An Introductionto

Intraday Trading

Continue at your own Risk

Disclaimer

• This presentation contains many observations, some of which the author feels are good universal “rules” and some of which merely reflect his current thinking about intraday trading.

• The author does not mean to represent that a trading strategy herein hinted at is better than any other trading strategy.

• He does mean to represent that he has thought seriously about his subject and understands the fundamentals.

• He fully expects that any trading program he may work on (note the logical leap) will be the aggregate of the thinking of many smart and experienced people.

• Fine Print: Trading involves substantial risk of loss and may not be suitable for everyone.

Overview

On Trading

Cardinal Rules of Trading

Key Considerations

Charts

Going Live

You Want More?

On Trading

Trading vs. Investing Trading vs. Gambling On Fundamentals On Technical Analysis A Trader’s Mindset

Trading vs. Investing

Investors invest in companies; traders trade stock. Investors count years, traders count minutes. It still puzzles this author why investors persist in

examining their portfolio’s net worth, DAILY, when they know full well that they aren’t going to act on their fear or greed and that, more often than not, they’ll find something to get upset about.

Good advice for a trader is usually bad advice for an investor.

Investors who begin to think like traders ask for trouble. Investors: stay away, this presentation is not for you!

Trading vs. Gambling

Good traders love gamblers, they provide them with their income.

Why most traders lose is they are gamblers; they crave action and trading certainly provides it.

Casino owners are not gamblers, casino players are. Good traders emulate casino owners; they are in it to make a good living, not to get a rush.

On any given trade, the trader may take a loss. The good trader, like the casino owner, is OK with this.

On Fundamentals

If you “like” a company, DON’T trade it. If you must do anything with a company you like, put it into your (separate) investment portfolio.

Don’t trade on the News, it was factored into the price days ago by folks closer to it. The only way to play the News is to play against investors, but this is risky because traders, your real competition, determine short-term price more than investors.

Tips: ignore them or test them. * If you act on another’s advice, it’s your choice and your results.

On Technical Analysis

Learn as much as you can; but rigorous Technical Analysis has little place in trading, it’s too fast. *

On the other hand, thinking LIKE a technician has everything to do with succeeding at trading.

T. A. Indicators for the most part describe the past, not the future.

Nonetheless, Technical Analysis “works” because: T.A. maps human behavior (the trend is your friend maps

“everyone loves a winner”). T. A. works because enough people believe it and act on it.

A Trader’s Mindset

The successful trader learns from other traders; but he cannot be a clone of another trader and succeed.

Traders who need to be “right” don’t win in the market. The successful trader has a well-defined strategy that he

follows mechanically. If it works, he knows what’s working; if it doesn’t work, he knows what isn’t working.

He also knows that what worked yesterday may stop working tomorrow.

The successful trader knows the risk he can handle that will let him sleep at night, and he trades within that risk.

Cardinal Rules of Trading

Rule #1: Protect Your Capital Rule #2: Protect Your Capital Rule #3: Protect Your Capital Rule #4: Manage Your Money Rule #5: Trade Smartly Rule #6: Exit Strategy

Rule #1: Protect Your Capital

No trade should be greater than 5 - 10% of your trading capital.

The surer you are about a trade, the more dangerous it may turn out to be. There is no such thing as a “sure thing.”

Putting a second and third helping of eggs in the same basket, while sometimes a good idea, is a bad idea if it breaks this rule.

Multiple trades intentionally in the same Industry or Sector is another form of putting too many eggs in the same basket.

Always going Long is a bad idea too, for similar reasons.

Rule #2: Protect Your Capital

Cut your losses: set tight Stops. More importantly, obey them. This is called “discipline.”

Rule #3: Protect Your Capital

If today’s trades are going against you, stop trading for the day.

Rethink your strategy and your executions and begin afresh tomorrow.

Even if you’re a computer program! If today’s trades are with you, be thankful, and careful.

Being “smart” can cost you dearly.

Rule #4: Manage Your Money

This one is nearly as important as Protect Your Capital, but it’ll cost you to see it. *

No trade should be smaller than 2-3% of your trading capital.

Diversity can easily slide into futile dilution.

A hint…

• Do you remember the one about the Dutchman Peter Minuit getting the best of those foolish Indians by giving them $24 worth of trinkets for Manhattan Island? Well, if the tribe’s Medicine Man had whipped out his trusty H-P Calculator, and if he had told the Chief to put the tribe’s new-found wealth into a C.D. paying 7%, that simple wampum would now be worth more than $8.5 trillion! Even at 6% it would be worth $200 billion, arguably a fair price for all of Manhattan’s Real Estate.

Rule #5: Trade Smartly

Pre-select a small universe of stocks to watch. When a pre-determined set of conditions trigger a pre-

determined action, take it. Cut your losses and ride your winners. * Easy to say,

right?

Rule #6: Exit Strategy

A trader with a good and disciplined Exit strategy can prevail even with random trades. *

Use Trailing Stops for Exiting positions. * Be watchful around “magical” Support / Resistance

levels. * Employ tight Stops; either your timing is right or you

don’t want to stay in the trade. * If you stall (Buyers and Sellers in balance, Supply and

Demand equal), Exit your trade.

Key Considerations

Spreads Volatility Liquidity Timing Direction Safety

Commissions

Did I forget to mention commissions? Too obvious… Commissions are enough by themselves to sink an

otherwise successful trader. Keep commissions low. That’s not low enough! A $15 flat commission is WAY high for a 100 share trade,

not good for a 1000 share trade, and great for a 10,000 share trade. Relativity rules in equity trading too.

On Spreads

If you play with low spreads (.01 or .02 max.), you’re playing against a casino (51% edge); you have to be smart to win consistently.

If you play with high spreads, you’re betting at the track (65% edge); you have to cheat to win at all.

The Swing-Trader is less inclined to heed this advice, to his cost.

On Volatility

Volatility is the short-term trader’s friend. Volatile stocks are an investor’s Hell and a trader’s

Heaven. Pre-select stocks that are volatile and liquid. Get in early in the direction you want. The risk of a 2-

day bounce is less than that of a 9-day trend. * Relative volatility is more important than absolute. R.V.

is biased toward low priced stocks. If you don’t like low priced stocks, keep in mind that a $50 stock that moves $2.00 moves 4% while a $100 stock that moves $2.00 moves 2%. Cheaper means more leverage.

On Liquidity

It is good to trade a stock whose trading volume will allow you to exit when and where you want to.

If you can find a highly liquid stock with a wide spread (not likely), you can play the spread for a small profit. *

On Timing

Take account of how the weather and news events affect traders.

Take into account how regular market events affect the markets.

Take into account how Day of Week and Time of Day affect the markets.

Shun the 1st 45 minutes of the day, or learn to trade them.

More… *

On Direction

Tend not to trade against a stock’s own trend (obviously, trend reversals are a big exception to this).

Tend not to trade against a strong {market’s | industry’s | sector’s} direction.

Look for “Maverick” stocks that go against the market, their industry and their sector; they can be interesting exceptions to this rule.

Be wary of going Long near Resistance or Short near Support.

On Safety

If you crave safety, what are you doing trading? There’s “safety in numbers”: make lots of smart trades

and you’ll win in the trader’s game. Safety can look like good value or support or a good

price or a trend.

Charts

What are Charts? What Charts Show What Charts don’t Show The Art of Seeing Chart Patterns Interpreting Charts Using Charts to Win

What are Charts?

Charts are 2-D graphical visualizations of Number Series across N dimensions. A Trader’s Charts are visuals of a financial instrument’s Price (and Volume) activity, over Time.

A chart’s vertical axis (1st dimension) maps price (and volume). Its horizontal axis (2nd dimension) maps time.

Static print Charts are the sine qua non of the technical analyst and of interday traders. Dynamic Real-Time charts are the sine qua non of the intraday trader.

Charts portray the past; they do NOT predict the future. While the past cannot predict the future, what else have we to look at?And if we don't learn from history, it will surely repeat itself. "Ahhhh!" says the astute trader.

What are Charts? (2)

A chart's smallest unit of information, one Time period, is drawn by a point, a bar or a candlestick. Points are typically connected by lines to suggest continuity.

A point typically locates the Closing price of the security. A bar typically reveals the equity's (Open, ) High, Low, and Close. A candlestick shows all four prices.

Candlesticks' advantage over bars are their ability to show 2-period relationships more clearly.

Charts with no security name, no price-axis, and no time-axis values, ought to be viewed with suspicion.

What are Charts? (3)

Dynamic, computer-based, charts can be customized to the user’s preferences.

The time-frame (30 years, 1 year, 2 months, 1 day) that a chart maps from end to end is chosen by the user.

The time-interval (1 year, 1 week, 1 day, 1 tick) that is mapped by one period on the chart is chosen by the user.

Only Real-Time charts can display time-intervals less than 1 day. A trader ought to know what is his time-frame and use charts

appropriate to that choice. IOW, one-minute charts are appropriate to the extreme intraday trader, not to swing traders.

What Charts Show

Charts show a security’s price and volume activity over time. That is ALL they show that is not derived or invented.

HOWEVER, Price/Volume charts ARE often overlaid with all manner of quasi-magical points and lines.

“Indicators” or “Systems” are arithmetic functions of price, volume and time data. They all mean something objectively (their mathematical definition). But it is their subjective meaning that gives them power. Traders make decisions based upon the meaning they give them. Thus, they mean what the trader thinks they mean.

Some popular Indicators are: Moving Averages (various), Bollinger Bands, On Balance Volume, Relative Strength Index, Stochastics (various).

What Charts don’t Show

On the other hand, “Patterns” are not overlaid on top of a Price/Volume chart. Patterns are “recognized” by the astute trader looking at the raw price/volume data. Thus, a trader will see “trends”, “breakouts”, “reversals” and “consolidations”.

Most traders believe that the chart they are looking at actually shows the patterns they see. However, the pattern(s) a trader sees is much like interpreting a Rorschach inkblot. *

While each pattern is supposed to suggest a trade -- one way or the other, sooner or later -- it is up to the trader to see the pattern and to act on it. The chart will only show what a security WAS doing, not what it will do.

Some popular Patterns are: Head and Shoulders, Double Tops, Triple Bottoms, Cups & Saucers, Triangles, Flags & Pennants (and a host of Candlestick patterns).

Art of Seeing Chart Patterns

Clearly, the simplest pattern to see is an “up trend.” Consider: A security’s price must go up, go down or remain the same. If a

security’s price persistently goes up, it defines an up trend. "Well, duh", you say.

But how long is "persistent"? Several months, days, or just hours? How consistent is persistent? 60% or 80% of price movement? How steep must be the price climb in order to call it a trend? Does the daily chart show a trend and the weekly not? Must it meet all or some of these criteria? Which ones?

Thus, even recognizing a simple pattern like an up trend requires human judgment.

Interpreting Charts

In short, while the gift of System interpretation and Pattern recognition are necessary to become a successful trader, it is still an art not a science; and most likely it will be learned over time, at great cost.

The successful trader will concentrate on a small number of systems or patterns to look for, in choosing a security to watch or a time to pounce. Without this discipline, decision-making would be rendered impossible. And the trader would not know what technique to credit or blame for his results.

Using Charts to Win

A trader I know likes to say: "Any fool can see that this stock is trending." But he just talks about it, he rarely acts. Who fails to act on his chart’s interpretation is wasting somebody’s time.

Personally, I look for long trends (against the market direction), with the beginnings of a reversal showing up over a few days. *

There are thousands of diet books: no diet is for everybody. There are hundreds of books on trading successfully: no method is for everybody. The good trader has his OWN strategy.

Interpreting charts is personal: you'll see what you see. Charts are utterly invaluable. But they are NOT the key to the treasury; the dragon is sitting on that. And the dragon is the trader's own psyche.

The Holy Grail

Beginning traders hope, and many not-so-new traders believe, that there is a technique or a strategy, some combination of patterns and indicators, to guarantee making money in the markets, a “Holy Grail” of trading, and that it lies just around the corner, just waiting for them to discover it. Folks who buy black box programs believe this; folks who pay lots of money to learn someone else’s “secrets” believe this.

What “worked” on one market doesn’t work for another, what worked for one sector doesn’t work for another, what worked for one security doesn’t work for another, what worked for one security yesterday doesn’t work tomorrow, and what works on a weekly chart doesn’t even work on the daily chart of the same security over the same time-frame.

There is no substitute for experience, developing a well-defined and personal strategy, and the ability to adapt to change. Sorry.

Going Live

Playing for KeepsPre-selecting StocksEntry and Exit PointsSelecting Stocks Real-Time

Playing for Keeps

The only patterns a trader can love are Reversals, Trend Continuations and Breakouts.

The surest way to lose in this game, after bad Exit executions, is by trading stocks that don’t move.

Spreads, commissions and slippage are the cost of playing this game; slow movement can result in a slow death.

Pre-selecting Stocks

Stocks have personalities: trending, choppy, and trading range. All of these personalities are viable for trading. Do their personalities conflict or coincide with their breakouts and reversals? Back-test.

Events that make a stock potentially attractive for trading: Gapping Up or Down New Highs & Lows Volume Surges Most Actives Biggest Gainers & Losers Impending Splits Trend Line Continuation (various types) Reversals (various types)

Entry and Exit Points

Support and Resistance points are logical places to be watchful for Entry and Exit.

On entry, I never bet against short-term tick movement Fibonacci numbers (if enough traders believe in magic,

you will see proof positive of it in the market every day). More…

Selecting Stocks Real-Time

Sharp moves are often followed by sharp reversals, mild moves often persist.

1 minute charts reveal different information from 5 minute charts from 15 minute charts from hourly and daily charts. If you wait until they appear to tell the same story, you’ll wait too long.

Chose which charts to look at. Daily charts are useless to the 1-minute trader. And 1-minute charts will only aggravate the longer-term trader (let Stops take care of themselves).

Really, this game is not THAT hard!

• Being a Successful Trader is not difficult, it demands only that you be able to:

• pick the right stock• time it right for a big move• get its direction right• get in at your price• suffer no slippage, small spreads and small commissions• and get out with a Big gain

OR• be great with Exits

Some Random Observations

• Anyone who claims to predict the future in the markets is a fool or a fraud; the best you can do is weigh the evidence, make your trade, hope for the best, and be prepared to get out quickly if your trade goes in the opposite direction.

• When the Fed Chairman changes rates once or twice a year, he is giving chiropractic to a patient’s ailing back; when he drops the rate a dozen times in a year, he is dosing a very sick patient with chemotherapy.

• “Good” news can be disappointing news.• Most market players are optimists, so “denial” can be a shared vision.• Bet the “truth” against the market’s “denial” and you will surely lose your

cookies. -or- “He who spits against the wind spits in his own face” (I love clichés!).

More Random Observations

• Rising earnings support a bullish market, as does higher productivity.• But pay for this with decades of M & A’s, massive layoffs, stagnant

retail sales, reduced consumer spending and saving, and you’ve found the recipe for economic disaster.

• But don’t bet on this anytime soon. The shit will eventually hit the fan, but I’d be the last to predict when.

• Can we prevent this economic calamity? Sure; but first we have to talk about it and act in obvious but painful (to some) ways.

• Programmed trading has saved the market more than once.• Well-paid trading gurus talk about “patterns that work.” There is

no such thing: what there is is patterns that have worked in the past in a limited way and may continue to work for a time.

• …

You Want More?

• Really, this game is not THAT hard (if you are adequately capitalized)!

• But, if you insist…• You want more, here’s how to find me.

David Abraham 212-410-9261 davidkernabraham@hotmail.com