Ordinary People, Extraordinary Profits

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1 Ordinary People, Extraordinary Profits How to Make a Living as an Independent Stock, Options, and Futures Trader DAVID S. NASSAR John Wiley & Sons, Inc.

3 Additional Praise for Ordinary People, Extraordinary Profits An outstanding guide to trading and investing excellence. A must read! Jack Nick, NYSE Veteran Specialist Ordinary People, Extraordinary Profits is second to none. This book covers short term trading in great detail providing a solid foundation for success. Traders who utilize this information have a huge edge on their way to large profits-outstanding! Dr. Greg S. Orlando, MD President of Mohawk Valley Plastic & Reconstructive Surgery I have been active in the markets for over ten years. My trading library is easily over 100 books and I have attended countless classes, lectures, and seminars. I wish that I had discovered MarketWise at the very beginning. Ordinary People, Extraordinary Profits is simply outstanding! If someone were to ask if MarketWise is helpful to the active trader or investor, my response will be YES...and I have proof! Dr. Laurence Stewart

5 Ordinary People, Extraordinary Profits

6 Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers professional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market s ever-changing temperament and have prospered some by reinventing systems, others by getting back to basics. Whether you are a novice trader, professional, or somewhere in between, these books provide the advice and strategies you need to prosper today and well into the future. For a list of available titles, visit our web site at

7 Ordinary People, Extraordinary Profits How to Make a Living as an Independent Stock, Options, and Futures Trader DAVID S. NASSAR John Wiley & Sons, Inc.

8 Copyright 2006 by David S. Nassar. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) , fax (978) , or on the web at Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) , fax (201) , or online at Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Disclaimer: The information provided is strictly for educational purposes. It is expressly understood this information is not investment advice. Each reader/trader must make their own decisions and is 100% responsible for his/her results. The publisher nor MarketWise takes any responsibility for the results a trader or investor may realize based on this information. Trading is inherently risky and the results of one individual may or may not be achieved by another. Any trades the reader makes are based on the readers unique perspective and not in any way considered a recommendation from this author or publisher. The author or publisher takes absolutely no responsibility for results the reader/trader may achieve regarding gains or losses whatsoever. Designations used by companies to distinguish their products are often claimed as trademarks. In all instances where John Wiley & Sons, Inc., is aware of a claim, the product names appear in initial capital or all capital letters. Readers, however, should contact the appropriate companies for more complete information regarding trademarks and registration. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) , outside the United States at (317) or fax (317) Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at Library of Congress Cataloging-in-Publication Data: Nassar, David S. Ordinary people, extraordinary profits : how to make a living as an independent stock, options, and futures trader / David Nassar. p. cm. (Wiley finance series) Includes bibliographical references and index. ISBN-13: (cloth/dvd) ISBN-10: (cloth/dvd) ISBN-13: (cloth) ISBN-10: (cloth) 1. Investment analysis. 2. Portfolio management. 3. Risk management. 4. Investments. I. Title. II. Series. HG4529.N dc Printed in the United States of America

9 Contents Preface Acknowledgments xi xiii INTRODUCTION 1 Trade the Professional Way 2 Ride the Statistical Edge... Like Betting Seven in Craps 3 Master the Inner Game 4 CHAPTER 1 Foundational Analysis 5 Charts 7 Two Types of Analysis 12 What Exactly Is Technical Analysis? 14 The Four-Stage Theory 19 Stage 1: Accumulation 22 Stage 2: Markup 25 Stage 3: Distribution 29 Stage 4: Decline 29 Support and Resistance 34 Definitions of Support and Resistance 34 Once Broken, Support Tends to Act as Resistance 36 Once Broken, Resistance Tends to Act as Support 37 The More Often Support or Resistance Is Tested, the More Likely That Level Is to Fail to Hold Back Price Movement 38 The Longer the Trend Has Been Neutral (Consolidating), the More Significant the Eventual Breakout Becomes 41 Trends 43 Trading Volume 51 Moving Averages 58 CHAPTER 2 Risk Management 69 Discipline The Key to Trading Success 70 Discipline Perspectives 70 v

10 vi CONTENTS Avoid Trading with Scared Money 71 Terra Nova Trade Evaluator 71 Your Goal: To Trade without Emotion 71 Plan Your Trade and Trade Your Plan with Risk-Reward Ratios 73 Setting Stops Overview 75 Overall Protective Stop Guidelines 75 Protective Stops and Trading Time Frames 76 Percentage of Price Stops 79 Time Stops 80 Avoid This Mistake 80 RealTick Can Help 80 Risk Management and Trading with the News 81 Risk Management and Share Size 83 Summary 84 CHAPTER 3 Basic Chart Formations 85 Time Frames 88 Weekly Charts 89 Daily Charts 90 Intraday Charts 90 Sixty-Minute Charts 91 Ten-Minute Charts 91 Interpreting Chart Patterns 92 Reversal Patterns 92 Head and Shoulders Chart Formation 92 Long Base and Saucer Formations 94 Saucer Bottoms and Tops 96 Cup and Handle Formation 97 Bull and Bear Traps 97 Continuation Patterns 100 Rectangle (Box) 100 Flags and Pennants 102 Triangles 105 Summary 111 CHAPTER 4 Going Short 113 Finding Shorting Opportunities 115 Price/Earnings Ratio Imbalance 115 Gap Openings 116 The Loaded Spring 118 Day-Trading Tape Resistance 122 The Short Squeeze (Be Cautious) 123

11 Contents vii Margin Accounts 125 The Federal Reserve Board s Regulation T 125 Opening a Margin Account 126 Calculating Initial Requirements 127 Excess Equity 128 Calculating Maintenance Requirements 129 Minimum Maintenance Requirements 129 Change in Market Value 129 Short Sales and Margin Requirements 130 NASD/NYSE Minimum Deposit on Short Sales 131 Margin Maintenance Calls on Short Sales 131 Shorting-against-the-Box 132 Summary 132 CHAPTER 5 Other Trading Vehicles 133 What Is an E-Mini S&P 500 Contract? 134 E-Mini Symbols 135 Initial and Maintenance Margin Requirements 136 Treatment of Settlement 136 The E-Mini Contract versus the Pit-Traded Contract 137 Price and Percentage Limits 137 Single-Source Liquidity 138 E-Mini Standard & Poor s 500 as a Hedge 139 Tax Advantages with the E-Mini 140 The E-Mini Nasdaq Chicago Board of Trade Mini-Dow Futures Use $5 Multiplier 141 Who Regulates Futures Trading? 142 Program Trading and Fair Value 142 Predicting the Opening 144 How to Calculate Fair Value 144 What about Exchange-Traded Funds? 145 The QQQQs 146 E-Mini Is Hard to Beat 146 Put and Call Options 146 A Brief History 147 Puts and Calls and Standardized Options 148 Shares per Option 148 Pricing 149 Symbology 150 Settlement 151 In-the-Money or Out-of-the-Money 151

12 viii CONTENTS Rights versus Obligations 151 Opening and Closing Transactions 152 Open Interest 152 Opening Rotation 153 Option Positions 154 Long Stock 154 Short Stock 155 Long Call 155 Short Call 155 Long Put 155 Short Put 156 Conversions, Reversals, and Synthetics 156 The Greeks and Delta Value 161 Position Delta 161 Gamma 162 Position Gamma 164 Long/Positive Gamma 164 Short/Negative Gamma 164 Omega 164 Vega 164 Theta 165 Summary 165 CHAPTER 6 Trading Strategies 167 The Profiler s-systems Trading 170 Pricing Puts/Calls A Strategy You Can Use 177 CHAPTER 7 Indicators and Oscillator 185 Stochastics 186 Stochastics Interpretation 186 Relative Strength Index 190 ARMS Index 192 Using the TRIN 195 Fibonacci Retracements 196 CHAPTER 8 Traditional Pivot Analysis 201 The Pivot Formula 202 The Pivot in Action 203 Calculating Pivots 204 Choosing the Right Data for Calculations 205

13 Contents ix The Area between R1 and S1 205 Illustrating Pivot Lines on RealTick 207 Archiving Pivot Levels 208 Pivotal Psychology 209 Paper Trading 209 Strategy and Money Management 210 Lining Up Levels on Multiple Time Frames 211 Trading a Confluence Zone 213 Swing Trading with Confluence Areas 215 Summary 218 CHAPTER 9 Planning and Staying on Track 219 What Is Your Time Commitment? 219 How Will You Fund Your Trading Account? 220 What Style of Trading Will You Pursue? 220 What Are Your Profit Objectives? 222 How Will You Manage Your Profits? 222 Do You Evaluate All Your Trades? 222 Are You Keeping a Journal? 222 Summary 225 CHAPTER 10 Your Path to Success 227 Where to Next? 229 Summary 231 Appendix: MarketWise Tools Routes to Success 233 MarketWise Web Site Resources 235 Tuning to the Market Intraday 236 Glossary 239 Bibliography and Exchange Contact Information 255 Exchange Contact Information 257 About the DVD 259 Index 261

15 Preface A WORD ABOUT RISK... Investing and trading in anything, be it real estate, raw land, oil, gas, securities, futures, options has associated risks. You must understand, face, and embrace them before you act. What are the risk factors for stocks, options, and futures? First, they are all speculative in nature, but what isn t? Will you live 5 more years? 10? 20? 50? Who knows? Yet you endure day in and day out with this uncertainty. We all understand that at some point our life, as we know it, ceases. What happens next has been debated without a consensus since humans learned to talk. Investing and trading are no different. You can do all the fundamental research in the world about a particular investment, only to watch it melt like a block of ice in the parking lot on a hot summer s day. Or, you can be the top technical trader and execute the perfect trade only to be whipsawed by an erratic market. Life does not offer a money-back guarantee why should you expect any more from the stock, futures, or options markets? Nevertheless, educating yourself about the markets you plan to trade gives you an edge. Although it is not huge, I hope that edge will make you a net winner instead of a net loser. But I cannot guarantee it because there are too many uncontrollable factors in the win-lose equation. In any trade or investment, think about the elements you have absolute control over the specific entity you decide to trade, the side (long or short) you decide to enter on, the size of your position, and the length of time you hold the position. But the most important factors you face are totally unpredictable! Is your market headed higher or lower? How fast is it moving? What new information will influence the market for or against your position without warning? Will you have time and the will to exit, if you enter your position on the wrong side? I cannot train you to know which direction the market you are trading is going to go. What I do in Ordinary People, Extraordinary Profits is teach foundational analysis that will if you employ it properly tell you xi

Simple Profits from Swing Trading, Revised and Updated

Simple Profits from Swing Trading, Revised and Updated Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia,