CONTENTS

Chapter 1 | Synopsis of Course Book Material ​ ​

Chapter 2 | Stock Analysis ​ ​ Technicals vs Fundamentals The Importance of Time Frames

Chapter 3 | Stock Charting and Trade Execution Basics ​ ​ Chart Types Candlesticks Chart Indicators/Overlays Technical Overlays Indicators Order Types

Chapter 4 | Chart Patterns ​ ​ Support and Resistance Trendlines Cup with Handle Flags/Tightening Patterns Head and Shoulders Flat Top Breakout Flat Bottom Breakdown

Chapter 5 | Styles of Trading ​ ​ Position Trading Swing Trading Day Trading Scalp Trading What Style Are You?

Chapter 6 | Trading Rules ​ ​

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Chapter 7 | Evaluating Market Sentiment ​ ​ Russell 2000 Dow Jones Industrial Average NASDAQ 100 S&P 500 VIX, etc Evaluating the Market Environment

Chapter 8 | Swing Trading Strategies ​ ​ Breakouts/Breakdown Strategy Fundamental Trend Strategy Rubber Band Strategy Trading Patterns with a Biotech Focus (Kyle Dennis) Simplifying Charting to Perfect Entry Points Identifying Breakout Trades Reliable Chart Patterns (Fibonacci Retracements and Double Bottom Reversals)

Chapter 9 | Day Trading Strategies ​ ​ Opening Range Breakout Strategy Double Bottom Strategy Red to Green Strategy VWAP Strategy Options Sweep Strategy

Chapter 10 | Managing Risk ​ ​ Planning Your Trades Stop-Loss and Take-Profit Points How to Use Stop-Loss Points 2% Rule Trim and Trail

Chapter 11 | Introduction to Options ​ ​

Chapter 12 | Utilizing Level 2 to Improve Your Entries ​ ​

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Chapter 13 | Growing as a Trader ​ ​ Trading Psychology Tips

Chapter 14 | Putting it All Together ​ ​ Typical Trading Day - Open to Close Screen Setup Utilizing the Chat Room/Services

Glossary

Valuable Resources for Traders

Additional Chart Examples

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CHAPTER 1 SYNOPSIS OF COURSE BOOK MATERIAL

This course book is designed to give its readers all the tools necessary to become a successful full time trader with the ability to actively manage his or her brokerage account. It begins with an in-depth explanation of the two most common ways to analyze a stock: fundamental analysis and technical analysis. I will carefully review the techniques of charting a stock’s price movement, as well as technical indicators and chart overlays to empower the active trader. I will then outline six specific strategies, geared toward both the active trader and the part time investor. I will teach these strategies and detail how to trade each one with numerous examples, including how to scan for each different approach. After detailing each strategy, I will conclude by examining important concepts such as managing your risk, executing the trade, and evolving as a trader. I will finish with a diary of a day in the life of a trader -- me! It is important to remember that every individual is unique; we each possess different personalities, risk tolerances, and time constraints. You will find that one of these strategies suits your temperament and life situation better than the others. This course will help you determine what type of trader you are and allow you to analyze which strategy works best for you. I have designed these concepts and strategies based on hundreds of thousands of trades and this course is a compilation of my many years of experience as an accomplished trader. Learning to trade can be an expensive and time consuming pursuit, but with my experience and expertise to guide you, you will be able to save both time and money compared to those who learn solely by trial and error.

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CHAPTER 2 STOCK ANALYSIS

Technical analysis and fundamental analysis are the two most common methods of analyzing a stock’s worth. Technical analysis looks at the price movement of a company’s stock and attempts to use this data to predict the future price movements of the security. Fundamental analysis examines economic and fiscal factors such as financial statements, management roster, competitiveness and relevancy. I will now explain how these two forms of analysis are different, the strengths and weaknesses of each, and how technical and fundamental analysis can be used together to create powerful trading and investing strategies.

Technicals vs Fundamentals

A technician makes decisions based on chart analysis, while a fundamental analyst relies on financial statements. By looking at its balance sheet, cash flow statement and income ​ ​ ​ ​ ​ statement, a fundamental analyst determines a company's value. In this approach, ​ investment decisions are easy to make. If the price of a stock trades below its value as determined by the analyst, it would be deemed a good investment. Those who trade solely off technicals believe that all of a company’s fundamentals are priced into the share price, thus making fundamental analysis moot. Technicians believe that the information necessary to make decisions about a stock can be found in its technical trading patterns and that by studying the stock’s historical price trends, it is possible to predict price action in the immediate future.

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Example of a financial statement as found in a Google search

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Example of a stock chart

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The Importance of Time Frames

Fundamental analysis takes a long-term approach to analyzing investments in contrast to technical analysis. A company’s fundamentals can take years to be reflected in a stock’s price, while charting technical patterns traders use time frames ranging from 1 minute to a year. When a fundamental analyst estimates value, it is not realized until the stock's price rises to its "correct" value. This type of investing is referred to as value investing ​ and assumes that the short-term market is inefficient, and that the price of a particular stock will eventually trade at its “true” value as determined by its fundamentals. Financial statements are filed quarterly and changes in earnings per share don't emerge on a daily ​ ​ basis like price and volume do. Fundamentals are the characteristics of a business. A company’s management can't implement sweeping changes overnight as it takes time to create new products, marketing campaigns, and supply chains. Therefore, one reason fundamental analysts use a long-term timeframe is because the data they use to analyze a stock is generated more slowly than daily price and volume data used by technical analysts. Technical analysis allows a trader to more easily utilize multiple time frames. Although having a long term time horizon works as well, technical analysis allows a trader to take advantage of short term price movements in stocks.

Trading Versus Investing

Not only is technical analysis more short term in nature than fundamental analysis, but also the goal for the purchase of a stock is usually different for each approach. Most often technical analysis is used to trade, while fundamental analysis is used to make an ​ ​ investment. Investors buy assets they believe can increase in value, while traders buy ​ assets they believe they can sell to somebody else at a higher price. Critics see technical analysis as illegitimate and question its validity to be predictive. Only recently has technical analysis begun to garner mainstream credibility. While most analysts on Wall Street focus on fundamentals, most major brokerage firms employ technical analysts as well. My view of technical analysis is that it accurately reflects buyers vs sellers. The charts reflect the historical price movements that create patterns and trends that can be studied and used to predict future price movements with certain probabilities. In my own trading experience, I have found technical analysis to be a powerful tool. If used properly, technical analysis can markedly increase the probability of profitable results. The debate over fundamental analysis vs technical analysis is inconclusive. Both methods have their strengths and weaknesses. In Chapter 8, I will discuss a specific

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strategy employing both technical and fundamental analysis that has provided excellent results over time, especially for a trader with a longer term horizon. The rest of this course will focus on technical analysis and specific ways to analyze charts, price patterns, technical indicators, volume patterns and price and volume trends. I have had consistent success using technical analysis and I have developed specific strategies for active traders to take advantage of stock price movements.

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CHAPTER 3 STOCK CHARTING AND EXECUTION BASICS

Note: Segments of this chapter were taken from selections from great online resources for financial information, Investopedia.com and stockcharts.com!

What is a Stock Chart?

A stock chart is a sequence of prices plotted over a specific time frame. In statistical terms, charts are referred to as “time series plots.”

On the chart, the y-axis (vertical axis) is the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis; the

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most recent price is the furthest right. The price plot for SINA includes the dates found at the bottom of the chart.

Chart Types

Line Chart

Some investors and traders place more importance on the closing level than the open, high or low. By paying attention to only the close, intraday swings can be ignored. Line charts are also used when data for the open, high and low are not available. Sometimes only closing data is available, such as for certain indices, thinly-traded stocks and intraday prices.

Bar Chart

The bar chart is perhaps the most popular charting method. The high, low and close form the price plots for each period of a bar chart. The close is the short horizontal line crossing the vertical bar and the high and low are represented by the top and bottom of the vertical bar. For example, on a daily chart, each bar represents the high, low and close for a particular day. On a five minute chart, there would be a bar for each five minute period, with a high, low and close for each.

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Bar charts can also have an open, in addition to the high, low and close. The only difference is the addition of the open price, which is displayed as a short horizontal line extending to the left of the bar if and when the data for the open price is available.

Bar charts can be effective for cleanly displaying a large amount of data. Candlesticks can take up a lot of space and look cluttered when you have a large number of data points. Line charts are less cluttered, but do not offer as much detail (no high-low range). The individual bars that comprise a bar chart are relatively skinny, which allows users the

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ability to fit more bars before the chart gets cluttered. If you don’t care about the opening price, bar charts are an ideal method for analyzing the close relative to the high and low. Bar charts that include the open will tend to get cluttered quickly, so if you are interested in the opening price, candlestick charts probably offer a better alternative.

Candlestick Chart

Candlestick charts, which were first used more than 300 years ago in Japan, have become very popular in recent times. On candlestick charts, the open, high, low and close are all required. A daily candlestick is based on the open price, the close price, and the intraday high and low. A weekly is based on Monday’s open, Friday’s close, and the high and low for the week.

Many traders prefer candlestick charts as they are easy to read, and with a glance you can see the open and close. The white and black section of a candlestick is formed from

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the open and close and is called the body (white body or black body). When the close is higher than the open the candlestick is white; when the close is lower than the open it is black. The high and low lines are called shadows.

Chart Indicators/Overlays

Technical Indicators are the lines found above, below and on-top-of the price information on a stock chart. Indicators and overlays are utilized to give traders an edge by giving “indications” of overbought or oversold areas. If an indicator uses the same scale as the price it is usually plotted on top of the price bars and is therefore referred to as an "overlay." I will explain the more important indicators and overlays in the following pages, and I will also share which ones I use in each of my trading strategies.

Technical Overlays

Moving Averages

Moving averages form a trend-following indicator by taking X number of data points and averaging them. Moving averages define the current price direction, rather than predicting future direction. Because they are based on past prices, moving averages lag. Despite this lag, moving averages help smooth price action and filter out the noise. They ​ also form the building blocks for many other technical indicators and overlays, such as Bollinger Bands, MACD and the McClellan Oscillator. The two most commonly used ​ ​ ​ ​ ​ moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). Moving averages can be used to help identify support and resistance levels and the direction of the trend.

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Here's a chart with both an SMA and an EMA on it:

Most moving averages are based on closing prices. An 8-day simple moving average is the eight-day sum of closing prices divided by eight. Old data is dropped as new data becomes available, hence the name “moving average.” This causes the average to move along the chart.

An exponential moving average reduces the lag of simple moving averages by giving more weight to recent prices.

Volume by Price

Volume by Price illustrates the amount of volume for a particular price range. Volume by Price bars are displayed horizontally on the left side of the chart so that they match up with price points. These color-coded bars divide volume based on up periods -- green -- and volume on down periods -- red. Technical traders use Volume by Price to identify high volume price points that may provide support or resistance.

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The chart above plots Volume by Price for QQQQ during the period displayed. Notice that the Volume by Price bars are divided into red and green - this separates positive volume from negative volume. The longest Volume by Price bar extends from the fifth price block from the bottom ($45.12 to $45.78). Despite the heaviest volume, positive and negative volume are close to equal.

Bollinger Bands

Bollinger Bands are volatility bands that are placed below and above a moving average. Volatility is based on the standard deviation, which changes as volatility increases and ​ ​ decreases. When volatility increases, the bands widen; when volatility diminishes, they narrow. The dynamic nature of Bollinger Bands also means they can be used on different stocks with the default settings. For signals, Bollinger Bands can be used to identify M-shaped tops and W-shaped bottoms. They can also be used to determine the strength of the trend.

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Indicators

Relative Strength Index (RSI)

The Relative Strength Index (RSI) was developed by J. Welles Wilder. It is a momentum oscillator that measures the speed and change of price movements. The RSI oscillates between a reading of 0 and 100. Traditionally, the RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for divergences and centerline crossovers. RSI can also be used to identify the general trend of a stock.

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According to Wilder, divergences signal a potential reversal point because momentum does not confirm the price. A bullish divergence -- meaning a stock is likely stronger than it appears -- occurs when the stock makes a lower low and RSI forms a higher low. As the RSI doesn’t confirm the lower low, it shows strengthening momentum. A bearish divergence forms when the security records a higher high and RSI forms a lower high. RSI does not confirm the new high and this shows weakening momentum. The chart below shows Ebay (EBAY) demonstrating a bearish divergence in August - October. As the stock moved to new highs in September-October the RSI formed lower highs for the bearish divergence. The subsequent breakdown in mid October confirmed weakening momentum.

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MACD

Developed by Gerald Appel in the 1970s, the Moving Average Convergence-Divergence (MACD) indicator is a simple and effective momentum indicator. The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting ​ ​ the longer moving average from the shorter moving average. As a result, the MACD offers the best of both worlds: trend following and momentum.The MACD is not, ​ however, particularly useful for identifying overbought and oversold levels.

The MACD Line oscillates above and below the zero line, which is also known as the centerline. Traders look for signal line crossovers, centerline crossovers and divergences ​ to generate signals.These crossovers signal that the 12-day EMA has crossed the 26-day ​ EMA. The direction, of course, depends on the direction of the moving average cross. A positive MACD position indicates that the 12-day EMA is above the 26-day EMA. Positive values increase as the shorter EMA diverges further from the longer EMA. This means upside momentum is increasing. Negative MACD values indicates that the 12-day EMA is below the 26-day EMA. Negative values increase as the shorter EMA diverges further below the longer EMA. This means bearish momentum is increasing. ​ ​

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There are many more indicators and overlays available to traders. I have focused on the few that I use and provided ways of interpreting these indicators and overlays. I have found that I have had more success when keeping my routine simple. I encourage new traders to determine which indicators work for them and to develop a repetitive trading routine. Too much information can overwhelm any trader and make the process of trading more complicated than it needs to be.

Order Types

Before I go further, this is a good point to review the different types of trades one can place with a broker. The order types and definitions are below:

Market Order: An order that tells your broker to buy or sell an investment immediately, at the best available current price. A market order should never be used with illiquid stocks--those that trade only minimal volume on an average day--as your order will often be filled at a price much higher or lower than desired.

Limit Order: An order that tells your brokerage to buy or sell x number of shares at the specified price or better. Unlike a market order, it may not be executed if the price set by the investor cannot be met during the period of time in which the order is open. Limit

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orders also allow an investor to limit the length of time an order can be outstanding before being canceled.

Stop Order: An order to buy or sell a security when it passes a particular price point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor's loss or locking in his or her profit. Once the stock’s price passes the specified entry or exit point, the stop order becomes a market order.

Stop Limit Order: An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price or better after the specified stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better.

These are the most common types of orders and all traders need to be familiar with them. Nearly all of my trades are either limit orders or stop limit orders. Limit orders are best when you can actually place the trade yourself, while stop limit orders can be placed and executed automatically even when you are not there trading.

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CHAPTER 4 CHART PATTERNS

The most important skill a successful technical trader needs to master to achieve consistent success is chart pattern recognition. Without the ability to recognize certain patterns in price, it would be difficult to succeed on a consistent basis. To that end I will review the basic chart patterns that I look for every day. I scan approximately 1000 charts a day for certain patterns. Like indicators and overlays, there are many types of chart patterns that seasoned traders look for to identify potential trading opportunities. I want to emphasize that a successful trader determines what tools and strategies work and keeps a simple daily routine which allows the trader to more easily repeat that routine each trading day.

Support and Resistance

Support is a price level at which demand exceeds supply and is considered strong enough to stop the stock price from declining further. The logic behind support dictates that as the price declines toward support and becomes cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, demand will exceed supply and prevent the price from falling below support, so the stock will either then increase in price, or consolidate at that level.

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Resistance is the price level at which selling is thought to be strong enough to prevent the share price from rising further - the flipside of support. This logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. When the stock reaches the resistance level, supply will overcome demand and prevent the price from rising above resistance, pushing the price down or leading to consolidation.

Trendlines

Technical analysis is built on the assumption that stocks trend, and as such, trend lines are an important tool in technical analysis for both trend identification and confirmation. A trend line is a straight line that connects two or more price points and then extends into the future to show potential areas of support and resistance. In fact, many of the principles applicable to support and resistance levels can be applied to trend lines as well.

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Cup With Handle

The Cup with Handle is a bullish continuation pattern -- meaning the stock is likely to continue higher after the pattern develops. It marks a consolidation period followed by a breakout. It was identified by William O'Neil and introduced in his trading book, How to ​ Make Money in Stocks. As the name implies, there are two parts to the pattern: the cup ​ and the handle. The cup forms after an advance and looks like a bowl, displaying a rounded bottom. As the cup is completed, a trading range develops on the right hand ​

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side and the handle is formed. When the stock breaks over the handle’s range, it signals a continuation of the prior advance.

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Flags/Tightening Patterns

Flags and Pennants are short-term continuation patterns; they mark a small period of consolidation before the previous move resumes. Generally, these patterns are preceded by a sharp advance or decline accompanied by heavy volume, and mark a ​ ​ mid-point of the move.

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Head and Shoulders

A Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal. The pattern comprises a series of three peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The lows of each peak can be connected to form support, also referred to as the “neckline.” The Head and Shoulders Bottom, often referred to as an Inverse Head and Shoulders, is a pattern that shares many common characteristics with its comparable partner, but relies more heavily on volume patterns for confirmation. As a major reversal pattern, the Head and Shoulders Bottom forms after a downtrend, and its completion marks a change in trend. The pattern contains three successive troughs with the middle trough (head) being the deepest and the two outside troughs (shoulders) being shallower. Ideally, the two shoulders are roughly equal in height and width. The peaks in the middle of the pattern can be connected to form ​ ​ resistance, or a neckline.

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Flat Top Breakout

The defining feature of a flat top breakout is areas of resistance that have been tested multiple times, with subsequent lows becoming higher and higher until the stock eventually breaks through the resistance level. Flat top breakouts can be short term or long term in nature. Expanding volume sticks accompany the breakout. This pattern usually has horizontal resistance areas.

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Flat Bottom Breakdown

Like the flat top breakout, flat bottom breakdown patterns have multiple tests of recent support areas with each bounce off support becoming progressively weaker. Typically flat bottom setups are horizontal support in nature.

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CHAPTER 5 STYLES OF TRADING

Position Trading

Position trades can be held for months to years. Position traders often utilize a combination of fundamental and technical analysis to make trading decisions; they typically refer to weekly and monthly price charts when evaluating the markets. Generally, short-term price fluctuations are ignored in favor of identifying and profiting from longer-term trends. This style of trading most closely resembles investing. The key difference is that while buy-and-hold investing typically involves long trades only (profiting from a rising market), position traders may utilize both long and short trading strategies.

Swing Trading

Swing trading refers to a style of trading in which a stock is held for a period of days or weeks, with the goal of profiting from short-term market moves. In general, swing traders rely on technical analysis and price action to determine profitable trade entry and exit points, paying little attention to the fundamentals. Swing trades are exited when a previously established profit target is reached, when the trade is stopped out (moves in the wrong direction) or after a set amount of time has elapsed. As swing trading takes place over a period of days or weeks (with an average of one to four days), this trading style does not necessarily require constant monitoring to be profitable, making it a good choice for traders who are unable to actively monitor their positions throughout each trading session.

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Day Trading

Day trading refers to a style of trading in which stocks are bought and sold during the normal market hours of the same day. Unlike position and swing traders, a day trader doesn’t hold any positions overnight; trades are usually closed using a profit target or stop loss. Most day traders use technical analysis to find and exploit intraday price fluctuations, viewing intraday price charts with minute, tick and/or volume based charting intervals. Because trades are held for a period of minutes to hours, large price moves are uncommon, unless playing very volatile issues, and day trading relies on frequent small gains to build profits. To leverage their buying power, day traders usually trade with margin, as well. Since positions have to be constantly monitored and traders need to be made immediately aware of any interruptions to technology (for example, a lost Internet connection or a trading platform issue), day trading is a full time job.

Scalp Trading

Scalping is an extremely active form of day trading that involves frequent buying and selling many times throughout the trading session. Scalp traders target the smallest intraday price movements, relying on frequent, very small gains to build profits. Stops and profit targets are used to manage positions that are generally held for a period of seconds to minutes. Because gains are small on any one trade, scalpers may place dozens, scores or even hundreds of trades each trading session. Precision is paramount with this style of trading, and scalping requires constant and alert attention to the markets.

What Style Are You?

When choosing a trading style, you must consider a variety of factors, including: ● Account size ● Amount of time that can be dedicated to trading ● Level of trading experience ● Personality ● Risk tolerance Generally, there is an inverse relationship between trading time frame and the amount of time you will have to devote to the markets; position traders may be able to spend a couple hours each week evaluating and managing trades, whereas scalp trading is a

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full-time job requiring the trader spend every minute of each trading session actively managing trades.

Many market participants - whether investors or traders - do not fit neatly into any one category. For example, many traders are also long-term investors, while others may primarily day trade with a few swing trades mixed in. If you are unsure of which style will best suit you, I recommend starting with swing or position trading. If you are profitable, then you can begin to place some day trades as well.

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CHAPTER 6 TRADING RULES

All consistently profitable traders have a set of rules or guidelines by which they abide. As is the case with many professional traders, my list emerged organically over a long period of time as I saw what worked and what didn’t in the market. When considering trading rules, it’s important to recognize that you will see plenty of exceptions to each rule. For example, I never hold a stock overnight into earnings unless I have a clear edge; while there are plenty of cases when doing so would have netted me huge returns, I have seen more cases where I would have lost my shirt. If you alter or abandon your rules every time you encounter an exception, you will drive yourself crazy. Another misconception is that developing a “perfect” set of trading rules means you will never lose money. Many novice traders believe that if X group of indicators all align in a certain way the trade MUST work, and they spend a great deal of time looking for this magical alignment of conditions. There is no set of rules or conditions that will prevent you from ever having a down day or week, and looking for such a thing will only frustrate and distract you from the actual goal of recognizing patterns and managing risk. As you grow as a trader it’s important to develop your own list of rules that suit your trading style and reflect your experiences in the market. Here are the ones that I have found most useful in my trading:

1. I will only enter a breakout if it has expanding volume, on the daily chart, relative to its own average volume. This is the most reliable indicator that I have found, and the most important one. 2. I do not like to enter new positions in the first 10-15 minutes of the market open. I have found that breakouts/breakdowns that occur on the open have a high chance of failure. An old saying is that amateurs rule the open, pros the close. 3. I never hold a position into earnings, unless I feel that I have some sort of edge. Holding into earnings is just too high of a risk. 4. I like to “trim and trail.” When I have a profit, I sell half my position quickly and let the rest ride up. This allows for quick profits, less risk, and also a lower risk position for the “home run”. 5. I always keep an eye on the overall market sentiment. For example, I hesitate to enter a position when the market is up a large percentage for the day, as the risk of a pullback is greater. I like to enter long positions when the market is flat to

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down short term, and short positions when the market is extended. I will elaborate more on this in the following chapter 6. Keep an eye on relative strength. I like to see which stocks are acting well in a red tape and which stocks are acting weak in a green tape. 7. Try not to double up a losing position. I have found that sticking to your initial stops allow you to lose less on losing trades. 8. Manage your risk. I personally do not like to use margin and like to limit any one position to roughly 10% of a portfolio. This can vary from trader to trader, but is a good rule of thumb. We will discuss risk management rules more thoroughly in the Risk Manager chapter. 9. I like to enter technical setups that also have good “stories” behind them. For example, stocks that are on the Stocktwits 50, IBD50, CANSLIM plays are good candidates. Also, stocks that have a possibility for a short squeeze (high % short), good relative strength, stocks in strong sectors, etc. In other words, stocks that have good fundamentals or a special situation. 10. Lastly, if you are holding a position overnight, make sure you know if there is pending news. For example, if you are holding a biotech name, does it have pending results the next day,does the stock have pending litigation coming soon, etc.

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CHAPTER 7 EVALUATING MARKET SENTIMENT

When considering any trade, it’s important to be aware of the current market environment as a whole. Stocks do not trade in a vacuum; economic news and sentiment, sector strength and other factors can and do influence a stock’s movement. A favorable market can be the wind at your back, further bolstering a trade, or it can work against you.

The easiest way to determine the relative strength or weakness of the market is to look at the indexes. Below are the major indexes to watch.

Russell 2000

The Russell, which can be tracked with the ETF IWM, comprises 2000 small cap stocks. The median market cap of a stock in the Russell 2000 is around $500 million, with the largest in the index at roughly $5 billion.

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The Dow Jones Industrial Average

Commonly referred to as The Dow, this index is composed of 30 of the largest publically traded companies in the country, such as IBM, McDonalds, and ExxonMobil. You can follow the Dow with the ETF DIA.

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NASDAQ 100

The NASDAQ 100 is made up of many of the most important tech and e-commerce brands, including several companies not based in the United States. Examples of stocks in the index include Intel, Amazon, Facebook and Starbucks. The index is also known for not containing any financial services companies. It can be tracked with QQQ

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S&P 500

When someone states that “the market was way down today” they are most likely referring to the S&P 500. The S&P is arguably the broadest and most important index for this reason - it gives us the best sense of the market as a whole. As such, it is the index we watch most closely. The ETF SPX is the easiest way to monitor this index.

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VIX

The VIX is used to measure the implied volatility of S&P 500 index. It is often referred to as the fear index because it moves when the market fluctuates. ​ ​

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Evaluating the Market Environment

We evaluate these indexes and the market as a whole in the same way we do individual stocks: by determining the trend, if any, and where the index is trading in relation to support and resistance levels.

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If one of the indexes is in a trend or at a major support/resistance level, it can give us clues as to what type of stocks to scan for. For example, if the Russell is in an uptrend and currently at a support level, we might want to focus some extra attention on scanning for small caps. If, on the other hand, it is at a resistance level, taking on new long positions in small caps is riskier. One last thing to note is that you can trade the indexes themselves with the ETFs mentioned above. Additionally, all of the major indexes have leveraged, inverse, and inverse leveraged ETFs. The leveraged ETFs move at some multiple - 2x or 3x - of the underlying. So, if the unleveraged SPY ETF moves up 1%, the 3x leveraged ETF UPRO will move 3%. Inverse ETFs, which can be both leveraged and unleveraged, simply move in

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the opposite direction. For example, QID is a leveraged, inverse ETF that trades in the opposite direction as QQQ with 2x leverage.

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CHAPTER 8 SWING TRADE STRATEGIES

This chapter is a culmination of years of trial and error spent determining what types of technical formations provide low risk, high reward trading situations with the greatest probability of a profitable outcome. I will review my six favorite trading strategies; three swing trades and three day trades. Mastering these trading strategies will help prepare you to become a successful investor or active trader. I use these strategies to trade for a living as have many other successful traders I know. Whether you are a part time trader with a full time job or a full time professional trader this section will provide you with proven trading methods that will put you in the best position to profit. I will first review three swing trade strategies that are designed to be held for a medium to longer time frame and then I will review three day trade strategies that are designed to identify short term trades intraday.

Swing Trade Strategy #1 - Breakouts/Breakdowns

Breakout patterns are my favorite type of trading strategy. There are many types of breakouts patterns but all have one thing in common: an identifiable resistance area for breakouts, and an identifiable support area for breakdowns. The chart timeframe for these setups is a daily chart. Each stick on the chart represents a full day of trading. When scanning for breakout charts I try to identify areas of specific resistance or support that have consistently repelled the share price from those areas. Below I provide some examples of areas of resistance or support that I have identified and the resulting breakout or breakdown.

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When trading this setup, the main indicator I use is volume. What is key in this breakout process is seeing volume that is expanding relative to recent volume sticks. Below is an example of a breakout volume stick:

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Conversely, with a breakdown setup, I have found that volume is not as important. Because a drop in price only requires one party, the seller, a breakdown in share price will often require less volume than a breakout in price to the upside. If I determine that a stock has a breakout price of $40.8, as in the example above, the breakout requires a print, or actual trade, at $40.81 to confirm the breakout. When this occurs with expanded volume the trade should be executed. In the recent example above, the resistance area was $40.8. If a trader was able to execute the trade in real time, the limit order would be placed at $40.82 on the $40.8 breakout. This would ensure an execution at $40.82 or better. If the order could not be executed manually in real time a stop limit order would be placed. The stop order would be placed at $40.81 meaning that as soon as the breakout at $40.8 occurred the order would be activated at the next price. The limit portion of the trade would ensure that the trade would not be executed above a certain price. So in this instance we would place a stop limit order of $40.81, $40.82. That is, a stop order of $40.81 and a subsequent limit order of $40.82.

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So now that I’ve discussed how to buy, how does one decide where to sell? Here is an example of how to figure out price targets on a breakout setup explained in detail below:

What is demonstrated in the above example is the “stop” level or price that shares would be sold if the pattern did work to upside as anticipated. The up trend line from $.6 up to $.9 would serve as sell point in this example so a stop would be placed just below the $.9 area. In this example there is an entry level of $1.1 breakout, a stop level of .9, with a target of $1.6. This example provides a favorable risk/reward trade. The trade risks$ .2 to profit $.5. Even with a success rate of 50% with such trades, the result would still be a significant return for the trader. Now let’s look at a similar example in MEET:

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To scan for these type of setups, I use moving averages to identify stocks that are in uptrends and then examine the charts to determine favorable patterns.

A few more examples:

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Swing Trade Strategy #2 - Fundamental Trend Strategy

The fundamental trend strategy utilizes both fundamentals and technicals in a strategy that offers a high probability of success. This is a swing strategy and can be employed by traders with longer time horizons. The first step is to identify stocks with rapid growth. I personally do not have the expertise to perform fundamental analysis on stocks. Instead, I utilize prescreened lists for companies with strong fundamentals. My favorite list is the IBD (Investor Business Daily) 50 list, which can be accessed at http://research.investors.com/screen-center. The headings in the graphic below lists the metrics the IBD 50 uses to create their list:

This is a portion of a recent IBD 50 list. At the top you will see the criteria used to rank stocks and find the companies with the strongest fundamental characteristics. IBD ranks stocks with fast growing EPS (earnings per share), and sales combined with with strong internal financials.

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These types of lists are a shorthand method to identify high growth companies, with strong internal financials. The Briefing.com Growth List and the Stocktwits 50 List are similar in nature to the IBD 50. Utilizing the IBD 50 or the Briefing.com Growth list, I then screen each stock to identify charts of interest. The strategy is to find charts that have pulled back to a major support trendline. Below are examples of recent Growth list stocks or IBD50 stocks and their charts:

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In this chart of SWHC the pullback to a strong historical chart support trend line, in this case the 200 Day SMA, is clear. Other major moving averages that traders use to find levels of support are the 10, 20, and 50 Day SMAs. In early March SWHC tested its trend line. The test of the trend line provides a good entry to buy because the objective price target is new high on the chart while a stop limit price just below the support line is used. There is a risk of $.25 to $.50 cents with a potential reward of 5 points. In this example the entry was $11.5, with a stop at $11 and a target of $16. This presents an excellent risk/reward swing trade. Here is another example of an IBD stock with an identified support trend line:

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In January there is an entry in the $50 area with recent highs at $70. In March there is an entry at $60 with recent highs at $80. In both cases tight stop limit orders are used to minimize potential losses. This example also shows the 200 sma again being the area of support. Initiation of the trade is triggered by a test of the support area at the 200 Day SMA with a limit order at that level. The limit order will ensure the order will not execute until the stock price has been reached. To scan for these plays one only needs access to the fundamental lists and then identify areas of support or breakout patterns to initiate the trade.

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Some more examples:

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Swing Trading Strategy #3 - Rubber Band Strategy

The “Rubber band Snap Back” strategy is an effective swing strategy for traders who are willing to give the trade a period of days to develop. With this strategy, the trader utilizes Bollinger Bands (BB), and the relative strength index (RSI) indicators. The strategy requires identifying charts that have a one day candle completely out of the Bollinger Bands and a corresponding RSI in oversold or overbought territory in the same direction as the stick. If a stick is completely below the BB’s we then look for RSI to be in oversold territory (<30). Here is an example:

Once charts outside of the BBs with an extreme RSI value are identified, the next day’s open must be monitored. If this trade is a long setup (stick below BBs and oversold RSI) avoid buying any sort of gap up at the open. Ideally the stock would open in the direction of the trend, in this case lower still. Off this lower open the trade contemplates a trend reversal back into the middle range of the BBs and the RSI to relieve the oversold condition. The target is not specific, but rather a move into the middle of the BBs, and a trend back up in the RSI. The trader can then scale the position by selling into the move and raise stops up as the position is sold. A stop point for this trade would use the low of the BBs, thus giving the trade a good risk/reward scenario.

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Here are a few more examples of the setup and how the chart responded with the described parameter:

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The scan for this strategy is very specific. Simply build your formula to find charts with that day’s price range completely out of the Bollinger Bands with an RSI <30. This scan should yield only a few candidates and it should be easy to identify them.

Swing Trade Strategy #4- Trading Patterns with a Biotech Focus

Simplifying Charting to Perfect Entry Points

I like to take a simple approach to charting and identifying entry points. A lot of technical analysts like using indicators, such as bollinger bands, MACD, etc. I just like using basic support and resistance lines. At the end of the day, the markets are driven by buyers and sellers. When you remove all these indicators, it’s easier, in my opinion, to identify where traders might be looking to buy and where they might be looking to sell.

I like to look at support and resistance lines, where a stock has gapped and channels, or trends. Now, charting is an art, not a science. Just because a stock has some bullish pattern, it doesn’t necessarily mean it’ll go up. Using charts and the fundamentals of the company, it’s easier for you to build a story around a company. When you combine the two, it could improve your accuracy and better understand why a stock might be trading the way it has been.

Moving on, let’s take a look at channels up and channels down.

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Let’s look at Cempra Inc (CEMP), here’s a look at channel support and resistance lines, with annotation:

If you look above, this is just a simple channel line. You’ll notice the line up top is the channel resistance line, and the line on the bottom is the channel support line.

Now, let’s bridge together how I used a catalyst event, as well as basic technicals to trade CEMP.

Now, Cempra announced the U.S. FDA was scheduled an adcomm, so I got long in anticipation of a move higher. However, I sold out for a profit, ahead of the event. I’m not a news trader, so I don’t hold my positions into a catalyst, because it’s generally very risky.

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Next, let’s talk about gaps. Gaps are very useful, and for those who don’t know what gaps are, it’s typically when a stock gaps up or gaps down around some catalyst or news, and there’s going to be no trading in that region. Let’s continue with CEMP.

Now, you’ll notice blue horizontal lines drawn on the chart. This would help to identify gaps. Now these were all news events, such as the adcomm meeting and earnings. Take note, how there’s little support and resistance levels here.

Here’s another look at CEMP.

Here, you’ll notice just a couple of annotations and lines, nothing fancy here. Now, if you look at these lines, you’ll notice a pattern. Take a look at the two boxes drawn under the support area. This is what we would call a double bottom. A double bottom is just a term used in technical analysis usually signals a potential bullish reversal. Now, notice how CEMP found support at that

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area. It’s not a coincidence that if you look two years back, the stock had some support around that area.

Not only that, if you look at the top most line, you’ll notice there was some resistance there. If you look back, this was the same level from when the stock gapped down in early 2016.

As stated earlier, I used these technicals, coupled with the catalyst run up to profit from a trade in CEMP.

Moving on, let’s get more in depth in gap ups and gap downs. Let’s look at an example with CYTR. CYTR had some horrible news in early July 2016, causing a large gap down, and then another gap down thereafter.

You might be wondering, “This is a terrible company, why would I even consider trading this?” ​

I completely agree with you, but there are some opportunities. Take a look at CYTR below:

These catalysts have uncovered an opportunity in CYTR, and if you pair these gaps, support and resistance lines, as well as a catalyst run up, you could potentially double your investment, if the stock fills the gaps.

Remember when we mentioned double bottoms in the CEMP example? Let’s take a look at double bottoms and double tops. Again, these are just simply horizontal lines. If you look below at the chart on Lexicon Pharmaceuticals, you’ll notice LXRX formed a double top.

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If you look at where the two rectangles are drawn, this is where the double top was formed, in early to mid-September, and in early-October, it tested that area again, and sold off after. Now, double tops could be used for shorting entries, while double bottoms could be used for long entries. Take the case of CEMP again. If you recall, it formed a double bottom and the stock rose a bit after.

Let’s take a look at something that you could use simple support and resistance, sentiment, as well as news. Contravir Pharmaceuticals (CTRV) was about $1.20 on October 12, and traded all the way up to around $2.65 in just a few sessions. Now, one way to play this would be to hold the stock into the catalyst event, that’s fair game, but it’s a risky game. On the other hand, if you don’t have a high risk tolerance, you could be patient and wait until the stock pulls back, and wait to see until the sentiment changes to your favor.

That’s exactly what I did. I wasn’t able to catch the news. So I was patient, and waited for it to pull back around $1.68, and it found some buyers. Now, if you use the Fibonacci retracement tool, you’ll notice this is approximately a 50% pull back, as shown in the chart below.

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Another thing you might notice is that a “hammer candle” was formed. That could mean the sentiment is changing. Now, if the stock when over $1.88, it indicated a buy signal, and I actually alerted some of the people in the trading room, and the trade turned out pretty well for myself, and others.

If you look further back, it makes sense why the stock pulled back after hitting the $2.40 area, because this was an old resistance level.

Let’s look at another example of how we can combine technicals and fundamentals. Akari Therapeutics (AKTX) had multiple catalysts recently, which included its earnings release, granted FDA Fast Track Designation for Coversin, and analyst comments. Now, William Blair initiated coverage on April 6, 2017. The firm initiated AKTX with an Outperform rating with a price target of $37, due to the bullish prospects for its lead product candidate Coversin. Now, the stock ran all the way above $22.

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In the company’s press release on March 31, 2017, which noted that it granted FDA Fast Track Designation, the company stated:

Here’s the press release if you’re interested in reading it. ​ ​

Now, if you look at the chart above, and you missed the news, you could’ve used simple support and resistance lines to time entries. The stock ran all the way up to around $22 in just a few trading sessions. If you look on the chart, this was a previous resistance level. Thereafter, it retraced to the 61.8% Fibonacci level. This could’ve been an entry, ahead of the company’s interim results, which were going to be presented on April 24, 2017. This would’ve been a good swing trade for a couple of days, and you could’ve sold out ahead of the event when the stock was approaching its previous resistance level.

Again, this is all simple charting, just basic lines, and following sentiment. Now, I personally don’t like to use indicators, like MACD, bollinger bands, exponential moving averages and RSI, because it could get confusing, and it’s harder to build a story around the company if you’re just looking at technicals.

Now, that you should’ve learned the basics of some technicals, and how to use them with fundamentals and catalysts. Moving on, we’ll look at how to identify breakout trades.

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Identifying Breakout Trades

In the previous lesson, we briefly went over double bottoms and double tops, but we’ll look more in depth into these patterns. Additionally, we’ll look at bullish flags and revisit Fibonacci retracements.

You’ve probably heard of a bullish flag, or bullish pennant pattern before. The name for the pattern fits exactly what some of you might be thinking. The pattern resembles a flag or pennant on a pole. In this pattern, you’ll typically see a few sessions of the stock trading higher, which represents the pole. Thereafter, you’ll see the stock consolidate, which would be the flag or pennant formation.

Here’s a look at an example of a bullish flag pattern:

Notice the hourly chart on Apple, the stock formed the “pole”, and then consolidated and formed the “flag.” What do you think happened after? If you guessed it went higher, you were right.

Here’s a look at what happened after:

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That should be simple enough for you. However, you’ll need to practice looking for these patterns. Now, as you practice and see these charts over and over again, you’ll be able to find these breakout plays easily.

It’s hard for anyone to look through thousands of charts in the markets. We’ve used finviz.com as a research tool earlier, and it could also be used in technicals and searching for breakout trades.

Here’s a look at finviz.com:

The site is free, and the screener could save you a lot of time when you’re looking for stocks to trade.

If you click on the screener tab, you’ll see this:

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Now, you could screen your stocks based on a plethora of filters, such as market cap, sector, industry, price, country, short float and technical indicators. Since we are primarily looking for biotech stocks in this sections, we’ll want to screen for stocks included in the healthcare sector.

After we filtered for stocks only in the healthcare sector, we still have over 700 stocks in the list, and it’ll be very time consuming for you to go through all of those to find a handful of setups that you would like to trade. Now, another filter you could add is the country it’s in, the volume and price.

Now, remember earlier what we said about price? I generally want to look at lower-priced stocks because those are the ones that could soar and the ones we see double, sometimes. Another thing we should be wary of is liquidity. We don’t want to get into a stock that doesn’t have any liquidity, because we could get stuck and end up paying a large spread, or worse....not being able to get out before a catalyst event.

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That said, we’ll also filter by volume. Typically, I like to look for stocks that have a current volume of more than 300K.

After adding those filters, we’re down to just over 130 stocks. Here’s a look at the first page of stocks:

Now, if you go under the Charts tab, you can get a view of all the charts in these stocks, so it shouldn’t take you too long to find potential trades.

After looking through all of these pages, I was only searching for stocks that had a clear bullish flag. Here are the ones I’ve found:

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Cleveland BioLabs (CBLI)

Galectin Therapeutics (GALT)

Ignyta Inc (RXDX)

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After we’ve found these patterns, we should do some more research into the company and piece together what’s going on, and try to explain why the stock may be behaving the way it is.

Let’s start with CBLI. CBLI had a strong up move, after the company announced in a Form 8-K that “the European Medicines Agency (EMA) has accepted the company’s pediatric investigation plan (PIP), paving the way for submission of a Marketing Authorization Application (MAA) for entolimod as a medical radiation countermeasure.”

Thereafter, it formed the pole of the flag, had some consolidation and also retraced. Here’s a look at CBLI, with Fibonacci retracements drawn:

Notice how it closed just above the 50% retracement level. Therefore, this is one stock I might keep an eye on.

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Moving on, let’s look at GALT.

GALT is forming a bullish pennant pattern here, but it doesn’t have any expected catalysts until later this year. However, the company received a Decision to Grant from the Japanese Patent Office for its patent application for "Composition of Novel Carbohydrate Drug for Treatment of Human Diseases." The patent will extend coverage of the Galectin’s lead compound, GR-MD-02, to Japan.

GR-MD-02 is currently in a Phase IIb clinical trial in subjects with NASH cirrhosis and is in preclinical testing for lung, kidney and cardiovascular fibrosis. The company isn’t expected to report data until later this year, but it’ll be interesting to see whether the company issues a secondary after running up.

Let’s look at RXDX now. This one is pretty interesting, and actually had a catalyst coming up.

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Take a look at the RXDX on the daily chart. You’ll notice how the stock formed a bullish flag pattern, and it hit the 50% level on the Fibonacci retracement. Now, the stock had a catalyst coming up, and it would’ve been a good trade based on the technicals and the catalyst run up.

Moving on to double bottoms now. Here are some double bottoms I’ve found after I’ve filtered through healthcare stocks using finviz.

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Here, you’ll notice Advaxis, Inc. (ADXS) made fell to the $7.50 in late mid- to late- March, and rebounded right after. Thereafter, in April, it retested that level and rebounded, and would be considered a double bottom.

In late March, the company announced that the European Medicines Agency (EMA) issued an advanced therapy medicinal product certificate for manufacturing quality and non-clinical data. Not only that, but the company also reported some Phase I data in late March. Now, in April, the only press release it had was that the company announced it appointed a new chief business officer, which isn’t all that exciting. This move higher after the double bottom might just be due to buyers purchasing the stock around that level.

Another example of a double bottom was BioTime (BTX). Notice how the stock fell to the $3.10 area in late March and rebounded right off of that, and thereafter it fell to the $3.10 area again. And again, the stock rebounded off of that area.

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Now, the company announced in its press release that it would be presenting data at the Annual Meeting of the Association for Research in Vision and Ophthalmology (ARVO) in Baltimore, Maryland, May 7-11, 2017.

The company is expected to report data on its Phase II trial on May 8, 2017, and it would have been a good play after the double bottom coupled with the catalyst run up.

Another stock that made a double bottom was CSU. CSU is in the healthcare sector, but isn’t a biotech. However, it’s worth looking at the chart as an example of the double bottom pattern. If you look at the chart below, you’ll notice how CSU sold off, in most of March, until it found some support just above the $13 level. The stock rebounded above $14, and then pulled back around the $13 and formed a double bottom. Now, right after that, you’ll notice the stock bounce right off that level.

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Moving on, let’s take a look at something known as a double-double. This is just simply when a stock makes a double top, followed by a double bottom. We saw this with Endocyte (ECYT). Look at the chart below, around mid-March and April. You’ll notice how the stock found some resistance around the $2.60 level, and ECYT hit that level, pulled back to the $2.20 level. Then the stock rebounded off of the $2.20 area, and made a double top, after hitting the $2.60 level, again.

Now, the stock fell back to the $2.20 area and rebounded off of that, and therefore, it made a double top, followed by a double bottom.

One side has got to give up. Generally, when you see stocks bouncing up and down within a range, it means that traders are buying at the low end of the range, while traders are selling, or

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shorting, at the upper end of the range. Ultimately, one side will get tired and the stock will either break above the resistance area or below the support area.

ECYT had a catalyst even coming up, just over a month away from when it made its double bottom. The company expected to present its Phase I poster for EC1169, a cancer drug, at ASCO on June 5, 2017. Additionally, it expected to present its Phase I poster for EC1456, a treatment for cancer at ASCO. Now, abstracts for that conference will be available on May 17, 2017, and that would have given you some insight if you were in on the trade.

Let’s take a look at another example. Abeona Therapeutics (ABEO) found some support around the $4.50 area and began to consolidate. Now, the company announced it would present its Phase I/II poster at the Society for Investigative Dermatology on April 28, 2017.

Additionally, the lower support trendline was holding up, and this would have been good to get into ahead of this event, and sell out the day before. Here’s what happened:

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The support area held up well, and there were some buyers after it bounced off the support trend line.

Now, you could also use finviz’s filter to only look at stocks that have some certain pattern. Again, all you have to do is go under screener, then go under technical. Here’s a snippet of what you’ll see when you filter out for stocks that had double bottoms:

Keep in mind, this is all computerized, and sometimes it might filter out stocks that had double bottoms, and you might miss out on those. Since technicals is an art, and not a science, you don’t really need to be exact. However, pattern recognition algorithms are typically exact. So I don’t really like to use this filter for patterns. I’m not saying that you can’t, everyone has their own preference, but I like to see all the patterns in case some stocks are filtered out that may have provided some opportunity.

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You should have an idea of how to search for stocks that could potentially break out, based on technicals, by now. If you haven’t you should go over this lesson again, and then practice looking for these patterns. Doing your homework will only make you better at spotting these patterns, and in the long run, you’ll be much faster and these patterns will be ingrained in your memory.

If you’ve understood everything we’ve gone over thus far, in the next lesson, we’ll go over some chart patterns that I think are reliable.

Reliable Chart Patterns

In this lesson we’re building upon what we’ve gone over in the previous lessons, and by the end of this, you should understand which chart patterns have the highest probability of breaking out. I’m going to go over battle-tested patterns, which I’ve found to work over my years of trading. I’ve gone through a bunch of technical setups over my years of trading, and I’ve found that these two patterns have worked the most. You’ve probably heard of Fibonacci Retracements and double bottoming reversals.

We’ve already briefly gone over Fibonacci Retracements and double bottoms, and I’m a long-biased trader.

It’s pretty hard to be short a biotech overnight, because it could have news overnight, which could send the stock higher. For example, if you were short Akebia Therapeutics (AKBA) overnight ahead of it announced it would expand its deal with Otsuka Pharmaceuticals, you would’ve been down over 30% on the position overnight. When there’s a bull market like this one, and more activity in the biotech space, it’s pretty hard to be short.

Getting back to reliable chart patterns.

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Again, we’ll be using finviz as our screener. All you have to do is go under the screener tab, and we’ll only look at stocks in the healthcare sector, and those with a current volume greater than 200K. Now, since we’re looking for Fibonacci Retracement setups, you’ll need to go under the technical tab in the screener, and select stocks that have been up 10% on the week. It doesn’t need to be 10%, you can set it at over 10%, if you want, but I’ve found that this gives us a good number of stocks to potentially trade.

Here’s a snippet of what you should see after you’ve filtered out stocks that have been up 10% on the week.

Keep in mind, these stocks will have bullish action and this will help you identify stocks that might have a Fibonacci Retracement setup. Let’s go over what that is. A Fibonacci Retracement setup is quite simply, a stock that’s had good news, and skyrockets and hits a high or resistance level.

After I’ve found some setups, I’ll put them into a watchlist and make a note indicating that this could probably be a Fibonacci Retracement setup. Let’s use a hypothetical example. Assume you’re long some biotech stock that released positive Phase III data, and the stock pops from $1.00 to $2.25. Now, you’ll probably want to book your profits, and other traders might be thinking the same. This would add some selling pressure to the stock. You’ll also have traders who are looking for the stock to mean revert, and they might get short too. Thereafter, there stock could drop.

Let’s move onto some examples.

Here’s a look at CytRx (CYTR), a stock that showed up on the screener.

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CytRx had some positive news, after the company announced that it reached an agreement with the regarding the path to filing for its new drug application (NDA) for its lead candidate aldoxorubicin. If you’re interested, here’s the news. This fits our criteria. The stock was up over ​ ​ 10% in a one-week period, had some positive news and is fairly liquid.

The stock hit a high of 99 cents, and you could use the low of that day’s green candle as a stop. Note that the stock hit its 38.2% Fibonacci Retracement, and it looks like that area is holding well as support. Therefore, this might be a Fibonacci play, so I’ll put it onto my watchlist, and let the chart tell me when to get long.

Now, I generally don’t like using the Fibonacci Retracement tool, rather I like to use simple heuristics and intuition to figure out the play. For the purposes of this course, I’m just using the tool to give you all an idea of how the trade works. However, just because I don’t use it, doesn’t mean that you can’t use it. If you find it helpful to your trading, by all means, use it.

Let’s look at another example of a Fibonacci setup. ImmunoGen Inc. (IMGN) had an analyst upgrade, and the stock gapped up. Here’s a look at the daily chart.

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Now, you have to think as if you were long this stock. The stock gapped up after Leerink Partners upgrade the stock from market perform, to outperform. Thereafter, the stock rose higher, and broke through some resistance. Now, notice how IMGN broke through the $4.30 level, where it previously gapped down from, and started to pullback. Now, if you’re a trader, you might be thinking, “I’m in just above $3 and the stock rose above $4.30, this might be a good place to sell because it failed to fill that gap.” If other traders are also thinking this, they might want to take profits, which should add some selling pressure.

Thereafter, this might provide some opportunity, if and when, IMGN pulls back. This would be another Fibonacci I would consider. The company also announced it would host its conference call on May 5, 2017, a few weeks after this pop up. Now, if it pulled back and built some support, and I got in long, I wouldn’t hold it into the conference call, because that would pretty much be gambling and you really don’t know what they might say.

Moving on, Pluristem Therapeutics (PSTI) is another Fibonacci play.

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Notice how PSTI completely filled its gap and ran higher. Now the stock moved over 30%, after Ray Dirks indicated that PSTI could have some upside potential commenting on potential budget spending on stockpile radiation antidotes, after Trump raised its military and defense spending budget. Now, if you were in this stock long ahead of this news, and the stock hit around $1.60, you might have considered selling out of your position to take profits.

Again, other traders might be looking to sell or short the stock around this area, which may have been why the stock retraced, and found support around the area before it previously gapped down. This would be a great example of a Fibonacci setup.

If you got long the stock right around the support area, this is what would’ve happened:

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If you got long on that green candle, you would’ve made a profit. Keep in mind that the company was expecting to report Radiation Trial data May or June, and it could be a potential multiple week swing trade. Additionally, in late 2017, the company is expected to report Phase II Intermittent claudication data

Moving on to another example.

Windtree Therapeutics (WINT) rose after announcing AEROSURF (lucinactant for inhalation) Phase IIb independent Data Safety Monitoring Board (DSMB) completed its second and final interim safety review and has recommended continuing the trial without modification. Now, the stock got a nice pop and rose over 75% in just 3 trading sessions. Traders who were long might’ve took some profits, and some might have gotten short the stock.

Now, you’ll notice the retracement to the $1.15 area, followed by a green candle. That would’ve been a good spot to get long. The company also reaffirmed its plan to announce top-line results from the AEROSURF Phase IIb clinical trial in mid-year 2017.

Let’s look at one final example of a Fibonacci setup, before we move onto bottom reversals.

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Here’s a look at Adamis Pharmaceuticals. Now the stock had a strong move in early March 2017, but pulled back and built some support around the $4.20 area. This would’ve been a good spot to get long on a green candle.

Here’s how that Fibonacci play would’ve turned out:

Now, take note that the stock tested its resistance level around the $4.65 area, but failed to break out, which should signal that you should take profits, if you were long. Thereafter, the company issued a secondary offering, causing shares to gap down. There is one key takeaway in trades like this: take profits when you can, because if you were in this position and stayed in, in hopes of the stock breaking above the resistance level, you would’ve ended up losing money on the trade.

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You should have a good idea of how to look for Fibonacci setups, and which areas to get long. Let’s move onto bottom reversal setups.

Oversold conditions are generally easier to trade, because they’re been down so much and they’re cheap, and they don’t want to go lower. So if stocks like this attract some buyers, there could be a lot of upside potential.

Now, contrary to the Fibonacci setup, with the bottom reversal pattern, we’re looking for stocks that have gone down due to some news, and could potentially bounce. With this setup, we’re looking for stocks with a float between 10M to 100M, which means that it provides some liquidity. If a stock has, say 1M floating shares, it’ll generally be less liquid and the bid-ask spreads will be wider. Consequently, you don’t want to be in a stock with a low float/low liquidity, because in a blink of an eye, the stock could drop significantly, if someone hits the bid.

Additionally, you’ll want to look at the short float. If there’s a high short interest, and the stock dropped, say 30%, shorts might want to cover their short if the stock bounces. And in turn, this could cause some buying pressure. With the bounce play, we’re waiting for a green candle to potentially get in long, after the stock had multiple down days. Now, similar to the Fibonacci setup, you’ll want to see some support area, and some buyers at the bottom.

In addition, you’ll want to keep an eye on the biotech index and the overall market, if you’re trading a bounce play intraday. However, with long-term trading, you would want to see the biotech index, or biotech ETF, such as IBB, red so you could get shares of a stock with a bottom setup cheaper. Reiterating what we’ve stated previously, you’ll want to look at the news. If the stock has an investigation or is going to be delisted from a major exchange, you wouldn’t want to get long. However, if it’s down on a secondary offering or some slightly bad data, it would be a better play.

Moving on, let’s see how you could scan for bottom plays. Again, we’ll look use finviz to do so. Similar to the Fibonacci Retracement filter, we’ll be looking at stocks in the healthcare sector, with current volume of over 200K, and under $10. However, with the bottom bounce, we’ll need to set the performance filter to down 10% or 20% on the week. Here’s a look a snippet of the settings with stocks that have been down 10% on the week:

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Notice here, we have 18 potential setups.

On the other hand, if we set the performance to down 20% on the week, we’ll have a lot less, only 3 in this case:

Note, that these are just snapshots, and you’ll get different results when you’re looking for these plays.

Let’s move onto some examples now.

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Trevena Inc. (TRVN) was a double bottom bounce play. Now, if you take a look at the chart, TRVN gapped down, after it provided data from its Phase III trial for its drug used to treat acute pain. However, the company noted that it slightly underperformed morphine.

Notice how the company sold off for three days and made a double bottom. Before we get into something like this, we’ll need to look at the amount of floating shares. Here, TRVN had over 40M shares floating, which indicated that it was fairly liquid. Also, there was a short float of 7.74%.

Although its drug underperformed morphine, H.C. Wainwright reiterated its buy rating on TRVN, and FBR & Co. reiterated its Outperform rating on the stock. However, the firms cut their price targets to $8.

We know the news, and built a story around why the stock plummeted. After its third down day, the stock had a green candle, which would have been a good spot to get long. If you got long, you could’ve got out on another up move, and profited.

Moving on, let’s take another look at a potential bottom reversal play.

Apricus Biosciences (APRI) shares gapped down and looked like it found some support area.

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Let’s try to build a story around this. Now, the company announced the pricing of a public offering, which sent shares lower, significantly.

The underwritten public offering amounted to an aggregate of 5.03M units, with each unit consisting of one share of Apricus common stock and one warrant to purchase 0.75 of a share of common stock, at a public offering price of $1.40 per unit. Now, the stock is trading well below that.

Let’s look at some stats now. The stock has just over 6M shares floating, but doesn’t meet our requirement of stocks with a medium float between 10M and 100M shares. Therefore, this bottom bounce play would be best for more risk-tolerant traders.

Again, we’ll need to wait for some buyers to step in here, and wait for a green candle to potentially get long.

Let’s take another look at a bottom bounce play.

Onconova Therapeutics (ONTX) gapped down lower, and bounced right off the psychological level of $2.

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Now, the reason behind the gap down was due to a public offering. Public offerings are quite common for clinical stage biotech companies. We know the news now.

The stock broke below its previous support area of $2.20, and it hit the psychological level of $2. Now, there were some buyers here and this area held up. So if you got in long on the green candle after the stock bounced off the $2 area, you could’ve taken some quick profits.

Moving on, here’s a final example of a bottom reversal pattern.

ContraVir Pharmaceuticals (CTRV) shares gapped down and fell below $1, and found some support around the 80 cent level.

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Now, the reason behind this significant drop was the company’s pricing of a public offering of common stock and warrants.

ContraVir was offering 12M shares of its common stock and warrants to purchase 6M shares of its common stock at a combined offering price of $1.00. All of the shares and warrants are being offered by ContraVir. The shares of common stock and warrants will be issued separately. The warrants will be exercisable beginning on the date of issuance for a period of five years from the issuance date at an exercise price of $1.25 per share.

Now, if the 80 cent area holds as support and we see a larger green candle, which would be our signal to get long.

The stock also fits our criteria. CTRV has over 50M shares floating, and therefore it’s fairly liquid.

Now, you should have a good idea of how Fibonacci setups and bottom reversals work by now. Again, you have to do your own homework, and continue looking for these setups and play them out. That’s the only way you’ll reinforce your learning and figure out the best entry points.

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CHAPTER 9 DAY TRADE STRATEGIES

Day Trade Strategy #1 - Opening Range Breakout

Day trades are just that: a trade that is entered and exited during the market hours of one day. For day trades, the chart time frames are much shorter than those used with swing trades. In the previous three sections, you noticed that the charts were daily charts, with each bar representing a full day’s worth of trades. In the next three sections, intraday charts are utilized using a 1 minute bar. Each bar represents one minute of price action. The first trading strategy is an Opening Range Breakout trade. With this strategy, we identify stocks with intraday momentum. These momentum stocks will typically have had an event that day, such as earnings, an analyst upgrade, or other news that causes a spike in the stock’s price and volume. Here’s an example of the type of volume that must exist for the stock to be considered a momentum stock.

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It is easy to scan for these plays; simply scan for relative volume. A good free scan can be found at finviz.com under their screener tools. Here are the settings I use for such a screen:

Once a list of momentum stocks for the day has been compiled, intraday charts of 1, 3, or 5 minutes are used to determine which are candidates for an Opening Range Breakout trade. Next, we watch these stocks after the open; any stock that forms a range, not making new highs for 10 - 15 minutes, is in play for a potential Opening Range Breakout trade. Once an opening range is established, the high of that range acts as the trigger price for a long entry. The corresponding uptrend line that has developed will serve as the stop loss level; a move below that line means the trade is longer valid and should be exited. Once this trade triggers, profits should be taken quickly, scaling out as the stock rises.

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Day trades are not as mechanical with respect to sales as swing strategies, meaning there is more room for discretion when choosing entries and exits. There is one rule, however, that is a must: hold at least a portion of the position and use the support trendline as your stop. This will allow you to ride a winner unemotionally until the chart stops you out. The stop limit can be raised above entry in this case to ensure profits on the remaining position. Here are annotated Opening Range Breakout examples, the daily chart and intraday chart, respectively:

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Day Trade Strategy #2 - Swift Pullback, Double Bottom Strategy

The second day trade strategy is the Swift Pullback, Double Bottom. Like Day Trade Strategy #1, the day’s momentum stocks must be identified. Again, an opening range must be established by waiting for the first 10-15 minutes. Once the opening range is established, the high end of this range serves as the entry price. Below is an example of a chart that has daily momentum:

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The same scans can be identified by entering the parameters into the finviz.com scanner as the last section to find ideas intraday. The settings are as follows:

Once momentum issues are identified, the intraday 1 minute chart is used after the first 15 minutes have elapsed to determine entry. In the example below, a retest of the opening range lows on a sharp move down will serve as our entry spot. This retest of the lows is a potential double bottom. The stop is on a move below the double bottom, giving this trade a good risk/reward ratio. The double bottom is not always exact, so some leeway should be given when setting your stop. The price target is a move back up into the trading range. Here are some chart examples:

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The event that causes the volume surge -- usually news or earnings related -- also causes the price to “gap” up in the morning, resulting in the momentum play. These gaps are a natural support area. The more times these gaps are tested, the less likely they will continue to act as support, but the first test down offers a high probability of holding.

Day Trade Strategy #3 - Red to Green Strategy

Day trade strategy #3 once again involves momentum stock plays. In this strategy we scan the previous days momentum movers, looking for range breaks with huge volume sticks, telling us momentum has initiated. As we know, momentum can occur in both directions, giving us both long and short trading opportunities. Once we have identified the previous day momentum list, we then watch the list the next trading day for moves into the momentum. For example, in the chart below, on June 16th, we have identified the first day momentum stick. The next day, on the 17th, the stock opened down, or red, and then turned positive, or green during the session. It is this move that we are trying to capitalize on. In this example, SBLK closed the first day stick on the 16th at $13.48 and opened the next day at $13.44. We are looking to buy the stock on a break of $13.48 the second day for the continuation. This is why we coin the phrase “red to green”. We have a good risk/reward scenario in this strategy as we use the second day’s lows as our stopping point upon the red to green move. We then scale out on the ascent with stops in place!

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Here are a few more examples:

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We can also employ this strategy on the short side by simply looking for first day downside momentum. As you can see in the example below we scan for momentum plays from the previous session and use that stick for our levels. With COH, on June 19th we have a first day momentum stick with a close $39.5. We had an open the next day at $39.6. We short the break below $39.5 on the second day move. Using the second stick’s high of day, we have established a stopping point and a great risk reward situation!

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A few more examples:

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Day Trade Strategy #4 - VWAP

The VWAP indicator stands for Volume Weighted Average Price. The strategy that I use behind this indicator is an intraday short term strategy. Often times, in a stock with momentum, the VWAP indicator will serve as a short-term support area. On a bullish stock, I will wait for a coil/pullback around the VWAP indicator on a 5 minute chart to initiate a daytrade. We also want to only daytrade in the direction of the price vs the vwap. This means that if we are looking to long the stock it is important that price stays above the VWAP. See the examples below (VWAP is the orange line):

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Day Trade Strategy #5 - Option Sweeps

One day trading strategy that I turn to every single day is known as the option sweep. The goal behind this strategy is not to trade the option but rather daytrade the quick move in the underlying stock based on an order that our scanner picks up. These orders, called “sweeps”, indicate that the buyer wants to take a position in a hurry, which could imply that he or she is anticipating a large move in the underlying stock’s share price in the very near future. There could be various reason for this, but that doesn’t matter. What we want to do is play the call side (bullish action) and daytrade the move off the sweep. The scanner that I use to find the sweeps was created through Trade Alert. (https://whatstrading.trade-alert.com)

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A few rules to follow when trading options sweeps:

1. Only trade odd names and odd lots. For example 13774 QVCA Calls. 2. Only trade front months (3 months out max). For example 13774 QVCA Apr 22 Calls (if April was within 3 months of the current month). 3. Use the 8ema on the 5 minute intraday chart to follow them up. 4. Do not trade scans that are momentum plays for the day. These usually are crowded and contain much more risk. 5. Repeat and multiple sweeps are ideal if they meet all the other criteria.

Now that we have established our rules, let’s look at a few examples:

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CHAPTER 10 MANAGING RISK

Risk management is an essential but often overlooked aspect to successful active trading. Even a successful trader who has accumulated significant profits over a long period of time can lose it all in just one or two bad trades if proper risk management isn't employed. Here are some simple strategies to help you avoid incurring outsized losses in your account.

Planning Your Trades

"Every battle is won before it is fought." The phrase implies that planning and strategy - not the battles - win wars. Similarly, experienced traders commonly quote the phrase ​ ​ "Plan the trade and trade the plan." Successful traders plan trades in advance and this is often the difference between profitability and loss. Defined stop-loss and take-profit points represent two key ways in which traders ​ ​ ​ ​ can plan ahead when trading. Successful traders know what price they are willing to pay and at what price they are willing to sell, and they measure the resulting returns against the probability of the stock hitting their goals. If the adjusted return is high enough, then they execute the trade. Conversely, unsuccessful traders often enter a trade without having any idea of the points at which they will sell at a profit or a loss. Like gamblers on a lucky or unlucky streak, emotions begin to take over and dictate their trades. Losses often provoke people to hold on and hope to make their money back, while profits often entice traders to imprudently hold on for even larger gains.

Stop-Loss and Take-Profit Points

A stop-loss point is the price at which a trader will sell a stock and take a loss on the trade. Often this happens when a trade does not pan out the way a trader hoped. The points are designed to prevent the "it will come back" mentality and limit losses before they escalate. For example, if a stock breaks below a key support level, traders often sell as soon as possible. On the other side of the table, a take-profit point is the price at which a trader will sell a stock and take a profit on the trade. Often this is when additional upside is limited,

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given the risks. For example, if a stock is approaching a key resistance level after a large ​ ​ move upward, traders may want to sell before a period of consolidation takes place.

How to Use Stop-Loss Points

Setting stop-loss and take-profit points is often done using technical analysis, but fundamental analysis can also play a key role in timing. For example, if a trader is holding a stock ahead of earnings as excitement builds, he or she may want to sell before the news hits the market if expectations have become too high, regardless of whether the take-profit price was hit. Moving averages represent the most popular way to set these points, as they are ​ easy to calculate and widely tracked by the market. Key moving averages include the 10, 20, 50, 100 and 200 day averages. These are best set by applying them to a stock's chart and determining whether the stock price has reacted to them in the past as either a support or resistance level. Another great way to place stop-loss or take-profit levels is on support or resistance trendlines. These can be drawn by connecting previous highs or lows that ​ ​ occurred on significant, above-average volume. Just like moving averages, the key is determining levels at which the price reacts to the trend lines, and of course, with high ​ ​ volume.

When setting these points, here are some key considerations: ● Use longer-term moving averages for more volatile stocks to reduce the chance that a meaningless price swing will trigger a stop-loss order to be executed. ● Adjust the moving averages to match target price ranges; for example, longer targets should use larger moving averages to reduce the number of signals generated. ● Stop losses should not be closer than 1.5-times the current high-to-low range (volatility), as it is too likely to get executed without reason. ● Adjust the stop loss according to the market's volatility; if the stock price isn't moving too much, then the stop-loss points can be tightened. ● Use known fundamental events, such as earnings releases, as key time periods to be in or out of a trade as volatility and uncertainty can rise.

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2% Rule

A common rule of thumb when deciding how much to risk in any given trade is the 2% rule. For example, if a trading account is worth $10,000, the 2% rule dictates no more than $200 is risked on any given trade. In our 6 trading strategies discussed above, all present favorable risk/reward scenarios. This is the goal of any successful trader. Even if only half of these trades are successful, a trader would still make a significant return on capital.

Trim and Trail

Trimming and trailing is also a key discipline to employ when managing a trade. When you trim, you sell partial positions as the trade succeeds keeping a portion in the event a larger move develops, hence trailing. Trimming and trailing can be done in quarter, third and half positions. Here is an example of how trimming and trailing can maximize profits and minimize risk:

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Bottom Line

Traders should always know when they plan to enter or exit a trade before they execute. By using stop losses effectively, a trader can minimize not only losses, but also the ​ ​ number of times a trade is exited needlessly. Make your battle plan ahead of time so you'll already know you've won the war.

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CHAPTER 11 INTRODUCTION TO OPTIONS

An option is a financial contract which gives the owner the right to buy or sell stock at a specific price, on or before a specific date. The person selling the options contract has a corresponding obligation to fulfill that contract. When the owner of an options contract uses that options contract it is called “exercising.” There are two basic types of options: calls and puts. A CALL option gives the owner the right to purchase the underlying stock at a certain price. A PUT option gives ​ ​ the owner the right to sell the underlying asset at a certain price. ​ ​ Each options contract controls 100 shares of stock; if you exercise a single call contract for GOOG, you purchase 100 shares of that stock. Both call and put options have a “strike” price, occasionally referred to as an “exercise price,” as that is the price at which the option can be exercised. So, if you owned a call contract for GOOG with an exercise price of $550, you could purchase GOOG if and when it reached that price. If you owned a put option for GOOG at $550, you could sell at that price. Technically, you can exercise options regardless of whether or not they hit the strike price, but there is usually no reason to do so. For example, if you own a GOOG call option for $550 and GOOG is currently trading at $520, exercising the option would mean you pay $30 more per share than if you just purchased the stock normally - not a wise decision! However, if GOOG was trading at $600, you could exercise your call option, purchase at $550 and immediately sell those shares at $600 to make a $50 per share profit. Options contracts “expire,” meaning after a certain date they become null and void. There are weekly and monthly options: monthly options last for one month and expire on the third Friday of every month; weekly options last a week and expire every Friday. Options have what is called “intrinsic value.” Intrinsic value is the amount that the current stock price is higher than the strike price for a call option, and the amount that it is lower than the strike for a put option. The intrinsic value is the amount of money that the option would be worth if it expired today. We can categorize contracts based on whether they are “in-the-money,” “at-the-money” and “out-of-the-money.” A call contract with a strike lower than the current price is considered in-the-money, as you could exercise that contract and acquire the stock at a lower price than it is currently trading, immediately sell it, giving you a profit. If the stock was trading at the current strike price, it would be considered at-the-money. If the strike price was higher than the current stock price - meaning you’d take a loss if you exercised the option - it is considered out-of-the- money. For puts, you simply reverse it: if the strike price of a put is higher than the current price at which a stock is trading, that options contract is considered in-the-money. In addition to buying call and put options, you may also write options contracts. For example, you could write a call contract for GOOG stock that you hold. The individual

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who purchased that contract would have the right to exercise that contract and buy GOOG at the strike price. As the writer of that contract, you would be obligated to sell at that price.

The primary benefit to writing options contracts is that you receive “premium,” which is the price the options buyer pays for the right to buy or sell at the specified price. One of the most common options-writing strategies is called a covered call. With a covered call, you write an options contract for a longer term stock position you hold. For example, if you plan on holding GOOG for a couple of years in anticipation of it increasing in price, but think that it will either go down or remain flat for the near term, you could write a call option for the stock at a higher price. If the stock does or remains flat as you expect and fails to hit the strike price, you get to keep the premium and your stock, as the contract will expire worthless and unexercised. If the stock exceeds the strike price, however, the option will be exercised and you will be forced to sell the stock that you’d planned on holding for a longer period of time. Below is an options screen illustrating the components discussed above. Note that there are several components you also see on a stock screen, such a bid/ask and volume.

I primarily utilize weekly options as a part of my Breakout Strategy. For highly liquid stocks above $30 in price, buying options contracts vs the stock itself offers some advantages. The most significant is that it requires less capital. Purchasing 10 options contracts for a $80 stock is far cheaper than buying 1,000 shares of that stock, meaning I

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can put that capital to use elsewhere. The other big advantage is that it is low risk. If I purchase 1000 shares of a $80 stock and it decreases in price to my stop price of $77, I’ve lost $3,000. If instead I purchase 10 options contracts and the stock drops, I won’t exercise the contracts and they will expire useless, but I will have paid far less than $3,000 for those contracts. Options can be a very valuable tool and there are many, many ways to utilize them. Note, however, that some of these strategies are both highly risky and complicated and should only be used by seasoned options traders. You can learn more about some of the most common options strategies, such as spreads, straddles and collars at www.cboe.com

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CHAPTER 12 UTILIZING LEVEL 2 TO IMPROVE YOUR ENTRIES

One helpful tool available to traders is the Level 2 screen. Though it can be used in many different ways, I employ it primarily to provide additional confirmation that a stock I am watching for a breakout has a legitimate level of resistance. Before we dig into that strategy, let’s quickly review a Level 2 screen. Though yours may look a little different than mine, the essential components and layout should be the same.

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1. This is the market maker. This has no real impact on what we are learning here, just know that some brokers allow you to route your orders to a particular market maker. 2. This column contains the bids - orders to buy a certain number of shares at a particular price. The highest bid - $9.97 in this example - is at the top of the page. 3. This is the size of each order. So, the top order for $9.97 is for 300 shares. 4. These are the offers - orders to sell at a particular price. As on the Bid half of the Level 2 screen, the MMID and Size columns stand for Market Maker and Order Size, respectively, on the Offer/Ask side. 5. Sometimes referred to as Time and Sales, this black box shows the most recent “prints,” which are orders that have filled.

Also note in the upper left-hand corner we can see the ticker symbol for this particular stock, which is BONT. To demonstrate how I use Level 2, lets walk through an example trade. As you’ve learned, I first identify prospective breakout trades on a daily chart, looking for both price and volume expansion. This chart meets those criteria.

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I next zoom in on the intraday to find my intraday pattern.

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I have now identified a level of resistance at $10 and am interested in buying a break over that level. This is where the additional information that Level 2 provides can come in handy. I pull up my Level 2 screen for this stock and look at the offers at the $10 level. Conventional wisdom says that a significant level of resistance at that level - a large offer - means you should stay away, as it will be difficult for the stock to break through. My approach is the opposite, as I want to see a large offer at the identified resistance level.

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Note the huge offer at $10 on this stock! There are over 63,000 shares on the offer at that level, which you can see is far larger than at any other price on either the Bid or Ask side of the Level 2 screen. Now what I want to see is that traders are not scared by the large offer and that the bids are not backing off. Ideally, that huge offer should continue to get whittled down, as you see orders continue to fly by at that price on the Time and Sales. If that offer continues to get worked down, I wait and buy when it has been worked down to almost nothing. This is in anticipation of the rest of the shares on the $10 offer being purchased and then the stock breaking out higher.

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Here is another example of this ($SNAP):

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This also works in reverse; you can use Level 2 to identify support levels that you are watching to initiate a breakdown (short) trade. Simply look for a large bid at the support level you’ve identified and see if it continues to get worked down to nothing. Again, this is just one of many ways in which Level 2 can be used, but I find that utilizing it in this way allows you to identify those stocks which are most likely to experience a significant breakout and then enter before the actual breakout occurs.

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CHAPTER 13 GROWING AS A TRADER

Up to this point, I’ve only addressed the mechanical requirements necessary to be a successful trader. This course book is mainly devoted to just that - giving investors the trading tools they need to be successful. However, while essential, the mastery of trading techniques and tools is not enough to ensure success as a trader. There are many traders I have known who were smarter than I am and who had a complete mastery of the mechanics of trading yet ultimately failed. The reasons for their failure can be traced to their mental attitude toward trading. This mental aspect of trading is what I will focus on in this chapter. All of the trading skills discussed in this course book will not aid an undisciplined trader. I like to refer to this quality, present in the most successful traders I know, as being “brutally disciplined.” There is a near negation of human emotion in top traders and this is not something that comes easily because we are all human beings and emotions will always creep into our trading decisions. It is a never ending battle the most successful traders wage each day, trade by trade, assessing the risk/reward of each investment decision they make. One tactic that will aid in the trading discipline required to be successful is a religious examination of each trade before you execute. Another mental attribute the successful trader possesses is a survival instinct. I’ve discussed limits on assets allocated to an individual trade but there always must be an awareness of the market environment as well. When the market action turns hostile even the best technical setups may fail. The successful trader does not fight the tape and realizes that in difficult markets it is best to be patient. Always realize that anything can happen in financial markets. This realization, if adhered to, will prevent you from ever making any one trade that has the potential to explode your account. While this advice sounds elementary I would point out the field of formerly successful traders who forgot this basic rule and blew up their accounts. No matter how successful a trader becomes the most elementary rules still apply and must be followed. A major pitfall to avoid as a trader is to avoid surrendering a green trade. Nothing will distress a trader more than allowing a successful trade to turn into a loss. A trader who does not learn how to take profits on a trade that works will quickly suffer a loss of confidence which will lead to more unsuccessful trades. I like to say that “one bad trade begets another.” Just as the successful trader must be disciplined in assessing each trade before it is entered, he or she must be equally as disciplined in selling into a successful transaction and learning to ALWAYS protect the trade. Repetition of executing each trade in a similar fashion will soon become second nature to the successful trader.

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The temptations to deviate from the mechanical process of executing a successful trade will always be present but they must be avoided to achieve success. It is is important to pace yourself as a trader. This advice applies more to scalp and day traders as they tend to work in the most rapid and intense conditions. It is easy for any trader to get caught up in the fast pace of trading, which can cause a loss of the discipline necessary to be successful. Do not let this happen. If the pace of trading becomes too rapid, there is no harm in passing on a potential trade. There will always be another trade opportunity. It is far better to pass on a trade than to rush into a transaction which ends in a loss. Strive to be deliberate and controlled, always assessing the risk/reward of each trade you enter. Simple enough advice but again human emotion has a way of derailing trading discipline. One activity that will help you curb the desire to overtrade - a big problem for many - and also provide data about what is and is not working in your trading is keeping a trading journal. If you record all of your trades, just the knowledge that you will be forced to account for that horrible, impulsive trade will often keep you from making it in the first place! As for providing data, reviewing your trade journal will give you a 30,000 foot view of your trades. The observant trader will see patterns that would not be obvious otherwise: Do you always lose on morning trades? Do you consistently see stocks blow through your stops and then rebound a penny later? Do you make more money in bear markets than bull markets? You’ll be shocked at what you learn from your journal. So what should a trade journal look like? While answers vary, a good trade journal will include at least the following: ● Ticker ● Number of shares ● Entry date(s) ● Entry time(s) ● Exit date(s) ● Exit time(s) ● Stop ● Strategy/setup ● P/L I recommend using either a Google Drive or Microsoft Office spreadsheet for your journal, as that will allow you to sort easily. For example, you can reorder your list by setup type to see what setups you trade most and least profitably. Additionally, with a spreadsheet, you can calculate things like P/L automatically. I have posted a simple trading journal spreadsheet template for download on my website.

Lastly, I would say try to have a bit of fun trading. Even after mastering the mechanics and mental attributes needed to trade successfully, if one does not have the passion to

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trade it is unlikely to result in long term success. While it is important to find the style of trading which works best for you, compare notes with other traders. Try to learn from those who are already successful. Doing this will not only help you with your own trading but you will find those with whom you will develop a sense of camaraderie. It helps to compare notes with other traders who understand the difficulties and pressures of trading. Social media makes contacting other traders any easy task. If you can develop online friendships with like-minded traders it will not only help you to trade better but also help to keep you mentally grounded when the trading environment is difficult.

Trading Psychology Tips

An important part of trading is your mindset. Maintaining a healthy mind and body, as well as a balanced, unemotional trading outlook is vital. Here are some practical tips:

● Don't trade when you are in bad or very distracted state of mind ● Be prepared before the market opens. You should have a plan in place so that you can focus on executing, and if needed, adapting that plan ● Use position sizes you are comfortable with. If you trade with too much size you are more prone to jump out of trades at the first downtick ● Overcome the fear of missing out by recognizing that there will be always be other opportunities in the market ● Focus on your trading system and the execution of good trades, not on PnL ● Exercise and eat healthy ○ I shower in the morning; it helps wake me up ○ Eat a good breakfast ○ Some caffeine during the day helps me stay alert ○ Break midday for brief walk, exercise ○ Standing desk ● Develop confidence in your trading system by applying it with consistency but always analyzing to see if there is room for change or improvement ● Goals should be weekly or monthly, not daily ● Recognize that you will experience losses - every single trader does ● Don't jump around from one strategy or guru to the next - there's no miracle system that will keep you from ever having down days or turn you into a millionaire overnight ● Cultivate patience. This is very challenging for many traders, but letting a trade develop will allow you to easily cancel out your small losses with large gains

There’s a trading scenario that I have seen play out many times in my own trading and that of others. Avoiding this type of bad, mismanaged trade is key to staying in the game and profiting. It goes like this:

● You enter a trade

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● The trade goes against you ● You ignore your stop level (or you never set one in the first place!) ● You get stubborn, thinking you are right ● Instead of stopping out, you double up at a lower price ● Set a new stop ● That stop hits and you add a third piece thinking you just now wanna break even ● BAM! It tanks even more and you just wasted a month of good trades being stubborn

The point of trading is to minimize risk and losses and maximize profits. When you find yourself more concerned with “being right” or “making a point” you’ve lost sight of that and need to step back and reevaluate your motives for a trade.

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CHAPTER 14 PUTTING IT ALL TOGETHER

In this chapter, I will take you through an entire day of my trading activities. My actual trading day starts the night before, scanning charts. I run various scans with IQchart.com software and also use the free screener at Finviz.com. I examine 500 to 1500 charts each night looking for various technical setups. In the morning, my day starts at 7 AM. Using the scan I ran the night before, I physically chart the list of stocks in my stockcharts.com account. Stockcharts.com is a great resource for organizing charts, updating them, and evaluating lists. Stockcharts.com facilitates organizing these charts in whatever manner one desires. I spend the morning managing my stockcharts.com folders by editing charts I’ve listed, adding new charts if warranted, and updating any charts that have been held overnight. Once my list of actionable stock has been completed, I prepare my trading software screens for the day. I use the Etrade professional platform which gives a 4 screen blank canvas with many tools for setup. Each trader can personalize his or her screen in a manner which best suits that individual’s trading style. Here are screenshots of all 4 of my screens that I use:

Screen 1 is my Level 1, or watchlist screen

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The level 1, or watchlist screen, allows you to watch prices in real time. My setup gives me the current bid, current ask, total volume for the day, and change in price. These screens also allow me to set alerts on any stock I want. I like to set price alerts for the list as the price approaches key breakout levels that I am watching. The software will have a popup window and audio alert when my parameters are met. I also have a column for news. If the stock on the list has recent news, a blue block will show up in real time.

The second screen I have in my platform is a screen with a few level 2 windows and an options window.

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Level 2 is a trading service consisting of real-time access to the quotations of individual market makers registered in every Nasdaq-listed security, as well as market makers' quotes in OTC Bulletin Board securities. With Etrade Pro we can also get level 2 quotes for AMEX and NYSE listed stocks. By looking at the screenshot above, you can see in the level 2 windows what information is provided. At the top of the window, there is level 1 information that we covered in the first screen. There is also a list of all the bids and asks with the amount of shares bid and offered. On the right side we have the “tape.” Prints, or trades, will scroll down the screen in real time as they happen. We can gather a lot of additional information by watching the level 2 of stocks that we think have the best chance of breaking out. I like to have 4 to 6 level 2 boxes up at once, as you can see on screen #3:

This screen is used for additional level 2 screens.

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My fourth and final screen is my intraday chart screen. I like to use a 1 min 2 day setting. This screen also has a scanning menu at the bottom that gives me a list of the largest percentage gainers listed in order of total daily volume. I like to use the intraday chart below to look for possible entries from my daily watchlist, along with my intraday momentum setups.

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After I have organized my screens, I scan the news headlines to get a feel for what is going on in the world, the economy, and specific companies, especially those stocks that are on my watchlists for the day. To do this, I use a website called briefing.com. Briefing.com offers both a free and premium news service. Below is an example of the Briefing.com screen. It scrolls in real time throughout the day .

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Getting a feel for news flow,and the overall market environment is important to understand what kind of patterns and stocks might be successful that trading day. The last thing I do before the market opens is to note stocks that have unusual pre market trading activity. Every morning there are usually several stocks that have trading activity that is out of the ordinary. Being aware of what is going on premarket can help give you the edge you need to be profitable that day. After all my pre-market activities are complete, I make time for some physical exercise. I try to have my routine complete by 8:30 am, which gives me about 30 minutes to go for a jog or walk. I find exercise calms my mind and allows me to focus on my objectives for the trading day. A good 30 minutes of exercise also helps when one must sit most of the day. Even with some morning activity, I recommend full time traders try to stand as often as possible during the day.

At 9:30 am the market opens. With my strategies, the market open is a time I like to use to take any profits, if any, on any overnight holds. I DO NOT like to enter new positions during the first 10-15 minutes of trading. I use this time to clean my screens of any stocks that have gapped through their breakout prices at the open. I also like to let potential momentum names for that day establish their opening ranges, which provides potential trading setups. These first few minutes are a good time to search for stocks with relative strength. For example, if the

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market opens down 100 points I scan my watchlists to see if there are any stocks that are green, or up on the day. Identifying relative strength can provide an edge later in the trading session to initiate a profitable trade. I also l use this time to search for stocks with relative volume on my lists. Above average volume is the main indicator that I use to initiate many of my strategies. The first half hour of trading is a good time to identify setups with expanding volume. I choose a few stocks from my watchlists, based on possible relative strength, expanding volume, or price alerts and put them on my level 2 screens to focus on these stocks. After the first 10-15 minutes, I am ready to trade. I am usually busy for the next 2-3 hours into midday. It is this period of the day when I am most active trading ideas from my watchlists. Normally there is a lull in the day from about 12-2. This is not always the case but happens often. By this time, I have usually traded or sensed which names from my watchlists have triggered or may trigger shortly, and which stocks will not trigger that day. I use this time to scan the momentum plays for that day (large percentage gainers with big relative volume) to scan through their 1 minute setups. Opening range breaks, double bottoms, and resistance breakouts can all be played on these momentum names as they typically move with large volume. Even as I do other things, I constantly watch level 2 screens all day looking for nuances in trading which may give clues to future price movements. I find if I can get a feel for how a particular stock trades, I am able to observe subtleties which can give me an edge in the future. Also periodically throughout the day, I will monitor social media, (ie Twitter, Stocktwits, chat rooms). It is helpful to have a feel for the more knowledgeable follows in social media and what stocks they are watching, and also what stocks may have moved from their mentions. I like to use TweetDeck to watch a stream of Twitter follows:

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Lastly, as the market closes, I begin to look for potential plays for the next day. I note stocks that act well late. Did any stocks confirm their resistance level and bounce lower again? Did any watchlist stocks close at or near their breakout level for tomorrow? What news might be coming in the morning or evening that I need to be aware of? There are many moving parts on a trader’s screens. To monitor all of the information necessary to be an accomplished trader takes time and experience, but with today’s technology, it has become easier to manage all of the tools on a desktop without making a trader feel overwhelmed. In a few hours, I will be scanning and getting ready for the next day to do it all again!

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Glossary

Bar Chart - A bar chart or bar graph is a chart with rectangular bars with lengths ​ ​ ​ ​ ​ ​ ​ proportional to the values that they represent. The bars can be plotted vertically or horizontally. A vertical bar chart is sometimes called a column bar chart.

Bollinger Bands - Bollinger Bands is a technical analysis tool invented by John ​ ​ ​ ​ ​ Bollinger in the 1980s as well as a term trademarked by him in 2011.Having evolved from ​ ​ ​ the concept of trading bands, Bollinger Bands and the related indicators %b and ​ ​ bandwidth can be used to measure the "highness" or "lowness" of the price relative to ​ previous trades.

Breakout - A breakout is when prices pass through and stay through an area of ​ ​ ​ ​ support or resistance. On the technical analysis chart a breakout occurs when price of a ​ ​ ​ stock or commodity exits an area pattern.

Candlestick - A candlestick chart is a style of bar-chart used primarily to describe price ​ ​ ​ ​ movements of a security, derivative, or currency for a designated span of time. It is a ​ ​ ​ ​ ​ ​ combination of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity ​ ​ and currency price patterns.

Cup with Handle - A cup and handle or cup with handle formation is a chart pattern ​ ​ ​ ​ consisting of a drop in the price and a rise back up to the original value, followed a smaller drop and a matching rise. It is interpreted as an indication of bullish sentiment in ​ ​ the market and possible further price increases.

Day Trading - Day trading is speculation in securities, specifically buying and selling ​ ​ ​ ​ ​ ​ financial instruments within the same trading day, such that all positions are usually ​ ​ ​ ​ ​ closed before the market close for the trading day. Traders who participate in day trading ​ ​ are called active traders or day traders. Traders who trade in this capacity with the motive ​ ​ of profit assume the capital markets' role of speculator.

Flag/Pennant - The flag and pennant patterns are commonly found patterns in the ​ ​ ​ ​ price charts of financially traded assets (stocks, bonds, futures, etc.). The patterns are

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characterized by a clear direction of the price trend, followed by a consolidation and range bound movement, which is then followed by a resumption of the trend.

Fundamental Analysis - Fundamental analysis of a business involves analyzing its ​ ​ financial statements and health, its management and competitive advantages, and its ​ competitors and markets. When applied to futures and forex, it focuses on the overall ​ ​ ​ ​ ​ ​ ​ state of the economy, and considers factors including interest rates, production, earnings, employment, GDP, housing, manufacturing and management. When analyzing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis.

Head and Shoulders - On the technical analysis chart, the Head and shoulders ​ ​ ​ ​ formation occurs when a market trend is in the process of reversal either from a bullish or ​ ​ ​ bearish trend; a characteristic pattern takes shape and is recognized as reversal ​ formation.

MACD - MACD, short for moving average convergence/divergence, is a trading ​ ​ ​ indicator used in technical analysis of stock prices, created by Gerald Appel in the late ​ ​ ​ ​ ​ ​ ​ 1970s. It is supposed to reveal changes in the strength, direction, momentum, and ​ ​ duration of a trend in a stock's price.

Market Order - A market order is a buy or sell order to be executed immediately at ​ ​ current market prices. As long as there are willing sellers and buyers, market orders are ​ ​ filled. Market orders are therefore used when certainty of execution is a priority over price of execution.

Moving Averages - A moving average (rolling average or running average) is a ​ ​ ​ calculation to analyze data points by creating a series of averages of different subsets of ​ ​ the full data set. It is also called a moving mean, or rolling mean, and is a type of finite ​ impulse response filter. Variations include: simple and exponential. ​ ​ ​

Limit Order - A limit order is an order to buy a security at no more than a specific ​ ​ ​ ​ price, or to sell a security at no less than a specific price (called "or better" for either direction). This gives the trader (customer) control over the price at which the trade is executed; however, the order may never be executed ("filled"). L​ imit orders are used ​ when the trader wishes to control price rather than certainty of execution.

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Line Chart - A line chart or line graph is a type of chart which displays information as a ​ ​ ​ ​ series of data points called 'markers' connected by straight line segments. ​ ​

Resistance - You'll often hear technical analysts talk about the ongoing battle between ​ ​ the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). ​ ​ ​ ​ This is revealed by the prices a security seldom moves above (resistance) or below (support).

RSI - The relative strength index (RSI) is a technical indicator used in the analysis of ​ ​ ​ ​ financial markets. It is intended to chart the current and historical strength or weakness of ​ a stock or market based on the closing prices of a recent trading period. The indicator should not be confused with relative strength. ​ ​

Stop/Limit Order - A stop–limit order combines the features of a stop order and a ​ ​ limit order. Once the stop price is reached, the stop–limit order becomes a limit order to buy (or to sell) at no more (or less) than another, pre-specified limit price. ​ As with all limit ​ orders, a stop–limit order doesn't get filled if the security's price never reaches the specified limit price.

Stop Order - A stop order, also referred to as a stop-loss order, is an order to buy or ​ ​ sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order. A buy–stop order is entered at a stop price above the current market price. Investors generally use a buy stop order to limit a loss or to protect a profit on a stock that they have sold short. A sell–stop order is entered at a stop price below the current market price. Investors generally use a sell–stop order to limit a loss or to protect a profit on a stock that they own.

Support - You'll often hear technical analysts talk about the ongoing battle between ​ ​ the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). ​ ​ ​ ​ This is revealed by the prices a security seldom moves above (resistance) or below (support).

Technical Analysis - Technical analysis is a security analysis methodology for ​ ​ ​ ​ forecasting the direction of prices through the study of past market data, primarily price ​ ​ and volume.

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Trend Line - A trend line is formed when a diagonal line can be drawn between two or ​ ​ more price pivot points. They are commonly used to judge entry and exit investment timing when trading securities.

Volume by Price - Volume by Price is an indicator that shows the amount of volume ​ ​ for a particular price range. Volume by Price bars are shown horizontally on the left side of the chart to match up with price points.

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VALUABLE RESOURCES FOR TRADERS

Charting Services

Stockcharts.com Finviz.com BigCharts.com FreeStockCharts.com

News Services

Briefing.com TradeTheNews.com FlyOnTheWall.com Dow Jones Bloomberg Yahoo Finance DTNIQ

Online Brokers

Etrade Interactive Brokers Scottrade Ameritrade Schwab Fidelity Option House Trade Monster

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Scans

Trade- Alert Trade-Ideas Telechart 2000 FinViz.com

Trading Education Resources

BiotechBreakouts.com Newsletter Alerts Trading Education

Social Media

Twitter StockTwits Yahoo Finance

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ADDITIONAL CHART EXAMPLES

Breakouts/Breakdowns

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Fundamental Trend Strategy

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Rubber Band

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Opening Range Breakout

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Double Bottom

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Red to Green

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