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Extract from


Selected Tactics For Short-Term Trading

Daryl Guppy This extract copyright 2002.

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Many years ago the Government gave me the opportunity to drive M113 armored personnel carriers. These were fast tactical vehicles and we trained in rapid deployment tactics. These tactics relied on the same speed and agility that had added the Australian Light Horse cavalry charge at Beersheba to the regimental colors. Successful short term trading calls for the same speed and agility and in this book we examine the discipline, routines and some of the procedures necessary for survival in a dangerous field. We deploy our trades with speed and precision, and extract them at the first sign of overwhelming danger. These are cavalry trading tactics and should not be confused with a cavalier approach to risk and reward in this market time frame.

    A few traders apply these tactics every day, but most of us belong to the part time cavalry. We use these tactics in nervous, unstable and volatile markets. In essence these are defensive strategies designed to limit the time spent in the market. Speed offers protection and limits risk by reducing the time the trade is open. If we believe the market is nervous it makes more sense to snatch profits from short term trades than to buy into a stock near the top of its up trend, hoping it does not sink.

    Tactical success in the field relies on an armored personnel carrier, a platoon or company of troops and enough firepower to overcome the enemy. Success in short term or day trading rests upon five elements.

  • Reliable real time data supply

  • Effective end of day charting and analysis

  • Straight through order processing

  • A broker that offers effective stop loss and contingent buy order services

  • Your full time attention while every trade is open.

    Please do not kid yourself. Dropping troops out of the back door of an armored personnel carrier while under fire is no less dangerous than day trading the market. It requires total commitment, constant training practice, and courage borne of confidence in your skills. Anything less invites, in our case, a financial disaster.

    The first day I was introduced to the standard infantry weapon on the rifle range, I was perplexed at the degree of caution shown by the weapons instructor. He took a lot of time – an inordinate amount of time it seemed to me – explaining the dangers of the weapon. Gung ho and pumped up, we just wanted to jump straight in. After all, the L1A1 SLR worked on much the same principle as the semi-automatic .22 calibre rifles many of us had used at home for shooting rabbits.

    His concern was well placed. These were dangerous weapons and in the hands of this group of inexperienced recruits, they had the power to inflict widespread carnage and great personal damage. Treated with respect, and used with skill, the weapon was a tool that ensured a soldier’s survival. The instructor’s method was to make us fear him more than we feared the weapon in our hands. This would give us time to survive and learn to use it effectively.

    The gullible are easily separated from their money by a promise of quick and large profits, so in planning the structure of this book, we deliberately saved the discussion of our profitable and favorite intra-day trading techniques until last. These have the reputation for glamour, but they are a collection of dangerous weapons- lethal at short range. They are a disappointment for the aspiring day trader raised on a diet of media hype. The returns appear to be small change and the work required for mastery is time consuming. No easy profits here.

Snapshots are not pictures. This is not a photo opportunity. Tourists take pictures, but our objective as traders is to take money. This means that like a marksman, we wait until we can take the perfect snapshot at the market.

    The approaches included are a personal selection of day trading and short term tactics we apply to Australian markets. It is not an exhaustive exploration. There are many different ways to trade this time frame, some more effective or less effective, than the ones included here. We encourage readers to explore these avenues and we provide references to other resources in the text.
In some chapters we draw on techniques or approaches first created by traders like Robert Deel, Tony Oz, Oliver Velez and others. We do not claim these as our own. Our interest is in the way these are applied, and where necessary, subtly altered, to provide effective trading solutions in our Australian markets. We provide an overview of the original technique, and then explain how it has been modified. The results are illustrated with a case study.

    In each section or chapter we start with a general introduction and overview of the topic. Our intention is to highlight the application in short term and intra-day time frames, alerting readers to special risks. Where appropriate we include the data base search formulas used to locate these opportunities. Some apply to end of day charting packages like Guppy Traders Essentials and Metastock. Others come directly from real time data suppliers including Marketcast, AOT On Line Trading and Hubb Data who provide real time data screening.

    Many chapters include a detailed example of the technique in action. Some of these are blow-by-blow, tick-by-tick, narratives of real time trades. This is unavoidable in this time frame because traders must focus on the detail of price behavior. At times, literally every trade counts and a tick up or down means the difference between profit or loss. We have chosen these ‘fishing’ stories carefully to ensure they fully illustrate the implementation of the tactics under discussion. Success in short term trading demands attention to detail so we encourage readers to follow the detail in the trading approaches they are interested in.

    The first few chapters are a wrecker’s balls designed to demolish some popular misconceptions which stand in the way of success in these short term time frames. They include the supposed advantages belonging to inside traders, and their close relatives, those who know exclusive market moving news. The single most powerful self defeating excuse for poor trading performance is the idea that success depends on exclusive news. It is an antiquated hangover from the turn of the nineteenth century. It pervaded and distorted market analysis throughout the twentieth century. It is the myth of the insider. There have been some spectacular examples of successful insider trading and from these the popular press has succeeded in convincing many people that insider trading is rife in every stock.

    There is no room for conspiracy theories in this book. Day trading and short term trading is built around the idea that every fast ride ends suddenly, but we control when we get on, and off. The ride is widely advertised. We join an eager crowd who all have access to the same news and facts we do. Success does not depend on exclusive access. This is not a private ride. It is a public excursion.

    Survival and success depends on skill and not on some secret knowledge of prearranged events. Traders of all types steered clear of corporate collapses like Enron, WorldCom and HIH Insurance because one look at the chart of price action showed a strong and solid downtrend. Many of the general public continued to hold, or buy, this stock. The same news was available to everybody, but success came to those who assessed it objectively.

    Once we move beyond the first section, each chapter is designed to introduce and explain one or two important concepts underpinning short term trading success. Each includes a case study trade to highlight the application and impact of the concepts, be it trading surprise news, increased volatility or a breakout to a new high. At the end of these chapters we include a summary of the technique. Readers in a rush can take a shortcut by simply flipping to the end of each chapter to read the summary. This is useful, but it ignores the subtlety in application involved with short term trading. The case studies explore the twists, the inferred clues in order volume, and the skill required to effectively apply the technique. It is detailed reading but the difference between your golf swing and Tiger Wood’s is also in the detail. Day trading looks like a quick fix but it takes time to prepare.

    This is the media’s idea of day trading and it was helped by the inefficiencies of the US market. At the turn of the century the US market traded in fractions – quarters, eights, sixteenths and teenies. The minimum tick size translated into $0.065 cents. Imagine buying a $0.10 stock knowing the next minimum price bid could only be at $0.165. Few US stocks traded at this level, although when Enron traded at $0.41 the minimum tick represented a 16% return. I would be happy to ‘nickel and dime’ the market for these types of returns. Many US day traders turned this type of scalping into a high frenzy of trading, reputedly making twenty or more trades a day.

    Sorry, this trading style does not cross the Pacific.

    The instruments of leverage – derivatives including warrants, options and futures – supply the very profitable edge of short term trading. Success looks easy from the outside with warrant prices moving from $0.05 to $0.13 with apparent ease. This is the magic of price leverage in action and it attracts many new and unskilled players. But make no mistake. These sophisticated markets call for high levels of skill. This is not a modern version of haggling over the price of batik with a stall holder in Bali. The stock market most closely emulates this direct haggling between buyer and seller, but not the derivative market.

    We focus on derivatives. When the public actively trades the warrant, the market maker may intervene at times to restrain the growth of prices beyond what they consider to be a fair value range. In most active warrant markets the market maker stands to one side, and for a while the trading truly reflects the haggling between buyer and seller, and opens the door to market inefficiency driven by crowd despair and enthusiasm.

    This inefficiency makes warrants an appealing short term trading instrument. We are not interested in working on the market maker’s theoretical terms when it comes to pricing and volatility. We are interested in observing the activity of excited crowds. This is where we trade, but to trade effectively requires an understanding of the order the market maker seeks to impose on the action.

    Stocks and trading instruments which offer price leverage open the door to very useful trades. This is a long section because success depends on the detail.

    These chapters are the first of those dealing with specific short term techniques. These are bread and butter trades. Returns are 5% to 15% in a 24 hour overnight period. Like most day trading strategies, they look easy at first glance – and they are when the exact set up conditions are met. The details of pattern recognition and the evaluation of the order screen structure make the trade possible.

    It is the detail of the intra-day price action with tightly placed stop loss conditions that make the trade profitable. Not all readers have the patience required to micro manage the detail so the rewards are likely to slip through their fingers.

    These are short term time frames and success depends more heavily on good trade execution than it does in position trading or investment approaches to the market. Time and timing is critical. A delayed order can mean the difference between a successful trade and a failure. Direct access to accurate, real time price and trading data is not an optional extra.

    We take readers on a detailed tour of what is currently available. This includes the full range of electronic and hybrid stop loss execution systems. Once you plug in a stop loss order facility to a fully electronic market like the ASX then the next logical step is to expand the range of contingent orders. This is intelligent use of computer technology but it appears few brokerages believe their clients could benefit from this.

    Beersheba was the scene of the last great cavalry charge in modern history and I, like my great uncle, was proud to serve in the same regiment that still carried those battle honors. Their success rested on monotonous training and the experience gained in small skirmishes. Officially they were mounted infantry and battle victory depended on accurate shooting once they were deployed for action.

    We are not engaged in the same endeavor, but we draw on the traditional cavalry tactics of fast action, precision and swift defensive extraction and apply them to the market. When market conditions are appropriate, we raid the trading screens for profit and our survival depends on consistent skill.

    Train hard and raid well.


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