FFOORR SSAALLEE && EEXXCCHHAANNGGEE wwwwww..ttrraaddiinngg--ssooffttwwaarree--ccoolllleeccttiioonn..ccoomm SSuubbssccrriibbee ffoorr FFRREEEE ddoowwnnllooaadd mmoorree ssttuuffff.. MMiirrrroorrss:: wwwwww..ffoorreexx--wwaarreezz..ccoomm wwwwww..ttrraaddeerrss--ssooffttwwaarree..ccoomm CCoonnttaaccttss aannddrreeyybbbbrrvv@@ggmmaaiill..ccoomm aannddrreeyybbbbrrvv@@hhoottmmaaiill..ccoomm aannddrreeyybbbbrrvv@@yyaannddeexx..rruu SSkkyyppee:: aannddrreeyybbbbrrvv IICCQQ:: 7700996666443333 THE MASTER SWING TRADER THE MASTER SWING TRADER Tools and Techniques to Profit from Outstanding Short-Term Trading Opportunities ALAN S. FARLEY McGraw-Hill New York San Francisco Washington, D.C. Auckland Bogota Caracas Lisbon London Madrid Mexico City Milan Montreal New Dehli San Juan Singapore Sydney Tokyo Toronto To John Yurko Market Wizard, Selfless Teacher, and Ancient Soul Library of Congress Cataloging-in-Publication Data Farley, Alan S. The master swing trader : tools and techniques to profit from outstanding short-term trading opportunities / by Alan S. Farley. p. cm. Includes bibliographical references. ISBN 0-07-136309-2 1. Speculation. 2. Stocks—Charts, diagrams, etc. 3. Stock price forecasting. 4. Day trading (Securities) I. Title. HG6041.F35 2000 332.64'5—dc21 00-062222 McGraw-Hill A Division of The McGraw-Hill Companies Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publi- cation may be reproduced or distributed in any form or by any means, or stored in a data base or retrieval system, without the prior written permission of the publisher. 1234567890 DOC/DOC 09876543210 ISBN 0-07-136309-2 Printed and bound by R.R. Donnelley & Sons Company. 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C O N T E N TS Foreword xvii Acknowledgments xix Introduction xxi PART ONE THE GATEWAY TO SHORT-TERM TRADING Chapter 1 Trading the Pattern Cycle 3 The Path to Trading Power 3 The Hidden Market 6 Pattern Cycles 7 Trend-Range Axis 9 Swing vs. Momentum 12 Time 14 Trend Relativity 16 Volume 18 Cross-Market Analysis 20 Reward:Risk 21 Mastering the Trade 21 Chapter 2 Preparing for the Market Day 25 The Closing Bell 25 Support-Resistance 26 Types of S/R 27 Cross-Verification 35 3D Charting 35 The Charting Landscape 38 Building the Road Map 39 Moving Average Ribbons 40 Candlesticks 43 ' Bollinger Bands 45 vii viii CONTENTS CONTENTS ix Chart Polarity 50 Silent Alarm 111 Bull-Bear 51 Reading The Crowd 112 Trend-Range 51 Bear Markets 112 Expansion-Contraction 53 Chapter 4 Leading-Lagging 54 Convergence-Divergence 56 Building a Swing Trading Strategy 117 Reading Market Sentiment 58 Systems and Methods 117 Avoiding the Momentum Trap 59 Momentum Trading 118 The Big Picture 60 Countertrend Trading 120 Dow Theory Y2K 62 Trading Tactics 124 Finding Winners 63 More on Cross-Verification 126 Needle in the Haystack 63 Trader vs. the Crowd 131 Opportunity Costs 64 Short Sales 132 Building Watch Lists 66 Time Frame 137 Writing Scans 67 Loading the Gun 139 Day Trading 142 Chapter 3 Risk Management 143 Analyzing the Market 69 Winning and Losing 145 Pattern Cycles 69 Stop Losses 147 Bottoms 70 Capitalization 149 Breakouts 73 Records and Results 150 Rallies 76 Inner Trader 151 Highs 79 Avoiding Self-Destruction 152 Tops 81 Reversals 84 Chapter 5 Declines 86 Mastering the Tools 155 Market Mechanics 90 Patterns vs. Indicators 155 Pattern Characteristics 91 Managing Technical Tools 156 Understanding Price Breaks 92 Price, Time, and Volume 160 Recognizing Trends 95 Building Custom Indicators 162 Trend Mirrors 97 Pattern Tools 163 Clear Air 99 Trendlines 164 Signposts 102 Psychotic Trendlines 168 Volume and the Pattern Cycle 104 Accumulation-Distribution 105 Parallel Price Channels 160 Gaps 170 Trends and Volume 107 Congestion and Volume 109 Triangles 180 Intraday Trading Volume 110 Flags 183 CONTENTS CONTENTS xi X Pattern Recognition 244 Candlestick Patterns 184 Managing Opportunity 246 Pattern Failure 189 Two Classic Applications 248 Indicator Tools 192 2B Top 248 Bollinger Band Tactics 193 Description 249 MACD Histogram 195 Setup Tactics 250 RSI and Stochastics 197 Execution and Position Management 251 Volume Tools 199 Reward:Risk 253 OBV 200 Channel Break 253 Farley's ADA (Accumulation-Distribution Accelerator) 202 Description 253 Special Tools 204 Setup Tactics 254 Fibonacci 204 Execution and Position Management 255 Market Numbers 212 Reward:Risk 256 TICK 213 Introducing the 7-Bells 257 Chapter 6 • Original Setups and Execution 257 7-Bells Characteristics 258 Understanding Time 219 Dip Trip—Price That Moves Against a Strong Trend Will The Time Element 219 Rebound Sharply 258 The Market Clock 221 Coiled Spring—Constricted Price Gives Way to Directional Movement 258 Position Timing 223 Finger Finder—Candles Flag Reversals in the Next-Smaller Time Frame 258 First Hour 225 Hole-in-the-Wall—Gap Downs after Strong Rallies Signal a Trend Opening Imbalance 225 Change 259 The Gauntlet 226 Power Spike—-High-Volume Events Print the Future Direction of Price 259 Midday Markets 229 Bear Hug—Weak Markets Drop Quickly after Rallying into Resistance 259 Time for the Pros 229 3rd Watch—Breakouts through Triple Tops Signal Major Uptrends 259 Finding Midday Winners 231 Trading Strategies 260 Last Hour 232 Chapter 8 Change of Character 234 Quitting Time 235 Dip Trip 261 Time of Week and Month 235 Characteristics 261 Seasons and Seasonally 237 Trade Mechanics 262 Dip Strategies 265 PART TWO Applications 268 THE 7-BELLS: TOOLS TO LOCATE OUTSTANDING OPPORTUNITIES The'38-62 268 Description 268 Chapter 7 Setup Tactics 269 Mastering the Setup 243 Execution and Position Management 269 Reward:Risk 270 Classic vs. Original Patterns 243 CONTENTS CONTENTS xiii xii Finger Strategies 299 Continuation Dip 271 Other Considerations 300 Description 272 Applications 302 Setup Tactics 272 Hidden 100 302 Execution and Position Management 273 Description 302 Reward:Risk 275 Setup Tactics 303 First Fullback 275 Description 275 Execution and Position Management 303 Reward:Risk 303 Setup Tactics 276 Execution and Position Management 277 2B Finger 303 Reward:Risk 278 Description 304 Setup Tactics 305 Chapter 9 Execution and Position Management 307 Coiled Spring 279 Reward:Risk 308 Death Star 308 Characteristics 279 Description 308 Trade Mechanics 279 Setup Tactics 309 Spring Strategies 281 Execution and Position Management 311 More on Range Bar Analysis 283 Reward:Risk 311 Applications 285 Triangle Coil 285 Chapter 11 Description 285 Hole-in-the-Wall 313 Setup Tactics 286 Execution and Position Management 286 Characteristics 313 Reward:Risk 287 Trade Mechanics 313 Failure Coil I 288 Hole Strategies 316 Description 288 Applications 319 Setup Tactics 289 1-2 Decline 319 Execution and Position Management 289 Description 319 Reward:Risk 290 Setup Tactics 319 Failure Coil II 291 Execution and Position Management 320 Description 292 Reward:Risk 322 Setup Tactics 292 Support Hole 322 Execution and Position Management 292 Description 322 Reward:Risk 294 Setup Tactics 323 Execution and Position Management 324 Chapter 10 Reward:Risk 324 Finger Finder 295 Island Reversal 324 Description 325 Characteristics 295 Setup Tactics 326 Trade Mechanics 297 XV CONTENTS CONTENTS xiv Execution and Position Management 355 Execution and Position Management 327 Reward:Risk 355 Reward:Risk 328 Intraday Short 356 Description 357 Chapter 12 Setup Tactics 358 Power Spike 329 Execution and Position Management 358 Characteristics 329 Reward:Risk 360 Trade Mechanics 329 Spike Strategies 332 Chapter 14 Applications 333 3rd Watch 361 Breakdown Spike 335 Characteristics 361 Description 335 Trade Mechanics 361 Setup Tactics 335 Watch Strategies 365 Execution and Position Management 335 Applications 368 Reward:Risk 336 Watch Echo 368 Fullback Spike 337 Description 368 Description 338 Setup Tactics 368 Setup Tactics 338 Execution and Position Management 369 Execution and Position Management 338 Reward:Risk. 371 Reward:Risk 339 3rd Watch Classic 371 Climax Spike 340 Description 341 Description 371 Setup Tactics 341 Setup Tactics 371 Execution and Position Management 341 Execution and Position Management 372 Reward:Risk 343 Reward:Risk 374 Swing Watch 374 Chapter 13 Description 374 Bear Hug 345 Setup Tactics 374 Execution and Position Management 376 Characteristics 345 Reward:Risk 377 Trade Mechanics 345 Bear Strategies 349 PART THREE Applications 351 50-200 Pinball 351 MAKING THE TRADE Description 351 Setup Tactics 352 Chapter 15 Execution and Position Management 352 ' Precise Trade Execution 381 Reward:Risk 352 Timing and Methods 381 Channel Short 353 Execution Target 381 Description 354 The Trading Day 383 Setup Tactics 355