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STPro Focus Report Newsletter
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The 10 Laws of Daytrading
An 8 page full color e-book by Chief Equity Strategist, Peter Reznicek |
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GLOSSARY
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Advance Decline The advance decline line for the NYSE or Nasdaq. This is a figure composed of a net sum of the number of advancing stocks minus the number of declining stocks at any given moment in each of the two respective markets.
At the Market If ShadowTrader is initiating a position "at the market" it simply means that limit orders are not being used and the position is being entered with no regard to price. This is used much more often on more liquid Nasdaq issues.
15's 15 minute charts. The primary timeframe utilized by ShadowTrader for intraday (day) trading.
60's Hourly charts
20ma The twenty period moving average, often dicussed in the context of a certain timeframe such as 15 minute chart or daily chart. All moving averages discussed in ShadowTrader are SIMPLE and not EXPONENTIAL.
50ma Fifty period moving average
200ma Two hundred period moving average, a key level especially on longer timeframes that many institutions trade against.
Body - Referring to the body of a candlestick or the area that is between its open and close, disregarding its swing highs and lows which are represented by the shadows or wicks.
Beta - A measure of volatility of a security in comparison to the market as a whole. In the broadcast we often say the stock has "big beta" when its a very volatile mover.
Black Swan - A market event that is completely unpredictable and often without historical precedent. The sell-off on 2/27/07 would be considered a "black swan" event. By the same token the advance that followed it within three weeks pushing the market quickly back over the highs of 2/27 and much further could also be characterized this way.
Bottoming tail - A candlestick pattern which is comprised of a relatively small body and a much larger shadow or wick which is pointing downwards (towards lower prices), indicating that within the time period of the candle, bears pushed prices low but by the end of the candle period were forced to retreat to an area either close to or above the open of the candle. Generally a bullish pattern pattern, it requires that the tail or wick be at least twice the size of the body to be designated as a "tail". It is the opposite of a Topping Tail and is often referred to as a "hammer".
Breadth Describing market breadth in terms of volume for the NYSE or the Nasdaq. This is a figure composed of the net sum of the amount of volume flowing into up stocks minus the amount of volume flowing into down stocks at any given moment in each of the two respective markets. Often the advance decline line is also referred to as "breadth", but ShadowTrader differentiates between the two by using two separate terms. Generally, the Breadth is more important than the advance decline line.
Bull & Bear Trap - An opening gap type of daytrade in which the trader seeks to exploit the psychological shock that longer term traders feel when faced with a opening print that is strongly opposite the prior day's price action. A bull or bear trap is created when the prior day's price action is overly biased in one direction, and the next day opens in an area that negates the entire prior day's move, thereby causing everyone who held the stock the day before in the expectation of greater gains to experience shock and head for the exit. For example, say XYZ has a very bullish day on Monday, opening at 74.20, making an intraday low of $74.10 and closing at $79.55, with an intraday high of $79.75. As you can see the stock opened close to the low of the day and closed close to the high, creating a "big body" candle on its daily chart. On Tuesday morning a catalyst occurs which causes the stock to open at $73.50. This negates the entire previous day's price action and causes every investor who is still holding the stock long overnight from Monday to be "wrong". The prior day's bulls are now "trapped", hence the name, Bull Trap. Reverse the whole scenario for a bear trap.
Core Sector List Although ShadowTrader analyzes many different sectors and may call trades from any of them, there are 16 sectors which are watched more closely and reported on often throughout the trading day. On any day when one or more of these sectors is moving strongly in either direction, there will more than likely be trade calls for stocks from within these sectors. The core list is as follows: Banking, Biotech, Broker-Dealer, HealthCare, Pharmaceuticals, Gold, Homebuilders, Insurance, Internet, Oils, Oil Services, Retail, Semiconductor, Software, Transports, and Utilities. The tickers on the thinkorswim platform are: BKX, BTK, XBD, $HCX, DRG, GOX, $DJUSHB, IUX, $DJUSNS, XOI, OSX, RLX, SOX, $DJUSSW, $DJUSIT (or $TRAN), UTY.
Christmas Tree This is any time that the core sector list is split 50/50 with half of the sectors in the red (negative on day) and half in the green (positive on day). Usually signals "sit on hands" approach.
Diamonds The tracking stock or ETF for the Dow Jones Industrial Average. Its symbol is DIA.
Doji - A candlestick pattern in which the open and close are the same (or almost the same). The pattern indicates extreme indecision as prices move up (to form the upper shadow) and then move sharply down (forming the lower shadow), only to end up closing very near where they originally opened at the beginning of the time frame in question. The pattern also indicates a contraction of volatility.
Doldrums The time period between 11:30 and 1pm in the markets which is generally characterized by lower overall volume and lack of trend.
ES - The S&P 500 e-mini contract. In the broadcast we only discuss this contract in the pre-market to get a feel for where the S&P will open.
Fade - When a stock moves opposite the direction of its gap on an intraday basis.
Gin - $GIN or $GIN.X. The Goldman Sachs Internet Index.
Gox - $GOX or $GOX.X The AMEX Gold Index.
Inside Day - A day in which the entire range of price action from lows to highs is within or inside the prior day's range. This pattern in candlestick terms is called "harami" and is a sign of a small pause in the prevailing trend before continuing onward rather than reversing.
In-Between Periods - Any time that is in between two reversal periods (See "Reversal Periods" below). Most often, however this call is made at roughly 10:15am EST. The theory being that the two main reversal periods of the morning session are the 10:00am and the 10:30. From experience we have found that when analyzing intraday action, the time around 10:15 am is either a continuation of a move that has begun in an earlier reversal period or a time of minor consolidation. Since the moderator uses 15 minute bars exclusively to reference intraday pivots, it has been found from experience that intraday entry on a 10:15 (ending at) bar does not statistically result in follow through of the pattern that defined entry. The 10:30am bar (ending at) has greater chance of producing follow through movement as it is at a reversal period rather than in between reversal periods.
Internals Internals refers to "market internals" and is a blanket term to collectively describe the advance decline, breadth and trin indicators.
Inverted - A term used to define a situation when the major market averages or the internals are not either all positive or all negative. ie: the Dow is up and S&P and Nasdaq is down might be called out as "Head's up, top line figures are inverted." Basically, when we have inversion, its a signal of a choppy market that is rangebound at the prior day's close.
Led Zeppelin Breakfast - Friday mornings from 8am EST to 9:15am EST. Bring your purple umbrella and wear your fifty cent hat........
NQ - The Nasdaq 100 E-Mini futures. In the broadcast we only discuss this contract in the pre-market to get a feel for where the Nasdaq will open.
NYSE New York Stock Exchange
On Balance Volume - A technical indicator developed by Joe Granville, the calculation of which relates volume to price change. OBV provides a running total of volume and shows whether this volume is flowing in or out of a given security. OBV attempts to detect when a financial instrument (stock, bond, etc.) is being accumulated by a large number of buyers or sold by many sellers. Traders will use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend. Finding a downward sloping OBV while the price of an asset is trending upward (divergence) can be used to suggest that the "smart" traders are starting to exit their positions and that a shift in trend may be coming.
Opposing Tails - A situation on 15 minute charts (usually discussed in reference to $SPX or another index) where the shadows or tails of two consecutive 15 minute candles point in different (opposing) directions. This indicates extreme indecision on an intraday chart as bulls and bears pushed prices both low and high over the last half hour but at the end of that time period ended little changed.
Overhead or Supply - When a stock or index suffers a down move, it is said that the area to the left of current prices which is higher is an area of "overhead" or "supply". This is because we know that not all individuals on the way down were sellers. At all levels are buyers and sellers who are net long or short. As stocks move up back towards resistant areas we say that they have overhead or supply because we know that bulls will be waiting to "get their money back" as the stock rises back to levels that they purchased at.
Pivot Points - Below are the calculations for the floor trader pivots that are sometimes used in the broadcast and are listed daily in the ShadowTrader Pro Focus Report. The high, low and close used in the calculation is from the prior day's values. Generally these values are derived from the E-mini S&P futures, also known as "ES". The pivots can be calculated using 24hour data or only trading hours only data. Although experimentaion has proven both to be valid, we have found using trading hours only data to be more relevent as large gaps often put the pivot points too far outside of the market to be of any use. Although the high and low can be taken from any intraday futures chart, its important to get the proper closing value which is the settlement value. Your best bet is to use the CME Settlement Prices to get your CLOSE number. Refresh the page if necessary to make sure you have the prior day's data on the screen. Write down the figure from that site and plug it and your high and low (from your intraday ES chart) into a simple Xcel with the formulas below. Use the settlement price (SETT) as your closing price, rather than the "LAST". "R" means Resistance and "S" means Support.
PIVOT = (High + Close + Low)/3
R3 = High + 2(Pivot - Low)
R2 = Pivot + (R1 - S1)
R1 = (2*Pivot) - Low
S1 = (2*Pivot) - High
S2 = Pivot - (R1 - S1)
S3 = Low - 2(Hi - Pivot)
Q's The tracking stock or ETF for the Nasdaq 100 Index. Its symbol is QQQQ.
Reversal Periods Generally the market tends to pivot or have inflection points at certain recurring times of the day. These times are 9:55 10:05, 10:25 10:35, 11am, 1pm, 2pm, 2:30pm and 3pm. ShadowTrader generally initiates positions around these time.
Same Size Bodies - A comment that often precludes "S.O.H.", it is a market phenomenon when fifteen minute bars that are next to each other are lined up and have "bodies" of the same size where the last candle is a mirror image of the previous one. Also described as "Candles Lining Up", it is a pattern that shows a very choppy market that may be untradeable intraday for the time being due to erratic price action.
Sandwich Time - The midday break in the broadcast between 11:30am and 1:30pm EST.
S.O.H. Literally, "Sit On Hands". A term used when the market is choppy or erratic and the odds of trades on either side of the market (long or short) have low odds of working out due to overall market indecision. This term is used often and is a warning against overtrading. Most professional traders are out of the markets much more than they are in them.
Sox $SOX or $SOX.X. The Philadelphia Semiconductor Index. This index which tracks the leading chipmakers is discussed very often during the course of the trading day. Due to the heavy weighting of semiconductor companies throughout the Nasdaq Composite and Nasdaq 100 ($NDX), the Sox often "leads" the Nasdaq and is watched as another internal indicator alongside the breadth, trin and advance decline lines.
Spiders The SPDR or S&P depository receipt which is traded as a proxy for the entire S&P 500. It trades similar to the DIA or QQQQ and its symbol is SPY.
Stalking A form of "heads up" for clientele to know that an official trade call is more than likely coming soon on the symbol being stalked. Generally announced before an intraday trade, the term is however often applied to any stocks that are currently on our watch lists for possible position (swing) play.
Sweet 16 - See "Core Sector List" above. The sweet 16 is just another word for the core sector list which has 16 sectors.
Topping Tail - A candlestick pattern which is comprised of a relatively small body and a much larger shadow or wick which is pointing upwards (towards higher prices), indicating that within the time period of the candle, bulls pushed prices high but by the end of the candle period were forced to retreat to an area either close to or below the open of the candle. Generally a bearish pattern, it requires that the tail or wick be at least twice the size of the body to be designated as a "tail". It is the opposite of a Bottoming tail, or Hammer pattern. Can also be called "inverted hammer".
Top-Line Figures - The top line figures are nothing more than the current levels of the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite. Peter keeps these three numbers on the top line of a quote box on one of his screens so he started calling them "top line figures". Its not a term he coined himself and would not be found on a site like Investopedia.com
Top-Line Divergence - A occurrence where the three major averages mentioned above are diverging from each other. During top line divergence, there is some combination of either one of the three being positive (up) with the other two negative (down) or one negative and two being positive. This indicates a choppy session as there is relative strength in some indices which may be acting as a drag on the others and vice versa. When the moderator calls out top line divergence generally the market is stuck in a range.
Tick The net cumulative tick reading on the NYSE or Nasdaq Composite. This is measured by the number of stocks ticking up minus the number of stocks ticking down at any given moment. It is the least used of the internal indicators but is discussed from time to time. Generally the tick readings are only helpful when they are at extremes such as +1000 on the NYSE to indicate that program trading is ensuing.
TOPS Tops refers to the highest or lowest possible price that will be accepted to enter a trade when bidding or offering using limit orders. Therefore if the moderator says "Shorting IBM at 84.60, 84.50 tops", it means that limit orders between 84.60 and 84.50 are being used to enter the postion.
TRIN The Traders Index, also called Arms Index after inventor Richard Arms. A complex fractional equation that takes into consideration the number of advancing stocks versus the number of decliners and also the respective volume of those two groups. Although TRIN readings over 1.0 are interpreted as bearish and readings below 1.0 are bullish it is the trend of the TRIN that is most important and any discussion of TRIN will always be in context of the trend.
Zero Line - A term we use to indicate parity in the internals. For instance if the breadth goes flat (advancing volume is equal to declining volume), we say its sitting at the 'zero line'. We use this for breadth and also for the advance decline line.
Zones 1,2,3 - The zone analysis is a way of discerning whether or not the S&P (our main gauge of current market sentiment and direction) is trading within the upper, middle or lower third of the current day's range. Once at least 45 minutes of trade have ensued, take horizontal line drawing tools on your charting package and draw one line across the high of the day on the SPY or the S&P 500 (SPX). Next draw another line along the low of the day. Then finish by drawing two more lines equidistant from each other and from the first two lines drawn so that the days range is divided into three equal thirds. Label the upper third "zone 1", the middle third "zone 2", and the lower zone "zone 3". The thinking here is that when the market is trading in zone 1, there is an increased chance that stocks will break higher and traders should favor longs if trading intraday. When the market is trading in zone 3, the chances increase of a move lower and shorts should be favored if trading intraday. When the market is trading in zone 2, there is essentially equal chance that the market can break in either direction and intraday trading should essentially be avoided. The longer the market stays in the this middle third over the course of the trading day, the "choppier" it is. Zone 2 is the area most mentioned by the moderator because through experience we have found that the most difficulty in predicting short term market direction comes when the market is just treading water in a range (also known as 'backing and filling' or 'chopping').
RECOMMENDED READING LIST:
A Beginner's Guide to Daytrading Online by Toni Turner
Japanese Candlestick Charting Techniques by Steve Nison
How to Make Money in Stocks by William O'Neill
The Disciplined Trader by Mark Douglas
Reminiscences of a Stock Operator by Edwin LeFevre
Mastering the Trade by John Carter
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