The Master Swing Trader Toolkit: The Market Survival Guide (PROFESSIONAL FINANCE & INVESTM) - Hardcover

Farley, Alan S.

Hardcover

ISBN 10: 0071664009 ISBN 13: 9780071664004

Publisher: McGraw Hill, 2010

Synopsis

With more than 50,000 copies sold, AlanFarley’s The Master Swing Trader has becomethe definitive guide for maximizing profitfrom short-term price moves. Now in hishighly anticipated companion volume, TheMaster Swing Trader Toolkit: The MarketSurvival Guide, Farley builds on his provenstrategies and techniques and delivers newtips for consistently beating the markets―today and in the future.

The Master Swing Trader Toolkit is a powerfulapplication-oriented handbook that showsyou how to identify and grow wealth fromthe opportunities resulting from the steepmarket crash. Additionally, this full-servicevolume offers prescriptions for prosperingin the postcrash environment and providesguidance for finding new, reduced-risk marketprospects during virtually any economicscenario to come.

The author’s trading style has evolved sincethe publication of The Master Swing Trader.This follow-up companion helps you adaptand gain an edge as the author has, specificallyin the vein of “defensive trading,” toachieve profitability in the modern electronicmarkets.

Because The Master Swing TraderToolkit is a survival guide for the real world,Farley presents an abundance of authenticcase studies to show his defensive tradingstrategies in action, and he illustrates a broadvariety of other patterns and observationsacting in specific market scenarios.

The Master Swing Trader Toolkit preparesyou for success in the financial landscape oftoday and tomorrow with insightful, up-todatecoverage on:

• Cross-market analysis
• Convergence-divergencerelationships
• Relative strength
• Managing multiple positions
• Remote trading
• Risk management

At its core, The Master Swing Trader Toolkit:The Market Survival Guide is a book abouttape reading. The ticker tape is immunefrom manipulation, deconstruction, regulation,and fragmentation, which makes it themost powerful tool for attaining wealth. Getthe most out of what you read by startingwith The Master Swing Trader Toolkit.

About this title

About the Author

Alan S. Farley (Denver, CO) is publisher and editor of HardRightEdge.com, an online trader's resource covering technical analysis, short-term trading tactics, an more. A professional trader with more than 14 years experience, Farley has been featured in Barron's, SmartMoney, Tech Week, and TheStreet.com.

From the Back Cover

Master today's volatile stock markets-- and profit in the years to come

If you're a trader or an investor who was beaten up by the financial crash, this book was written for you. So dust yourself off, get back in the game, and start reading this brilliant new companion to the bestselling investing guide The Master Swing Trader.

This expert playbook is packed with rock-solid advice for winning in today's markets and positioning yourself for future opportunities. Learn how to take advantage of new market plays with reduced risk, make profitable decisions with the help of market-tested investing strategies, and master the art of defensive trading to hold on to gains in volatile markets. The Master Swing Trader Toolkit shows you how to:

• Evolve core principles into brand-new market strate gies for this decade
• Become a "survivalist trader"
• Read the market clock and anticipate market seasonality
• Achieve greater gains through convergence-divergence relationships

The Master Swing Trader Toolkit gives you a set of up-to-date tools for seeing past the inefficiencies of today's follow-the-herd markets and profiting from the resulting highprobability trade setups before they disappear. With The Master Swing Trader Toolkit, you'll never be caught short again when the market is running.

Excerpt. © Reprinted by permission. All rights reserved.

THE Master Swing Trader Toolkit

The Market Survival Guide

By ALAN S. FARLEY

The McGraw-Hill Companies, Inc.

Copyright © 2010 The McGraw-Hill Companies, Inc.
All rights reserved.

ISBN: 978-0-07-166400-4

Contents

Foreword
Preface
Acknowledgments
PART ONE PARSING THE MODERN MARKETS
Chapter 1 Prospering in the Postcrash Environment
Chapter 2 The Crooked Playing Field
PART TWO CYCLES, SHOCKS, AND SEASONALITY
Chapter 3 Revisiting the Market Clock
Chapter 4 Relative Strength
PART THREE REDISCOVERING PROFITABILITY
Chapter 5 The Nature of Winning
Chapter 6 survivalist Trading strategies
PART FOUR MANAGING OPPORTUNITY
Chapter 7 Market Entry
Chapter 8 Positions, Markets, and Trading styles
PART FIVE CONTROLLING EXPOSURE
Chapter 9 Position Management
Chapter 10 Mastering the Intraday Market
PART SIX MANAGING RISK AND REWARD
Chapter 11 The Nature of Losing
Chapter 12 Capital Preservation
Glossary
Bibliography
Index

Excerpt

CHAPTER 1

PROSPERING IN THE POSTCRASH ENVIRONMENT

The markets have never been a pretty place. Just ask those Dutch traders whobought into the tulip mania back in the seventeenth century. You think the realestate bubble was bad? Imagine paying the modern day equivalent of $10,000 for asingle tulip bulb, sight unseen. Where were the attorneys general and the SECenforcers back then, when they were really needed?

To be frank, I like my markets just the way they are, warts and all. And I'mconvinced that world capitalism would get a lot worse if we didn't have a goodplace to make bad decisions, at least between 9:30 a.m. and 4:00 p.m. New Yorktime. Maybe that's why I cringe whenever government bureaucrats or stateprosecutors step onto our sacred ground.

You see, we earn a living when other people put on their dumb hats and buy toohigh or sell too low. No, folks like us don't build bridges, sell suits, or leadtheir flocks to salvation. To be realistic, we contribute absolutely nothing tosociety except pure liquidity and an aggressive attitude. And you know what? Iwouldn't have it any other way, because the trading game works directly with themachine language of the world monetary system and is the only profession I knowthat doesn't depend on a boss, a company, or an economy. At its core, our uniquebusiness feeds ruthlessly off the excesses of the marketplace, and it justwouldn't be the same without all the manipulation, misinformation, and monkeybusiness.

Many former investors now hate the financial markets and anyone who prospersthrough trading or speculation. With biblical fervor, these folks believe thatjustice must rain down on the greedy bastards who still appreciate themarketplace or prosper from its existence. Amazingly, many of these self-righteous critics still follow the market's every twist and turn through theirfavorite news channel or Web portal. Talk about hypocrisy!

I have a standard response whenever I get attacked for my continued faith intrading, capitalism, and the modern markets. It goes something like this: Whywaste your time if you're getting angry and upset reading the financial news?Take up knitting instead, or, better yet, join a political party. I'm sureyou'll be much happier in your misery, and Mr. Market will be a much kindergentleman without your daily attendance.

To quote a famous fictional trader, greed is good. Greed pays the bills and getsthe kids through college. Greed also performs an important community service. Itrelieves the misinformed of their excess capital and gives it to those moredeserving of its ownership. Indeed, pure unadulterated greed greases the engineof worldwide market inefficiency. And, without question, the twenty-first-century trader must be greedy in order to develop the predatory style requiredto prosper in our modern electronic markets. This fact of life may bedistasteful to folks who still believe in the tooth fairy or in Robin Hood, butthe rest of us understand there will be a loser for every winner, and everyonewho plays the financial markets has to choose whether to take—or gettaken.

THE PARADOX

The next two declarations are true on multiple levels, but they're also totallycontradictory. The markets (a) are the same now as they were one hundred yearsago, with timeless principles moving the tape, and (b) have changed radically inthe last decade and no longer operate according to timeless principles. Thereinlies the challenge for traders at all levels as we head into the second decadeof the new millennium. In a nutshell, we've read all the technical analysisbooks, attended all the seminars, and listened to all the market gurus andtalking heads. But nothing, absolutely nothing, has prepared us for the surrealscience fiction landscape we're now forced to navigate each day.

Of course, it starts with the trading bots. We knew the influence of programtrading would grow when we saw its handiwork between 3 and 4 p.m. New York timeback in the 1990s. But who could have predicted that coldhearted algorithmswould become the overriding force in price development, on a daily basis, just10 years later. On the surface, computerized trading is a great addition to themarketplace because it adds significant liquidity to the ticker tape. But thesealgorithms lack the singular force of nature we could always count on throughoutour years of flipping stocks, futures, and currencies: they operate without thetwin emotions of greed or fear.

That's right, trading bots won't panic when they find themselves on the wrongside of the market and won't get euphoric after good news delivers a windfallprofit. In other words, they don't act or react to the financial markets likeyou or I, our neighbors, or those suits on Wall Street. They're cold,calculating, and totally focused on their one-minded goal to move the markets intheir favor. Sadly, today's state-of-the-art algorithms wouldn't work with suchdiabolical precision if the market's historic center of gravity still existed.For all our complaints in the 1990s about the NYSE specialists and Nasdaq marketmakers, those savvy middlemen kept the trading bots in a controlled space, fromwhich we flesh-and-blood players could coexist in an uneasy peace.

That delicate balance was lost, perhaps forever, when electronic executionsystems killed the middlemen around 2005 and replaced their overriding role inmaintaining orderly markets with the ephemeral barrage of bid-ask prices thatnow flash across our screens at the speed of light. Retail traders like you andme have been forced to operate since that time in a desolate Mad Max landscapethat has become the centerpiece of our twenty-first-century auction place.

Wait a second. If things are really that out of control, why don't weall just give up and find another moneymaking hobby, like poker or macramé?Well, as it turns out, you can only screw around so much with the modern marketenvironment before it bites back. Whenever the tape gets a little too crazy,manipulated, or downright synthetic, we can depend on the natural forces ofsupply and demand to suddenly kick back into gear and take control, just likethe old-fashioned NYSE circuit breakers. Therein lies the incredible power oftechnical analysis. In truth, this venerable practice still works, although it'sbeen battered, beaten, and deconstructed into a zillion microscopic particles.Indeed, the power of price charts to expose zones of conflict and levels ofopportunity is undiminished in our new millennium, despite trading bots,inadequate regulation, and a marketplace with no center of gravity.

The balancing act for modern traders like you and me is to coexist peacefullywith the market whales that control price movement while applying technicalanalysis and razor sharp observation to identify inefficiencies that translateinto consistent profits. Of course, this is easier said than done because long-termprofitability requires a near fanatical commitment to our unique craft.Gone are the salad days when we could just throw money at a rising tape andexpect to get paid off on a regular basis. Simply stated, there's no seat at thetable for lazy or dumb money in our tough-crowd, postcrash market environment.

If you're still up for the considerable task, despite the sea of obstacles,you'll need to master the three overriding aspects of market knowledge andday-to-day strategy. These essential items represent the core themes of mypeculiar market view:

• Recognize what the market is saying whether or not it supports your bias orpositions.

• Find the right time and right price to take on exposure, or step back to thesidelines.

• Manage risk with razorlike efficiency while adjusting the odds in real time atthe hard right edge.

Finally, let me offer a word or two about trading discipline. As I noted adnauseam in The Master Swing Trader, most market players will fail due toa lack of discipline rather than a lack of knowledge. Despite that great truth,most of us are uncomfortable with the subject matter because we've deludedourselves into thinking we're disciplined individuals when we're not. Simplystated, the strategies and observations in this book are totally worthless ifyou fail to exercise steady discipline in your market approach. And there isn'tmuch I can say or do to turn you into a more disciplined trader. So, beyond apleasant set of truisms, bulleted lists, and horrifying examples scatteredthroughout this text, you're on your own when it comes to this life-or-deathaspect of market performance.

THE DIABOLICAL MARKET

Listen up, because the next sentence is extremely important to your long-termsurvival. Traps and trapping behavior are the primary forces moving ourmodern electronic markets. This contrary dynamic assumes the tape will actin a way that hurts the most traders and trading strategies. While stilldangerous, these bull and bear traps occur less frequently when the publicfloods into or out of the market, especially during strong bull advances andcascading selloffs.

Price seeks volume at all times and will go to great lengths to find it. This iswhy the markets tend to move toward points of maximum pain, taking out carefullyplaced stop losses and rational risk-based positions. In other words, themajority needs to be punished, with this prime directive seeking out fulfillmentthrough diabolical price mechanics. This force of nature becomes especiallypowerful after events (economic news, Fed meetings, earnings reports) that defycurrent expectations. Sadly, most traders react to shock data by overthinkingthe news instead of just leaning against whichever side of the market is gettingtrapped as event-driven price swings oscillate through the ticker tape.

How does price know where the greatest pain lies? It's relatively easy,because most traders do things in exactly the same way. For example, themajority of the retail crowd chases into overmargined positions using momentumstrategies already deconstructed by the smart money and their emotionlessmachines. As a result, price action undermines those classic methodologies farmore efficiently now than in the past. Fortunately, traders have the power toco-opt this contrary force and use diabolical thinking to get on the right sideof the market. Simply stated, diabolical thinking is your razor sharp focus onall the traps that can be set against the majority. To this end, ask yourselfthe following question whenever a shock event hits the market: "Which side hasthe biggest targets on their backs, right at this minute?" If you cananswer that query accurately, you're in a great position to make money.Figure 1.1 provides an example of how this diabolical thinking works inreal-time.

FedEx gaps down on June 22 in response to a premarket shock event. Downsidemomentum fizzles out within the first 45 minutes (1) of the session, with thestock settling into a narrow trading range (2) through the rest of the day.Clearly, longs holding positions overnight are the first group to be trapped bythe big gap. But the bull-bear dynamic evolves over time because weak-handedshort sellers pour in at the open "just because" the stock is down over a point.In the real world, these folks need to get punished because the lazy traderarely gets rewarded. With this in mind, the observant trader recognizes thattwo conflicting groups have targets on their backs that morning. First, thedown-side has to go far enough to shake out trapped longs. Second, the downsidealso needs to deny short sellers who jump in mindlessly after the open.

This bilateral scenario responds well to a first hour breakout-breakdownstrategy in which the trader marks out the high and low for the first 60 minutesof the session and then does nothing until one side gives way. Now, add indiabolical thinking and realize how the odds shift over time against the shortsellers because the trading range refuses to break to the downside. This simpletape reading observation, taken in conjunction with a basic execution strategy,contains all the elements needed to (a) get a reliable signal, long or short,and (b) locate and execute a trade with favorable reward:risk.

FedEx's first hour range holds through the rest of that session, with pricedropping to the morning low in the final minutes and inviting short sellers toenter at the close in anticipation of a breakdown at the next day's openingbell. The diabolical tape then kicks into gear, right on schedule, with a gap(3) well above the closing price and prior day's range. This buying thrustserves two vital functions. First, it traps short sellers, and second, it deniesrisk-conscious longs an easy entry into the new uptrend. The gap also serves athird and more diabolical purpose. It generates enough disgust on both sides ofthe aisle to force most traders to give up and move on, just as best entry (4)is finally setting up. This triggers when price pulls back to range support,tags it perfectly, and then resumes the uptrend with a three-point buying spike.

This perfect moment illustrates a key inefficiency within the diabolical crazyquilt. Simply stated, the market will often give you exactly what you want ifyou read the contrary forces accurately and are willing to wait long enough foryour ideal trade. That's easier said than done when you're suffering from thedata overload of a typical trading day, so how do you actually profit withdiabolical thinking? For starters, realize that many traps occur in volatilemarkets that are in the process of shifting balance between bulls and bears.Green bar–red bar alternation and contrary day-to-day gaps are the mostreliable "tells" for these all-too-frequent transitional periods. Two defensiveentry strategies work well in these actively diabolical conditions:

• Stand aside and watch the edges of support-resistance until the shakeout gamesare over. Then step into the trade.

• Keep stop losses tight and position size small, taking multiple entries untilprice action finally yields a favorable trend.

Diabolical forces are at work in quiet markets as well. Financial instrumentscan move through narrow ranges for weeks, shaking out traders through falsebreakouts and breakdowns. As with more volatile markets, the real trend usuallyarrives when the crowd is put to sleep through narrow range bars or is stuckpermanently on the sidelines, licking their wounds after too many losingpositions. Notably, the contrary dynamics in these large-scale events areidentical to the FedEx gap example but can take months to unfold, instead ofhours.

Mr. Market draws pretty pictures all the time through sentiment and priceaction. It's our job to wait patiently for the inevitable ambush as soon as themajority believes the illusion and takes the bait. This diabolical thinkingprocess might sound like a lot of work just to make a few bucks in the financialmarkets. Well, that's true up to a point. Fading strategies—i.e.,execution that takes advantage of traps—requires a unique skill set but,realistically, it's often the only way to play if you want to trade in the bigleagues.

There's an old expression that bulls and bears make money while pigs getslaughtered. If you take a passive approach to the modern electronic markets,you set yourself up to get pickpocketed on a daily basis. For this reason alone,it makes perfect sense to identify the weakest hands as quickly as possible andthen get positioned with the smart money and their coldhearted machines.

TWENTY-FIRST-CENTURY INEFFICIENCIES

The ferocity of the 2008 market crash caught most traders and investors offguard. Not surprisingly, none of the classic technical analysis books told uswhat to do when the CBOE Market Volatility Index (VIX) spiked above 50 and thenwhipped violently for over two months. The damage incurred during that historicperiod was as much psychological as financial, because it became virtuallyimpossible to trade overnight. The postcrash aftermath triggered a secondaryshock because most traders had spent their entire careers playing in a fertileenvironment that generated new and exciting bubbles on a nearly annual basis. Inturn, that beneficial cycle fostered a grand illusion that all price movementtakes place within relatively narrow buying and selling boundaries. Of course,we now know that this isn't quite true.

Price action generates constant inefficiencies that traders capitalize upon toearn their daily profits. These aberrations occur in all time frames, fromfive-minute charts to monthly trends. All inefficiencies, regardless of theirsource, have one thing in common: they generate a counterforce that will, sooneror later, cause the profitable opportunity to implode and disappear. Here's aclassic example. The tech bubble in 1999 and 2000 generated so much excitementthat folks with no market knowledge—i.e., "waitresses," "shoeshine boys,"and "Joe six-pack"—felt compelled to buy stocks at higher and higherprices. This chasing behavior eventually drained the last supply of availablebuyers, triggering a massively overbought technical condition that closed theinefficiency. Smart money then recognized the new inefficiency and sold thehighs aggressively, triggering a massive decline that forced first-in first-outweaker hands to exit the market for substantial losses.

At its core, the 2008 crash simply targeted the buy-and-hold mentality, which,although Wall Street might disagree, was the most abused market inefficiency ofthe last two decades. We got hurt during that period to the degree we weremindless investors rather than trader-opportunists, and since most traders arecloset investors, many of us got hurt badly. While the investing crowd can beforgiven for failing to comprehend the market dynamics that create profits,traders should be flogged for making the same error during those turbulenttimes.

(Continues...)

(Continues...)

Excerpted from THE Master Swing Trader Toolkit by ALAN S. FARLEY. Copyright © 2010 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: McGraw Hill
• Publication date: 2010
• ISBN 10: 0071664009
• ISBN 13: 9780071664004
• Binding: Hardcover
• Language: English
• Number of pages: 368