergence


Oversold & Divergent
Confirmed Reversal

Overbought & Divergent

Potential Reversal

Bearish Divergence

Bullish Divergence
213

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Verify Your Knowledge


Which statement best describes the condition of this RSI indicator?
Overbought Oversold Divergent Overbought & Divergent Oversold & Divergent

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214

Chapter 4 Quiz
Identify the false statement.
Indicators can provide secondary confirmation. Indicators can provide signals of confirmation. The MACD can predict a change in trend. The RSI can help identify overbought & oversold conditions. The ATR can help identify the average daily trading range of a stock.

Identify the true statement.


Stocks bounce off of moving averages. When a stochastic crosses below 80 that stock is going to go down. The 20 period SMA defines trend. A clear and concise understanding of price & volume is more important than secondary indicators.

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215

Chapter 5: Master The Bullish Retracement

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216

Chapter 5 Learning Objectives


Learn to apply the S.U.C.C.E.S.S. Model for the Bullish Retracement
Survey the Market
Learn how to properly survey the market and identify conditions that are conducive to the Bullish Retracement. Know when to call this play. Learn to scan for & identify the Bullish Retracement Pattern.
Top Down Learn how to identify Sectors & Indices with bullish retracement patterns. Bottom Up - Learn which SeekerTM scans to run.

Use MachTraderTM to identify to identify and research potential trades

Learn to technically Score the Charts. Learn how to structure trades using stock as the tradeable instrument. Learn to identify and estimate reward & risk. Learn to estimate what the stock can P.A.Y. (Potential Average Yield). Learn to use the P.R.E.P. Calculator& Risk Graphs during the planning phase of the trade. Determine at what price to place potential entry and exit orders. Learn to implement the trade according to plan. Supervise the trade & learn to make the proper trade adjustments. Learn to use the Master Trader journal to track cumulative-trading performance.

Choose the Tradeable Instrument


Carefully Plan & Prep the Trade

Execute the Trading Plan


Supervise the Trade Systematically Journal & Review

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217

S.U.C.C.E.S.S. with the Bullish Retracement

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218

Learn to Call the Right Play from the Playbook Understand the pattern Know when to call the Bullish Retracement
Identify broad market trend. Top down approach
Identify bullish Sectors & Industry Groups.

Understand the power of the SeekerTM


Powerful Pattern scans Scan by Sector/Group

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219

Recognize the Pattern


Bullish Retracement
R et ai l

Buy Low (Wholesale) Sell High (Retail)

Consistent Repeatable Pattern


Price pattern that occurs frequently High Probability of trend continuation
The trend is your friend.

Learn the Master Trader techniques for managed risk entry.


220

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ho

le s

al

S U C C E S S

Create & use broad market layouts in MachTrader.TM


Broad Market Indices
Sectors
Industry Groups

Read the charts to identify bullish areas in the market.


221

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S U C C E S S

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222

S U C C E S S

Master Trader scans


Bullish Retracement
***Automatic Primary Scoring***
Available in Mach II & Mach III

Filter
Minimum Price Maximum Price Minimum Average Volume (in thousands) Exchange Minimum 5 Star Ranking Sector & Industry Group*
(Avail. in Mach II & Mach III)

Swing scans
Daily Swing Buy Watch Daily Swing Buy Triggered Weekly Swing Buy Watch Weekly Swing Buy Triggered

Mach scans
Bull Area Stock Bouncing off of Rising 20 Mov Avg.

Bullish Daily & Weekly Candlestick scans


Doji Engulfing Hammer Harami Star

Fundamental scans
Top 50

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223

S U C C E S S

Score the Chart Technical Trade Identification 7 core price and volume criteria. Individual traders can add personal rules and filters.

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224

Know the Bullish Retracement Price & Volume Conditions

Uptrend
Higher swing pivot highs & higher swing pivot lows are what define an uptrend.

Increasing Trend Momentum


The vertical distance in price between resistance pivots is the best measure of momentum. Expanded resistance is a strong indication of a strengthening trend.
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225

Know the Bullish Retracement Price & Volume Conditions

Corrective Retracement
An orderly price retracement from the swing pivot high for a minimum of three periods is typical of a profit-taking selloff.

Slowing Retracement
Decreasing candle range indicates that the sell-off is losing momentum. Decreasing vertical distance in price between candle bottoms also indicates slowing.
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226

Know the Bullish Retracement Price & Volume Conditions

Technical Catalyst
Price should be trading near a technical catalyst that can help initiate change. Catalysts include: support/resistance zones, trend zones, moving averages & Fibonacci retracements.

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227

Know the Bullish Retracement Price & Volume Conditions

Reversal Candle
A reversal candle can signal change. Watch for: Doji, Hammer, Harami, Engulfing, etc... opening price.

or a closing price >

Volume
Decreasing or below-average volume indicates decreasing participation during the sell-off. Volume tends to increase near the technical catalysts as traders act & react.
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228

Score the Chart

Inverted Hammer

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229

S U C C E S S

Secondary Confirmation & Routine Checklist. Eight-point secondary check list Be thorough. Individual traders can add personal rules and filters to this checklist.

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230

Know the tradeable Instruments for the Bullish Retracement


S U C C E S S

Master Trader
Long Stock Understand Trading with Stock
Costs
Commission In Commission Out Bid-Ask Spread Slippage Points multiplied by shares
(e.g., 100 shares x 1 point = $100 )

Cash Flow Options


Long Calls Short Puts Covered Calls Leaps Calendar Spreads Bull Call Spreads Bull Put Spreads Ratio Spreads All Instruments Complex Combos Advanced Adjustments Dynamic Hedging

Spread Trader

Leverage

Elite Options & Technical Mastery


Potential Reward/Risk
Unlimited reward Maximum possible risk is theoretically the entire dollar value of the position Position Sizing Protective Stop Loss

Bullish Retracement pattern is compatible with other trading instruments.


Futures F.A.C.T (Futures & Commodities Trading) Foreign Currencies Focus Forex 24/7 currencies Trading

Master Trader Risk Management


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231

S U C C E S S

Long Stock Risk Profile

Use the Risk Graphs


Understand the tradeable instrument Master Trader instrument is long stock
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232

S U C C E S S

Know how to plan & P.R.E.P. your trades


Price Trigger Realistic Target Exit Stop Loss Position Size
Personal Position Sizing Personal Risk Tolerance Reward to Risk Ratios Personal Trade Management Rules

Apply personal trading discipline


Careful planning will help ensure that you make intelligent decisions and mitigate the powerful effect that emotions can have on traders.

Use the Trade P.R.E.P. Calculator.


Pre-determine the game plan for the trade.

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233

S U C C E S S

Use the Trade P.R.E.P. Calculator


User defined inputs Designed specifically for Master Trader strategies Pre-determine Price Trigger, Exit Stops, Realistic Targets & Position Size Automates Order Entry Prices Potential Position Sizes Trade Costs Break Even Point Reward/Risk Ratios Capital Requirements Compliance with Personal Rules User defined money management Account Size Asset Allocation Risk Tolerance

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234

S U C C E S S

Understand Pay Days


Average number of candles between swing pivots

Understand Pay Range


Average number of points between swing pivots Identify potential support zones. Identify potential resistance zones. Understand Average True Range. Understand the potential
Risk
Entrance Price Protective Stop Loss

Understand Potential Average Yield (P.A.Y.)


Average number of periods and points in a typical price swing

Learn to choose stocks that meet your personality and financial goals.

Reward
Estimated Target Entrance Price

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235

Identify Known Support & Resistance Zones


The last swing high R1 is minor resistance. The previous swing high R2 is where old resistance could act as a catalyst for new support. Price is trading near a catalyst and has a reversal candle. A new support pivot could be forming in this zone. Wait for it to trade above the last candle for confirmation of a possible buy.

Pivot Confirmation Price Zone

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236

Identify The Potential Reward to Risk Ratio


Buying the stock at the pivot confirmation price helps ensure that the uptrend is resuming. Plan the trade.
Target at known resistance Protective stop loss below the current candle low
Potential Risk

An eyeball assessment of potential risk compared to potential reward looks very appealing. There is twice as much potential reward as potential risk. R/R ratio is 2 to 1.

2 to 1 Reward to Risk Ratio

Potential Risk Potential Risk

Potential Reward

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237

Identify The Average True Range (ATR)


The ATR of a stock is a vitally important piece of information for short-term traders.
Potential Daily Yield
Day traders target

Critical information when determining the placement of protective stop losses


Place stops outside of one ATR from the trigger price.
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ATR can help estimate the probabilities for daily candle range.

238

Understand P.A.Y. Days


P.A.Y. Days = Time Expectancy The estimated average number of days in a typical price swing between pivots
S3 to R3 = 6 periods S2 to R2 = 5 periods S1 to R1 = 7 periods

Three swing ranges calculated

5 + 6 + 7 = 18 3 = 6

Quick estimate = 6 periods

Potential average time yield is about six days between pivots


How many periods could the next swing potentially take?
Approximately six-trading periods
Based on quick estimates, six periods is a typical time expectancy.
239

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Understand P.A.Y. Range


P.A.Y. Range = Price Expectancy

The estimated average number of points in a typical price swing between pivots
S3 to R3 = 6.00 points S2 to R2 = 6.50 points S1 to R1 = 7.00 points

Three-swing ranges calculated

6.00 + 6.50 + 7.00 = 19.50 3 = 6.50

Quick estimate = 6.5 points

Potential average price yield is about 6.50 points between pivots


How many points could the next swing potentially yield?
Approximately 6.5 Points
Based on quick estimates, 6.5 points is a typical price yield.
240

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Understand the Potential Average Yield


P.A.Y. (Potential Average Yield)
The estimated average number of points and periods in a typical swing between pivots
S3 to R3 = 5.00 points over 6 periods S2 to R2 = 5.50 points over 5 periods S1 to R1 = 6.00 points over 7 periods 5 + 6 + 7 = 18 3 = 6 periods 6 + 6.5 + 7 = 19.5 3 = 6.5 points

Three-swing ranges calculated

Quick estimate = 6.5 points over 6 Periods

Potential Average Yield is about 6.50 points over 6 periods


What could the next swing yield?
Approximately 6.5 points/ 6 periods

Based on quick estimates, 6.5 points over 6 periods is the Potential Average Yield
241

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Master Trader Trigger


Buy above the signal candle.
Place a Buy Stop Order above the signal candle
A Buy Stop Order will be executed at the specified price or higher.

Use a percentage of the ATR as a confirmation filter or buffer.


(e.g., 5% to 10% of the ATR) 10% of $1.91 = .19
19 cents

A Buy Stop Order placed above the signal candle high requires an upward move in price to trigger.

5% of $1.91 = .095
9 to 10 cents

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242

Master the Protective Stop Loss


Once the entry order is filled, the position is exposed to risk. Protect your capital by using a Protective Sell Stop.
5 to 10 percent of the ATR below the signal candle low will usually do the trick.

Use Sell Stop Market Orders


Sell Stop will trigger a market order Market order will help ensure rapid execution.

Place the Sell Stop Order at the same time as the Buy Order.
A one triggers other order known as an OCO can help ensure that a protective stop is in place.

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243

Know Master Trader Targeting Techniques


Basic Target
One ATR
1 to 1 reward to risk minimum

Tgt 3

Intermediate Target
Swing high resistance (R1)
2 to 1 reward to risk or better is desirable

Tgt 2 Tgt 1

Extended Target
Forecasted Potential Average Yield Trend Resistance

Use Sell Limit Orders for Targets


Will sell at the specified price or higher.

Targeting is one of the master traders secrets to success

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244

P.R.E.P. the Trade


Price Trigger
Select a technical price trigger.
Realistic Price Target

Realistic Target
Select a price target.
Choose the Master Trader targeting technique that suits your individual trading style.
Price Trigger

Exit Stop Loss


Identify the technical price for the protective Stop Loss Order.

Exit Stop Loss

Position Size
Use the Trade P.R.E.P. Calculator to help determine an appropriate position size.

Position Size Properly!


Base position size on pre-determined personal rules.
Asset Allocation Risk Tolerance

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245

P.R.E.P. this Trade Using the Calculator


Identify KeyTechnical Prices
Signal Candle High Signal Candle Low Potential Targets
Previous Swing High R1 $56.23
Selected price target

Identify
Trigger Price Stop Loss Price Target Price

Signal Candle High $51.50

Selected technical high price

Plug the numbers into the Trade P.R.E.P. Calculator.

Selected technical low price

Signal Candle Low $49.94

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246

Crunch The Numbers


Plug in the Key-Trade Data to Help P.R.E.P the Trade
Select Long vs. Short trade. Input the current ATR. Apply personal-trigger buffer.
ATR % buffer Above High ATR % buffer Below Low

Selected High Price. Selected Low Price. Identify Realistic Targets.


Basic, Intermediate, & Extended

Manage Your Money


Input current trading account balance. Input maximum percentage for Asset Allocation. Input maximum percentage for Risk Tolerance. Account for potential slippage. Account for round trip commissions. Input the desired position size.

Manage Trading Costs


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247

Assess the Risk & Reward


Study the potential trading plan. Pre-determine
Price Trigger Entry
Stop Price Limit Price

Stop Loss Target Limits

Identify Reward & Risk.


Expressed in dollars Expressed as a ratio

Verify that the plan is in complete compliance with personal rules and discipline.
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248

Re-enforce Disciplined Trading


Choose an Appropriate Position Size
Identify & Understand
Estimated transaction cost Estimated breakeven price Identify earnings date Input fundamental score

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249

S U C C E S S

Place the Buy Stop Limit Trigger Order


Stop Price Will route Limit Order to the exchange if price trades @ the stop price or higher. Limit Price Once routed the order will @ the limit price or lower.

Sell Limit Price $56.23

Sell Limit

Buy Stop Limit Limit $51.69 Stop $51.60 Buy Stop Limit Sell Stop Market Sell Stop Market Low $49.84

Place the Protective Stop Loss


Sell Stop Price Will route a Market Order to the exchange if price trades @ the stop price or lower. Order will fill at the next available price.

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250

S U C C E S S

Supervise the trade & make proper adjustments. Trail Stops


First to the break even point Adjust stops up below the new candle stick lows or according to personal rules.

Allow target to be hit or make an adjustment.

Sell Limit

Take Profits
Close all or part of the position if the target is achieved according to personal rules. Make adjustments to the target according to personal rules.

Manually adjust the Sell Stop up each day.

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251

S U C C E S S

Use the Master Trader Journal

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252

Test Your Knowledge


Sell at $56.23 and higher

1.)

Desired Entry Price $51.69 and lower $51.60 and higher

2.)

3.)

Exit if the stock trades at $49.84 and lower

Properly identify & label the corresponding order types above.

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253

Test Your Knowledge


1. What will happen if the stock price trades at or above the limit order?

2. Based on the most-recent candle, what should be done with the existing manual trailing sell stop?

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254

Practice Identifying the Bullish Retracement

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255

Practice Estimating Risk/Reward


Signal Candle Data
High 32.95 Low 32.04

ATR = 2.1671 Swing High R1 = 38.18 Estimate potential reward using resistance as the target. Estimate potential risk using the signal candle low for the protective stop loss.
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256

P.R.E.P. the Trade


R1 = $38.18

Signal Candle High $32.95

Signal Candle Low $32.04

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257

Practice Executing the Trading Plan


Sell Order? Limit Market

Buy Order? Stop Limit Stop Market

Sell Order? Limit Market Stop Market

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258

Practice Using MachTraderTM


Perform each of the following tasks.
Open MachTrader. Open up a chart. Open up the Seeker. Link the two windows together. Select scans listed in this chapter that are designed to identify Bullish Retracements. Input price & volume filters. Identify how to narrow down a search by sector & industry group.

Perform each of the following tasks.


Identify a candidate that appears to match the Bullish Retracement Pattern. Score the Chart. Identify Expectancy Risk/Reward. Plan the trade using the trade planning worksheet. Place a virtual trade based on the plan. Open up the trading journal and document the virtual trade.

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259

Chapter 5 Quiz
The Bullish Retracement typically will have the best results
In a bear market In a bullish market In a bullish sector In both a bullish market & bullish sector

A proper-position size should be determined by which criteria?


Impulse The technical score A pre-determined asset allocation rule & risk tolerance How much money you want to make.

The Trade Seeker can be used to help identify potential trades.


True False

Journaling is an important part of the trading process.


True False
260

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Chapter 6: Master The Bullish Breakout

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261

Chapter 6: Learning Objectives


Learn to apply the S.U.C.C.E.S.S. Model for the Bullish Breakout
Survey the Market
Learn how to properly survey the market and Identify conditions that are conducive to the Bullish Breakout Know when to call this play. Learn to scan for & identify the Bullish Breakout Patterns.
Top Down Learn how to identify sectors & indices with Bullish Breakout patterns. Bottom Up - Learn which SeekerTM scans to run.

Use MachTraderTM to identify and research potential trades

Learn to technically Score the Charts. Learn how to structure trades using stock as the tradeable instrument. Learn to identify and estimate potential reward & risk. Learn to estimate what the stock can P.A.Y. (Potential Average Yield) Learn to use the P.R.E.P. Calculator & Risk Graphs during the planning phase of the trade. Determine at what price to place potential entry and exit orders. Learn to implement the trade according to plan. Supervise the trade & learn to make the proper trade adjustments. Learn to use the Master Trader journal to track cumulative trading performance.

Choose the Tradeable Instrument


Carefully Plan the Trade

Execute the Trading Plan


Supervise the Trade Systematically Journal & Review

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262

Master S.U.C.C.E.S.S. with the Bullish Breakout

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263

Recognize the Pattern


Bullish Breakouts
Buy Breakout Momentum Play
Breakout Confirmation

Consistent Repeatable Patterns


High Base Cup & Handle Ascending Triangles etc Price patterns that occurs frequently High Probability of Trend Continuation
The trend is your friend.

Resistance

Learn the Master Trader techniques for managed risk entry.

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264

S U C C E S S

Broad Market Analysis


Potential Breakout Identified Transportation Index
$TRAN
Check

Run SeekerTM scans for breakouts In the transportation sector.

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265

S U C C E S S

Master Trader scans


Bullish Breakout
Available in Mack II & Mack III

Filter
Minimum Price Maximum Price Minimum Average Volume (in thousands) Exchange Minimum 5-Star Ranking Sector & Industry Group*
(Available in Mach II & Mach III)

Basic scans
Two-Month Highs Today 52-Week Highs Today

Eduscans
Bull Area Stock Bouncing off of Rising 20 Mov Avg. Three-Green Lights Up MACD Crosses Up Stochastic Crosses

Fundamental scans
Top 50

Also, look for hot stocks in other ways outside of the Seeker.TM
In the news Heavily traded Strongest trending

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266

S U C C E S S

Score the Chart Technical Trade Identification Seven-core price and volume criteria. Individual traders can add personal rules and filters.
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267

Know the Bullish Breakout Price & Volume Conditions

Uptrend
Higher swing pivot highs & higher swing pivot lows are what define an uptrend.

Trading within One ATR of Resistance


Correctly timing a breakout is more likely if price is trading within One Average True Range of the resistance zone in question.
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268

Know the Bullish Breakout Price & Volume Conditions

Bullish Continuation Pattern


A recognizable bullish continuation pattern should be present. Watch for: high base, cup & handle, ascending triangle, etc...

Room For Price to Run


Make sure that no historical support/resistance zones will interfere with a healthy run in price. Remember to check plenty of history on both daily & weekly charts.

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269

Know the Bullish Breakout Price & Volume Conditions

Consistent Buying Pressure


Both pivot & candle lows must be registering higher. Higher lows are consistent with an up trend. Reversal patterns can be identified when price trades below pivot support zones.

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270

Know the Bullish Breakout Price & Volume Conditions

Remaining Range
Remember that price is not likely to exceed a typical-trading range, also known as the Potential Average Yield. Make sure that price is not overextended or overbought prior to the breakout.

Volume
Decreasing or below -verage volume indicates that participants are waiting for directional price confirmation. Once direction is confirmed, participation tends to increase as traders act & react.

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271

S U C C E S S

Secondary Confirmation & Routine Checklist Eight-point secondary check list. Be thorough. Individual traders can add personal rules and filters.
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272

Score the Chart

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273

Know the tradeable Instruments for the Bullish Breakout


S U C C E S S

Master Trader
Long Stock Understand Trading with Stock
Costs
Commissions In Commission Out Bid-Ask Spread Slippage Points Multiplied by Shares
(e.g., 100 shares x 1 point = $100 )

Cash Flow Options


Long Calls Short Puts Covered Calls Leaps Calendar Spreads Bull Call Spreads Bull Put Spreads Ratio Spreads All Instruments Complex Combos Advanced Adjustments Dynamic Hedging

Spread Trader

Leverage

Elite Options & Technical Mastery


Potential Reward/Risk
Unlimited Reward Maximum possible risk is theoretically the entire dollar value of the position. Position Sizing Protective Stop Loss

Bullish Retracement pattern is compatible with other trading instruments.


Futures F.A.C.T (Futures & Commodities Trading) Foreign Currencies Focus Forex 24/7 currencies Trading

Master Trader Risk Management


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274

S U C C E S S

Long Stock Risk Profile

Use the Risk Graphs


Understand the tradeable instrument Example of Long Stock

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275

S U C C E S S

Use the Trade P.R.E.P. Calculator


User defined inputs Designed specifically for Master Trader strategies Pre-determine Price Trigger, Exit Stops, Realistic Targets & Position Size Automates Order Entry Prices Potential Position Sizes Trade Costs Break Even Point Reward/Risk Ratios Capital Requirements Compliance with Personal Rules User defined money management Account Size Asset Allocation Risk Tolerance

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276

S U C C E S S

Understand Pay Days


Average number of candles between swing pivots

Understand Pay Range


Average number of points between swing pivots
Identify potential support zones. Identify potential resistance zones. Understand Average True Range. Understand the potential
Risk
Entrance Price Protective Stop Loss

Understand Potential Average Yield (P.A.Y.)


Average number of periods and points in a typical price swing

Reward
Estimated Target Entrance Price

Learn to choose stocks that meet your personality and financial goals.
277

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Understand Breakout Expectancy


Identify potential support zones. Identify potential resistance zones. Identify the ATR. Estimate Potential Average Yield.
The estimated average number of points and periods in a typical swing between pivots

A typical swing range is a reasonable expectancy for the breakout.

Understand the potential


Risk
Entrance Price Protective Stop Loss

Reward
Estimated Target Entrance Price

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278

Identify Known Support & Resistance Zones


The last swing high R1 & R2 are minor to intermediate resistance. The R1 & R2 zone could act as a catalyst for new support after the breakout. S1 is a minor support pivot. S2 is a minor to intermediate support pivot. Check for historicalresistance zones on a historical price zones.
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Remember to look at the historical data to identify old resistance zones.

279

Identify the Potential Reward to Risk Ratio


Buying the stock on the confirmation of the breakout helps ensure that the uptrend is continuing. Plan the trade.
Target at known resistance Protective stop loss below the current candle low
Potential Reward

Potential Risk

An eyeball assessment of potential risk compared to potential reward looks very appealing. There is twice as much potential reward as potential risk. R/R ratio is 2 to 1.

Potential Risk Potential Risk


280

2 to 1 Reward to Risk Ratio

Potential Reward

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Master Trader Trigger


Buy above resistance
5 to 10 percent of the ATR above resistance will usually do the trick. Place the Buy Stop Order above Resistance
Buy Stop Market will get filled @ next available price at or above the stop trigger. Buy Stop Limit will get filled at the limit price or lower once the trigger is hit. Create a window for the Limit Order.
5 to 10 percent of the ATR will usually do the trick.
Place a Buy Stop above the breakout resistance zone.

Couple the Buy Stop with a Limit Order to limit the entry price.

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281

Master the Protective Stop Loss


Once the entry order is filled, the position is exposed to market risk. Protect your capital by using a Sell Stop Closing Order if the price runs the wrong direction. Place protective stops below technical price levels determined by the market.
Candle lows Pivot lows Other technical support zones

Use a small price buffer.


5 to 10 percent of the ATR will usually do the trick.

Sell Stop Market Orders can help ensure a timely exit. Remember:
Protective stops protect trading capital. Mental stops dont work. Place the protective stop at the same time as the entry order.

Once the Buy Stop is triggered, a protective Sell Stop can be activated.
A good brokerage firm provides sophisticated order combinations like OTO (One Triggers Other) & OCO (One Cancels Other) etc 282

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Know Master Trader Targeting Techniques


Basic Target
One ATR
1 to 1 reward to risk minimum

Tgt 3

Intermediate Target
Forecasted Potential Average Yield
2 to 1 reward to risk or better is desirable

Tgt 2 Tgt 1

Extended Target
Trend Resistance Significant Price Zones
Whole numbers Numbers that end in 5 or 0

Use Sell Limit Orders for Targets


Will sell at the specified price or higher. Targeting is one of the master traders secrets to success.
283

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S U C C E S S

P.R.E.P. the trade


Price Trigger Realistic Target Exit Stop Loss Position Size

Forecasted P.A.Y. $36.23

Selected Target

Identify
Trigger Price Stop Loss Price Target Price

Resistance High $31.34

Selected technical high price

Selected technical low price

Plug the numbers into the Trade P.R.E.P. calculator

Candle Low $29.94

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284

S U C C E S S

Forecasted P.A.Y. $36.23

Selected Target

Resistance High $31.34

Selected technical high price

Selected technical low price

Candle Low $29.94

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286


S U C C E S S

Place the Buy Stop Limit Trigger Order


Stop Price Will route Limit Order to the exchange if price trades @ the stop price or higher. Limit Price Once routed, the order will fill @ the limit price or lower.

Sell Limit Price $36.23

Sell Limit

Buy Stop Limit Limit $31.58 Stop $31.42


Buy Stop Limit

Place the Protective Stop Loss


Sell Stop Price Will route a Market Order to the exchange if price trades @ the stop price or lower. Order will fill at the next available price.
Sell Stop Market

Once filled, update your trading journal with actual fill prices.

Sell Stop Market $29.86

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287

X X

What action is needed?

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S U C C E S S

Four-logged trades: three completed and one open positions Two winners & one loser $424.65 & $608.60 & $205.50
289

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Identify & Label the Correct Order Type


___________________________

__________________________

_____________________________

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290

Score the Chart

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291

Practice Estimating Expectancy


Signal Candle Data
Resistance Zone 28.50 S1 Support Pivot 27.50
What is the quick estimate for risk?

ATR = 1.1986 Identify the Pivot Data.


R6 = 28.10 S5 = 23.00 R5 = 25.06 S4 = 22.82 R4 = 28.10 S3 = 26.60 R3 = 28.54

Estimate the P.A.Y. (Do the math)..


What is the average number of candles between pivots?
__________________________

What is the average number of points between pivots?


__________________________

P.A.Y. = $3.59 over 6.75 days


(based on 4 highlighted cycles)

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292

P.R.E.P. the Trade


P.A.Y. = $3.59

R2 & R3 = $28.50

S1 Low = $27.50

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293

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294

What action is needed?

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295

S U C C E S S

Four-logged trades: three completed and one open positions Two winners and one loser $424.65 & $608.60 & $205.50
296

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Practice Using MachTraderTM


Perform each of the following tasks.
Open MachTrader.Open up a chart. Open up the Seeker.TM Link the two windows together Select scans listed in this chapter that are designed to identify Bullish Breakouts. Input Price & Volume Filters. Identify how to narrow down a search by sector & industry group.

Perform each of the following tasks.


Identify a candidate that appears to match the Bullish Breakout Pattern. Score the Chart Identify expectancy Risk/Reward. Plan the trade using the trade planning worksheet. Place a Virtual Trade based on the plan. Open up the trading journal and document the virtual trade.

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297

Chapter 6 Quiz
How Many Core Price & Volume Criteria Can You Identify on this Breakout Pattern Setup?

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298

Chapter 7: Master The Bearish Retracement

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299

Chapter 7: Learning Objectives


Learn to apply the S.U.C.C.E.S.S. Model for the Bearish Retracement
Survey the Market
Learn how to properly survey the market and identify conditions that are conducive to the Bearish Retracement . Know when to call this play. Learn to scan for & identify the Bearish Retracement Pattern.
Top Down Learn how to identify sectors & indices with bearish retracement patterns. Bottom Up - Learn which SeekerTM scans to run.

Use MachTraderTM to identify and research potential trades.

Learn to technically Score the Charts. Learn how to structure trades using stock as the tradeable instrument. Learn to identify and estimate reward & risk. Learn to estimate what the stock can P.A.Y. (Potential Average Yield). Learn to use the P.R.E.P. Calculator& Risk Graphs during the planning phase of the trade. Determine at what price to place potential entry and exit orders. Learn to implement the trade according to plan . Supervise the trade & learn to make the proper trade adjustments. Learn to use the Master Trader journal to track cumulative trading performance.

Choose the Tradeable Instrument


Carefully Plan the Trade

Execute the Trading Plan


Supervise the Trade Systematically Journal & Review

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300

Master S.U.C.C.E.S.S. with the Bearish Retracement

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301

Recognize the Pattern


Bullish Retracement
Sell High (Retail) Buy Low (Wholesale)
R et ai l

Consistent repeatable pattern


Price pattern that occurs frequently High Probability of trend continuation
The trend is your friend.

W sa le ho le

Learn the Master Trader techniques for managed risk entry.

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302

S U C C E S S

Broad-Market Analysis
Potential Bearish Retracement Identified Industrials Construction Index

Run SeekerTM scans for breakouts in the transportation sector.

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303

S U C C E S S

Filter
Minimum Price Maximum Price Minimum Average Volume (in thousands) Exchange Minimum 5 Star Ranking Sector & Industry Group*
(Available in Mach II & Mach III)

Master Trader scans


Bearish Retracement
***Automatic Primary Scoring***

Swing scans
Daily Swing Sell Watch Daily Swing Sell Triggered Weekly Swing Sell Watch/Triggered Bear Area Stock Bouncing off Falling 20 Mov. Avg.

Mach scans

Bearish Daily & Weekly Candlestick scans


Doji Engulfing Dark Cloud Cover Hanging Man Bearish Harami Evening Star Top 50

Fundamental scans

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304

S U C C E S S

Score the Chart Technical Trade Identification Seven-core price and volume criteria. Individual traders can add personal rules and filters.

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305

Know the Bearish Retracement Price & Volume Conditions

Downtrend
Lower swing pivot lows & lower swing pivot highs are what define downtrend.

Increasing Trend Momentum


The vertical distance in price between support pivots is the best measure of momentum. Expanded support is a strong indication of a strengthening trend.

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306

Know the Bearish Retracement Price & Volume Conditions

Corrective Retracement
An orderly price retracement from the swing pivot low for a minimum of three periods is typical of a profit-taking buy-in.

Slowing Retracement
Decreasing candle range indicates that the buy-in is losing momentum. Decreasing vertical distance in price between candle tops also indicates slowing.

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307

Know the Bearish Retracement Price & Volume Conditions

Technical Catalyst
Price should be trading near a technical catalyst that can help initiate change. Catalysts include: support/resistance zones, trend zones, moving averages & fib. retracements.

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308

Know the Bearish Retracement Price & Volume Conditions

Reversal Candle
A reversal candle can signal change. Watch for: Doji, Hammer, Harami, Engulfing, etc... or a closing price < than the opening price.

Volume
Decreasing or below-average volume indicates decreasing participation during the buy-in. Volume tends to increase near the technical catalysts as traders act & react.

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309

S U C C E S S

Secondary Confirmation & Routine Checklist Eight-point secondary check list Be thorough. Individual traders can add personal rules and filters.

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310

Score the Chart


Signal Candle

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311

Know the tradeable Instruments for the Bullish Retracement


S U C C E S S

Master Trader
Short Stock Costs
Commissions In Commission Out Bid-Ask Spread Slippage Broker Call Rate Points Multiplied by Shares
(e.g., 100 shares x 1 point = $100 )

Cash Flow Options


Short Calls Long Puts Protective Calls Put Leaps

Understand Trading with Stock

Spread Trader
Bear Call Spreads Bear Put Spreads Ratio Spreads

Leverage

Elite Options & Technical Mastery


All Instruments Complex Combos Advanced Adjustments Dynamic Hedging

Potential Reward/Risk
Unlimited Reward

Master Trader Risk Management


Asset Allocation Position Sizing Protective Stop Loss

Bullish Retracement pattern is compatible with other trading instruments.


Futures Forex

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312

S U C C E S S

Short Stock Risk Profile

Use the Risk Graphs


Understand the tradeable instrument Example of Long Stock

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313

Identify Known Support & Resistance Zones


The last swing high R1 is minor resistance. The previous swing high R2 is where old resistance could act as a catalyst for new support. Price is trading near a catalyst and has a reversal candle. A new support pivot could be forming in this zone. Wait for it to trade above the last candle for confirmation of a possible buy.

Pivot Confirmation Price Zone

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314

Identify the Potential Reward to Risk Ratio


Buying the stock at the pivot confirmation price helps ensure that the uptrend is resuming. Plan the trade.
Target at known resistance Protective stop loss below the current candle low
Potential Risk

Potential Risk

Potential Reward

An eyeball assessment of potential risk compared to potential reward looks very appealing. There is twice as much 2 to 1 potential reward as potential risk. Reward to Risk Ratio R/R ratio is 2 to 1.

Potential Risk

Potential Reward

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315

Understand Bearish Retracement Expectancy


Identify potential support zones. Identify potential resistance zones. Identify the ATR. Estimate Potential Average Yield.
The estimated average number of points and periods in a typical swing between pivots

Understand the potential


Risk
Entrance Price Protective Stop Loss

Reward
Estimated Target Entrance Price

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316

Practice Estimating Expectancy


Signal Candle Data
High 24.25 Low 23.15
What is the quick estimate for risk?

ATR = 1.15836 Identify the Pivot Data.


R1 = 27.68 S1 = 18.44 R2 = 29.10 S2 = 24.01 R3 = 30.59 S3 = 25.10 R4 = 31.69 S4 = 23.80 What is the average number of candles between pivots?
__________________________

Estimate the P.A.Y. (Do the math)..


What is the average number of points between pivots?


__________________________

P.A.Y. = $6.93 over 6.75 days


(based on 4 highlighted cycles)

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317

S U C C E S S

Use the Trade P.R.E.P. Calculator


User defined inputs Designed specifically for Master Trader strategies Pre-determine Price Trigger, Exit Stops, Realistic Targets & Position Size Automates Order Entry Prices Potential Position Sizes Trade Costs Break Even Point Reward/Risk Ratios Capital Requirements Compliance with Personal Rules User defined money management Account Size Asset Allocation Risk Tolerance

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318

Master Triggers
Master Trader Triggering Technique
Sell below the signal candle low
Place a Sell Stop Order below the signal candle low. The Sell Order will be triggered at the specified price or lower. Use a percentage of the ATR as a filter or buffer. (e.g., 5 to 10 percent of the ATR)
10 percent of $1.58 = .16 16 cents

A Sell Stop Order placed below the signal candle low requires a downward move in price to trigger.

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319

Couple the Trigger with Either a Market or Limit Order


Manage the entry
Sell Stop Market
Once the stop price is triggered, a Market Order will be routed to the exchange.
Market Order will fill at the next available price

Sell Stop Limit


Once the stop price is triggered, a Sell Limit Order will be routed to the exchange
Limit Order will fill at the specified price or better

Use a buffer between the stop and the limit to allow the broker some wiggle room to fill.
A 5 to 10 percent of the ATR window will usually do the trick.

A Sell Stop Order can trigger either a Market or Limit Order. When coupled with a limit, the fill will only occur at the specified limit price or higher. 320

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Master Protective Stop Loss


Know the Master Trader Protective Stop Technique.
Once the Sell Stop is triggered, the position is exposed to market risk. Protect your capital by using a Buy Stop Closing Order if the price runs the wrong direction.
Place Protective stops a percent of the ATR above the signal candle high, or technical resistance zone. 5 to 10 percent will usually do the trick.

Use Buy Stop Market Orders to help ensure a timely exit at the next available price.

The number one rule of trading is: Dont lose money


The second rule of trading is: Dont forget the first rule. Protective stops protect trading capital.

Once the Sell Stop is triggered, a protective Buy Stop can be activated.
Good brokerages provide sophisticated order combinations such as OTO (One Triggers Other) and Bracket Orders.

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321

Master Targets
Know Master Trader targeting strategies
Basic Target
One ATR
1 to 1 reward to risk minimum

Intermediate Target
Swing low support (S1)
2 to 1 reward to risk or better is desirable

Extended Target
Forecasted Potential Average Yield Trend Support Significant Price Zones
Whole numbers Numbers that end in 5 or 0

Tgt 1

Use Buy Limit Orders for Targets


Will buy at the specified price or lower. Targeting is one of the Master Traders secrets to success

Tgt 2

Tgt 3

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322

Trigger Stop & Target Quiz


A Bearish Retracement Trigger should be placed
At the previous candle low 5 to 10 percent of the ATR below the previous candle low A protective stop loss should be placed at least 5 to 10 percent of the ATR
Above the signal candle high Above a resistance pivot Above a technically significant price level Any of the above

Who chooses the trigger price?


The Instructor Your Mentor You are responsible for selecting the entrance trigger price.

Who decides where to place the protective stop?


Your Broker The Software You are responsible for selecting the protective stop trigger price.

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323

P.R.E.P the Trade


Identify
Price Trigger Realistic Target Exit Stop Loss Position Size
Signal Candle High $24.25 Selected technical high price

Identify Key Technical Prices


Signal Candle Low Signal Candle High Potential Targets
Signal Candle Low $23.15

Selected technical low price

Plug the numbers into the Trade P.R.E.P. calculator


Previous Swing Low (S1) $18.44 Selected Target

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324

Trade P.R.E.P. Calculator


User defined inputs Designed specifically for Master Trader strategies Plan the trade
Then trade the plan

Pre-determine
Trigger, Stops, & Targets

Automatically calculates estimated


Order Entry Prices Trade Costs Break Even Point Reward/Risk Ratios Capital Requirements Personal Rules Compliance

User defined money management rules


Account Size Asset Allocation Risk Tolerance

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325

Know How to Estimate Short Sells Using the Trade Calculator

Select Short from the drop down menu in the Long Trade or Short Trade field.
326

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Analyze Reward & Risk

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327

Place the Sell Stop Limit Trigger Order.


Stop Price Will route Limit Order to the exchange if price trades @ the stop price or lower. Limit Price Once routed, the order will fill @ the limit price or higher.

Buy Stop Market $24.33

Place the protective stop loss.


Buy Stop Price Will route a Market Order to the exchange if price trades @ the stop price or higher. Order will fill at the next available price.

Buy Stop Market

Sell Stop Limit Stop $23.07 Limit $22.91


Buy Limit

Sell Stop Limit

Once filled, update your trading journal with actual fill prices.

Buy Limit Price $18.44

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328

Understand the Master Trader adjustment techniques. Trail Stops


First to the break even point Adjust stops down above the new candlestick highs or according to personal rules.

Manually adjust the Sell Stop up each day

Take Profits.
Close all or part of the position if the target is achieved according to personal rules. Make adjustments to the target according to personal rules.

Update Trading Journal with any adjustments that have been made.

Allow target to be hit or make an adjustment Buy Limit


329

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S U C C E S S

Four-logged trades: three completed and one open positions. Two winners and one loser $424.65 & $608.60 & $205.50
330

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Practice Identifying the Bearish Retracement

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331

Practice-Estimating Expectancy
Signal Candle Data
Candle Low 39.39 Candle High 40.04
What is the quick estimate for risk?

ATR = 1.8602 Identify the Pivot Data.


R1 = 42.69 S1 = 37.03 R2 = 43.97 S2 = 38.92 R3 = 43.96 S3 = 40.12

Estimate the P.A.Y. (Do the math)..


What is the average number of candles between pivots?
__________________________

What is the average number of points between pivots?


__________________________

P.A.Y. = $4.85 over 6.00 days


(based on three-highlighted cycles)

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332

Signal Candle High $40.04

Signal Candle Low $39.39

S1 = $37.03

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333

Analyze Reward & Risk

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334

Buy Order? Limit Market Stop Market

Sell Order? Stop Limit Stop Market

Buy Order? Limit Market

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335

Should the stop loss be adjusted?

If so, where?

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336

Short Trades require an x in the Short column of the spreadsheet in order for the reward/risk as well as income & expense trades to calculate properly.
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337

Practice Using MachTraderTM


Perform each of the following tasks.
Open MachTrader. Open up a chart. Open up the Seeker. TM Link the two windows together Select scans listed in this chapter that are designed to identify Bearish Retracements. Input price & volume filters. Identify how to narrow down a search by sector & industry group.

Perform each of the following tasks.


Identify a candidate that appears to match the Bearish Retracement Pattern. Score the Chart Identify expectancy Risk/Reward Plan the trade using the trade planning worksheet. Place a virtual trade based on the plan Open up the trading journal and document the virtual trade.

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338

Chapter 7 Quiz

How many technical price & volume criteria can you spot?

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339

Chapter 8: Master the Bearish Breakdown

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340

Chapter 8 Learning Objectives


Learn to apply the S.U.C.C.E.S.S. Model for the Bearish Breakdown
Survey the Market
Learn how to properly survey the market and identify conditions that are conducive to the Bearish Breakdown. Know when to call this play. Learn to scan for & identify the Bearish Breakdown patterns
Top Down Learn how to identify Sectors & Indices with Bearish Breakdown patterns Bottom Up - Learn which SeekerTM scans to run.

Use MachTraderTM to identify and research potential trades

Learn to technically Score the Charts. Learn how to structure trades using stock as the tradeable instrument Learn to identify and estimate reward & risk Learn to estimate what the stock can P.A.Y. (Potential Average Yield) Learn to use the P.R.E.P. Calculator& Risk Graphs during the planning phase of the trade. Determine at what price to place potential entry and exit orders. Learn to implement the trade according to plan Supervise the trade & learn to make the proper trade adjustments Learn to use the Master Trader journal to track cumulative trading performance.

Choose the Tradeable Instrument


Carefully Plan The Trade

Execute the Trading Plan


Supervise the Trade Systematically Journal & Review

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341

Master S.U.C.C.E.S.S. with the Bearish Breakdown

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342

Recognize the Pattern


Bearish Breakdowns
Short Sell the Breakdown Momentum Play

Consistent Repeatable Patterns


Low Base Inverted Cup & Handle Descending Triangles etc Price patterns that occurs frequently High Probability of trend continuation
The trend is your friend.

Support Zone

Learn the Master Trader techniques for managed risk entry.

Watch for Breakdown Confirmation .


343

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S U C C E S S

Top Down Market Approach


Start with Broad Market Indices
Identify posture If bearish, gauge strength of trend. Pick your posture.

Check Sector Charts for strength. Look for economically weak sectors. Fundamentally weak sectors.

Look for breakdowns in the weakest sectors and industry groups in the market.

Gauge the broad markets & identify sector & industry groups with bearish breakdown patterns.
344

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S U C C E S S

Master Trader scans


Bearish Breakout
Available in Mach II & Mach III

Filter
Minimum Price Maximum Price Minimum Average Volume (in thousands) Exchange Minimum 5 Star Ranking Sector & Industry Group*
(Available in Mach II & Mach III)

Basic scans
Two-Month Low Today 52-Week Lows Today Bear Area Stock Bouncing off of Falling 20 Mov. Avg. Three-Green Lights Down MACD Crosses Down Stochastic Crosses Bottom 50

Machscans

Fundamental scans

Also, look for down trending stocks in other ways outside of the Seeker.
In the news Heavily traded Strongest trending

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345

S U C C E S S

Score the Chart Technical Trade Identification Seven-core price and volume criteria. Individual traders can add personal rules and filters.
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346

Know the Bearish Breakdown Primary-Price Conditions

Downtrend
Lower swing pivot lows & lower swing pivot highs are what define a downtrend.

Trading within One ATR of Support


Correctly timing a breakdown is more likely if price is trading within One Average True Range of the support zone in question.

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347

Know the Bearish Breakdown Primary-Price Conditions

Bearish Continuation Pattern


A recognizable bearish continuation pattern should be present. Watch for: low base, inverted cup & handle, descending triangle, etc...

Room for Price to Drop


Make sure that no historical support/resistance zones will interfere with a healthy drop in price. Remember to check plenty of history on both daily & weekly charts.

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348

Know the Bearish Breakdown Primary-Price Conditions

Consistent Selling Pressure


Both pivot & candle highs must be registering lower. Lower highs are consistent with a downtrend.

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349

Know the Bearish Breakdown Primary-Price Conditions

Remaining Range
Remember that price is not likely to exceed a typical trading range, also known as the Potential Average Yield. Make sure that price is not overextended or oversold prior to the breakdown.

Volume
Decreasing or below-average volume indicates that participants are waiting for directional price confirmation. Once direction is confirmed, participation tends to increase as traders act & react.

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350

S U C C E S S

Secondary Confirmation & Routine Checklist. Eight-point secondary check list Be thorough. Individual traders can add personal rules and filters.
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351

Score the Chart

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352

S U C C E S S

Know the Tradeable Instruments for the Bearish Breakdown

Master Trader
Short Stock Understand Trading with Stock
Costs
Commissions In Commission Out Bid-Ask Spread Slippage Points Multiplied by Shares
(e.g., 100 shares x 1 point = $100 )

Cash Flow Options


Long Puts Short Calls Bear Call Spreads Bear Put Spreads Ratio Spreads All Instruments Complex Combos Advanced Adjustments Dynamic Hedging

Spread Trader

Elite Options & Technical Mastery


Leverage

Potential Reward/Risk
Unlimited Reward Maximum possible risk is theoretically the entire dollar value of the position. Position Sizing Protective Stop Loss

Bullish Breakdown pattern is compatible with other trading instruments.


Futures F.A.C.T (Futures & Commodities Trading) Foreign Currencies Focus Forex 24/7 currencies Trading

Master Trader Risk Management


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353

S U C C E S S

Short Stock Risk Profile

Use the Risk Graphs


Understand the tradeable instrument Example of Long Stock

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354

S U C C E S S

Know how to plan your trades


Know Triggers. Know Protective Stops. Know Targets. Know how to apply personal trading discipline.
Personal Position Sizing Personal Risk Tolerance Reward to Risk Ratios Personal Trade Management Rules

Know how to use the Trade Planning Worksheet.


Pre-determine the game plan for the trade.

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S U C C E S S

Understand Pay Days.


Average number of candles between swing pivots

Understand Pay Range.


Average number of points between swing pivots
Identify potential support zones. Identify potential resistance zones. Understand Average True Range. Understand the potential
Risk
Entrance Price Protective Stop Loss

Understand Potential Average Yield (P.A.Y.).


Average number of periods and points in a typical price swing

Reward
Estimated Target Entrance Price

Learn to choose stocks that meet your personality and financial goals.
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Understand Breakdown Expectancy


Identify potential support zones. Identify potential resistance zones. Identify the ATR. Estimate Potential Average Yield.
The estimated average number of Points and Periods in a typical swing between pivots

A typical swing range is a reasonable expectancy for the breakdown.

Understand the potential


Risk
Entrance Price Protective Stop Loss

Reward
Estimated Target Entrance Price

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Identify Known Support & Resistance Zones


The last swing low S1 & S2 are minor to intermediate support. The S1 & S2 zone could act as a catalyst for new resistance after the breakdown. R1 is a minor resistance pivot. R2 is a minor resistance pivot. Check for historical support zones on the left hand history of the chart.
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Look back for historical resistance zones.

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Identify the Potential Reward to Risk Ratio


Selling Short only upon the confirmation of the breakdown helps ensure that the downtrend is continuing. Plan the trade.
Target Trend Support Potential Average Yield Protective stop loss above the R1 resistance pivot
Potential Risk

Potential Risk

Potential Reward

2 to 1 Reward to Risk Ratio

An eyeball assessment of potential risk compared to potential reward looks very appealing. There is twice as much potential reward as potential risk. R/R ratio is 2 to 1.

Potential Risk

Potential Reward

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Master Triggers
Master Trader Triggering Technique
Sell Short below support
5 to 10 percent of the ATR below support will usually do the trick Place the Sell Stop Order below support. Order will trigger at or below the Sell Stop Price
Market will get filled @ next available price at or below the stop. Limit will get filled at the limit price or higher once the trigger is hit. Create a window for the limit order. 5 to 10 percent of the ATR will usually do the trick.

Place a Sell Stop below the breakdown resistance zone.

Couple the Buy Stop with a Limit Order to limit the entry price

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Master Protective Stop Loss


Know the Master Trader Protective Stop Technique.
Once the Sell Stop is triggered, the position is exposed to market risk. Protect your capital by using a Buy Stop Closing Order if the price runs the wrong direction.
Place protective stops a percent of the ATR above the candle highs or technical resistance zones. 5 to 10 percent of the ATR will usually do the trick.

Once the Sell Stop is triggered, a protective Buy Stop can be activated.

Use Buy Stop Market Orders to help ensure a timely exit at the next available price.

Remember
Protective stops protect trading capital. Mental stops dont work. Place the protective stop at the same time as the entry order.

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Master Targets
Know Master Trader targeting strategies
Basic Target
One ATR
1 to 1 reward to risk minimum

Targeting is one of the Master Traders secrets to success.

Intermediate Target
Forecasted Potential Average Yield
2 to 1 reward to risk or better is desirable

Extended Target
Trend Support Significant price zones
Whole numbers Numbers that end in 5 or 0

Tgt 1

Use Buy Limit Orders for Targets


Will sell at the specified price or higher.

Tgt 2 Tgt 3
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R1 $41.83 Selected technical high price

Selected technical low price Support Zone $40. Selected Target


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Forecasted P.A.Y. $33.92

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Analyze the Risk & Reward

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S U C C E S S

Place the Sell Stop Limit Trigger Order.


Stop Price Will route Limit Order to the exchange if price trades @ the stop price or lower. Limit Price Once routed the order will @ the limit price or higher.

Sell Stop Market $41.91

Place the protective stop loss.


Buy Stop Price Will route a Market Order to the exchange if price trades @ the stop price or higher. Order will fill at the next available price.

Buy Stop Market

Sell Stop Limit Stop $39.92

Sell Stop Limit

Limit $39.76 Once filled, update your trading journal with Buy Limit Price $34.31 actual fill prices.
Buy Limit

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Identify & Label the Correct Order Type

_________________________

__________________________

_______________________

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Score the Chart

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Practice Estimating Expectancy


Signal Candle Data
R1 15.82 S1 Support Pivot 14.90 Last candle high 15.35
What is the quick estimate for risk?

ATR = 1.1071 Identify the Pivot Data.


R2 = 20.58 S1 = 14.90 R3 = 22.85 S2 = 18.38 R5 = 21.15 S4 = 18.16

Estimate the P.A.Y. (Do the math).


What is the average number of candles between pivots?
__________________________

What is the average number of points between pivots?


__________________________

P.A.Y. = $4.38 over seven days


(based on three- highlighted cycles)

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R1 = $15.82

S1 Low = $14.90

P.A.Y. = $4.38
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Analyze the Risk & Reward

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Identify & Highlight


Exit Stop Loss Buy Limit Target

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This supervised trade triggered then reversed and hit the initial stop loss. According to the S.U.C.C.E.S.S. Model what would be the next step?

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S U C C E S S

Eight logged trades. Six completed and two open positions. Four income trades and two expense trades.
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Practice Using MachTraderTM


Perform each of the following tasks.
Open MachTrader. Open up a chart. Open up the SeekerTM Link the two windows together. Select scans listed in this chapter that are designed to identify Bearish Breakdown. Input price & volume filters. Identify how to narrow down a search by sector & industry group. Perform each of the following tasks.
Identify a candidate that appears to match the Bearish Breakdown Pattern. Score the Chart. Identify expectancy Risk/Reward. Plan the Trade using the Trade Planning Worksheet. Place a Virtual Trade based on the plan. Open up the trading journal and document the virtual trade.

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Chapter 8 Quiz

What is potentially wrong with this minor pivot low base break pattern trade setup?

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Chapter 9: Hit the Ground Running 30-Day Action Plan

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Chapter: 9 30-Day Action Plan


Analyze, Develop, Design, Implement & Review a 30-Day Action Plan
Analyze Required Actions
Open a Brokerage Account that has an excellent virtual trading platform. Virtually trade all four strategies. Actively work towards completing and logging your first 25 virtual trades. If successful with virtual trades, stick your toe in the water with live trades. Register for the free month of trading labs. Schedule your next class. Research brokerage accounts.
Go on line or call the brokerage to initiate opening the account. Analyze the broad market Identify Trades Instrumentation Estimate Expectancy Reward/Risk Trade Planning Trade Execution Tracking trades and updating the journal

Develop & Design a Structured Schedule for the Next 30-Days


Schedule & dedicate time to perform the S.U.C.C.E.S.S. model

Commit to and register for the free trading labs. Call the scheduling department, or login online & schedule your next class.

Commit to & Execute the Structured Plans & Goals After 30-Days Review the Action Plan & Goals.

Create a New 30-Day Action Plan & Repeat The Process.


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Open Up Your Schedule


Look at your calendar for the next 30 days. Identify available times and dates. Make time if necessary. Set aside time each day to dedicate to your trading business. Dedicate a block of time each week to dedicate to your trading business .

The success minded individual will prioritize and make time for activities that lead them down the path to success.

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Identify What Needs to Happen in the Next 30 Days


What time of day and what days you will dedicate to your trading business?
Days of the week
Sunday Monday Tuesday Wednesday Thursday Friday Saturday

Schedule time to call & register for the free Master Trader trading lab.
____________________________ _______________

Schedule time to call & register for your next course.


____________________________ _______________

Schedule the Time of Day.

______________________________

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Plan Your Schedule for S.U.C.C.E.S.S.


Commit to & document the time that you will dedicate to your trading business.

How much time are you willing to dedicate each day/week to your trading business?

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Identify Your Brokerage Needs


If you do not have a brokerage or a suitable virtual trading platform schedule time to make it happen.
Perform Online Research.
Date__________________________ Time__________________________

Have you opened a brokerage account?


Yes No

Does your broker offer a realistic virtual trading platform?


Yes No I dont know

Register Online or Call.


Date__________________________ Time__________________________

Fund the account or fill out rollover paperwork.


Date__________________________ Time__________________________

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Sunday

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

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Develop a Daily Routine


Example Swing Trader Daily Routine Assess broad market.
Market Posture Check order status.
Stocks that hit targets Stocks that hit stops

Trade Identification.
Prospect
SeekerTM

Check your positions.

Adjust trade management on open positions. Update your trade journal or log.

Analyze trades that did not trigger.


adjust or discard

Check watch list or favorites folder. Check sectors for top down approach. Use any other prospecting techniques desired. Score and analyze your possible candidates. Check economic calendar. Check news and earnings.

Update trade journal or log.


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Develop Your Personal Rules


Understand the psychology of money.
Emotion is the enemy of traders.
Do not make decisions based on emotion. Base decisions on pre-determined rules and discipline. Mitigate emotions at every opportunity.

Pre-determine your personal money management rules.


Maximum Position Size
Percentage & Dollars

Maximum Risk Tolerance


Percentage & Dollars

Pre-determine trade management and adjustment strategies & discipline.


Adjustments Scaling in & Scaling out. Understand how to manage the if then scenarios that the market consistently presents traders.

Take ownership of your trading by making sure that the trades you place meet your needs and match your personality. Personalize & tailor your techniques, money management and trading psychology for optimal performance.

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Virtual or Live

Work on Logging Your First 25 Trades

Start applying what youve learned immediately.


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Review Your First 25 Trades

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Attend One Month Free Trading Lab


Try the Trading Labs.
First month free one hour per week Online Instructor Classes limited to 20 students Choose a Lab that meets your schedule Choose a Lab that matches your learning objectives

Trading Labs offer a unique online learning environment based on practical application of curriculum taught in courses.

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Schedule Your Next Course


Call Enrollment and schedule your next course.
Online Live

Prepare for the course by starting the ondemand lessons in preparation for a live or live online course.
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Practice Your Happy Dance Brush up on all your best moves Work hard Trade often Perfect practice makes perfect Build on success
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Persistence
Nothing in this world can take the place of persistence. Talent will not; nothing is more common than unsuccessful people with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan press on has solved and always will solve the problems of the human race.
Calvin Coolidge

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