This tutorial was originally titled Daytrading the Bear
and was recorded at the Online Trading Expo
Beating The Bear: Short-Term
Trading Tactics for Difficult Markets
By Jea Yu
© Copyright 2001 Traders Library
© Copyright 2001 Traders Library
The New Market Paradigm
" Bull mania, dart throwing, impulse trading,
news stories, momentum trading is DEAD
" The Market has FILTERED out the novelty
players and the momentum daytraders
" The Bull was a fruitful age of marvelous
bounty and plunder
" The Bear is the ICE AGE
" Focus and Discpline is Key to Survival
What Makes This Market
Tougher?
" Lower Prices = Less movement (CSCO at
$90 moves much more than CSCO at $17)
" Decimalization
" Lighter Volume = More Ranges = Less
Liquidity = Less Followthrough = Less
Profit
Quick Review Of Basket Trading
" The Key to making steady income and
hitting daily profit goals is to PICK a set of
BASKET stocks.
" Watch, watch, watch
" Impulse trading is a CARDINAL SIN
" Basket stocks should be tier 1 or tier 2
stocks with Volume and move with the
Noodles (aka Nasdaq 100 futures)
The Tools
" 1 minute Stochastics for Nasdaq 100 Futures
" 3 minute Stochastics for Nasdaq 100 Futures
" 3 minute Simple Moving Averages Chart
" 1 minute Stochastics Chart
" Nasdaq Level 2
Basic Tools Setup
Decimalization
" Smaller profit increments
" More chippie panic
" More sweep orders
" .10 increment mo ticks
" Crosslock Overshoots
Watching the FULL CONTEXT
" Now more than EVER, you MUST watch the FULL
history of your basket stocks and whatever stocks you play
prior to any action
" You can NEVER take a stock s move out of its context =
no impulse trading
" The more history you know about the stock, the higher up
on the totem pole you stand
" He who doesn t know who is the MARK... Is the
MARK!
" There are no Cliff Notes to this game anymore
Taking Profits
" Range, range, range, PANIC, wiggle, range,
range, range
" Most stocks have limited followthrough on
breaks and panics
" Usually the PEAK of the gains are made on
the panic before stock stalls and RANGES
again, therefore ALWAYS be prepared to
take some PROFITS on the peak panic
overshoots based on the mo ticks
Crosslock Overshoots
Apples and Oranges Dont Mix
" Scalps are FULL LOTS (usually shares 500-
1000+)
" Swings/Range trading are SMALL LOTS (usually
shares 200-500)
" Scalps based on 1 minute increment premises
" Swings/Ranges based on 3 minute increment
premises
" Scalp 75% of shares (apples), Swing 25%
(oranges)
Share Management Decimal
Style
" What is the Difference between a 1 point
stop loss and a 20 cent stop loss?
NOTHING! (If share management is
implemented)
" 1 point STOP on 200 Shares = .20 STOP on
1000 shares
" RANGE/SWING vs. SCALP
" DEFINE THE TRADE BEFOREHAND
Determine Wiggle Equivalent
" CSCO in the 17 s, a normal wiggle is .10 =
QLGC in the 30 s normal wiggle = .50
" So 1,000 shares of CSCO = 500 shares of
QLGC
" .10 wiggle x 1000 = $100 on CSCO
" .50 wiggle x 500 = $100 on CHKP
" So REMEMBER --- When scalping CSCO you play 1,000 shares,
when scalping CHKP you play 500 shares. Mentally need to also
remember that CHKP wiggles more and can NOT play .10 stops on
wiggles! Must give the trade TIME to Work <-- CRITICAL NEWBIE
ERROR!!
Paring
" Paring to Unload = Shaving off partial lots of your shares to lock in profits yet
leave potential for more upside (ie: selling 50% then 25% and final 25% on an
uptrend)
" Paring to Buy = Entering in partial lots of a stock (ie: buying 200 shares of
CHKP 41.25 and 41.75 to avg long 400 at 41.50)
" Paring to Short = Shorting a stock in partial lots as it nears an exhuastion point
(ie: Shorting 200 shares of CHKP at 41.25 and 41.75 to avg short 400 at
41.50)
" Pare ONLY when there is potentially more UPSIDE or DOWNSIDE, when
paring, you switch to 3 min ma charts and 3 min noodles --- and keep swing
stops not SCALP stops. No point in Paring a scalp if you are planning on
taking a .10 stop loss on the remaining shares. If that is the case just take the
SCALP because you are not allowing the Pared shares to play out.
" Paring helps to SOFTEN the blows. The pressure for EXACT tops and
BOTTOMS entry and exit is relieved. Market makers and HEDGE traders
PARE all the time.
The Fade and Transparency
" FADE = A buyside or sellside bias opposite of the 3
minute noodles trend
" Stocks either Oscillate or Fade with the noodles
" Transparency makes itself apparent on VOLUME or TIME
" Fades allow you a heads up on the Transparency
" The trader who realizes the Transparency the soonest will
make the Profits - The NAME OF THE GAME IS FIND
THE TRANSPARENCY BEFORE IT BECOMES
TRANSPARENT
" When Transparency finally makes itself known, usually
the profit potential is over, thus when everyone goes one
way, look to the other
Spotting the Fade
" The Early Signs of a Sellside Fade = 3 minute noodles above 80 band
and stock is selling or not rising
" The Early Signs of a Buyside Fade = 3 minute noodles below the 20
band and stock is holding supports or rising
" The later signs of a Sellside Fade = 3 minute moving averages
downtrend
" The later signs of a Buyside Fade = 3 minute moving averages uptrend
Playing the Fade
" No Brainer Fade to SHORT = Noodles at high of the day above near
100 band, Stock are Low of the Day = Short on 1/3 min noodles
reversal trigger
" No Brainer Fade to BUY = Noodles at low of the day near zero band,
Stock at or near High of the Day = Buy on the 1/3 min noodles
reversal trigger
" Mini pups on the 3 minute setup + 1 min reversal trigger = Beauty!
" Fades give you a heads up on Consoldiations and PUPS
" The PRIMO spot to play the FADE is on a Consolidation looking to
breakout or breakdown triggered by the noodles
" A 3 min PUP pattern will FADE the 5 period moving average on a
break, always triggered by the 1 minute and 3 min noodles
PUP (Power Uptik) Breaks
" PUP Breakout = set up initially as a 5 period flatine (the immovable
object) and a rising 15 period (the unstopppable force) and the 5 period
break higher triggers the breakout
" Inverse PUP Breakdown = setup initially as a 5 period flatine and
slipping 15 period and the period break lower triggers the breakdown
" PUPS on the Noodles are used with Stochastics and are substituted
with %d as the lead and equivalent to 5 period and %dslow is the
laggard and equavalent to the 15 period
" 3 Minute PUPS are usually Triggered by the 1 minute stochastics and
this applies to noodles ALSO, thus the 1 minute trigger is the entry
Inverse PUP Breakdown
Longside Trigger = Buyside Fade + 3 minute MA
PUP setup + 3 min noodles mini pup = BOOM!
3 Minute Noodles Inverse PUP
Breakdown
Playing the TREND
" Oscillation players tend to have more trouble on TREND
days because they overtrade the exahustion or wiggles.
" For the most Part, Trend days are reserved for 3 minute ma
range/swing trades
" Scalpers and Oscillation players need to limit their trades
to the SIDE of the Trend. If the stock is uptrending then
scalps should be made on the long side
Playing Oscillations
" Oscillating stocks move with the 3 minute and 1
minute noodles fluently within a range
" There is little to no FADING and therefore implies
no serious insitutional activty allowing the market
makers to simply go with the flow and adjust
spreads with noodles
" Stick primarily to SCALPS since stocks will
technically very little NET gains if you swing or
range it - TAKE the PROFITS while its there
Rentry Into the Trend
" To renter into the longside trend watch the 1
min noodles and stochastics to wait for a
coil, WHILE the 3 min noodles are still
rising and 3 min ma charts are still rising
" The point of ENTRY will be the 5 period
uptrend fade (ie: CIEN screencam
short/long)
Playing the CounterTrend
" Countertrend plays can be played ONLY at or near an exhuastion
resistance level usually 2.50 +/- .50 and only on WIGGLE
overreactions = stock is trading at least double wiggle room above the
5 period
" If stock is trading normal wiggle room or at 5 period, no countertrend
trade
" A countertrend entry near a 11am/2pm mood shift reversal + extended
extreme high bands + 5 period flatine and lower highs is your best bet
" Remember, countertrend plays are riskier and require RANGE trading
shares with firm 3min premises and enough wiggle room without
excessive damage because you are not only banking on a 5 period
break but a 15 period crossover breakdown - Not a method for
newbies!
11:00am and 2pm Mood Shift Phenom
" 10:30-11am a pre deadzone Mood Shift often occurs, look for a
deadzone Countertrend to emerge in the markets. The best setup is
when 3 min noodles are extreme extended in duration and over 80
band or under 20 band
" 1:30-2pm a post deadzone Mood Shift often occurs, watch for the
Resumption of morning trend to emerge in the markets. The best setup
is when 3 min noodles are extreme extended in duration and over 80
band or under 20 band
" These are common paradigms but not always set in stone so you
MUST pay close attention. The clue will be the initial fading into
10:30am with lower highs or a mood shift reversal down or higher
lows for a mood shift reversal up
Confidence and Comfort Zone
" Confidence comes from Familiarity and anticipating ahead
the potential DOWNSIDE on your trade
" Comfort Zone is absolutely KEY - Unforced errors occur
when traders move up their share size too fast thinking
they can immediately duplicate paper trades or small lot
share trades on a higher level
" Even in gambling, it is theoretically easy to turn $5 into
$20, but the mistake is thinking you can duplicate that with
$5000 turning it into $20,000 immediately (eg: going from
1,000 shares of CSCO to 5,000 shares must be done
slowly)
The Transition to Larger Shares
" The Transition is VERY fragile and must be taken slowly
= raise sizes 100-300 shares (realative to stock) a week and
continue to duplicate results once you are 80% consistent
on trades
" Lastly, remember that you must manage the allotment of
shares RELATIVE to the VOLUME and VOLATILITY
(ie: trading 5,000 shares of CSCO when its consolidating
in a .10 range during deadzone light volume is NOT wise)
" Make SURE the market can ABSORB the liquidity or you
are faced with slippage on lighter volume which can
eliminate some or ALL of your profits not to mention
cause more panic
Putting it All Together ScreenCam I
" SHORT VRSN 51.50 (Screencam); Premises: SELL SIDE Fader (while
noodles 3 and 1 minute were RISING, VRSN was selling) + Both 1 and 3min
stochastics are peaking high bands + 3 min MA charts downtrending; Wiggle
Room/resistance: 52 (VRSN is a thin and fast moving stock, 52 was prior
support now resistance as noodles rose higher VRSN sold); Trigger: 1 minute
noodles stochastics slip should set off the selling and 3 min noodles slip should
compound the selling, VRSN is a THIN fast mover so I expect to be PARING
the overshoot knowing that 50 x 50.50 are the absolute supports on any panic
Putting it All Together ScreenCam II
" SHORT PRGN 23 (screencam); Premise: SELL SIDE Fader No Brainer +
INVERSE PUP BREAKDOWN setup (while noodles are peakingout above
80/90 bands, PRGN is selling near lows of the day); Wiggle Room/resistnace:
23.50; Trigger: 1 min noodles FIRST TRIGGER and 3 min noodles slip under
23 should trigger the INVERSE PUP Breakdown as the 5 period bidders
retreat, PRGN should sell off harder on a PANIC. Also, apparent seller on
INCA wants out and is NOT sitting around letting the MM s adjust spreads,
rather he s just nailing every buyer and possibly inside cranking occaisionally
to suck in reversal players only to dump back on them. The 2.50 rules dictate
that 22.50 is a support area overshoot pare already in mind with potential to
move down lower if 3 min noodles continue to slip for this IS a inverse pup
breakdown.
Putting it All Together ScreenCam
III
" BUY SUNW 15.25 (screencam); Premise: BUYSIDE FADER as Noodles
slip + GAP FILL high of the day + 1 minute stichastics MINI pup; Trigger: 1
minute noodles stochastics reversal and further followthru is 3 minute noodles
reversal back up; Resistance/Support: Resistance is 15.50 peak overshoot
because of the super heavy float, I know that SUNW can only sustain so much
of a pop before volume dissipates, thus goal is to look for clips on HEAVY
shares on the noodles reversal yet PARING into the buyers under 15.50,
Support is 15 with overshoot wiggle to 14.90
THE END
" Thank you and if you have any questions,
feel free to email
jay@undergroundtrader.com
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