MASTERING THE TRADE PROVEN TECHNIQUES FOR PROFITING FROM INTRADAY AND SWING TRADING SETUPS JOHN F. CARTER McGraw-Hill New York Chicao Sap Franeikco Lisbon London Madi Mexico City Milan New Delhi San Juan Seo ‘Singapore Syaney TorontoACKNOWLEDGMENTS Writing and trading have a lot in common in that they are essentially solitary professions that are made much more enjoyable by anyone who is willing to lend a helping hand. In regards to this project, I would like to first thank Hubert Senters and Priyanka Rajpal for holding down the fort while 1 was “working on the nightmare.” Also thanks to your contributions to this project, which helped to keep me sane toward the end when things were getting crazy, Although the book deadline was firm, July Soybeans were moving and I couldn’ just ignore them. Thanks to Kira McCaffrey Brecht, Gail Osten, and everyone at SFO Magazine for help- ing me to realize that writing about trading could be a worthwhile thing to do. Larry Connors and Eddie Kwong at Trading Markets for advice along the way and for keeping me on track with this original project, snaking sure I didn’t spend a lot of wasted time reinventing the wheel. Kelli Christiansen at McGraw-Hill for initially contacting me about this project and turning it from idea into reality, and to Executive Editor Stephen Isaacs at MeGraw Hill forhelping to keep this, project on track. 1 thought I could rest easy once I completed the first draft, but little did I know that the real work was about to begin. Thanks to Bill Shug, Tim Sambrano, Pamela Snelting, and Don Allen for reading early drafts and providing feedback. Also thanks to the staff at McGraw- Hill, who performed the herculean task of bringing this book to life: Scott Kurtz, Editing ‘Supervisor; Maureen Harper, Production Supervisor, Roberta Mantus, copy editor, and Erie Lowenkron, proofreader. Thanks also to Mark Douglas for insightful feedback in the Tater stages of the project. For help with my trading and trading related projects along the way, I'd like to thank Marcia Wieder, goddess of Maui, for kicking things off in regard to my leaving corporate America and trading full time. Scott Sether, who was truly in this from the beginning, for helping to redefine the term “market research.” Tracy Alderman, Rosa Hernandez, and Michael Duwe, for helping to get things kicked off. Page Rossiter, for keeping me on track during the transition, Skip Klohn, as an early mentor in the process. Eric Corkhill ... where do I start? Thanks for acting as a consultant on a multitude of topics, and thanks for giving me enough red wine so that I only remembered the good stuff the next morning. ‘Thanks to Barbara Schmidt-Bailey and Jetf Campbell at the Chicago Board of ‘Trade, and Marty Doyle at One Chicago for good ideas and great feedback along the way. John Conolly, for a multitude of solid insights into the business, To the gang at Mirus, for continued support. “To the gang at Newport, for clarifying what not to do and how not to do it, Cooper Bates, for keeping me on track on the meaning of it all. Steve Patrow and Becky Herman, for keeping things entertaining while 1 was in the beginning stages of this journey. Of course, it makes sense to thank family members where appropriate. Thanks to my mom, Francie Cobb, for supporting me while I “did my thing” along the way, even if it was some- times scary to watch. Thanks to my step-father, Lance Cobb, for being a father and introducing viivill ACKNOWLEDGMENTS ‘me to the world of financial markets at an ewly age. To my brother, Jason Carter, for being a great sibling. I's nice to have another person in the world who understands. Maria Carter, my wife, for her unflinching support in the face of it all, and also for becoming passionate about the Home Decorating Channel while her husband played “catch up on the book” over the weekends. Next time I swear we'll ust go to Hawaii, I'm pretty sure I can write and drink Mai Tais at the same time, ‘Thanks also to the memory of my father, Bill Carter, who was taken away too soon, but in so doing passed along valuable lessons to his kids. And to the memory of Joanne Wolfram, a good friend, who reminds us all to live life while you have the chance.CONTENTS Acknowledgments vii Foreword by Peter Borish xvii Introduction xix PART 1: Trader's Boot Camp | Chapter 1 Markets Don’t Move Because They Want To, "They Move Because They Have To 3 Average Trader Profile: The Wrong Skills in the Wrong Place at the Wrong Time 3 It’s All About Pain and Suffering 4 ‘The Case Study You Won't Read About at the Harvard Business School 6 ‘Trading Rules for Selis/Shorts (Buys Are Reversed) 13 It’s Not the Economy, Stupid 15 Psychology 101: What They Didn’t Teach About Trading in School 17 Emotions Are Fine at Weddings and Funerals 17 Show Me a Guy with a System, and I'll Show You a Guy Who Is Welcome in My Casino 18 ‘The Right Mental Outlook for the Markets: Don’t Tum on Your Computer Without It 19 Phase I Trading: Destined to Lose—Traits ‘That Make a Person a Success in Life Get Them Killed in the Markets 22 Phase Il Trading: Fear-Based Trading or, “Everything I Touch Turns to Crap” 25 Phase Ill Trading: The Search for the Holy Grail: Holding. ‘Your Breath Is Not Advised 25 Signs That a Trader Is Stuck in Phases I, HL, or Itt 27 i Paper Tradi Why It’s More Worthless Than an Iraqi Dinar” 30__ CONTENTS Chapter3 ee Hardware and Software—Top Tools for Traders 35 Hardware—It's All About the Ram 35 ‘Taming the Technological Beast: Key Things Every Trader Should Know to Keep Their Computers Alive and Well 39 Turbo Charging the Trading Computer 42 ‘The Back Up Plan: What to Do When Your Computer Crashes or the Power Goes Out—Because They Will 43 Not Ail Quotes Are Created Equal 45 A Bad Execution Platform Can Inflict Capital Punishment on Your Account 46 Opinions Are Like Bellybuttons; Everybody Has One 51 Establishing Priorities: If You Are Getting Interrupted During the First ‘Two Hours of Trading, It Is Your Fault 52 Why Watching Harry Potter on DVD after 12 Noon Eastern Is Better Than Watching CNBC 53 Chapter 4 a ee ee Markets 101—Understanding the Basic Mechanics of the Markets Discussed in This Book 55 “The World Beyond Stocks and Why It’s Important 55 Markets are a Reflection of the People Who Trade Them. Is Your Competition Wired on Starbucks or Methodically Filling in a Crossword Puzzle? 57 Futures 10159 Ina Nutshell—What Traders Need to Know 60 ‘The Mini-Sized Dow vs. the E-Mini S&P 500 64 Liquidity Is King 65 Contract Specifications—What a Trader Needs to Know to Trade Key Markets 70 Forex for Newbies 74 ‘This Is How Forex Moves Are Measured 77 How to Hedge Your Own Life in the Forex Markets 79 For Traders, This Is All You Need to Know 81 Chapters ‘The Stock Market Is Now Open—Seven Key Internals to Gauge Intraday Market Direction 83 Musicians Know How to Read Music; Traders Must Know How to Read the Markets 83 ‘TICKS-—They Can Run but They Can't Hide 84CONTENTS: TIKI—When Only the Fastest Heads Up Will Do 90 TRIN: Like High School, Its All About Pressure 92. TRINQ—The TRIN for the Nasdaq 96 Pav/Call Ratio—The Keys to the Kingdom 97. Sector Sorter List—Beauty Is Not Only Skin Deep 104 This Is How You Know It’s Going to Be a Choppy Day 104 Putting It All Together—Sizing Up the Trading Day from the Opening Bell 107 Listening In on the Floor—The Value of Pit Noise 110 PART 2: Specific Intraday and Swing Trading Setups for Futures, Stocks, and Options, and Forex 113 Chapter 6 ‘The Opening Gap: The First and Highest Probability Play of the Day 115 ‘Trading Without a Specific Setup in Mind is Like Hiking in the ‘Amazon Without a Compass 115 Not Ail Gaps Are Created Equal 117 Trading Rules for Gap Down Buys (Gap Up Sells Are Reversed) 120 Who Is Getting a Spanking and Why? 121 Specific Examples of Trading the Gap 122 What to Do with Unfilled Gaps 128 Strategies for Those Who Can't Trade Full Time 131 Position Sizing with a $100,000 Account 131 Summing up the Gaps 131 Chapter 7 Pivot Points—Great for Trending Days and Even Better for Choppy Days 133 Beating Indicator-Based Traders to the Punch 133. Not All Pivots Are Created Equal 134 Here’s Exactly How I Set Them Up on My Charts 135 ‘The Psychology Behind the Pivots—Who Is Getting Bumed 140 ‘Trading Rules for Pivot Buys on Trending Days (Sells Are Reversed) 142 ‘Trading Rules for Pivot Buys on Choppy Days (Sells Are Reversed) 143 Trailing Stops in This Fashion Is the key 157 ‘Tips and Tricks for Using the Pivots 158