Traders' Library Blog

Gartley Pattern Lesson - Trend Reversal or Trend Continuation?

A Bullish TCG recently completed on McCormick and Company. What does TCG mean? In The Gartley Trading Method: New Techniques to Profit from the Markets Most Powerful Formation, the Gartley Pattern is categorized into two groups; the Trend Reversal Gartley (TRG) and the Trend Continuation Gartley (TCG.) The difference between the two has to do with the price action that precedes the X point of the pattern. In H.M. Gartley’s book Profits in the Stock Market, he identified a significant trend prior to X point of the pattern. He went on to describe his pattern as One of the Best Trading Opportunities and that it was similar to a head and shoulders pattern or a double top or bottom. If there was a significant down trend in McCormick prior to the X point on the chart, then the Gartley Pattern would be a TRG (Trend Reversal Gartley) and the D point would be a retest of the X point low or a double bottom. If the price action prior to the X point looks more like a correction against the existing trend (as in the case with McCormick) then the gartley pattern is a TCG (Trend Continuation Gartley.) To learn more about the Gartley Pattern and Geometric Trading Course, go to www.geometrictrading.com

Value and Volatility in Today's Markets, Plus What We're Watching Now

Please welcome this guest post from John Person & Tom Aspray of PA Stock Alerts.

In the equity markets, stock values are higher and volatility is lower, as we have seen over the last two years. Not only is this a true statement, but it was made by Ben Bernanke, the Chairman of the Federal Reserve on February 3, 2011. This in and of itself is very intriguing. Does Ben actually trade the markets and the VIX as well?

I want to comment on this a bit. First, it is not my understanding that the Fed's job is to monitor the equity markets and to gauge the health of the banking industry by stock valuations.

Secondly, I believe if they are supposed to monitor any sector of the overall markets, perhaps starting with the KBE, or the XLF would be a good start. After all, the Fed's main job as an independent entity is to regulate the nation's financial institutions. The primary responsibility of the Fed is devising and implementing monetary policy.

The chart below on the financial sector exchange traded fund (XLF) shows that the overall sector has not only yet to break out above April 2009 highs, but it is at lower levels from that point in time. In addition, the recent rally since the beginning of the year was on lighter volume, and now as we enter mid-February, this sector is showing a tendency towards price weakness.

 

 

 

MAKE MONEY TRADING LIKE AN IDIOT

Let’s face it, if you are fairly new to trading your initial exposure to technical analysis will, if nothing else, make you feel like an idiot.

Nothing surprising, though, as learning technical analysis is no different than learning any other skill.  It takes time, patience, dedication, and a willingness to accept humble pie as part of your diet.  Obviously, with the internet, there is a proliferation of information on technical analysis now available to go along with the hundreds, maybe even thousands, of books on the subject.   I’ve been trading for years and I still feel like an idiot, so when I am asked what book would be best suited to the beginner I am usually at a loss.  However, I did recently find a book that may just fit the bill.

Jan Arps has been using and developing his own award winning technical analysis tools for more than 40 years so his knowledge of technical analysis deserves attention and respect.  Who better, then, to ask to write The Complete Idiot’s Guide to Technical Analysis (Alpha Books, 2010).  I recently had the pleasure of meeting Mr Arps at his home and I find him to be a wealth of information as well as a reminder of my idiot status.  He offered me his book and I decided to give my humbled opinion, for what it is worth.

The outline of the book is very simple and well designed, consisting of four parts: Introduction to Technical Analysis, Tools For Technical Analysis, Time to Trade, and Trading Mechanics.  There is a wealth of information here so let’s look at a few nuggets.

INTRODUCTION TO TECHNICAL ANALYSIS

Arps does a good job of explaining the purpose of technical analysis as a way to “help you anticipate potential changes in the direction of market prices resulting from crowd behavior driven by the emotions of greed and fear” and not as a “business of absolute predictions.”  All too often the new trader considers technical analysis to be the answer to predicting future price action; Arps tempers this expectation with a good analogy:  “Like weather forecasting, technical analysis doesn’t result in absolute predictions about the future.  Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time.”  After laying the foundation Arps begins to build a firm structure by covering topics that include market structure, charting, and various swing patterns.

THE BASICS OF TECHNICAL ANALYSIS

Jason Jankovsky, in The Art of the Trade, gives us four basics on doing real technical analysis.  Jankovsky says "that the true trader, the consistent winner, is not concerned with any price or where prices started from.  He or she is concerned with what it takes for people to believe strong enough, and with enough commitment, that they will place their capital at risk."  So, with that in mind, the four basics:

1.  A price chart is simply "a pictorial representation of the sum total of all the market's belief structures."  No matter what we believe the chart does not lie.

2.  "Because every potential trader in every market is seeing it differently, every printed price will mean something different to everyone." Our entry may be someone else's opportunity to exit and vice versa.  We should always remember this the next time we believe we have a sure thing.

3.  Prices eventually have to stop their forward progress, in either direction.  "When every potential trader has executed for an entry, in any time frame, the market is vulnerable. When no one is doing anything, and what's been done is done, prices must stop." 

4.  No matter what indicator we use "every technical indicator designed is based solely on combining or dividing prices in some way."  Volume and open interest, however, "chronicles the true state of what is happening inside the minds of the market participants." 

As I always say and as other believe, trading is not difficult, it is the trader who makes it so.  Jankovsky confirms what we already know.

See you later...IN THE CROSSHAIRS!

 

 

Larry McMillan's 2010 Market Review & 2011 Forecast

For the past 20 years, Larry McMillan of McMillan Analysis has published The Option Strategist newsletter, including his annual market review and forecast with his expert assessment and predictions. Here, Larry has generously agreed to share an excerpt from this year's review and forecast focused on market volatility. To read more from the 2011 Market Forecast, click here.

An Excerpt from the 2010 Market Review & 2011 Forecast
From Lawrence G. McMillan, McMillan Analysis Corporation

Let us look at another representation of volatility. This is some new research that we have done recently. First, let’s review the concept of seasonal volatility. We usually present that in an annual view, as in Figure 7—which is the seasonal computed including this past year’s numbers (we use $VXO because it has a longer data history than the “new” $VIX). Since we had high volatility in May through July and low volatility in October, point C is higher than it used to be, and point F is lower. But the general concept is still the same: volatility is modest in the beginning of the year, then falls to the year’s lows about July 1st, then explodes into October, and then—often to the surprise of many, even though it happens frequently—volatility falls precipitously during the fall of the year, so that by Christmas, it’s almost back at the year’s lows. That is the case again this year.

The Gartley Trading Method Webinar Series Commences January 10, 2011

Come join optionsXpress host Jim Rouzan and special guest Ross L. Beck for a three-part series on the Gartley Trading Method. Part I is an Introduction to the Gartley Pattern and is based on Ross’ new book The Gartley Trading Method: New Techniques to Profit from the Markets Most Powerful Formation. Part II will be presented on February 7th and Part III will be presented on March 7th. This is an event that you will not want to miss! To register for Part 1 of the series, click here.

Traders’ Library on the iBookstore

If you are one of the thousands with an iPad, iPhone, or iPod (or maybe you are getting one over the holidays) then we have great news!  We just got 4 of our titles up on the iBookstore: 

1. The Three Secrets to Trading Momentum Indicators

2. Simple Steps to Trading Discipline: Increasing Profits with Habits You Already Have

1. 3. Iron Condor: Neutral Strategy for Uncommon Profit
3. 4. Volatility Indicators: Techniques for Profiting from the Market's Moves

Now you can read wherever you are!  We are working on getting more of our titles available,  I will be sure to keep you all updated!

Treasury futures might be bottoming, but one more flush?

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Click here to purchase the "Option Spread Advangage" DVD by Carley Garner and Trader's Library!

Sign up for our next FREE webinar, Day Trading Truths vs. Myths, click here!

December  3rd, 2010

A decisively Treasury bullish employment report triggered a sharp rally in bonds and notes, but the reaction proved to be temporary.  A gangbuster rally on the news, was gradually faded by traders throughout the day.  Thus far, Treasury rallies have been at the hands of short covering and thus once a majority of the buy stops are run the market simply runs out of buyers.  As a result, small speculators seem to have become comfortably short the note market...and this is often the precursor to a large rally. 

Remember, most traders lose money and the odds are most dismal for those with smaller trading accounts.  This group of trader is often the most fickle (quick to get out).  Therefore, if the average retail trader is comfortably short red-flags begin raising...and traders might  be better off looking for a reversal as opposed to following the trend.   

Treasury traders appear to be reluctant to be long the market ahead of next week's large auction.  The Treasury will be issuing large amount of securities on Tuesday (3-year notes), Wednesday (10-year notes) and Thursday (30-year bonds).  If you recall, the last round of uctions didn't go particularly well and therefore the market seems to be anticipating a repeat.  However, we feel like the jump in yields will lure some safe haven buyers next week's auction.   

We mentioned this yesterday, but feel as though it is important...During the month of December, the Euro is typically strong and the dollar weak.  Accordingly, we feel as though fluctuations in the currency markets will ultimately favor the Treasury bulls in the coming weeks. 

Fed induced rally

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 November 3rd, 2010* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.  However, market analysis and commentary does.  Charts provided by Track 'n Trade, Gecko software. **Seasonality is already factored into current prices, any references to such does not indicate future market action.

 "Helicopter Ben" delivered on Wednesday by announcing another $600 billion in Treasury purchases through the second quarter of next year.  At $75 billion a month being injected into the economy, it's hard to fight against the Fed machine. 

The equity market reaction to the news was relatively volatile and indecisive but by the close of trade it was clear the market was satisfied.  However, we could see some buyer's remorse going into the weekend.  Although earnings have been good and the recovery is underway, a large part of this rally has been at the hands of artificial influence.  At some point investors might begin to second guess themselves. 

With that in mind, we still don't believe that being overly bearish will pay off in the end.  Short entries should be done on sharp rallies and the bears mustn't overstay their welcome.  For instance, if you took our ideas from the previous newsletter of selling the S&P futures near 1195, the NASDAQ near 2156 and the Russell near 718 you could have done rather well had you been savvy enough to take profits, or at least trail tight stops, as the market plummeted.  Had you taken our entry points only to watch the market rally back in your face, you likely suffered psychological damage.

Fed's QE2 not enough for 30-year bond futures traders

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November 3rd, 2010

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.  However, market analysis and commentary does.  Charts provided by Track 'n Trade, Gecko software. **Seasonality is already factored into current prices, any references to such does not indicate future market action.

 

Most analysts were predicting the Fed to announce another round of quantitative easing in the amount of $500 to $700 billion and the central bank split the difference.  Today's FOMC announcement included a pledge to buy $600 billion in Treasuries through the end of the second quarter of 2011 at a pace of about $75 billion per month.  For the most part, this had already been priced into the markets and was more of an expectation than a gift.  The statement also revealed that 90% of the Fed's Treasury purchases would focus on the 2.5 to 10 year maturities and very little will be put into the longer end of the curve.  Accordingly, the long bond suffered at the hands of mass liquidation.

 The New York Fed said it would temporarily "relax" a rule limiting the Fed ownership of any particular security to 35%.  The new interpretation of the rule will enable the Fed to purchase securities beyond the threshold in "modest increments".  Bill Gross's description of the program as a ponzi scheme isn't too far off...

Negative TIPS hangover in Treasury Futures

 

 

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October 26th, 2010

Negative TIPS hangover in Treasury Futures

 

Treasury bond and notes suffered on Tuesday at the hands of "OK" economic data and follow through selling left over from yesterday's 5-year TIPS auction.  If you recall, the Treasury reopened 5-year note TIPS (Treasury Inflation Protected Securities) at a negative yield for the first time in history! 

TIPS have been in rally mode for some time and the buying has been exaggerated by speculation of the Fed's next round of quantitative easing, known by most as QE2.  Although investors have found comfort in the idea of fixed income backed by the credit worthiness of the government, it is clear they are also seeking some protection from inflation via TIPS.  In a roundabout way, those holding long Treasury note positions can hedge their bets through the purchase of TIPS.  Should inflation rear its ugly head, the TIPS "should" take some of the heat off price pressures felt in more traditional coupon securities.

The Federal Reserve implemented another phase of its POMO (permanent Open Market Operations) today.  Specifically, they purchased $2.5 billion worth of maturities ranging from 2011 through 2040.  The Fed's current tentative Treasury buyback schedule ends on November 8th but they are expected to announced a new round of purchases at next week's Fed meeting. 

Most are looking for the next round of buying to be about $500 billion in size,  but some estimates are calling for as much as $2 trillion.  Our guess is, the markets have likely priced in a half a trillion but if the Fed opts for the last bazooka, the markets might not be fully prepared. 

The correlation between the Yen and Treasuries held true during the session.  As we pointed out yesterday, the correlation coefficient between the Yen and the December 30-year bond futures is in the mid-90's.  If this correlation stands, it could weigh down the long bond a little more before a reversal can occur. 

Investors still buying dips along with POMO

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Carley will be speaking at the Trader's Expo in Las Vegas, entry is complimentary with expo registration.  Click here to sign up!

 

Can't make it to the Trader's Expo?  Sign up for our next complimentary webinar to learn more about credit spreads and iron condors.  Click here to register!

 

October 26th, 2010

 

 

Investors still buying dips along with POMO

 

If you are an avid reader of the "Stock Trader's Almanac" you are likely aware of the fact that we have officially entered what is known as the "Best Six Months" of the year.  You might also know that historical stats suggest the best time to be long stocks within the presidency cycle is the first quarter of the midterm year and the first quarter of the pre-election year.  In addition, history suggests the markets have out-performed when there is a Democrat in the White House and a Republican controlled Congress. 

 

What does all of this mean?  Investors maintaining a buy on dips mentality will likely face better odds of success than one that is fighting the statistics in the coming months. 

 

With all this in mind, chasing markets higher can be (more often than not) a recipe for disaster.  With the U.S. dollar ripe for a rather large short covering rally, it might be possible for equities to suffer from corrective trade at some point in the near-future.  This move has been a long time coming...we haven't given up on it, but warn those that have gotten complacent in the currency markets (and thus commodities) there could be some ruffled feathers when the somewhat inevitable technical trade takes hold. 

 

Excerpt from yesterday's newsletter for those of you that missed it:

 

 

Bond and note futures soar

 

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September 22nd, 2010

 

 

The ten year note has quickly made its way back to a 2.5% yield following yesterdays FOMC announcement.  The note yield hasn't spent much time below 2.5% (ever); however, the long bond looks to have some room to move and this could mean December note futures trading as high as 126'27 which could mean the cash market yield trades into the low 2% range. 

 

The Fed might not have mentioned QE2, but the market seems to be counting on it.  After all, they left the door wide open to just about anything by declaring they are "...prepared to provide additional accommodation if needed to support the economic recovery." 

 

Goldman Sachs economists are predicting the central bank will announce at the next meeting its intention to purchase at least $1 trillion of Treasuries...and the market knows this and seems to be in the process of pricing it in.  However, before the bulls get too excited...it is important to remember that more often than not, Treasuries seem to rally more on talk of Fed asset purchases than on the action itself.  In fact, it isn't uncommon for longer-dated government securities to struggle during the scheduled security buying. 

 

From a technical point of view, the 10-year note has reached our initial target of 125'25 and clearly hit a wall.  However, the 30-year bond is yet to reach our first resistance of 134ish and we "feel" like momentum could take the long bond to a bit above 135, this could drag the note up with it.  Therefore, we recommend any bearish positions on the note be taken with caution and preferably a hedge as there could be more gains ahead before the buying runs out of steam. 

 

Keep in mind, our technical objectives are counting on near-term weakness in equities but even if stocks maintain stability it is possible for the Treasury complex to move a bit higher...but at a measured pace.

 

Stock index futures biggest decline in weeks, wasn't so big

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September 22nd, 2010

 

Stock index futures suffered the biggest daily loss since September 7th; that is hard to swallow given the close of the December S&P which was a decline of just five handles.  We have to admit, after the major indices were rejected by (or near in some cases) our technical resistance areas, we were expecting the slide to be a bit more dramatic.  This leaves us wondering if the corrective move will be much shallower than we originally thought. 

 

Given the lack of selling, it seems as though the market has hit the facebook "like" button on the Fed's pledge to do whatever it takes to aid the sluggish recovery...and even promote inflation.  However, taxpayers have deep pockets but not unlimited resources and the central bank can't buy debt forever.  At some point, investors will be reminded of this and the rally will take a breather. 

 

In yesterday's newsletter we mentioned we were due for a trend-change in economic data and tomorrow we will know if the tides have turned.  We start the day with weekly jobless claims, but the focus will likely be on existing home sales and leading indicators later in the day.  With prices so frothy, bad numbers could be a good reason for the bulls to lock in profits.

 

For now, we are sticking with a sell rallies mentality.  If the current move, is the breather we are talking about...the December S&P should see 1105 (filling a previous gap) and likely even 1092ish before finding credible support.  If not, resistance lies at 1148 and then again near 1156. 

 

The Russell has been the market leader in past reversals, whether it be bullish or bearish.  Today's trade saw a considerably more selling pressure in the small cap index relative to the NASDAQ or the S&P.  In the past, this has worked against equities and could pull the other indices down in the next day or two.  Support in the December Russell lies at 636ish with resistance in the 668/673 range. 

Repeat of the last quarterly futures and options expiration?

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September 17th, 2010

 

 

This week's trade has mirrored that of the June expiration; several sessions of consolidation, following a dramatic rally.  If you recall, the last time around the "Monday after" saw a dramatic gap up on the Sunday night open only to sell off into the close...and for the next 2 weeks for that matter.  We can't help but think we could get a repeat.  Accordingly, we can't rule out 1136ish in the December S&P early next week as traders finally square their option expiration headaches...but it also means such pricing would be a "solid" place to be bearish. 

 

Of course, it is also possible that the Thursday night highs were the highs of this move all-together.  If you have been reading this newsletter, you know that we have been noting signs of a possible reversal and pointed out the possibility of a "crazy spike high to the low 1130's", before rolling over.  Was that it for the rally?

 

There are many arguments in favor for the bulls, but as we all know, timing is everything and I am not convinced that the markets will be able to overcome some of the near-term obstacles.  For instance, seasonal tendencies are calling for a pullback, many of the large speculators (smart money?) have gone short and added to their short positions this week, and market sentiment has gone from being overly bearish to overly bullish. 

 

As we mentioned on Wednesday, the markets seemed to want to hover into expiration simply because that is what would cause the most pain to the most people...and it did.  Those with short calls, or hanging onto short September futures into the last minute were likely squeezed hard enough in the last few weeks to make them reconsider trading.  What will be even more painful for "most", will be watching the market move lower next week without them...assuming it happens.   Just in case you missed it from yesterday:

 

If you haven't watched the movie "Floored" I highly recommend it.  Although it is rather racy and even shocking, it takes a good look at the reality of trading futures and options.  The reason I bring it up, is there is a particular quote that goes something like this (this is a highly edited version, yet I still apologize); "The market is a prostitute; it screws as many people as it can for as much money as it can". 

 

The point is, the market shouldn't be taken for granted.  It is bigger than all of us, and in order to survive we must look at things in a way that most don't.  After all, most active traders lose money...so if we are analyzing and forming the same expectations as nearly everyone else, we are probably wrong. 

 

We are sticking with the idea that the markets are starting to get a bit toppy, look for resistance in the S&P in the mid to high 1130's, should we get a repeat of the quarterly expiration rally to fish the last of the buy stops.  Similar resistance in the Russell lies at 660ish.    

 

Back and fill Thursday in stock index futures?

 

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September 1st, 2010

 

What are the true costs of trading futures and options?  Carley Garner and Karen Gibbs discuss.... http://www.aweber.com/archive/decarleystock/.MPm

 

Although this month is known as "Black September" because of its propensity to provide negative stock returns, the first trading day of September has now posted gains in 12 of the last 15 occasions. 

 

It is also important to realize that despite media banter about dismal performance in September, the average broad market loss is less than 1%.  The bears will tell you that in September of 2009 the markets were coming off a rough August, not unlike what we are seeing play out in 2010.  Similarly, investor sentiment was pointing toward doom and gloom and market commentators warned of rocky September seasonals.  Yet, the market found a low on September 2nd and rallied nearly 80 handles.  Can we get a repeat of last year?  We think everything is lining up to pave the way.

 

The major indices were vastly oversold and due for a relief rally, the question now remains whether or not it can hold gains...or more importantly continue higher.  Things look good to us, if you recall in yesterday's newsletter we noted

"It took a while to sink in, but I think the market eventually saw the Fed minutes as market supportive.  The committee maintained a relatively stable to optimistic outlook on the economy as well as pledged to take further steps if necessary.  In addition, they are dead set on keeping interest rates low...and isn't that what corporate America needs to fund operations and make money?"

 

Some back and filling is likely necessary and the S&P faces strong resistance near 1080, we doubt the move is over.  It is highly likely that this rally caught some large bears standing in front of the bus and they will be looking for opportunities to get out.  This means than any pull-back could be met with another round of short covering.  Assuming tomorrow's jobless claims and Friday's employment report (referred to as an "unenjoyment report" by our open outcry execution desk) are respectable the September S&P futures contract could be going for just under 1100 and if we get a string of good news...1130 could be on tap. 

 

If you are trading the NASDAQ, 1830 is the pivot but the next resistance will be 1873.  Like the others, the Russell faces immediate resistance near 624, but if follow through the next resistance will be about 650.

 

Stock index futures bulls might have pulled it off

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August 27th, 2010

 

Are long options better protection than stop loss orders? Carley and Karen Gibbs discuss...http://www.aweber.com/archive/decarleystock/U4vm

 

 

It has been a long and hard week for stock market optimists.  Bad news after bad news has put unrelenting pressure on equities but today's trade might offer enough momentum to fend off a slide in the S&P to the 1,000 area. 

 

Second quarter GDP was revised lower as expected, but the news wasn't as bad as most had anticipated and more importantly what the markets had priced in.  As of now, it is believed that the U.S. economy grew at a rate of 1.4% last quarter as opposed to what many believed would be much worse.  Also helping the bulls were comments by the Fed chair ensuring that the Fed would be ready to step in and defend against a weaker economy if necessary. 

 

As we have been noting in this newsletter, the market feels too bearish.  Retail investors have pulled their money out of stock funds in droves and there seems to be very little interest in putting it back to work anytime soon.  In fact, according to the American Association of Individual Investors, the number if individual investors that have a bullish outlook on the stock market in the next six months has plunged to 21%.  This is the lowest reading since March of 2009 and we all know what happened then.   I hate to say it, but once all of the weak hands are out, it is often the time to begin looking for a rally. 

 

In yesterday's newsletter, we were calling for a bounce to the 1065 area, and today we got what we were looking for but it will take some follow through buying early next week to confirm a near-term bottom.  I hope some of you were able to capitalize on our advice of trying to get long the S&P on a dip to the mid-to-low 1030's; the low prints weren't see and the 1037 print was quick...

 

Going into Monday, it seems as though we could get a bit of digestion from the rally.  Aside from seeing a 25 plus point run in the S&P from Friday's low, historical statistics suggest that the next to last trading day of August tends to see a struggling market.  According to the Stock Trader's Almanac the S&P has closed positive only twice in the last 13 years. 

 

We see resistance in the September S&P futures near 1065 and then again just under 1070.  In the meantime, support lies at 1050 and 1034. 

 

If you are trading the NASDAQ or the Russell, we have revised our upside targets to 1835 and 624.  If the markets take another big dip down, look for support near 1756 and 596.  We still lean toward buying weakness. 

 

Momentum Indicators now available on KINDLE!

Marketplace Books and Traders’ Library are very excited to announce The Three Secrets to Trading Momentum Indicators by David Penn is now available on Kindle through Amazon! 

 

The world of publishing is changing and so is the way people want to read!  No longer are all people fixated on holding a book in their hands and flipping through the pages; now they want to read on their computers, smart phones and e-readers, with acess right at their fingertips.

 

We would love to hear your feedback on eBooks vs print! 

 

 

Inside David Penn's new book, you'll get:

 

-An explanation of Candlesticks—the best way to see momentum,
-The mistakes traders often make with indicators and how to avoid them,
-Tactics for using momentum with breakout, reversal, and swing trading,
-And, the inside scoop on the king of all momentum indicators—Stochastics.

 

This exciting new format puts you at the controls of the charts, providing easy access from any reference in the text. Plus, you get complete definitions of vital terms right at the click of your mouse. There is no faster trading signal than price action properly interpreted—so get your copy of this money-making guide and start benefiting from momentum now.

 

Download it to your kindle now!

 

** Send us proof of purchase and receive 3 free eBooks!

 

How I Trade: 2 Minutes With a Successful Trader

Tom is a private trader who prefers to stay under the radar. However, contributor Tim Bourquin sat down with him recently and asked him about his trading methods and strategies that he uses to make profitable swing trades. Here he discusses why he keeps so many open positions at one time and how he uses his profit & loss spreadsheet to determine which positions to add to and which positions to close.

Tim - TraderInterviews.com: Tom, you've been trading for many years and have said you are constantly refining your techniques to adapt to the current market conditions. What's working for you right now?

Tom: Well, I was one of those "dot com" traders back in the late 90s, when WorldCom was $120 and Yahoo was also several hundred dollars per share. Every year since then it seems I've had to adjust my trading strategies slightly to make the right trading decisions. Over the last year or so, one of the strategies I've worked on perfecting is tape reading and looking for momentum breakouts. I've also been looking a lot at sector internals to find the strongest stocks within the strongest sectors. That's not new, of course, but I have slightly different twist on the typical momentum traders. I look for two-day highs and two-day lows that are backed up by strong volume. My experience has been that if a stock is moving strongly in one direction and continues on that path for a second day, it will typically rest a bit the morning of the 3rd day and then, as long as volume remains strong, it will again head in that same direction for a short time. The pullback on the third morning of this short-term trend will allow me time to secure a long or short position in anticipation of this continuation. I set my stop just below the high or low of the previous day - but not too close as to not get "washed and rinsed" with all the other traders that have placed orders at that level. Nearly 60% of the time, once those stops have been tested, it continues in the direction of the last two days and it's good for at least one to two points.

Tim - TraderInterviews.com: Have you found certain stocks that this strategy works particularly well with?

Tom: That's one of the things I've also been working on in the past 12 months. I could certainly setup real-time scans to find all the stocks that are achieving two-day highs or lows accompanied by strong volume, but I've found a better way. I keep very small positions open in about 300 of my favorite trading stocks - $200-$300. Of course, that may mean a single share or just a few shares depending on the price. Then I simply sort my P&L by gains and this allows me to see which stocks have achieved gains or losses over a two day period. I then pull up charts for those gainers and losers and see which meet my criteria. I then simply add to my long or short position in those stocks. This allows me to enter a position with very small risk. I also am very disciplined, on the long side, about only adding to those positions that are in the top five when I sort for percentage gains. If a stock is not in that top five, I won't add to the position. It's my way of sticking to my personal rule of only buying stocks that are making higher highs and selling stocks that are making lower lows - even if only on a two-day basis.

Tim - TraderInterviews.com: Interesting. Most traders seem to work on buying a low in the hope that it will reverse.

Monthly Market Outlook Webinar with John Person

What: Free Exclusive Webinar

When: Wednesday, August 4, 2010 | 8:30 PM EST

Where: Click here to register!

John Person will be having his monthly market outlook - some of you already know how John’s Techniques have helped many traders identify large market moves and profit handsomely! This time will be no different John promises not to pull any punches. John will:

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· Show you how to use ONE of his powerful price indicators available to determine whether you should be BUYING dips or SELLING rallies.

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