The Day Trader's Guide to Technical Analysis

299 Pages·2000·1.87 MB·English

by  Chris Lewis

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The Day Trader's Guide to Technical Analysis
How to Use Chart Patterns, Level II and Time of Sales to Profit in
Electronic Markets
Chris Lewis
Page iii
DISCLAIMER
This book is designed for educational purposes only. It is not designed to provide all the
information required to be successful in day trading. Day trading may involve a significantly
higher level of risk in comparison to other common forms of capital management such as long-
term investments in stocks, bonds, or mutual funds. Proficiency at day trading may take a very
long period of time to develop, depending on an individual's capacity to understand the high
degree of risk involved, the aptitude to manage these high risks in order to preserve capital,
and the potential to develop any and all necessary skills to create profitable results. Day trading
may result in the loss of all of a trader's capital and, in cases that involve the use of extended
buying power or margin, you may lose all your capital and assume liability for owing
additional funds that are substantially more than your capital invested.
The authors and publisher will not assume any responsibility due, but not limited to, losses
incurred as a result of applying what is discussed in this book. The authors and publisher do
not claim or guarantee your success at day trading or suggest that any past performance
mentioned in this publication indicates the same results will occur in the future.
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CONTENTS
Acknowledgments vii
Preface viii
Introduction x

PartI
PreparingthePlan
1.WhyDayTradeNASDAQSecurities? 3
A ManifestoofIndependence 4
DayTrading—WhatItIsandWhatIt'sNot 5
TheThreePhasesoftheTradingDay 9
TheDisciplineofDayTrading 15
NASDAQvs.ListedExchangesforDayTrading 25
WhoWinsandWhoLosesinDayTrading? 31
WhatIsTechnicalAnalysis? 33
TheBasicToolsofTA 36
AnsweringtheCriticismandMisperception 41
2.TradingConceptsThatHaveStoodtheTestofTime 46
DowTheory 46
TheBasicsofTrend 52
EssentialConceptsofTrendinSecurityPrices 55
HowtoIdentifySupportandResistancePriceLevels 61
CommonReversalPatterns 64
CommonContinuationPatterns 77
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Breakouts 88
3.ActivitiestoAvoid 91
Derivatives 92
OverrelianceonComplexChartAnalysis 96
Overtrading 121
TryingtoAssimilateTooManyVariables 123
UsingtheWrongToolattheWrongTime 131
A PotpourriofHelpfulHints 133
4.TheNASDAQLevelIIScreen 135
TheComponentsoftheLevelIIScreen 135
LevelIIParticipants,MarketMakersandtheECNs 137
LookattheFlowRatherThantheSnapshot 140
TheLevelIIScreenattheBreakofanUpwardTrend 147
TheLevelIIScreenattheBreakofaDownwardTrend 152

PartII
PuttingthePlanintoAction
5.Executions 161
UsingtheSOESExecutionRoute 162
WhyIsland(NotDatek)IsthePreferredRoute 168
TheLittleHelperARCAandtheOtherECNs 174
SelectNetCan BeaGoodFriend 176
GettingShortsintheMarket 178
6.A TradingWeek 184
AssessingtheMarketDirection:ChartingMethods 185
AssessingtheMarketDirection:NonchartingMethods 194
DailyPremarketPreparation 199
MarketOpen PatternstoLookFor 205
TradingthePost-openPeriods 212
A SampleTradingWeek 214
EvaluationoftheWeek'sTrading 237
7.TradingPsychology 239
LearningtoLoveStops 240
FocusontheProcess 241
ObstaclestoTradingSuccess 244
FormingYourOwnSetofRules 247
WhenThingsGoWrong 255
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8.KeepingTrack 257
PremarketTaskSheets 257
ScreenLayouts 261
WhattoKeep TrackofonaDailyBasis 263
WhattoKeep TrackofonaWeeklyBasis 263
Conclusions 265
Afterword 267
Index 270
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ACKNOWLEDGMENTS
I want first to acknowledge that, as always, without the loving support of my wife Claudia, I
would never be able to complete a task of this nature. In addition to Claudia, my other
inspiration is my son Ben, who at the tender age of one is able to give me all the fun I can
handle. I want to thank Thomas Astuto for his fine work in taking my random scribblings and
turning them into clear illustrations. I also wish to thank Stephen Isaacs for giving me this
opportunity and Steven Elliot for making the introductions.
Janice Kaylor of Townsend Analytics was instrumental in securing the permission required to
use the Real TickTM displays used in this book. My thanks to her. To the folks at MB Trading I
also wish to extend thanks for providing such high levels of service. Their efforts are essential
in providing me with profitable opportunities every day.
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PREFACE
Many texts on day trading mention the different styles of day trading that are most common,
and students are urged to find which style of trading is most compatible with their abilities. As
far as it goes, this is good advice, but it is incomplete. The choices offered tend to focus on
scalpers, who go for lots of small gains and hold positions for only a few minutes at a time, on
through to swing traders, who hold positions for more than one day. The reason I find the
classification of scalper to swing trader to be incomplete is that it misses a vital element of how
the exchanges operate in the U.S., and that is the change that trading on these exchanges goes
through during each day. Trading at the market open is different from trading at the middle of
the day, which is different from trading at market close. My advice is that you discover which
period of the day you are most comfortable trading in and stick to that. In this text I refer to
Phases 1, 2, and 3 as shorthand for market open, mid-market, and market close. Each has its
own character, risks, rewards, and required disciplines.
Phase 1 trading can be classified as momentum trading, identifying and going with the flow of
supply and demand. Phase 2 trading is better suited for those who are willing to constantly
scalp small profits and those willing to hold positions for longer when a trend is in effect.
Phase 3 trading requires much patience to wait for a breakout from a price level of support or
resistance to occur.
For many reasons, my preference has been to focus on Phase 1 trading, primarily because I am
more successful at it. With Phase 1 trading, I only have to hold positions for a short period of
time, typically less than five minutes, because the biggest price swings of the day usually occur
at that time and it leaves me with the rest of the day to pursue other things.