TRADING ON MOMENTUM This page intentionally left blankby Jacktw. TRADING ON MOMENTUM Advanced Techniques for High-Percentage Day Trading KEN WOLFF WITH CHRIS SCHUMACHER AND JEFF TAPPAN McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto ! ! "#$%&’()*!!+,,+!-%!.*&/01&23#42!566!&’()*7!&171&8102!./9:;/3*:&10!’9!*)1!<9’*10!=*/*17!#;!541&’3/2! >?31$*!/7!$1&4’**10!:901&!*)1!<9’*10!=*/*17!"#$%&’()*!53*!#;!@ABCD!9#!$/&*!#;!*)’7!$:-6’3/*’#9!4/%!-1! &1$&#0:310!#&!0’7*&’-:*10!’9!/9%!;#&4!#&!-%!/9%!41/97D!#&!7*#&10!’9!/!0/*/-/71!#&!&1*&’18/6!7%7*14D!E’*)#:*! *)1!$&’#&!E&’**19!$1&4’77’#9!#;!*)1!$:-6’7)1&2!! ! ,F,BF@GAHBIFJ! 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C O N T E N T S Acknowledgments ix Introduction xi Chapter 1 The Basics 1 The Start of It All 1 The Essentials 6 Chapter 2 Getting Started 9 Education 9 Trading Mentality 21 Chapter 3 Tools of the Trade 31 Traditional and Web-Based Brokerages 31 Electronic Direct Access Trading Firms (EDATs) 33 Order Routing Methods 35 Advanced Tools of an Active Trader 44 Charting Software 49 News Services 50 Chapter 4 The New Market Momentum 53 The New Players 53 Institutional Momentum 55 Technical Analysis Momentum 58 Online Trader Momentum 58 Smart Money, Informed Money, and Dumb Money 63 Theme Momentum 70 (cid:1)(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:10)(cid:11)(cid:10)(cid:12)(cid:13)(cid:13)(cid:12)(cid:10)(cid:14)(cid:4)(cid:10)(cid:15)(cid:9)(cid:5)(cid:16)(cid:17)(cid:18)(cid:5)(cid:19)(cid:20)(cid:2)(cid:21)(cid:19)(cid:10) v (cid:1)(cid:22)(cid:6)(cid:20)(cid:23)(cid:10)(cid:8)(cid:18)(cid:5)(cid:18)(cid:10)(cid:24)(cid:2)(cid:5)(cid:10)(cid:25)(cid:18)(cid:5)(cid:21)(cid:26)(cid:10)(cid:2)(cid:24)(cid:10)(cid:27)(cid:26)(cid:18)(cid:19) vi Trading on Momentum Chapter 5 Predictable Momentum 73 Predicting Momentum 73 Chapter 6 Predictable Patterns 91 Niche Patterns 91 Gainer Pattern 93 Dumper Pattern 106 End-of-Day Gap Plays 111 News Patterns 113 Chat Room News Hypes 117 Patterns to Avoid 118 Identifying Short-Term Tops and Bottoms 120 Upside and Downside Potential 121 Core Methods 124 Chapter 7 Indicators 125 Indicator Stocks 125 Picking an Indicator Stock 130 Trends 131 Chapter 8 Market Dynamics 133 Market Dynamics 133 Two Phases 134 The Players 136 The Moving Parts 138 Trading the Market 146 Mid-Range Rule 148 Mid-Morning and Afternoon 150 The End 150 The Specifics 151 Example Scenarios 157 Contents vii Chapter 9 Tracking 163 Building a Tracking Diary 163 Analyzing the Data 167 Forming Expectations 170 Relating Market Dynamics with Tracking 173 Tracking Summary 175 Wrap-Up 175 Chapter 10 Time of Day 179 Delayed Quotes 181 Numbers 184 After-Hours and Pre-Market Trading 186 Chapter 11 Identifying Trading Opportunities 189 Tape Reading 190 The Market Maker Effect 198 Chapter 12 Rules of a Trader 203 Stop Loss Discipline 204 Trailing Stops 207 Money Management 210 Golden Rules of Trading 211 Chapter 13 Personal Accountability and Trading Attitude 221 Trading Attitude 224 viii Trading on Momentum Chapter 14 Momentum Investing 231 How and Why I Began This Longer-Term Approach 231 The Principles of Momentum in Investing 233 The Law of Participation 238 The Market’s Influence on Momentum Investments 241 Defining the Market 242 Interpreting the Market 247 Momentum Investment Exits 247 Pre-Market Gaps 249 Closing Combinations 251 Epilogue 255 Glossary 257 Resource List 261 Index 263 A C K N O W L E D G M E N T S We would like to thank Ela Aktay of McGraw-Hill Professional Publishing for giving us the opportunity to write this book and Beth Brown from MacAllister Publishing Services for her efforts during the production process. Without your untiring efforts, this book would not have been pos- sible. We also want to thank Victor Jung, a fantastic partner and good friend for his remarkable efforts in the production of this book and tech- nically on a day-to-day basis in the chat room pits. And Steve Demarest from MB Trading for his friendship and constant encouragement. Finally, a warm and grateful thanks to the thousands of traders, both past and present that have graced the cyber halls of Mtrader.com and RealityTrader.com over the years. You have helped us create an explo- sive online revolution that has literally changed the way traders are edu- cated and enter the trading arena. With your help, we have literally changed the face of online trading, helping us shift the power of trading decisions from brokers to individual traders. Your enthusiasm, thirst for knowledge, and quest for education were the reasons we wrote this book. (cid:1)(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:10)(cid:11)(cid:10)(cid:12)(cid:13)(cid:13)(cid:12)(cid:10)(cid:14)(cid:4)(cid:10)(cid:15)(cid:9)(cid:5)(cid:16)(cid:17)(cid:18)(cid:5)(cid:19)(cid:20)(cid:2)(cid:21)(cid:19)(cid:10) ix (cid:1)(cid:22)(cid:6)(cid:20)(cid:23)(cid:10)(cid:8)(cid:18)(cid:5)(cid:18)(cid:10)(cid:24)(cid:2)(cid:5)(cid:10)(cid:25)(cid:18)(cid:5)(cid:21)(cid:26)(cid:10)(cid:2)(cid:24)(cid:10)(cid:27)(cid:26)(cid:18)(cid:19) This page intentionally left blank