Into the pit the battle commences


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Hi everyone

I dont post that often but Ive come across a gem of an article from the that I thought would make interesting reading.

Does anyone know these guys, jay and Rai who run the site and have also written a couple of books?

Happy trading to all!

Pitbull :)


We want to graciously thank our members for their support throughout the years as kicks off its 5th year of service. Last years resolution for every member was to stick to the basket method of trading. This year, we hope more and more traders will come to see the light and embrace this method. The advent of decimalization poured salt on the wound as stock prices deflated with the volume providing the toughest trading terrain possible in 2001 as stocks seemed to float in a range on light volume only to panic and then resume ranges. Throughout this period, the theme "that which does not kill you makes you stronger seemed to emanate daily". As much as clean victories with the least amount of resistance is what every trader wants to attain following in the lines of Sun Tzu, these conditions are not always present and thus a different type of battle emerges, one that can best be summed up as a war of attrition. Throughout this year, we have learned that one trade nor one day nor one drawdown week is not the end. It is but a blip in your trading career. We learned to grow a tougher and thicker skin and to reach down inside and pick ourselves back up when a probable setup does the improbable because in the end, it is all a numbers game... a game of probability. The GOAL of the game is to recognize and ACT on the TRANSPARENCY before it becomes TOO TRANSPARENT at which point the window of profitability shrinks. We learned to play the lightest volume with windows of opportunity that were the size of keyholes in an effort to train ourselves to to be better than the next trader. To be able to count the stitches on a fastball. While others whined and moaned, we sat and watched and watched and watched 8 hours a day in front of those monitors making ourselves better, more aware, able to anticipate, REACT and give us the EDGE. What may seem like a dead market at time is a test of discipline and patience to us. We learned to ease up on the gas pedal and tap the brakes to adapt to the rhythm as volume slows down. We learned that the best liquidity is to sell into the buyers and cover from the sellers and that PANIC is a gift in any situation so long as we are not on the tail end of it. Early entries, sweet spots and late entries make up your trades and we learned in light volume the late entry is a mistake. The early entries imply more risk but is proportionate to the reward. The sweet spot is the ideal entry to get in just in time for the panic pump and be out into the buyers or sellers.

Looking back in your own career as a daytrader. Remember when you first got into this game. Remember when you owned shares in your 'investment' account of a stock perhaps it was AMAT. You were always told that stocks are the company and fundamentals drive stock prices up and down. However, there was a fallacy with that explanation. If AMAT some material news? Then why did AMAT trade in a 2pt range from 42.50 to 44.50 ? Was there some news that I didn't hear? What makes AMAT move like it does throughout the day? Surely, it can't only move on news and fundamentals... and what if I could just buy AMAT at 42.70 and dump it above 43.50?? Wouldn't that be more prudent than sitting through all these moves up and down?

Remember, asking your broker "why is AMAT up and down throughout the day?" and getting some response like "well, we are only thinking long term here so don't sweat it". This is when the hunger for knowledge started to grow as your curiousity is not only piqued but now becomes an obsession. The circle of knowledge was incomplete and you set out to LEARN what makes stocks move intraday if it isn't news or fundamentals. This is the first step to daytrading.

Throughout your quest, you asked yourself how can anyone know when someone is going to put in a buy or a sell order. It seems completely random? How on earth can anyone track the buys and sells and anticipate when they will happen? This is pure gambling. There is just no way to know what each shareholder is doing at any point in time.

You read books. You visited many websites. You got a browser based broker account. You got realtime quotes. But there were many MISSING pieces and you struggled to get a clear answer. Perhaps, you got your feet wet and dipped your toes in this game early on and lost a leg. Perhaps you made money piling into a novelty stock or a internet stock in 2000 and thought that THIS is DAYTRADING, I love it and then got clawed by the bear only to resume your search to find out WHY?

One reason or another, your path lead you to the trading pit. Your first day in the Pit, you were overwhelmed with the terminology "noodles" "pups" "cranks" "overshoots", what language are they speaking?!? But interestingly, stocks seemed to move as they were called and in most instances they foreshadowed a lot of the moves and from that point on... your eyes were opened. Finally, it starts to make sense. Every day it gets hammered into your head:

STOCKS ARE NOT THE COMPANY. Stocks are a 4 letter word that move according to the futures. As the futures rise, stocks will bid up and as they fall stocks will bid down. As stocks move higher in price, their floats get thinner and stocks tend to move faster. As stocks get cheaper in price, their floats grow and they move slower. The market moves top down from the futures then the tier 1 generals in each sector and then the tier 2's and tier 3's and so forth. It's MAKING SENSE! If AMAT moves up, then NVLS and KLAC follow. Wow. Tier synergy! Eventually for each need, you learn another tool to follow.

At first you just start with Nasdaq level 2 and see those large sizes on the bid pop a stock for a few seconds and then see the stock panic back down and vice versa. You spot one market maker but can't read his motives. Its very confusing. The need arises where you ask yourself, how can i make sense of these sporadic Nasdaq Level 2 movements. You learn a tool called a stochastics chart. This chart is composed of a grid from 0 to 100 and two lines called stochastics oscillators %d and %dslow. You learn that this chart measures overbought and oversold conditions. When the stochastics lines are under 20 band they are oversold, when they are above the 80 band the stoch is overbought. Makes sense and as you watch nothing but Level 2 and the 1 min stochastics chart, it fills in a piece of the puzzle. Basicaly buy signals are when the %d cross the %dslow up through the 20 band and vice versa down through the 80 band on short signals. All this makes sense.... until you see that the 1 min stochastics sitting under the 20 band cross back up and slip again. You start to lose faith in the tool as it is not 100%. You ask yourself why is it that sometimes AMAT will be trading at 43.05 near its highs and wiggle to 42.90 as the 1 minute stochastics slips under the 90 band ready to cross the 80 band and then AMAT pops to 43.20 as the 1 min stochastics resumes to bounce back up through the 90 band?!? Stochastics ain't telling me enough here. Why is it sometimes stocks will sit near its highs and the stochastics doesnt drop for like 30 minutes? Or stock will hold near its highs and the stochastics will make a full oscillation? You quest continues to fill in the pieces of the puzzle.

Enter the 3 minute simple moving averages chart. This chart composed of a simple 5 period moving average and a 15 period moving average. They paint the direction of the TREND as well as proving supports and resistance levels. You learn firsthand the power of a consolidation breakout and a PUP breakout. Interestingly, you also learn that most breakouts start at a high band 1 minute stochastics reading because they all start off as minor short squeezes. Market makers are heding constantly in a stock with the noodles and if the noodles or the stock maintains a high band stochastics long enough, they are forced to hedge back to the longside thereby forcing a short squeeze. It then trigger real buyers and traders to step in and a snowball effect happens. Wow. Makes sense once again. You notice an uncanny phenomenon. When you click the 5 and 15 period lines, you notice how well the stock tends to coil off the 5 period when its breaking out. This is an ACTIVE uptrend making higher highs (ala 5 period) and higher lows (ala 15 period). This is an uptrend and an active uptrend will always trade higher than the 5 period simple moving average and thereby allows you to keep a profit stop when that 5 period breaks. You learn what a PUP breakout out is as Jay explains that the 5 period acts as a resistance by the shorts/sellers yet the 15 period is a the quiet buyers slowing lifting their bid prices, the classic immovable object versus the unstoppable force situation. When the 5 period gets penetrated, the buyers charge and the barabarians break down the gates as market makers trampled over each other to hedge long and a dynamic breakout or breakdown can occur. You see this happen in REAL time and you are amazed.

Finally, you ask yourself, how can I get a heads up on the movemets of the stochastics or a potential breakout? Simple. You chart the nasdaq 100 futures (aka noodles) on a 1 and 3 minute stochastics chart. The 1 minute noodles is the lead indicator that triggers the 3 minute noodles and all your other tools. Truly a synergistic effect.

"I can see!" said the blind man. Everyday you learn something. You learn that inidividual buy and sell trades don't affect the market. The big boys which are the institutions and funds move the markets. Stock can move without a single share being traded because market makers adjust spreads to the futures. YOu learn that the game is to REACT and not predict. However, we used the charts to track the footprints of the big boys. YOu learn what a buyside and sellside fade is and the effects of cranks and crosslocks. You learn about the rhythm of your stocks, the tier synergy effects the nuances. The no brainer setups like a low of the day at a high band 3 min noodles inv pup formation as a short and vice versa for a long. You learn to put a lot of emphasis on the futures as they are the HAND THAT holds the puppet strings to your stocks. You learn about the ovetrshoot panics and the 2.50 support/resistance lines and about adapting everything into the context of the noodles.

You learned the rules to the GAME. No one can predict WHERE stock prices will go. However, knowing the trend, the support and resistance levels from different time periods, you can gauge where a stocks resistance will be and be prepared to sell into those buyers and vice versa on shorts. In essence, you learn what the true probabilities are... and the real game is to react not to predict... to take ACTION on TRANSPARENCY BEFORE it BECOMES TRANSPARENT. You learned the GAME.

What seemed like an ocean of confusion in the beginning has now to shrunk to a few 20inch monitors on your desk, your terrain... your opportunity to make or lose money. People from across the globe all focused at any given moment in time at one point... in an effort to take your money or you to take their money. It's beautiful. Poetry in motion. Welcome to the greatest speculator sport in the world and you are a player... a trader. You have arrived. :)

The journey doesnt end there. Once you have the tools and the basket stocks, you battle with consistency. But you grow with each new battle. The markets constantly shift paradigms. You learn to adapt, anticipate and pull the trigger. You grow.... with us... together. Many of us spend more time in the Pit than our own family and in a sense we are a FAMILY. We share in triumphs and the greatest highs and also the defeats and the greatest lows from 8:30am to 4:30pm every trading day. We sit in the trenches as snipers and wait for the next trade patiently, methodically and decisively. The journey is the reward.
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