The Master Swing Trader.pdf - Trading Software

378 Pages·2006·7.98 MB·English

ALAN S. FARLEY

THE MASTER
SWING TRADER

Tools and Techniques to
Profit from Outstanding
Short-Term Trading
Opportunities
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To John Yurko
Market Wizard, Selfless Teacher, and Ancient Soul

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
Chart Polarity 50
Bull-Bear 51
Trend-Range 51
Expansion-Contraction 53
Leading-Lagging 54
Convergence-Divergence 56
Reading Market Sentiment 58
Avoiding the Momentum Trap 59
The Big Picture 60
Dow Theory Y2K 62
Finding Winners 63
Needle in the Haystack 63
Opportunity Costs 64
Building Watch Lists 66
Writing Scans 67
Chapter 3
Analyzing the Market 69
Pattern Cycles 69
Bottoms 70
Breakouts 73
Rallies 76
Highs 79
Tops 81
Reversals 84
Declines 86
Market Mechanics 90
Pattern Characteristics 91
Understanding Price Breaks 92
Recognizing Trends 95
Trend Mirrors 97
Clear Air 99
Signposts 102
Volume and the Pattern Cycle 104
Accumulation-Distribution 105
Trends and Volume 107
Congestion and Volume 109
Intraday Trading Volume 110
Silent Alarm 111
Reading The Crowd 112
Bear Markets 112
Chapter 4
Building a Swing Trading Strategy 117
Systems and Methods 117
Momentum Trading 118
Countertrend Trading 120
Trading Tactics 124
More on Cross-Verification 126
Trader vs. the Crowd 131
Short Sales 132
Time Frame 137
Loading the Gun 139
Day Trading 142
Risk Management 143
Winning and Losing 145
Stop Losses 147
Capitalization 149
Records and Results 150
Inner Trader 151
Avoiding Self-Destruction 152
Chapter 5
Mastering the Tools 155
Patterns vs. Indicators 155
Managing Technical Tools 156
Price, Time, and Volume 160
Building Custom Indicators 162
Pattern Tools 163
Trendlines 164
Psychotic Trendlines 168
Parallel Price Channels 168
Gaps 170
Triangles 180
Flags 183
Candlestick Patterns 184
Pattern Failure 189
Indicator Tools 192
Bollinger Band Tactics 193
MACD Histogram 195
RSI and Stochastics 197
Volume Tools 199
OBV 200
Farley’s ADA (Accumulation-Distribution Accelerator) 202
Special Tools 204
Fibonacci 204
Market Numbers 212
TICK 213
Chapter 6
Understanding Time 219
The Time Element 219
The Market Clock 221
Position Timing 223
First Hour 225
Opening Imbalance 225
The Gauntlet 226
Midday Markets 229
Time for the Pros 229
Finding Midday Winners 231
Last Hour 232
Change of Character 234
Quitting Time 235
Time of Week and Month 235
Seasons and Seasonality 237

PART TWO
THE 7-BELLS: TOOLS TO LOCATE OUTSTANDING OPPORTUNITIES

Chapter 7
Mastering the Setup 243
Classic vs. Original Patterns 243
Pattern Recognition 244
Managing Opportunity 246
Two Classic Applications 248
2B Top 248
Description 249
Setup Tactics 250
Execution and Position Management 251
Reward:Risk 253
Channel Break 253
Description 253
Setup Tactics 254
Execution and Position Management 255
Reward:Risk 256
Introducing the 7-Bells 257
Original Setups and Execution 257
7-Bells Characteristics 258
Dip Trip—Price That Moves Against a Strong Trend Will Rebound Sharply 258
Coiled Spring—Constricted Price Gives Way to Directional Movement 258
Finger Finder—Candles Flag Reversals in the Next-Smaller Time Frame 258
Hole-in-the-Wall—Gap Downs after Strong Rallies Signal a Trend Change 259
Power Spike—High-Volume Events Print the Future Direction of Price 259
Bear Hug—Weak Markets Drop Quickly after Rallying into Resistance 259
3rd Watch—Breakouts through Triple Tops Signal Major Uptrends 259
Trading Strategies 260
Chapter 8
Dip Trip 261
Characteristics 261
Trade Mechanics 262
Dip Strategies 265
Applications 268
The 38-62 268
Description 268
Setup Tactics 269
Execution and Position Management 269
Reward:Risk 270
Continuation Dip 271
Description 272
Setup Tactics 272
Execution and Position Management 273
Reward:Risk 275
First Pullback 275
Description 275
Setup Tactics 276
Execution and Position Management 277
Reward:Risk 278
Chapter 9
Coiled Spring 279
Characteristics 279
Trade Mechanics 279
Spring Strategies 281
More on Range Bar Analysis 283
Applications 285
Triangle Coil 285
Description 285
Setup Tactics 286
Execution and Position Management 286
Reward:Risk 287
Failure Coil I 288
Description 288
Setup Tactics 289
Execution and Position Management 289
Reward:Risk 290
Failure Coil II 291
Description 292
Setup Tactics 292
Execution and Position Management 292
Reward:Risk 294
Chapter 10
Finger Finder 295
Characteristics 295
Trade Mechanics 297
Finger Strategies 299
Other Considerations 300
Applications 302
Hidden 100 302
Description 302
Setup Tactics 303
Execution and Position Management 303
Reward:Risk 303
2B Finger 303
Description 304
Setup Tactics 305
Execution and Position Management 307
Reward:Risk 308
Death Star 308
Description 308
Setup Tactics 309
Execution and Position Management 311
Reward:Risk 311
Chapter 11
Hole-in-the-Wall 313
Characteristics 313
Trade Mechanics 313
Hole Strategies 316
Applications 319
1-2 Decline 319
Description 319
Setup Tactics 319
Execution and Position Management 320
Reward:Risk 322
Support Hole 322
Description 322
Setup Tactics 323
Execution and Position Management 324
Reward:Risk 324
Island Reversal 324
Description 325
Setup Tactics 326
Execution and Position Management 327
Reward:Risk 328
Chapter 12
Power Spike 329
Characteristics 329
Trade Mechanics 329
Spike Strategies 332
Applications 333
Breakdown Spike 335
Description 335
Setup Tactics 335
Execution and Position Management 335
Reward:Risk 336
Pullback Spike 337
Description 338
Setup Tactics 338
Execution and Position Management 338
Reward:Risk 339
Climax Spike 340
Description 341
Setup Tactics 341
Execution and Position Management 341
Reward:Risk 343
Chapter 13
Bear Hug 345
Characteristics 345
Trade Mechanics 345
Bear Strategies 349
Applications 351
50-200 Pinball 351
Description 351
Setup Tactics 352
Execution and Position Management 352
Reward:Risk 352
Channel Short 353
Description 354
Setup Tactics 355
Execution and Position Management 355
Reward:Risk 355
Intraday Short 356
Description 357
Setup Tactics 358
Execution and Position Management 358
Reward:Risk 360
Chapter 14
3rd Watch 361
Characteristics 361
Trade Mechanics 361
Watch Strategies 365
Applications 368
Watch Echo 368
Description 368
Setup Tactics 368
Execution and Position Management 369
Reward:Risk 371
3rd Watch Classic 371
Description 371
Setup Tactics 371
Execution and Position Management 372
Reward:Risk 374
Swing Watch 374
Description 374
Setup Tactics 374
Execution and Position Management 376
Reward:Risk 377

PART THREE
MAKING THE TRADE

Chapter 15
Precise Trade Execution 381
Timing and Methods 381
Execution Target 381
The Trading Day 383
Building Execution Skills 386
Pullback Execution 393
Trade Management 397
Perfect Entry 397
The Fill Machine 398
Watching Active Positions 400
Exit 404
Beating the Game 406
Mastering the Tape 409
ECNs and Direct Access 409
The Tape 412
Level II 415
Market Lies 417
Fakeouts 417
Whipsaws 419
Noise 421
Conclusion
Thirty Rules for the Master Swing Trader 423
Trade Craft 423
Rules for the Trading Game 424
Market Wisdom 424
The Swing 425
Time 425
Execution 426
Opportunity and Risk 426
Secrets of the Price Chart 427
The Master Swing Trader 428
Appendix A: Suppliers 429
Appendix B: Glossary 431
Bibliography 439
Index 441

FOREWORD

With explosive growth of the Internet and major changes in the financial markets, a new breed
of speculators has evolved. Armed with high-tech tools, these new traders access Wall Street via
their home computers in a search for the Promised Land. Although the art of speculation in all of its
forms has existed for centuries, the financial media label these online traders as common gamblers
who missed the bus to Atlantic City.
The use of skill rather than luck separates profitable speculation from gambling. Now that the
gates to Wall Street are open to all who wish to compete, smart speculators will hone their trading
skills and apply the right tools as they attempt to become masters of their profession. Education is
the essential element in building success in any discipline, and trading is no exception. Fortunately,
you are already on the right path if you are reading these words. You are seeking your trading
education from one of the best instructors in the industry today.

My dear friend Alan Farley teaches traders across the globe how to master the art of high-
probability short-term trading. He founded Hard Right Edge (http://www.hardrightedge.com), an
excellent website for short-term traders and a comprehensive online resource that provides
thousands of traders with educational materials on a daily basis. Alan is also an active message
board participant, generously answering challenging questions from both new traders and market
professionals. He has a true passion for teaching the beginner how to avoid the mistakes and pitfalls
associated with short-term trading. When I asked Alan how he finds the time to answer all of those
questions, he told me that he makes the time because new traders depend on veteran traders to give
them good advice. ‘‘If I manage to save only one new trader from making a costly mistake, then it
is well worth my time,” Alan said.

Alan is determined to provide high-end education and has joined me on several occasions as we
took center stage to teach at national online trading events. Although our compensation is small, I
always look forward to spending time with him because he has true character and a great sense of
humor. The greatest thing about his success is the fact that he has done very well just being himself.
He is an asset to the trading community, and I am proud to be his friend.

Trade Smart!

Tony Oz
President, Stockjunkie.com
Author of Stock Trading Wizard: Advanced
Short-Term Trading Strategies and The Stock Trader:
How I Make a Living Trading Stocks
June 2000

ACKNOWLEDGMENTS

Many friends and associates helped in the creation of The Master Swing Trader. I will fondly
recall their invaluable assistance for many years to come. Writing any book is a hard task even for
an accomplished writer. Writing a good book that may help thousands of swing traders beat the
game is far more difficult. The following individuals should take pride in knowing that they played
an important role in raising the bar of swing trading knowledge.

Special thanks to Tony Oz for many hours of late-night discussion about the modern trading
press and its many complications. His mentoring and friendship are greatly appreciated. Also,
warm, personal thanks to Tim Bourquin, Jim Sugarman, Joe Bettencourt, and Hillary Marks for
allowing a new voice to speak at national trading Expos. These dedicated individuals represent the
bright future of trading education, and their influence on the financial world should persist for
decades to come.

A very grateful acknowledgement to Ross Ditlove and the MB Trading team in El Segundo,
California, for a Townsend Real Tick account that allowed me to produce high-quality illustrations
for the book. MB Trading presents a professional direct-access broker choice. They also offer