Market Mastery Protégé Program Method 1 Part 1

Transcription

1 Method 1 Part 1 Slide 2: Welcome back to the Market Mastery Protégé Program. This is Method 1. Slide 3: Method 1: understand how to trade Method 1 including identifying set up conditions, when to enter a trade and when not to enter a trade, understand how to set initial stop orders and how to exit a trade profitably. Also we ll discuss how to set up your charting software with the Method 1 search criteria. Slide 4: I believe that Method 1 is a great swing trading method where the aim is to buy on weakness and to support in an uptrend, and then to sell short into strength in a downtrend. I believe this approach should only be done using the superior tactics that we're going to discuss in Method 1. Now with this method you'll be buying from other traders who are driving the price down on a particular day who are generally unaware that this is a great time to be buying and not selling. Oftentimes the same day you buy or the very next day the market will reverse and move up, putting you into a profitable position rather quickly. The reverse is true on a downtrend where you'll be selling short to other traders who are driving the price up on that particular day, and who are generally unaware that this is a great time to be selling and not buying. That s exactly what we want to do. Slide 5: Okay, before I get into the details of Method 1, I want to just quickly review the trading method basics. Remember that each of the Market Mastery Methods includes four components, and each of those will be color coded as you see on the right: the specific set up 1

2 Method 1 Part 1 conditions in yellow, the specific entry rules in blue, the specific initial stop rules in red, and the specific exit strategy rules in green. For each of these four components not only will I review with you the specific conditions and rules for each component, but also I'm going to show you several chart examples as to how those rules are applied so that you really get a good feel and understanding of the rules. You'll be looking at chart examples that will be very representative of the type of charts that you'll be looking at when you're actually trading. Slide 6: We're going to get into the meat of Method 1 now. This is where it gets exciting. First the uptrend setup conditions. Now when all of these conditions are met, then a valid setup occurs, and I refer to that particular day as the setup date, so keep that in mind. When all of these conditions occur or are met, that is the setup day. That s the day typically prior to when you would enter the market. Okay? So condition A is the 50 day moving average is going up, and the 20 day moving average is greater than the 50 day moving average. The setup day close is greater than the 50 day moving average, and it's less than the 20 day moving average. The maximum high of the past 11 days must be equal to the maximum high of the past 30 days. That means we're making new highs for the up move, and you'll see that on the chart. At the same time stochastics %K value is less than or equal to 40%. That s our definition of a significant low; if the %K is less than or 2

3 Method 1 Part 1 equal to 40%, I'm calling that a significant low, and the ADX must be greater than 20. Slide 7: We want to stand aside if any of the following occur. In other words if all of those setup conditions were met, but any of these situations occurred, we would not consider to be in a valid setup situation or the setup day would be invalidated. Bearish divergence occurs, so if we're in an uptrend and we meet all the other setup conditions but bearish divergence setup occurs, we don t want to take a long position, because that s telling us the probability is no longer with us. The next thing, if a gap up move occurs prior to the maximum high of the last 11 days that leaves a gap greater than eight percent of the current day s close, we want to stand aside. In other words, if the market jumps up more than eight percent, leaves a gap greater than eight percent, and then corrects back down into the area where we would normally look to buy, we don t want to buy there because that s a sign. When that market gaps up like that, that s a sign that the market may be in an exhaustions phase and ready to at least temporarily stop going up. Again, the probability is not with us. Slide 8: Let's take a look at how these setup conditions apply to an actual stock chart. To do this I'm going to be using a chart of MON, and we're looking at a setup day that occurred on January 9 of 07. We recall the setup day is the day on which all conditions are met, and it's typically the day prior to order entry. 3

4 Method 1 Part 1 Let's see if January 9th indeed met all the setup conditions. Let's look at setup condition A: the 50 day or red moving average has to be going up, which it is. It has to be going up as of the setup day, and it is. The 20 day moving average, the blue line, has to be greater than the 50 day moving average, which it clearly is so setup condition A has been satisfied. In addition then condition B, the setup day close, is greater than the 50 day moving average, it says close right here, is greater than the 50 day moving average and less than the 20 day moving average, which it is. In other words, it falls between the two. Then condition C, the maximum high of the past 11 days, let's just count back 1, 2, 3, 4, and 5. That s day 6, 7, 8, 9, 10, and 11. So that s the high of the last 11 days. It has to be equal to the maximum high of the last 30 days, and if you look back 30 days, indeed that is also the high of the last 30 days. In other words, we want the market to be making new highs prior to the correction down into support where we ll look to buy. So condition C has been met. With all of these setup conditions having been met, this indeed qualifies as a setup day. As you'll see later when we apply the search criteria of all the thousands of stocks out there every day that can be traded, this particular stock would have been selected by the search criteria for consideration of a long trade the following day: this day right here. And at the same time the stochastics %K is less than or equal to 40%. This is condition D and if I put the cursor right on the blue line, the %K line, you can see on the right hand side there it's 22.43%, indeed satisfying condition D. 4

5 Method 1 Part 1 Then also, condition E is that the ADX has to be greater than 20, which it is. Here's the ADX line above the 20 line right here. Then lastly, condition F is really not a condition other than if any of the stand aside conditions occur then that nullifies the setup day, and in this case none of those did. Let's just check it. There was no bearish divergence setting up here. The market did not gap up eight percent prior to this high. There was a gap here, a little gap here, and by the way, the gap is where the low is greater then the high of the previous day. That s a gap. That s what I'm talking about, so that s a very small gap, and not a problem. Slide 9: Moving on to the uptrend entry rules, once a setup day occurs, we can consider placing an order for the following day to buy as follows: you buy at the 20 day moving average less the 20 day moving average minus the 50 day moving average, times one third or divided by 3 limit. Now that looks kind of complicated, but it isn t, and I'll show you on the chart why that s so. With this order we're buying on weakness as the market falls below the 20 day moving average into support. Let's take a look at a chart. Slide 10: Moving back to the chart of MON, the same chart as we used to review the setup conditions, this was the setup day that had met all the setup conditions January 9 th, and we would have then placed an order, an entry order to buy at $49.61 limit for the next day, the day of January 10th. 5

6 Method 1 Part 1 Here's the setup day; we review our analysis. We see that indeed this is a setup day. We can place an order for the following day to buy at $49.61 limit. How is that calculated? Well we need two inputs. First the setup day 20 day moving average which is $50.46 right there, $50.46 and the 50 day moving average on the setup day which was $ Then you plug that into the formula that I gave you a little earlier to get the buy price, and that s simply the 20 day moving average, $50.46 minus the difference between the 20 day and the 50 day moving averages, divided by 3 or multiplied by 1/3, and you subtract that from the 20 day moving average to get $ What that really boils down to is once we get a setup day, we want to buy long one third of the way between the 20 and 50 day moving averages, or right in there. We're always trying to buy one third of this difference or one third into this range between these two averages right there. Slide 11: Moving on to the uptrend initial stop, the initial stop for Method 1 is only known in approximate terms until and if the market closes below the 50 day moving average, or 4 days after entry day, whichever occurs first. These are some of the tactics, the uncommon tactics that I'm talking about that gives us an edge in the market. At first blush it may look a little confusing, but I assure you it is not. Slide 12: I'll show you how the uptrend initial stop works in those two situations. I'm going to call them 1A and 1B. 1A is where we wait 6

7 Method 1 Part 1 until the market closes below the 50 day moving average. That particular day we will call closing day. Then once we have a closing day, you do the following: for stocks that are greater than or equal to $50 a share we want to sell at the closing day low minus ½ percent of the closing day low on a stop. For stocks less than $50 a share, we want to sell at the closing day low minus 25 cents on a stop. Slide 13: So let's go back to the MON chart. You recall that we went long according to the rules on January 10th at $49.61, and if a closing day, (remember a closing day as I defined it is a day that closes below the 50 day moving average which is in red here,) had occurred here after we entered long here, in other words if the market had come down and closed below that day, the initial stop would have been placed a half percent or 25 cents, whichever is lower, below the low of the closing day. If the closing day had occurred here, we would then place the stop 25 cents or a half percent below that low. Let me show you another example. Slide 14: Here's a chart of WFMI. Following the setup condition rules the day of July 20, 05 would have been a setup day, and that would have called for an order to go long July 21 the following day to buy at $59.75 limit. The market opened about right in that range and then traded on down, would have gone long that day, and that same day the market closed below the 50 day moving average. In this particular example both the entry and the closing day occurred on the same day. Of course that s not always the case. At 7

8 Method 1 Part 1 any rate, this trade is long on this day. This is a closing day because it closed below. You can just see it there. It closed below the 50 day moving average, and as such then a stop the following day would have been placed below the low of the closing day right here. That initial stop would have been placed a half percent below the closing day low at $58.39 right in there. Now you can see why it's important to have a buffer when using these stops. Had we placed it right at the low, on July 22 nd, that position would have been stopped out because the low of July 22 nd is lower than the previous day s low, but not as low as our stop. It did not come down that far, so the trade remained long. It's a good thing because it had a big jump up here. Okay, so that s what I mean about a closing day and placing the stop below the closing day. Slide 15: Here's another example, this time a stock that s less than $50 a share, CAL. The entry day to go long was at $19.68 on January 13 th. The very next trading day, January 17 th, the market did close below the 50 day moving average. That qualifies as a closing day. The stop would have been placed below the low of the closing day, 25 cents below the closing day low at $ Again you can see here the low the following day came close to that stop but did not touch it, so the trade remained long. What I'm doing here for stocks that are below $50, I want to add more than a one half percent buffer like we use on stocks above $50. So I want to use at least 25 cents. Okay, that s what I'm doing here. Otherwise if I had taken a half percent of let's say $20, that would not have been enough of a buffer to keep from being 8

9 Method 1 Part 1 stopped out here. So anything below $50 you want to use a 25 cent buffer when setting these stops. Slide 16: Here is the uptrend initial stop 1B. This is the case where we wait until four days after entry day and then do the following: for stocks over $50, sell at the lowest low, LL4, the lowest low of the last 4 days minus one half percent of that low on a stop. For stocks less than $50, we want to sell at the lowest low of the last 4 days, the LL4 minus 25 cents on a stop. Let me show you an example. Slide 17: This is a chart of IBM. IBM was in an uptrend. Here the 50 day moving average was moving on up, and the setup day occurred on November 28 th to buy the next day at $91.15 limit. Indeed the next day the market traded in that range, just below it, and the order would have been filled and that position would have been long at $ Then the market moved up, move down here a little bit, and this is the first day after the entry day. This is the second day, third day, and fourth day. Now recall that we're not going to set a stop on this trade until one of two things happens: until the market trades down and closes below the 50 day moving average, or if that doesn t happen, we ll set the stop after the fourth day after entry. Okay? In this case the market did not trade down to the 50 day moving average as it had in the previous examples, so we watch carefully each day counting the days, one, two, three, and four. Now that the fourth day is over with, and we're still long on the trade, haven t been stopped out on the 50 day closing day stop. 9

10 Method 1 Part 1 Then we place the initial stop at $91.09 after the fourth day after entry day, and $91.09 is the lowest low of the last four days counting 1, 2, 3, and 4. It's the lowest low of those four days minus one half percent of that low, which puts it right at $91.09 stop. That becomes the initial stop for the long entry that occurred on 11/29. Now just a caveat here: if you're really sharp and picking this up quickly, you might have thought that this was a setup day because it closed below the 20 day moving average, above the 50 day moving average and the other setup conditions were met except the stochastics at this point had not made a significant low. It was above 40, and it did not fall below 40 until this particular day. This was the setup day that then triggered the long position of the following day. Slide 18: Here's an example of a stock under $50. This is a chart of GT, and this particular chart we had setup day on November 30 to buy the next day at $16.61 limit which would have been filled on 12/1, and we would look to place our stop after the fourth day after entry. So here's the entry day counting one, two, three, four. After the close of the fourth day after entry day, we would put the initial stop at the lowest low of the last four days counting back one, two, three, four, and it would be right below the low of that day right there. Because it's below $50. it would be 25 cents below that low or at $16.36 stop. Okay? When we're placing the Method 1 trades and getting filled, we're going to either wait for the market to form a closing day below the 50 day moving average, or if that doesn t happen we're going to 10

11 Method 1 Part 1 count the 4 days, and then after the fourth day place the stop below the lowest low of the past 4 days back from that fourth day. Okay either way. This gives the market some room to maneuver. We're never going to buy the exact low except by chance, and when we do buy in this range, we're buying into support. We want to give the market some room. If it wants to come down to the 50 day moving average that s okay as long as it doesn t move on below a closing day. We want to give it a few days to test support before moving up, and sometimes it bounces right off support and heads higher but sometimes it takes a few days like it's doing here. Okay, I hope you get the feel of how this is working. Slide 19: To summarize the uptrend initial stop, if the stop is hit, we ll be stopped out with a small loss. Now this is very important for a number of reasons. First, when this happens, the premise of the trade is over with because we are fully expecting support to hold at the upward sloping 50 day moving average or at the lowest low of the last 4 days after entry. These are very strong support levels, and if either gives way, we don t want to be in this trade any longer. If the premise of the trade is over, then we're out. The tendency of beginners, amateurs, even some long time traders is they get so whetted to the market going up, and they want to give it a little bit more room. They start moving their stops lower to give it more room. That s a recipe for disaster. Don t do that. Stick with your stops. That s what this discipline thing is all about. 11

12 Method 1 Part 1 Second, we know going into the trade the approximate planned risk, and third, knowing this we will have the confidence and the discipline to place the trade. Slide 20: I want to turn to the uptrend exit strategy. This is the strategy we use to exit the trade profitably. We've had our setup condition occur. We went long the following day. We put the initial stop in place and at this point have not been stopped out, so it's time to look at the strategy we want to use to exit the trade profitably. That exit strategy is to scale out of the trade in two steps if possible. Step 1 is to enter a good til cancelled order to sell one half of the position at a ten percent profit target as follows. Sell one half of the position at the entry price times 1.10 limit. That will get you a ten percent above the entry price for a ten percent profit. Slide 21: Step 2 is to use a trailing stop that is updated each day as follows. For stocks over $50 we want to sell the entire position or half of the position if the profit target had been hit on the first half, at the LL4 minus one half percent of the low on a stop. The LL4 is the lowest low of the last four days minus one half percent of that low on a stop. For stocks under $50, the same strategy but a different buffer. Sell the entire position or again, half the position if the profit target has been hit, at the LL4 minus 25 cents stop. Slide 22: If a gap up occurs that makes new 20 day highs and for stocks over $50 the gap is greater than one half percent of the gap day high, that s the high of the day before the market jumped up forming the gap. Remember, a gap in an uptrend is where the low is higher than 12

13 Method 1 Part 1 the high of the previous day, or for stocks under $50 the gap is greater than 25 cents. When that occurs, the strategy changes from an LL4 stop to an LL2 stop so that for stocks greater than $50, you sell the entire position, or again one half the position if the profit target had already been hit, at the LL2 minus one half percent of that low on a stop that s the lowest low of the last 2 days minus a half percent on a stop. Then for stocks under $50, you sell the entire position again or half the position if the profit target had already been hit at the LL2 minus 25 cents on a stop. The only difference is again the buffer size. So what we're doing here, when the market gaps up, that s telling me that it may possibly be exhausting itself and may have a labored situation trying to go higher. It may drop back rapidly. At any rate I want to tighten up the stop, so I want to use the lowest low of the last two days instead of the lowest low of the last four days. Let's look at some examples. Slide 23: Here's a simple example of the exit strategy for an uptrend. This is a chart of LEH. Entry day would have been on October 19, 04. There was no closing day below the 50 day moving average, so it would have counted 4 days, 1, 2, 3, 4 and placed the initial stop at the LL4, the lowest low of the last 4 days 4 days after entry at $ Then following the exit strategy, you would move the stop up at successively higher LL4 trailing stops the lowest low of the last four day trailing stops. You can see how that would have occurred if we just follow along here, entry day, then one, two, three, four days, 13

14 Method 1 Part 1 place the initial stop here. Day five, the lowest low of the last four days would have been one, two, three, four, that low right there. On day six it would still be that low. On day seven it would still be that low, one, two, three, four. On day eight, one, two, three, four, now we move the stop up below the lowest low of these last four days right here. These four days it would have been here. These four days it would have been here. These four days here and here, and you can see how it moves progressively. You never move the stop down. You always move it up following the market up; up until this point here it would have been stopped out on the 19 th of November at $ The entire position would have been stopped out because the profit target at ten percent was not hit. That would have been above the highs here. So here's a simple example where you just simply trail the stop up below the lowest low of the last four days using your half percent of the low if the stock is over $50, and 25 cents if it s under $50. Slide 24: Here s another example. This time it's a chart of TRID. The entry day and the uptrend here would have been December 16, 05. The initial stop would have been at the lowest low of the last four days, which would have been this day right here at $17.10, and then successively higher LL4 trailing stops would have been put in place initially right here. 14

15 Method 1 Part 1 If you look at these four days, that s the lowest low; these four days, that s the lowest low. That s about the same there, and you ve got to all the way up to here one, two, three, four before you can move that stop up below this low. On this day right here, as you're trailing the stops at progressively higher LL4s, the ten percent profit target was hit for half the position right here at $ Then you continue to trail a market for the second half of the position with the LL4 stops until it's stopped out, the remaining one half position is stopped out at $ Once you enter the trade, you load in the initial stop. As you start to move the stop up, you also load in a profit target limit order so that you ve got the limit order laying there in the event the market moves up to that ten percent level for half the position. Then you move the trailing stop up for the entire position until that ten percent profit target is hit. Once you're out of half the trade, then you change, of course, the quantity on your LL4 trailing stop for only half your position. So you're protecting the whole position up until you hit that ten percent target, and then from there on you're protecting half of the position. Slide 25: Okay, in this example you're going to see all aspects of the uptrend exit strategy. This is a chart of GT, and the entry day would have been on December first. It s billed at $16.61 with the initial stop being set at the LL4 at $16.36 after 4 days after entry. 15

16 Method 1 Part 1 Then the first LL4 trailing stop would have been at $16.80, 1, 2, 3, 4, right there. Then these successively higher LL4s would have come into play here and along the way the ten percent profit target was hit right there for one half the position at $ Nice profit, ten percent, and from that point forward the LL4 trailing stop would be adjusted to reflect that it's now protecting half of the position. You have to reduce the number of shares in your order by 50%. Right in here we have a gap higher where the low of this day was higher than the high of the previous day by more than 25 cents. That caused us then to change the trailing stop to an LL2 stop minus 25 cents, and there it is right there. Then from that point forward we trail successively higher LL2 stops. Here we had another gap up. The LL2 was here, then here, then here, and it was stopped out right there on this particular day for the remaining one half of the position. You can see here on this particular stock it was just as well that we were out of the trade there because it kind of just meandered sideways, and it was best to go on to the next opportunity and not hang around in this stock. Slide 26: Here's another example of a stock that will show all aspects of the exit strategy. This time it's over $50 stock. It's AAPL, Apple. Entry day would have been October 10, 06. The initial stop at the LL4 at $72.23 and that would have been after 4 days after, 1, 2, 3, 4, after the entry bar. It would have been placed there, and then one, two, three, four right here would be the trailing stop moving up one, two, three, four below that low. Actually one, 16

17 Method 1 Part 1 two, three, four, there would have been one here as well right in there. This one moves up just a bit, and then a nice thing happened, a big gap up. As soon as that occurs we change the trailing stop to the LL2, the lowest low of the last two days minus one half percent of that LL2 on the stop. We re trailing now with the LL2. The ten percent profit target is hit right here and again, as soon as you enter the trade load, that profit target order in, that limit order because you never know when the market s going to jump up and hit that. So you load that in, and here it s in resting order, and that particular day it does hit so that one half the position is closed out for ten percent profit. Continue to trail the balance of the position using the LL2, and indeed it was stopped out right here. Okay? I hope you're starting to get a feel for how these work and the power of the exit strategy. You see, no matter what the market does, we're ready for it. I mean if it was to jump up quick and give us ten percent, we ll take it. Sometimes when that happens it ll drop right back down, and it's a good thing you took the ten percent, and other times it ll keep on trending up for awhile and sometimes for a long while. You just never know what it will do, but you always know what to do. Slide 27: To summarize the exit strategy for uptrend, what we're doing is combining a trailing stop with a profit target. If we're not stopped out of the trade with the LL4 or LL2 trailing stop before the market hits the profit target, then we take profits for half the position and continue to trail the LL4 or LL2 stop for the remaining one half of the position. 17

18 Method 1 Part 1 Slide 29: If on the other hand we're stopped out of the trade with the LL4 or LL2 trailing stop before the market hits the profit target, then we're out of the trade altogether with a smaller profit or possibly a small loss, and then the trade is over. Now, because the trade is over and we're out, we need to cancel the profit target limit order that s still resting. Slide 30: By now I hope you can see that this is a very powerful exit strategy and an excellent way to manage a trade because we're selling into strength at a very nice ten percent profit for one half the position and letting the market run in our favor as far as it wants to go by using the LL4 and LL2 stops for the remaining one half of the position. At the same time we're protecting the entire position with the LL4 and LL2 trailing stops. 18

19 Method 1 Part 2 Slide 3: Now we ll move into the downtrend scenarios. First the downtrend setup conditions: of course these are going to be the same as the uptrend but in reverse, and I want to go through them with you in detail just to be sure that you're okay with the method in the downtrend. Of course the more examples you look at, the better feel you're going to get for this, and the quicker you're going to learn. So here we go. Condition A, the 50 day moving average now is going down instead of uptrend, and the 20 day moving average is less than the 50 day moving average. Condition B, the setup day close is less than the 50 day moving average and greater than the 20 day moving average. The minimum low of the past 11 days equals the minimum low of the past 30 days. We want to trade stocks that are making new lows in a downtrend. At the same time, the stochastics %K value has got to be greater than or equal to 60%. Again, I consider that to be a significant high being confirmed by the %K anywhere above at or above 60. Then the ADX has to be greater than 20. Slide 4: Then the stand aside conditions. If any of the following occur, we stand aside. Of course in a downtrend, if bullish divergence occurs, we don t want to be selling any longer. The odds are no longer in our favor, so we would stand aside of any setup conditions when bullish divergence occurs, or if the gap down move occurs prior to the minimum low of the past 11 days that leaves a gap greater than 8% of the current day close, and I'll illustrate that on one of the charts that we ll look at next. Slide 5: Here's an example of the downtrend setup conditions. This is a stock called WCI, symbol WCI. The setup day was June 29, 06, and 19

20 Method 1 Part 2 the reason that was the setup day is because it met all of the downtrend setup conditions. Let's take a look at those. The first was Condition A, the 50 day red moving average is going down, and the 20 day blue moving average is less than the 50 day average, which it clearly is. That condition was met. Condition B, the setup day close is less than the 50 day moving average and greater than the 20 day moving average, or in other words it falls between the two. Okay, that s condition B. Then condition C, the minimum low of the past 11 days from setup day, 1, 2, 3, 4, 5, 6, 7, 8, that was the lowest low of the last 11 days. That s got to be equal to the minimum low of the past 30 days, and you can see looking left here if you were to count 30 days out that would also be the lowest low of the past 30 days. Condition C has been met. Condition D, at the same time as the stochastics %K is greater than or equal to 60%, and indeed it is and condition E, the ADX is above 20. Here s the ADX line and F, none of the stand aside conditions occurred. There s no bearish divergence here. There was no gap down prior to this low, no big eight percent gap down here, so all lights are green. The setup conditions have been met. Slide 6: Okay, so now let's check out the downtrend entry rules. Once a setup day occurs, we can consider placing an order for the following day to sell short as follows: sell short at the 20 day moving average plus the difference between the 50 day and 20 day moving average, times one third on a limit order. With this order we're selling short 20

21 Method 1 Part 2 on strength as the market rises above the 20 day moving average into resistance. Let's look at an example. Slide 7: Back to our chart of WCI, the setup day was June 29, 06. That would have told us to enter a short trade the following day, actually the following trading day, June 30 to sell short at $20.04 limit. You can see the arithmetic here that s based on the 20 day moving average which was at $19.11 on setup day right here, and the 50 day moving average which was $21.88 on setup day. You plug that into the little formula here. You get the 50 day minus the 20 day, times one third. Add it to the 20 day which gives you $ That s where the short order would have been filled right at that point. Slide 8: Moving to the initial stop for downtrend, this is just the reverse of uptrend again. The initial stop for Method 1 is only known in approximate terms until and if the market closes above the 50 day moving average, or four days after entry day, whichever occurs first. Let s check out an example. Slide 9: As was the case for uptrend, for downtrend we have the same initial stop example in reverse. Here is WCI. The entry day was June 30. If a closing day had occurred here after entry Let s say a closing day had occurred there where the close was above the 50 day moving average. The initial stop would have been ½ percent or 25 cents, whichever is higher above the high of the closing day. What that really means is if the stock is over $50, you re going to use the ½ percent under 50, 25 cents, so the stop would have been 21

22 Method 1 Part 2 right there. Again, we wait to see if we get a closing day above the 50 day moving average. We wait for four days. If we don t get one four days after the entry day, then we start loading in the ATH 4s, in this case, the highest high of the last four days, because we are in downtrend. I ll show you a couple of examples of that. Slide 10: So we want to wait until the market closes above the 50 day moving average. We will call this the closing day, and then you do the following: for stocks greater than $50, buy to cover with the closing day high plus ½ percent of the closing day high on a stock. Then for stocks less than $50, buy to cover at the closing day high plus 25 cents on a stop. Let s check out a few examples. Slide 11: Here s a chart where a closing date actually did occur. This is a chart of DO. The sell short entry day would have been June 29, The day after, the market traded up against the position, and then we had a closing day here on July 3 where the close was above the 50 day moving average. At that point then, once that closing day occurs, we place the initial stop right above it, in this case a ½ percent above the closing day high or at 8619 stop. Now this is a stock over $50, and that s why we are using the ½ percent. Here s one that actually occurred, and you can see sensitivity of these things in using the right buffer. Had we not used the right buffer, this would have been stopped out just prior to the market 22

23 Method 1 Part 2 dropping. The other thing is when you are selling short into resistance between the 20 and 50 day moving average, you don t know exactly where it is going to stop. If you try to be precise, you are just going to get stopped out. You have to give the market a little room here, but only enough room so that the premise of the trade is still in place. As I said before, if the market were to trade above this high the premise of the trade would be over with, and we would want to be out. Well fortunately here it did not, and down it went. Slide 12: Here s another example of where closing day did indeed occur. This is a stop chart of DVF and following the sell short entry rules, this trade would have gone short on July 26, right here. Indeed, that same day that the trade went short, the market closed higher above 50 day moving average, so that same day qualified as a closing day. Then as such you would place a stop above that high effective for the following day, July 27 th. Because this stock is less than $50, you use an initial stop that is 25 cents above the closing day high or $23.88 stop. You can see then the next day on the 27 th, the day that the stop was first effective, the market traded up right at the highs of the previous day, no higher, then closed lower, and then from there just dropped dramatically. Slide 13: Now if after getting short the market does not close above the 50 day moving average, then you wait until four days after entry day. You do the following for stocks greater than or equal to $50: buy to cover at the highest high of the last four day plus ½ percent of that high on a stop. I call that the HH4. 23

24 Method 1 Part 2 For stocks less than $50, you buy to cover at the HH4 or the highest high of the last four days, plus 25 cents on a stop. Let s look at some examples. Slide 14: Here s a chart of AAPL. This particular short position would have been triggered short on February 23, You can see there was no close above the 50 day moving average, so we did not have a closing day. The next day the market traded a little bit sideways here but then down. The rule here is if you don t get a closing day above that 50 day moving average, you count four days after entry day: one, two, three, and four. So that s the fourth day after the entry day, and for the trading of the next day you enter a stop above the high of the last four days. So here is the fourth day. We are going to enter a stop above the high of the last four days for the next day s trading. So let s count: one, two, three, and four. The stop would be above that HH4 right there, the highest high of the last four days, plus ½ percent because this is a stock that is over $50. That would place it right at $ The trade entered short at $71.79 with a fairly tight stop at $ Again, the reason we place the stop there is after four days if the market goes above that, the premise of the trade is over with, and we want to be out. Well, in this example it did not go above there, and we have the stop in place, and we are ready then to apply the exit strategy that I will review in a moment. Slide 15: Here is another example of a stock where we are going to set the stop after the fourth day following entry day. This is CMVT, and 24

25 Method 1 Part 2 back here on April 6, we had the setup conditions satisfied for a short trade. A short trade indeed was entered into on April 7 th, and then we look quickly here. You notice there were no closing days above the 50 day moving average following the entry day, so we just count four days after: one, two, three, and four. April 13 th was the fourth day after the entry day, and that means after the market closes on that day, we would enter a stop above the HH4, or the highest high of the last four days that would become effective for trading on the fifth day. So if we count back one, two, three, four, this is the HH4, the highest high of the last four days. The stop would be loaded in right up above it and because this stock is less than $50, it would be 25 cents above that high, or at $24.99 stop. Now we are in position to manage the trade with our exit strategy that we will talk about next. Slide 16: Before moving onto the exit strategy I want to summarize the downtrend initial stop. This is the same as it was for the downtrend initial stop except, of course, we are using the HH4 and a downward sloping 50 day moving average as opposed to the LL4 and an upward sloping 50 day moving average. This is so important that it bears repeating, and that is if the stop is hit, we will be stopped out with a small loss. Now this is very important for a number of reasons. First, when this happens, the premise of the trade is over with because we are fully expecting, in this case, resistance to hold at the downward sloping 50 day moving average as well as at the HH4 four days after entry. 25

26 Method 1 Part 2 Now these are very strong resistance levels. If either gives way, we don t want to be in the trade any longer. Second, we know going into the trade the approximate planned risk, and third, knowing this we ll have the discipline and the confidence to place the trade. Slide 17: Downtrend exit strategy: we want to scale out of the trade in two steps if possible, the same as we did for the uptrend exit strategy. We want to enter a good until cancelled order to buy to cover half of the position at a 10% profit as follows. Buy to cover one half of the position at entry price times 0.90 on a limit order, and that will give you the right price for a 10% profit. We use a term buy to cover because we had entered into a short position, and when you are short, you need to buy that position back. It is called buy to cover for those of you who are not familiar with that term. Slide 18: Then Step 2. Use a trailing stop that is updated each day as follows: for stocks over $50, buy to cover the entire position or half of the position if the profit target had been hit at the HH4 plus ½ percent of that high on a stop. So that s at the highest high the last four days plus a ½ percent of that high on a stop. For stocks less than $50, buy to cover the entire position or again one half of the position if the profit target had already been hit at the HH4 plus 25 cents on a stop. Slide 19: Continuing with Step 2, if a gap down occurs that makes new 20 day lows and for stocks over $50, the gap is greater than a ½ percent of the gap day high, or for stocks under $50 the gap is greater than 25 cents, then we change the stop from an HH4 to an 26

27 Method 1 Part 2 HH2 as follows: for stocks over $50, buy to cover the entire position or half of the position if the profit target has been hit at the HH2, the highest high of the last two days plus a ½ percent of that high on a stop, and for stocks under $50, we are going to buy to cover at the HH2 plus 25 cents on the stop. Slide 20: To summarize the downtrend exit strategy: we are combining a trailing stop with a profit target. If we are not stopped out of the trade with the HH4 or the HH2 trailing stop before the market hits the profit target, then we take profits for half of the position and continue to trail the HH4 or HH2 stop for the remaining half of the position. Slide 21: If, on the other hand, we are stopped out of the trade with the HH4 or HH2 trailing stop before the market hits the profit target, then we are out of the trade altogether with a smaller profit or possibly even a small loss, and then the trade is over. Because the trade is over and we are out, we need to cancel the profit target limit order that had been resting there on a good til cancel basis. You don t want to forget to go back and cancel out that order. Slide 22: So summing it up, the downtrend exit strategy, I believe, is an excellent way to manage a trade. We are buying to cover into weakness at a very nice 10% profit for half the position. We are letting the market run in our favor as far as it wants to go using the HH4 or HH2 stop for that remaining one half of the position, and we are protecting the entire position at all times with the HH4 or HH2 trailing stop. Before I move on, a cautionary note is in order here. The trade examples that I just reviewed with you are all profitable trades. 27

28 Method 1 Part 2 Now, I use these examples in order to illustrate how to manage a trade with trailing stops under varying conditions once the trade was entered into, and the initial stop was set. While these examples are indeed typical trades, you shouldn t conclude that all trades will be profitable. They will not. That s why we use initial stops to limit planned risk in the trade. Slide 23: In summary, these are the only trading rules for Method 1. They are very objective, and with some practice, easy to follow and potentially very rewarding. For your convenience I have summarized these trading rules on the Method 1 Trading Rules Blueprint. I am going to do this for each of the four methods that I teach you so that when we are all done with the Market Mastery program, you will have these handy blueprints available when you get into your trading activities. Slide 24: Here is a Method 1 trade. Let s see if we can eyeball the setup conditions and the entry and exit rules and so on. Here was the setup day closing between the two moving averages, the 20 and the 50. It would have triggered long the following day right in there, right near the low that day. You can see that there was no closing day below the 50 day moving average, so four days after that entry, one, two, three, four, and the stop would have been placed below the LL4, and then trail that up as the market moved up. The entry point here would have been around $46, so a ten percent profit target would have been around $51, and that would have been hit indeed right in here. So the ten percent profit target would have 28

29 Method 1 Part 2 been hit pretty quickly and for half of the position. Still trailing the stop the LL4 for the other half which would have taken a stop here, right in here it would have probably been stopped out. If not here, then it would have over here. I hope you can see how that Method 1 trade developed. Then further on there was another setup right here, another close below the 20 day and above the 50 day moving average. The entry day would have been that day right there, March 15, right around in that area. Again we wait for the four days or a closing day. Let s go one, two, three, four, and we would have placed the stop below the LL4 right there. We did get a closing day thereafter, in which case we would have moved the stop probably a little bit higher below that low and then trailed up with the LL4. This trade would have been entered somewhere around $52, so 10% would have been $57.50 or so right in here. While we are trailing the LL4 stop up, we would have exited half the position here for 10% profit, continued to trail the LL4, which would have been here, then here, then here, and probably stopped out right here for the balance of the position. Slide 25: Here s a Method 1 trade on AOB, and here was the setup day on December 18, The following day would have triggered into a long position on the 19 th somewhere right around in here at $ Ten percent would be about $11.70 right in here. You can see that was quickly hit. The trade was entered here, and it would have been covered here on half the position for 10% with the 29

30 Method 1 Part 2 LL4 trailing stop, but let s back up here. The trade was entered into here, there was no closing day below the 50 day moving average, we wait for days one, two, three, four, and that would have placed the first initial stop right there below that low. We would have trailed the LL4 stop taking half the profits, half the position off the 10% profit right in here, and the other half would have been stopped out one, two, three, four, right there for the balance of the position for an even greater profit. Slide 26: Let s move on to the search criteria. Once you understand how to apply the Method 1 trading rules, you will want to know how to easily find the stocks that offer the best and highest probability trades from the thousands that are available to trade each day. There are two great features about the way I search for stock candidates. One is that search criteria is very straightforward, is easy to implement with most good charting software packages including TeleChart, Trade Navigator, and Advanced GET. There are others. The other great thing is that it s not necessary to maintain a lengthy watch list because when a stock meets the Method 1 setup conditions, it will appear on the search list for the next day s order entry. In a sense, it is self-refreshing. If the order didn t trigger the next day and the setup conditions were still in place, the stock would show up again on the search list. There is no need to maintain a cumbersome watch list. All you have 30

31 Method 1 Part 2 to do is run the search at the close of each day for the next day s potential trades. The search criteria includes all of the Method 1 setup conditions plus additional criteria that will limit our search to the most liquid stocks so that you will be getting good fills on most of your trades. Now, you will be running two searches each day you wish to trade: one for long trade candidates and one for short trade candidates. This procedure is basically automatic once you have programmed the search criteria into your charting software and should only take seconds each night to update the current day s data and run the search. The search criteria require that a stock be a high volume stock. That s important because you only want to apply Method 1 rules to stocks that are being watched and traded by thousands of traders who are indeed using the day moving averages in their trading. Of course Method 1 is using these averages in an uncommon way that provides a significant edge when trading the markets. Now lower volume stocks have less of a following and therefore are less reliable candidates. Also, for options traders, optionable stocks tend to be the higher volume stocks, so most of the stocks selected by the Method 1 search criteria will indeed be optionable. Slide 27: Following is the specific search criteria for selecting high potential trade candidates. This is criteria that are suited for U.S. traded stocks. For non-u.s. stocks the criteria may vary and will be 31

32 Method 1 Part 2 provided via the Help Desk to any students trading these markets when requested. Most of this criteria is common to all liquid markets traded anywhere in the world. The only difference would be in the price range to account for different currencies or the average volume. Otherwise, the criteria apply as written. When you first review these criteria, they are going to appear complicated, but I can assure you they are not. These are very easy to program into any good charting software, and in a couple of minutes I am going to show you a video tutorial in how to do that with TeleChart. But you can do it with any good charting software. If you ever have a problem with that, all you have to do is call the software tech support, and they would show you how to handle that pretty easily because most of the coding is similar for these different charting software programs. You will be able to interpret that from the list of criteria that I have here as well as from the video tutorial on TeleChart. Another thing I want to point out is that when I use the term today in this criteria, for example, moving average of today, I am referring to the market after it closes, today s market after it closes. So the 50 day moving average of today would be the 50 day moving average as of today s market close. Reviewing the search criteria first for long trade candidates, you will find that this criteria reflects the setup conditions for a long trade as well. All those setup conditions are reflected in these criteria. Then there are additional criteria to pick up some other 32

33 Method 1 Part 2 aspects that allow us to further narrow the list for the very best candidates. First we have the price range from $10 to $200, the average volume of the past 50 days is greater than or equal to 500,000 shares, a wide-range filter that I developed that further narrows the list of trade candidates so that we are only looking at those stocks that have had a propensity to move in the past. I don t want to trade quiet or narrow range stocks that really don t offer much opportunity. So this is simple. It just says take the maximum high the past 65 days, subtract the minimum low the past 65 days, and that difference has to be greater than $10 a share. Or, if you take that difference and divide it by the close of today, it has to be greater than 30. Then we have the simple 50 day moving average of today must be greater than the simple 50 day moving average of yesterday, and at the same time, the simple 20 day moving average of today has to be greater than the 50 day moving average of today. The lowest close of the past three days must be greater than the simple 50 day moving average of today. Slide 28: Also the close of today must be less than the simple 20 day moving average of today. Then the maximum high of the past 11 days should equal the maximum high of the past 30 days. The slow stochastics with an setting has the %K less than or equal to 40%, and the ADX with the setting greater than 20. I ll show you those settings when we get into the TeleChart tutorial. 33

34 Method 1 Part 2 Then we want to stand aside if bearish divergence occurs or if a gap up occurs prior to the maximum high the past 11 days that is greater than 8% of today s close. Again, that indicates the market may be in an exhaustion phase, so the probability of getting into a good long trade is diminished, and we want to stand aside. Slide 29: Let s move to the search criteria for short trade candidates. This is essentially the same as the criteria for long trade candidates except the indicators are the reverse of what you would expect for a long. Except for price, average volume, and wide range filter, those are all the same as for the long trade candidates. Going to criteria D, the simple 50 day moving average of today will not be less than the simple 50 day moving average of yesterday, and the 20 day moving average of today will be less than the simple 50 day moving average of today. The highest close of the past three days is less than the simple 50 day moving average of today. Slide 30: Next, the close of today is greater than the simple 20 day moving average of today, and then the minimum law of the past 11 days equals the minimum law of the past 30 days. Again we are looking for new lows here before establishing a short position. Then the slow stochastics set at with the %K greater than or equal to 60%. ADX set at greater than 20, and I ll show you how to set those parameters when we get to the TeleChart tutorial. Then we want to stand aside if divergence occurs, or if a gap down occurs prior to the minimum low of the past 11 days that is greater than 8% of today s close. Again here this could signify that the market is in an exhaustion phase and trying to go back up, so the 34

35 Method 1 Part 2 probability would be in our favor, and we would avoid taking a new short position. That s it for the search criteria for both the long and short trade candidates. Now I want to walk you through a tutorial applying this criteria in TeleChart to show you how easy it is to do, and then once you have it, TeleChart will just do that search for you night after night after night. So let s take a look at TeleChart. Slide 31: Here s the TeleChart charting software. This is the basic page configuration that you will be using. On the right you have the price chart overlaid with the moving average indicators, and then down below you have the stochastics and the ADX. On the left you have the list of stocks for whatever folder you have opened that you would like to look at. In this case it is the Market Mastery Protégé Program, MMPP, Method 1, downtrend criteria. This particular day when the search was run, these were the stocks that showed up meeting the criteria. Now in TeleChart the way this works is for each of the criteria that I discussed with you on the prior charts, you name those criteria as a new personal formula in TeleChart. You do that by clicking on New and then New Personal Criteria Formula, and then let s give it a name. Let s just do a test here: Test One. Click Okay. That brings up a window for creating your formula. Let s say I want to load in a formula, a moving average. I can say, Insert Moving Average. It will ask me How long is the Period? Let s say I want 20, so I put 20 based on the close or the last price as of today. If I 35

36 Method 1 Part 2 click okay, it will load in my formula for a 20 day moving average, average CAVGC20. If I wanted to say that I wanted that to be less than 50, I could type in AVGC50, and I could hit Save as Test One, Close, and it would save that criterion as Test One. If I do another one, and click on New Personal Criteria, call that Test Two, click Okay, and let s say that I want the stochastics right here for a period of eight in three for today. stochastics 8.3 has to be less than or equal to 40, and I could save that as Test Two, and so on. For each of the criterion that I reviewed with you on the prior charts for long and short, and in this case we are looking at shorts or downtrend, you create in TeleChart what is called a new personal criteria formula. When you have all those done, you package them up under what they call Easy Scan right here on the lightening bolt. It s a lightening bolt, because once you have all this done, you hit that lightening bolt and it scans in seconds every night for you and gives you the list of stocks that meet the criteria. So to create a new scan, I m going to click on New, then New Easy Scan, and up pops a window that wants me to load in the criteria for the new Easy Scan. Now it says Watch all items in system. I m going to click on that and change that to Watch all stocks. I only want to look at the stocks, so Watch all stocks, and then I want to add some criteria. I m going to click that Add Criteria, and I m going to go down and find our Test One, click Okay, and Test One that we just loaded in 36

37 Method 1 Part 2 on the Personal Criteria formula kicks in here. It says, 3,823 or the 7,000 stocks meet the Test One criteria. So let s go get Test Two. Click Okay, and now Test Two kicks in and further reduces the list down to 1,280 stocks and so on. As we add each criterion into the list, the sort gets smaller and smaller and smaller. Then if we want to save this Easy Scan, we can say Save As, let s call it so it will pop up at the top of our list. I m going to save that. Okay, now it s saved. Now if I want to go look at that Easy Scan, all I do is click on this bar right here where you see the Method 1 Downtrend that I already loaded in. I ll look over here, and there is the test Easy Scan that we just created, It has 1,280 stocks in it. If I want to look at it, I click on it; it pops up and lists all of the stocks that meet those two test criteria. If you want to look at one of them, there it is. It shows right up on your chart. Okay, that s how you do it. You just create the personal criteria formulas first, and then you load them into the Easy Scan. I m going to show you what the finished product looks like with the downtrend Method 1 criteria and downtrend Method 1 Easy Scan. Slide 32: I want to show you the finished product for the Method 1 Downtrend criteria and the Easy Scan. To look at the criteria list I click on the F of X button right here, and that brings up all of the previously loaded personal criteria formulas, and here they all are. You can see them loaded in here. I have them coded for M1, Method 1, right in here, and then there are some common to all methods 37

38 Method 1 Part 2 like the price, the volume and the wide range filter. So here s the price from $10 to $200. Let s click Edit. This is the little Edit button here, and you can see what the formula is for that: simply the close is greater than or equal to ten, and the close is less than or equal to 100. That s the definition of the formula for those price criteria. If I come back down and look at volume right here, volume is greater than 500k, click on the Edit button. The average volume the past 50 days is greater than 5,000. In TeleChart 500,000 are 5,000. They drop the two zeroes, so these are in hundreds. Keep that in mind. To get the wide range filter, scroll down here. There it is, wide range filter. Click Edit, and there it is. You might recall it s the maximum high of the past 65 days minus the minimum low of the past 65 days which has to be greater than $10 a share, or that difference divided by the close has to be greater than There s the formula; very simple. Then we switch over to the simple 50 day moving average must be down, so here it is. DT is my code for downtrend. By the way, these are the names I gave the criteria. You can use these same names or any name you are comfortable with, but it s a little coding scheme I cooked up so I know what the criteria are about. This is downtrend 50 MA down. If I want to look at that formula, I hit the Edit button and there it is: the average close in the last 50 days, which is the simple 50 day moving average, must be less than 38

39 Method 1 Part 2 the average close of the last 50 days plus one, meaning.1 or yesterday. That s that code for the day before, or one day ago. The average close of the last 50 days must also be less than the average close of five days ago, in other words, the 50 day moving average of five days ago. Now this is something I added in the criteria to get a better sort because sometimes the 50 day moving average will have dropped for the first time for just one day, and it might be in a choppy market, and it might go back up the next day, that sort of thing. To avoid that I also require the 50 day moving average of today to be lower than it was five days ago, and that s what the.5 is. Slide 33: Then looking at the next one we want the 20 day moving average to be less than the 50 day moving average, so let s see what that looks like. This might look familiar to you by now. It s the average C 20, that s the 20 day moving average based on the close, the closing price of each day, is less than the average C 50, or less than the 50 day moving average of today. Then the next one we want the maximum close of the last three days to be less than the 50 day simple moving average. Let s see what that looks like. That s simply Max C for close, Max C 3, the maximum close of the last three days, less than the Average C 50, or the 50 day moving average of today. 39

40 Method 1 Part 2 Then we want the close of today to be greater than the 20 day simple moving average. Let s see what that looks like. Close is greater than the Average C 20; that s the 20 day simple moving average, and in addition I want the high of today to be greater than the high of yesterday. The high of yesterday is signified by the 1After the H, meaning one day ago. This is just an added criterion that will filter out stocks that we don t really want to look at. It s a little technique I use. I add what I ll call them is additional criteria, tricks of the trade, to filter out stocks that we are not interested in. They help the scanning results indeed line up exactly with the search criteria that we reviewed on the last slides. As you get into this you will see why this is a helpful addition. We want the minimum low of the last 11 days to be equal to the minimum low of the past 30 days. Click on the Edit, and that is simply Min Lo 11 equals Min Lo 30. It s that simple. Then going back up here we want the slow stochastics to be greater than or equal to 60. Click on the Edit Stoc, stochastics, 8.3, those are our settings, greater than or equal to 60. Now in TeleChart the third three in is hard coded into TeleChart so you don t have to specify that. You only have to specify the first two, 8, and then three. That is all of the personal criteria that we can load into TeleChart for the Method 1 Downtrend. Now what is missing is the ADX criterion. The reason for that is in TeleChart it will not scan with ADX, and that is unfortunate. That s one of the shortcomings of TeleChart, one of the few. 40

41 Method 1 Part 2 Every charting software seems to have something that you wish could be different, and that is one of them on the TeleChart. So that one there forces us to, when we do our scans, to eyeball the charts that come up, looking at the ADX indicator right down here on the chart and immediately eliminating any stock that comes up where the ADX line is below 20. That is something with TeleChart you are going to have to eyeball. With some other charting software ADX is included. For example, Trade Navigator does include ADX in their scans if you so desire. Slide 34: With all the downtrend Method 1 criteria loaded into TeleChart as a Personal Criteria Formula we can now create the Easy Scan as I showed you when we ran the test we created, the test file. Now I ve already done that, so I can call it up here. There it is, Market Mastery Protégé Program Method 1 Downtrend. When I click on the Edit button, now see, I m in the scans now, not in the Personal Criteria Formula. I m looking at the scans, so here s the Method 1 Downtrend. I click on the Edit, and now that brings up each of the Personal Criteria formulas that we had pre-defined. Those are the ones we just looked at, and these are the ones that contain the Method 1 Downtrend criteria. So let s take a look. I want to watch all stocks; there are 7,000 of them. We want the price to be between $10 and $200. That drops the list down to 5,100. We want the volume to be greater than 500,000 a day. That drops the list quite a bit down to 1,400. Apply the wide range filter, and it drops all the way to

42 Method 1 Part 2 Require that 50 day moving average be down, and it drops to 238, and that the 20 moving average is less than the 50. That drops it to 220, and so on, that the max close the last three days is less than the 50 moving average. That drops it to 214, and then that the close is greater than the 20 day moving average. Look at that. It drops all the way to 12, and that the min lo equals the min lo of the last 30 days; the last 11 days equals the last 30 days. That drops the 12 to eight, and that the %K is greater than 60, greater or equal to 60. All eight of those met that test, so the number stays at eight. That s how that works. The computer scanning process will automatically go through this for you every night, and what you see is the end result here, the eight. If I click on that scan, let s say I just did my scan, and now I want to look at those eight stocks. I click on that scan, and there they are. Let s just take a look at these and see if they meet an eyeball test of Method 1 Downtrend. Here is a close above the 20 day, below the 50. We have a significant high on the %K, the ADX is above 20. So there is a stock that could be shorted the next day if it meets the entry rules. If it doesn t, you don t short it. Let s look at another one. Gymboree, the 50 day moving average is going down, the market closed above the 20, below the 50. We have a significant high on the stochastics, the ADX is above 20 but not by a lot, but that s okay. That would be a short candidate for the next day if the short entry rules were met, and so on. 42

43 Method 1 Part 2 That s how that works. I hope that gives you a really great feel for how easy it is to load these criteria in as Personal Criteria formulas and then package them up as an Easy Scan. Once you do that, you are done, and it will automatically run the scans for you each night. Slide 35: Let s now take a look at the Method 1 Uptrend criteria. To do that I ll look at the F of X button here, and this brings up all the preloaded Personal Criteria formulas. For uptrend, the price range, the average volume and the wide range filter criteria are all the same as they were for downtrend, so I won t go through those again, but make sure you load those into the scan. I ll show you that when we get to the scan. Then we want to pick up the uptrend 50 day moving average going up. Let s see what that looks like. That is the reverse of the downtrend, of course, where now the 50 day moving average for today is greater than yesterday s, and today s 50 day moving average is greater than the 50 day moving average of five days ago. Then we come back up here. The 20 day moving average is greater than the 50 day moving average. There it is, average C20 greater than average C50. We have the lowest close of the last three days, the min close of the last three days greater than the 50 day moving average. There it is; min C3 is greater than the average C50. Then we have the maximum high of the last 11 days equal to max high of the last 30 days. That s simply max H11 equals max H30. Then we have the %K is less than or equal to 40, STOC8.3 less than or equal to

44 Method 1 Part 2 The last criterion again is the ADX, which we cannot load into TeleChart for the scan but we can plot it on the chart, thankfully. Again, that s a visual control that we have to use with TeleChart. Slide 36: Okay, now that we have the criteria identified for Method 1 Uptrend, let s look at the Easy Scan. To do that I m going to click on this folder button here. I have already preloaded the Method 1 Uptrend Easy Scan in. You see that s under the Easy Scan heading here. We will click on the Edit button, and here are the criteria that we had just reviewed earlier. You can see that price, volume, wide range filter are all loaded in at the top, narrowing the search rather dramatically down to 548 stocks. Then we have the 50 day moving average of today has to be higher than yesterday and five days ago. That drops it down to 283. The 20 has to be greater than the 50, down some more. Then the minimum close of the past three days is greater than the 50, down some more, and the close of today is less than the 20 day moving average of today, down quite a bit, down to 58. We require the max high of the last 11 days to be equal to the max high of the last 30 days, or the market is making new highs. That really drops it down, and then the %K must be less than or equal to 40, and that drops it down a couple more. So there you go. You go from 7,000 down to two stocks that meet the search criteria for Method 1 Uptrend that would then be reviewed for suitability the following day. Let s take a look at those stocks. Here they are. 44

45 Method 1 Part 2 Here is one that indeed is closing between the 20 and the 50 day moving average where you have a confirming low on the stochastics. Eyeballing the ADX, it s above 20. So if that one were to meet the entry rules to go along the following day, that would be a good long trade candidate. The next one technically does meet the search criteria or it wouldn t be on the list. It closed between the 20 and the 50 day moving average, significant low confirmation, ADX above 20, but look at here. We have a gap up of more than eight percent, and that disqualifies this as setup. This is one of those stand aside conditions that I talked about where even though it appears on the scan, you still have to eyeball it to confirm that it meets the setup conditions, in particular the stand aside conditions. Slide 37: Okay, before I leave the TeleChart tutorial, I want to show you how to plot the indicators on the price chart. In TeleChart you have three window panes to work with: one, two, and three. You can adjust the size of those any way you want. I usually keep the stochastics and ADX in smaller frames so I can save space for the price chart. To add a moving average all you do is right click on the top pane here, click on Add Indicator, and then Moving Average. You click on Prices because you want the moving average to be based on closing price. I ll just make one up here. Let s add an 87 day moving average. We ll call it Purple, and if I hit Close, there it is. Here s the 20, the 50, and the 87. That s how easy it is. That s how I added the other three moving averages. 45

46 Method 1 Part 2 If I want to delete that, I right click, Remove Indicator, 87 bar average, and it s gone. That s all there is to it. Then likewise down here if you want to add stochastics, you right click on the pane, Add Indicator, and there is the stochastics. You click on that, and it adds the stochastics and so on. On the bottom pane, if you want to add the ADX, you click on Add Indicator. There s the ADX; you click on that, and there it pops up. Okay, that s all it is to adding those indicators to TeleChart. I told you it is pretty simple. If it s all new to you, maybe it doesn t look so simple, but after you have gone through this tutorial once or twice and you have done it for yourself, you will have it knocked down here in no time. Slide 38: Here are the charting software Module 2 resources, same as Module 1 for TeleChart, Trend Navigator and Advanced GET. Again, for more information on any of those, please use the links shown on this chart. Slide 39: Last order of business is the quiz. I would encourage you to go ahead and take the quiz that will appear next. You will get several chances to answer correctly, and most of all, you want to make sure that you review to clarify any questions and answers you might have trouble with. Good luck. 46

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