Over the past decade, the face of the trading profession has evolved

dramatically. With a mere push of a button, the layman can now access
the same financial markets and information that only stockbrokers were
privy to some years ago which means that everyone now has the same
opportunities and potential rewards and risks as highly experienced
professionals.
Yet the world of global trading is a tricky arena; a potentially rigorous test
of discipline and work ethic, requiring sound experience and knowledge.
Lore of the Global Trader focuses on the interests of the online day trader,
with specific attention to global markets. It hones into a variety of trading
styles and gives clear guidelines on what makes a person successful trader,
how to prepare for global trading, how to create an inter-market trading
plan and how to use technical analysis to follow ones predetermined
global trading strategy.
While this book will guide new investors to becoming self-employed
traders with balanced and diversified global portfolios, it may equally
appeal to more experienced traders in terms of rethinking their strategies
and reinforcing their trading disciplines.
Jacques Magliolo has been an investment and corporate strategist
since 1987, and has significant experience as stockbroker and business
developer. He is also the author of ten financial books, which include
The Millionaire Portfolio (2003), Become Your Own Stockbroker (2005) and
Women & Wealth (Struik, 2009).

PENGUIN
Non-Fiction

Strategies to Master
International Stock Markets

jacques
magliolo

Lore of the
Global Trader
Strategies to
Master International
Stock Markets
Jacques Magliolo

PENGUIN BOOKS

PENGUIN BOOKS
Published by the Penguin Group
Penguin Books (South Africa) (Pty) Ltd, 24 Sturdee Avenue, Rosebank,
Johannesburg 2196, South Africa
Penguin Group (USA) Inc, 375 Hudson Street, New York, New York 10014, USA
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Canada M4P 2Y3 (a division of Pearson Penguin Canada Inc)
Penguin Books Ltd, 80 Strand, London WC2R 0RL, England
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Australia (a division of Pearson Australia Group Pty Ltd)
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(a division of Pearson New Zealand Ltd)
Penguin Books (South Africa) (Pty) Ltd, Registered Offices:
24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa
www.penguinbooks.co.za
First published by Penguin Books (South Africa) (Pty) Ltd 2011
Copyright Jacques Magliolo 2011
All rights reserved
The moral right of the author has been asserted
ISBN 9780143527374
Typeset by Wouter Reinders
Cover by Flame Design
Printed and bound by Ultra Litho, Johannesburg
Except in the United States of America, this book is sold subject to the condition
that it shall not, by way of trade or otherwise, be lent, resold, hired out or otherwise
circulated without the publishers prior consent in any form of binding other than
that in which it is published and without a similar condition including this condition
being imposed on the subsequent purchaser.

You get recessions, you have stock market declines.

If you dont understand thats going to happen, then
youre not ready; you wont do well in the markets.
Peter Lynch
International best-selling author of
Beating the Street

To my late grandfather
Salvator Giacomino Magliolo

Note from the Author

Some years ago I was introduced to a wizened old man, craggy in every
respect. He was dressed like a hobo, and had arrived in a vehicle that had
certainly seen better days.
Meet Mr Jaychek, I was told. You know; the trader I told you about,
my colleague added, reminding me that this was the man who had made
US$100 million as a day trader over a five-year period. He had made this
cash with little help from anyone, and had focused completely on day
trading the Asian markets.
He shook my hand and said: So youre the genius who wants to know
about international markets? I noted his sarcasm, but nodded anyway.
A grin moved across his face.
Let me start by scaring you to death.
Over the last 100 years there have been 29 major stock market corrections, with declines averaging 31.6%. That is an average market
correction every 3.5 years.
There were ten in which the declines averaged 49.4%.
In those, investors lost 50% of their invested assets.
Yes, I said, certainly scary.
Mr Jaychek frowned: Will the next bull market convince you that this
time it will be different? Are you immune to the next crash?
The statistics got me thinking. If the average correction is 31% and it
happens every 3.5 years, then, if you are to survive as a day trader, youd
better make significantly more during the bullish cycle. The record-breaking
bull market of the late 2000s certainly had that effect on many investors, who
lost most of their gains when the financial crises of 2008 hit world markets.
The reality is that even long-term investors lose their money if they are not
astute enough to sell when the market has reached its three-year height. In
fact the figure stands at a shocking 80%, which means that the old market
adage of beware of greed continues to play havoc with investors wealth.
What makes Mr Jaychek and other the global traders different from longterm traders?

vi

The global trader diversifies across securities, both locally and worldwide;
including foreign bonds, emerging markets, futures, commodities and all
types of newly developed instruments and securities. However, if you really
want to become an international trader, you have to be sufficiently informed
to understand risk-to-reward matrices and devote enough of your time
to study both fundamental and technical strategies. In Lore of the Global
Trader, the aim is to help you to discover a private trading methodology that
fits your personal preferences and ideologies, while setting out crucial and
essential strategic tools for you to succeed in a volatile and hostile global
trading environment.
Again, Mr Jaychek asks the obvious: Why do you want to take up day
trading? Do you think you are prepared? Do you have strong work ethics
and discipline?
I looked at this successful trader, and the words of so many failed
traders filtered through my subconscious mind.
Is it absolutely necessary to have only one trading strategy in place?
Cant you trade as you please?
Do you really need to hedge your trading positions?
Why must I understand forex to trade forex?

I shook those thoughts away and listened to Jaychek. He was reiterating

that day trading requires absolute discipline.
He said: The two obvious and much-talked-about market emotions of
greed and fear can quickly control your every waking moment and if you
allow them to you will surely fail. Then he smiled and added: Do you
know that there is another emotion which is hardly ever spoken about, but
which is especially pertinent to the global trader?
Despite my many years in stockbroking I had to admit that I didnt
really know what he was talking about.
Remember that trading too much is detrimental to your financial
health, if you are driven by greed or fear. Worse than that is the trader
who bases his or her trades on the chance or hope of making money.
Hope, he said, will annihilate every chance you ever had to succeed as an
international day trader!
I spent many more hours with Jaychek, and his final advice was as
follows:
Always trade with a long-term view.
This enables you to take advantage of short-term market anomalies.

vii

Have various global account and trading platforms. These are discussed
in this book.
Be disciplined.
Apply your own strategies, and believe in them.

It might be trite to start a book by pointing out mistakes commonly made by

the majority of new traders, but my intention is to do so as a forewarning:
Without discipline, you will repeatedly make the same mistakes until you
are permanently driven out of the market.
However, if you follow your own established trading rules as created in
a well-thought-out trading plan, then the following should not apply to you.
Trading without a fundamental and technical basis.
Trading without stops losses.
No discipline leads to erratic trading.
Continuously attempting to pick the market bottom or selling at
perceived (guessed) market highs.
Allowing losing positions to ride too long.
Trading too often.
Not taking responsibility for your actions.

MENTORING AND A KNOWLEDGE BASE

You need to start at the beginning and do it right the first time. Do you
have money and time to waste by continually making the same mistakes?
Getting you started properly is a key to trading success. A good mentor
should be your personal sounding-board to help you to ultimately make
your own decisions. In fact, a mentor should help you decide what you need
to get started as a day trader.
Who do you get as a mentor? I suggest that you find someone who can
provide you with advice on how to set up your own trading plan, select
trading strategies, set up an international trading platform and provide you
with guidance to formulate buy-sell strategies.
In addition, I suggest that your mentor should be knowledgeable about
different forms of securities, from equities and futures to bonds and forex.
If you intend to delve into the more complex commodity trading sphere,
you may need to get specific expert help.
My advice is to get an experienced mentor, but always ask this question:
Is your mentor honourable? Does he or she have a good reputation? Ask
for references.

viii

Ask the questions, and watch his or her reaction. A good mentor
will gladly provide you with answers, while less honourable ones may get
irritated. Anyone who becomes irritated with you should be ignored. Im
sure you can imagine how helpful theyre likely to be when you need advice
in future.
I suggest that you take this step very seriously, and that you think
carefully about finding a good mentor. Paying for the service of a good
mentor can be worthwhile, but one who is less than helpful could do more
financial harm than good. For instance, if the mentor says that he will charge
you a percentage on your capital growth, there is little objectivity. He or she
could place your funds in higher-risk securities, as his or her income will be
derived from your capital growth. Rather try and find a mentor who will be
paid a smaller upfront fee, with small capital gains.
That way, he or she has an objective link to your capital growth, but
not to the extent that he or she will place your funds in extremely high-risk
securities in the hope of earning a higher commission.
Thanks to all traders, writers and industry professionals who have been
kind enough to share their insights into trading since 1990.
I have been honoured to work with them, giving me the confidence
to conduct conferences and workshops and to set up day trading
strategies.

Contents

DEDICATION
NOTE FROM THE AUTHOR
INTRODUCTION
PART 1: ARE YOU READY?
CHAPTER 1: BULLS, BEARS AND OTHER FAQs
QUESTIONS AND ANSWERS
The basics
Starting out
Trading regions
Profitability
Knowledge and expertise
Trading rooms
Taxes
Trading basics

CHAPTER 3: STOP! HAVE YOU DEVELOPED A TRADING PLAN?

GUIDELINES FOR WRITING A TRADING PLAN
Aim of a trading plan

CHAPTER 2: LOOKING FOR TIPS? BECOME A WAITER

TESTING YOUR APPETITE TO BE A TRADER
Test 1: Are you a trader?
Test 2: Determine your trading beliefs
Test 3: Level of skill
Test 4: Profile your objectives
HONE YOUR TRADING SKILLS
Simple rules
Establishing your own strategy
Investment formulas should be flexible
Develop your own trading system
Know what to expect
Knowing when to trade
Bits of wisdom

A vital element for success

DEVELOPING A COMPREHENSIVE TRADING PLAN: A FOUR
PHASE, TEN STEP PROCESS
Phase A: Setting up the trading plan
Phase B: Selection of a specific trading strategy
Phase C: Trade execution methodologies
Phase D: Money management and reassessment of strategies
DIY QUESTIONNAIRE
PART 2: BECOME A GLOBAL TRADER
CHAPTER 4: MAGLIOLOS LORE OF GLOBAL TRADING
LORES TO LIVE OR DIE BY
Lore 1: Discipline and work ethic
Lore 2: Viva famine! Viva war!
Lore 3: Start with future goals
Lore 4: Develop a gut instinct
Lore 5: Survival of the fittest
Lore 6: The market is your guide
Lore 7: Basics are sacrosanct
Lore 8: Do or die never hesitate
Lore 9: Sometimes, just walk away
Lore 10: Be paranoid
Lore 11: No short cut to wealth
NOT LORES, BUT SAGE ADVICE
Trade only with proven methods
Ask questions
CHAPTER 5: KEY WORLD MARKETS
ITS A BIG WORLD OUT THERE
Become a financial globetrotter
Practicalities of global trading
Yes, you have to pay taxes
GLOBAL STOCK EXCHANGES
NYSE
NASDAQ
American Stock Exchange
The London Stock Exchange
Hong Kong Stock Exchange
Tokyo Stock Exchange

CHAPTER 6: CONNECTING TO GLOBAL EXCHANGES

SETTING UP A GLOBAL ACCOUNT
Offshore trading accounts
Direct-access broker
Commissions and fees
Opening a US futures account
Regulations
Opening a US futures account
SETTING UP A GLOBAL TRADING DESK
Share price downloads
Computer equipment
PLACING ORDERS ON GLOBAL EXCHANGES
PART 3: CREATING AN INTER-MARKET TRADING PLAN
CHAPTER 7: INTRODUCING TRADING STYLES AND METHODS
CHOOSING YOUR TRADING STYLE
MARKET ANALYSIS
Fundamental analysis
Technical analysis
DEFINING ACTIVE TRADING
Going long vs going short
CHAPTER 8: TRADING PATTERNS BASICS UNCOVERED
IDENTIFYING CHARTING PATTERNS
Some basic pattern definitions
DEFINED PATTERNS
Double-tops and -bottoms
Head and inverted head and shoulders
Descending, ascending and symmetrical triangles
Flags and pennants
CHAPTER 9: UNDERSTANDING LIQUIDITY, VOLUME AND GAPS
VOLATILITY, LIQUIDITY AND GAPS
TRADING GLOBAL MARKET GAPS
What is a gap?
CATEGORIES OF GAPS
Common gaps
Breakaway gaps
Runaway gaps

xi

xii

CHAPTER 10: TRADING STRATEGY STYLE 1 TREND-FOLLOWING

FORMS OF TREND TRADING
Scalpers
Swingers
Core trading
Position trading
Discretionary and system trading
CHAPTER 11: TREND-FOLLOWING TECHNICAL INDICATORS
IS IT A TREND?
Positive/negative directional indicators
USING SIMPLE MOVING AVERAGES (SMA)
Gauging moving average trends
TURTLE TRADING
The MACD
How traders use MACD
Positive divergence
Bullish moving average crossover
Bullish centreline crossover
Combining signals
Bearish signals
Negative divergence
Bearish moving average crossover
Bearish centreline crossover
Combining signals
CHAPTER 12: TRADING STRATEGY STYLE 2 TREND-FADING
NO FREE MEAL
STARTING WITH A DEFINITION
Market facilitation index (MFI)
THE CONTRARIAN OPTION
Fading long
Fading short
CHAPTER 13: TREND-FADING TECHNICAL INDICATORS
THREE FADING INDICATORS
Indicator 1: Williams %R

Exhaustion gaps

Indicator 2: Relative strength index

Indicator 3: Bollinger bands
Head flakes
FADING AND GAPS
CHAPTER 14: TRADING STRATEGY STYLE 3 END-OF-TREND
THE 1-2-3 CHART PATTERN
Method 1: The easy use of 1-2-3
Steps in finding the 1-2-3 pattern
Bearish and bullish candlestick 1-2-3 patterns
Method 2: More complex technique to confirm 1-2-3
Method 3: Identifying length of new trend
CHAPTER 15: TRADING STRATEGY STYLE 4 CANDLESTICKS
WEST MEETS EAST
DEFINING THE TWO PATTERNS
Candlesticks 1: Tower tops and bottoms
Candlesticks 2: Rising and falling three patterns
Trading like a Japanese demon
PART 4: DEVELOPING ADVANCED TRADING SKILLS
CHAPTER 16: FINDING THE MARKET BOTTOM
FINDING MARKET BOTTOMS
Forecast bottom reversals
CHAPTER 17: SHORTING TECHNIQUES
BASICS OF GOING SHORT
The mechanics of going short
Why go short?
Market balance
Offsetting risk
SIMPLE SHORTING STRATEGIES
CHAPTER 18: PAIRS TRADING
MATCHING STOCKS
STEPS TO PAIRS TRADING
Step 1: Find and choose a pair
Step 2: Use your technical charts to confirm correlation
Step 3: Create a price ratio chart

xiii

xiv

Step 4: Carry out the trade

CHAPTER 19: BREAKOUT STRATEGIES
PROS, CONS AND MISCONCEPTIONS
Pros and cons
Breakout misconceptions
TRADING BREAKOUTS
How to enter a breakout
Entry styles
Exit styles
CONCLUSIONS
CHAPTER 20: TESTING AND TROUBLESHOOTING SYSTEMS
TESTING YOUR TRADING STRATEGY
TROUBLESHOOTING PROBLEMS
Phase 1: Common human errors
Phase 2: Troubleshoot errors
Phase 3: Testing your indicators
CHAPTER 21: FINAL THOUGHTS
THE GLOBAL TRADER: TAKE NO PRISONERS
APPENDICES
REFERENCES
GLOBAL STOCK EXCHANGES
GLOSSARY

Introduction

There is a broad body of laws involving trading, which goes back many
decades. In the late 1980s I was reading about technical strategies before
online trading had even been considered as a possible future trend. This
method of determining what to buy or sell has gained enormous popularity
in the past five years, elevating the importance of stock markets around
the world. So, like any free-market profit endeavour, technical trading has
become the focus of market pundits, economists and traders around the
world. The difference is that online trading has given many individuals,
both professional and layman, the opportunity to start a new career.
As you read this book, you will realise that Lore of the Global Trader is
effectively the fourth in a series of books I have written on how to trade.
It all started in 2002, when I launched my first book, called The
Millionaire Portfolio. It was the first time emails and websites featured in
one of my books, and the result was astounding. I started receiving emails
from investors and traders who were struggling and needed assistance with
the absolute basics of fundamental and technical analysis. The demand for
advice led to Become Your Own Stockbroker, which set out in simple terms
on how to build your own broking firm. It also set out basic strategies to
trade in the South African equities markets.
The third book, Richer than Buffett, took the reader into the realms of
day trading equities and futures markets.
Yet, even as I was writing the Buffett book, a significant worldwide
change was taking place in the very foundation of stockbroking. The openoutcry trading floors of many global exchanges were being disbanded in
favour of computerised trading methods. Increasingly, stockbrokers use
fibre-optic cables to trade electronically, while the layman (the household
trader) uses telecommunications lines. Around the world, trades are
effectively executed directly between buyers and sellers on electronic
communications networks (ECNs). This even includes the multi-billiondollar US electronic market, NASDAQ.
This new way of trading around the world, which directly links buyers
and sellers, inspired me to write Lore of the Global Trader. My aim in writing
this book is to help interested investors to become self-employed traders,
with balanced and diversified global portfolios. At the outset, though, it is
important to understand that while some of what you read in Lore of the

xvi

Global Trader may be familiar, the approach to establishing your strategies

will be completely new. My hope is that the book will inspire you and bring
new meaning into your life as a global day trader. I have said this before
but I believe it needs to be reiterated do it right the first time. If you follow
some simple guidelines, you can avoid many of the pitfalls experienced by
those who have gone before you.
This book is also aimed at the more experienced trader, who has
unfortunately not yet reached predetermined financial and trading goals.
Stockbroking colleagues, in proofreading this book, have told me that
professional and semi-professional traders should also read Lore of the
Global Trader to rethink their strategies and to reinforce trading disciplines.
Even highly successful entrepreneurs may find global trading to be a
rigorous test of discipline and work ethic. This book therefore effectively
outlines two important steps for every trader:
Develop a detailed trading plan.
Develop strategies to carry out your trading plan.
At the risk of becoming bored and jumping straight to Chapter 1,
understand this: the Internet has changed everything about global markets;
about traders methodologies, and how they conduct their strategies. With
a mere push of a button you can access the same financial markets and
information that only stockbrokers could do some years ago. With todays
technology, you have all the same opportunities, potential rewards and
risks that professionals do.
The difference is knowledge and experience, both of which are now
within your grasp.
High-speed Internet access to worldwide information, including real-time
live securities prices and technical analysis of those prices, has turned
the homebody semi-professional trader into an intra-day, highly efficient
trader. Many investors are finally beginning to realise that they too can be
equal in the race to master trading techniques. This means that you can be
proactive and no longer simply reactive to major market movements.
Remember that, from a trading and fundamental perspective, nothing
can compete with experience. Therefore this book is designed to help you
avoid the same mistakes that others have made when they started out.
While there is no guarantee that you will always be successful in your

xvii

trades, follow sound advice from your mentor and you should keep losses
to a minimum.
This book is split into four parts: a basic overview of what makes a
person successful; how to prepare for global trading; how to create an
inter-market trading plan and how to use technical analysis to follow your
predetermined global trading strategy.

Back to Jaychek
If you still want to be a day trader, despite the negatives, let me tell you
about myself. The following is an abridged version of the story Jaychek
told me.
When Jaychek started out as a trader in October 1997, just before the
emerging market crash, he deluded himself into thinking that he simply
could never fail. He based this mindset on his personal history of poor
health. Despite being born with a bone disease, he has never been afraid
to take risks. In fact, he says that he is grateful for the disease, because
it taught him so much about himself and forced him not to be reliant on
others.
He never saw himself as any different from other people. Despite ill
health, he succeeded in obtaining a university degree and getting into
stockbroking. Working his way up from being a chalkie to being a fully
qualified trader, he is an inspiration to many younger people. In the days of
open-outcry systems, traders would shout prices to a person on a platform,
who would write these prices on a trading board with chalk; and so they
were called chalkies.
Many analysts today claim that open-outcry systems allowed traders to
better understand investor sentiment. This means that traders were better
able to assess greed and fear than todays computer traders are.
What is the result of Jaycheks positive attitude? Besides having a
positive outlook in his personal life, his ability not to give up in the face
of adversity enabled him to succeed as a trader. He believes in his analysis
and doesnt jump from one trade to another; panic and greed are not part
of his vocabulary.
Today, Jaychek cannot trade every day, because he is often in pain.
However, he trades well on the days that he does trade. His sleep schedule
has been thrown into chaos, so that he now goes to sleep around 05:00 and
sleeps until 11:00 or noon.
His solution is to trade international markets that are active when he is.

xviii

The opposite of Jaychek is also true. I have met many traders who see
faults and problems with every trade. The result is that they are virtually
paralysed by their own analysis, which finds only obstacles, problems and
impending doom in every possible variable of a trade.
Note that the contents of Lore of the Global Trader focus on the interests
of the online day trader, with specific attention to global markets. It homes
into trading styles and delves into a profession that is often shrouded in
mystery.

Part 1
Are You Ready?

A good trader has to have three things: a chronic

inability to accept things at face value, to feel
continuously unsettled, and to have humility.
Michael Steinhardt
Best-selling author of No Bull:
My Life in and out of Markets

A WORD OF CAUTION
Becoming a professional trader takes years of hard work, gaining
experience and knowledge. It is not a get-rich-quick scheme.
There is no doubt that you will encounter trading obstacles, problems
that must be resolved and risks that must be determined. Trading is
therefore not for the faint-hearted.
Day trading necessitates absolute knowledge of industry, diligence,
the ability to analyse and react to a hostile and ruthless tide of
contradictory information shrouded in fear, despair, greed and hope.
To make matters worse, such information is now global, incorporating
the new risks of time zones, methodologies and currencies.
If wealth and risk appeal to you, begin your transition into day trading
now! Why wait?

Please note that this is a book that shows you how to start on your
journey to international trading. Therefore, all denominations are in
US dollars.
Enjoy the book, and contact me personally if you have any questions,
whether theoretical or practical.

Jacques Magliolo
mentor@magliolo.com
www.magliolo.com
2010

Chapter 1: Bulls, Bears and Other FAQs

Day Trading Reality No. 1:

Analysis vs guessing
Many new traders analyse a potential deal for so long that the deal or
trading opportunity is lost. Conversely, some traders guess and trade
on mere gut feel. Both sets of traders will ultimately be driven out of
the market.
Every single day of the year, untold billions of US dollars are traded around
the world via equity, financial and currency markets. There is no doubt that
trading is by far the largest legal business on earth today, attracting millions
of new traders every day. Yet, when I present a lecture on trading, and I ask
people in the audience what a bull market is or what defines a bear market,
only a handful of people actually know the answer.
The conclusion is that the average person simply has absolutely no idea
what drives financial markets, yet everyone in the room wants to trade for a
living!
What astounds me is that the average trader doesnt actually
understand how markets work. Maybe we can blame sellers of technical
analytical packages, who promise traders that all fundamentals are already
in the indicators and you dont have to understand how markets work,
because indicators have built-in warning signals. If you do not understand
what factors influence markets and you do trade, then you are really just
gambling.
So, many new traders are quite happy to blindly follow technical systems,
which are based on market movements. They simply base their trades on
indicators without understanding economic, business, social or political
causes for the underlying equity movement. Many are highly intelligent,
but when two simple questions are posed, 98% do not know the answer.
While such a statistic is not part of any national database, personal
experience highlights that if you do not understand market conditions,
then every trade you make will be based on incorrect assumptions. You may
succeed for a while, but eventually you will be wiped out.
So what are the two simple questions posed to new traders?

QUESTION 1

Which is the leading indicator the stock market or the

economy?

QUESTION 2

What is the key driver of share prices?

ANSWERS

Youll find the answers in Chapter 7

If you cannot answer these two questions, you are in serious trading trouble.
That is, unless you start from the beginning and learn the basics before you
start to trade.
Since writing Richer than Buffett in 2007, I have been inundated with
questions about day trading, intra-day trading and in the words of one
client how do I get stinking wealthy in this volatile and unpredictable market?
As such, I thought that an obvious way to start this book would be to set
out some of the more critical questions which I have been asked in the past
two years. If you have additional questions, send them to me at mentor@
magliolo.com

QUESTIONS AND ANSWERS

The basics

What is day trading? Day trading is a strategy to buy and sell securities
within the same day; whether shares, futures or commodities, etc.
Using the Internet, you connect to a brokerage firm to buy or sell
stocks. Your ability to access a global online market is completed
through a system called Electronic Communication Networks, or ECNs.
The particularity about day trading is that you do not hold positions
overnight; ie if you buy 1 000 shares in Anglo in the morning and you
sell them before the market closes on the same day.
Is day trading for beginners? Yes, but it does take willpower and
strong discipline. While there is no magic in this form of trading, you
must accept that you will need to learn strategies through proper
education and practice.
Do I need a strategic plan? The quick answer is absolutely; see Chapter 3.
Can I start part-time? Yes. Always remember that you have control
over every aspect of your trading, including times you trade and what
securities you buy. However, it is highly recommended that you take
advantage of the services of a mentor before you begin trading. Trading

online using the Internet allows you the flexibility of trading from your
home and office, at the times which are convenient to you.
How much money do I need to start? Typically, you can open a stock
trading account with a minimum of US$2 000. However, with such an
amount many online brokerages will restrict you to three daily trades
over a five-trading-day period. To open an account with unlimited
trading access you always need to have a balance of US$25 000 in your
account. There are two types of people who ask this question.
Those with little capital at their disposal: I recommend that you
wait until you have enough money to trade. Save US$2 000 and then
trade. Meanwhile, use the time to learn the basics of fundamental
and technical analysis.
Those who lack trading knowledge: If you are disciplined and have
sound trading strategies, then it shouldnt matter how much money
you have to open an account. So, build up knowledge and, in the
meantime, accumulate cash to start trading.
What is being long or short? You are long of stock if you buy and hold
shares for a long period (usually years). However, it can also mean
that you are bullish and are buying shares which you believe will rise in
value. You are short if you believe that the share or market will fall; see
Chapter 17.
What is swing trading? This form of trading is a short-term investment
strategy where a trader will usually hold a security for up to five days. The
aim is to benefit from upward market gaps. The negative side to swing
trading is being vulnerable to downward gaps from unexpected negative
news or a market correction. Gaps are explained throughout this book.
Is day trading highly risky? Day traders are competing not only against
the many millions of day traders around the world, but also against
market-makers and institutional traders, who have billions of dollars at
their disposal.
To reduce your risk exposure:
Always use a stop-loss strategy.
Use a reasonable reward-to-risk ratio, ie you should make three
profitable trades to every loss.

Starting out
Is it wise to resign from my job to day trade? As with any potentially
life-changing decision, serious planning is required. I have noted in

previous books that day trading is not for everybody, so I suggest that
you start slowly. In fact, start by finding a mentor to teach you day
trading techniques, so that you are prepared before you take serious
decisions about your livelihood.
What is paper trading? This is the use of hypothetical trades. You
complete your own analysis and then theoretically buy securities. There
are systems which allow you to train before making trades with actual
money. Only after you are confident that you can make money should
you begin risking real funds. There are various websites which allow
you to trade with virtual money. I recommend www.realtick.com as a
good starting place.
Always develop your skills with a live-pricing share system to build
confidence and a personalised strategy. It is cheaper to have a
trading technical system which only updates share prices at the end
of the day, but this doesnt enable you to test how truly risk-averse
you are.
Make sure that you do not pay commissions when using a demo
system.
How long you use a demo system depends on you, and how fast you
can learn and implement trading strategies. Essentially, stop using the
demo system when you are comfortable with your trading strategy.
Should I day trade with my savings? The attraction of day trading to
many new traders is a means to make easy money. This is the reason
many novice investors risk too much too quickly, and usually make
substantial losses and give up trading before giving it a real chance to
succeed. The general rule of thumb is never to trade more than 25%
of your net available funds. I suggest that this should be 25% of your
liquid net worth, which includes shares, bonds and available cash.
Therefore, if you want to trade with US$25 000 as suggested above,
you effectively need to have US$100 000 in liquid assets.
I suggest that the initial amount should be US$2 000, which means
that you need to have at least US$8 000 to start your trading career.
Having less market exposure does not mean that you can be
more risky in your investments. If you have the right and initially
conservative trading strategy, it shouldnt be too long before you
have the increased your funds to US$100 000. Remember that
trading futures has a gearing effect on your US$2 000. In some
instances the geared effect is ten times, which means that you will
have a trading exposure of US$20 000.

Trading regions

Can I day trade if I live outside the US? Depending on who you speak
to, you get different answers:
While the US does offer incentives to foreign investors, there are
exclusions.
Due to the US Patriot Act, traders from some countries are not
permitted to open accounts in the US, including:
Afghanistan, Myanmar, Cuba, Iran, Iraq, Libya, North Korea,
Sudan, Syria, Angola and the Western Balkans.
If you do not live in one of the above prohibited countries, you should
have no difficulty opening an account in the US to trade. I would
recommend that you check first, with an online trading account. There
may be additional costs associated with trading through US-based
accounts.
You must meet certain requirements, but can access US markets
from other countries (See Chapter 5 and 6).

Profitability

Can I make unbelievable profits from day trading? This is probably

the most common question I have been asked by novice traders. The
answer really rests with the skills and ability of the individual to learn
and develop his or her own trading strategy.
A new trader can become successful by developing a realistic system
to earn increasing amounts of income over time, but such traders
can also fail miserably for many reasons, and not just because of a
lack of discipline.
As there are many psychological and educational variables involved
in becoming a successful day trader, it is actually difficult to give a
definitive answer.
However, if done correctly, day trading can become one of the most
lucrative businesses in the world.
Is there a way to prevent capital losses?
No broker or expert can guarantee that you wont lose your money
when day trading.
If you want to become a day trader, you must take responsibilities
for all your trades.
You make the decision to buy and sell, and you cannot and should
never play the blame game.

If anyone guarantees that you will make money from day trading,
they are lying to you. Day trading is like any other business, so there
are no guarantees. The question you should ask yourself: does that
prevent you from starting such a career?

Knowledge and expertise

Should I pay for day trading courses? Find a mentor; one who you
trust. Ask him or her about trading courses, information (books and
newsletters), and to help you to set up a strategic plan. There are many
scam artists out there, so be careful.
To learn to trade correctly, you must expect to pay somebody to
guide you through the many potential pitfalls in stockbroking. Start
with the basics, and get help with setting up a strategy.
The above should include actual trading with live-market prices using
a market demo programme.
These are a great learning tool for serious day traders.
I have invested in shares in emerging markets before. Will global day
trading be easy? If you are already familiar with the types of orders and
basic concepts, you can jump right into other more advanced day trading
systems.
Can day trading be treated as a career? If you obtain the appropriate
day trading education and practise on a day trading demo programme,
you can become a full-time day trader. But I am not suggesting that you
resign from your regular job to start day trading right away. Start slowly.
Rather than risking everything by assuming that you are definitely
going to be a successful day trader, you could open a day trading
account, while you remain in your current occupation and see how it
goes.
What is the best way to learn day trading? You need to go slowly and
not rush into anything.
First, you need to learn the basics of trading.
Read books, newsletters and newspapers, and you will accomplish
a good theoretical understanding of the markets. Before you start
day trading, you need to learn a specific trading technique that you
can understand and follow. Even though there are many day trading
strategies you can learn, you need to pick one; see Chapter 7.
Practise on a day trading demo system and then open your day
trading account to conduct real trades.

Trading rooms

Should I trade from home or from a separate office? Even though it

does feel good to trade with someone or with a group, this is not always
a good thing.
I have set up a personal trading room at home. However, it is not
part of the house, and so it is private and a place I go to work.
From experience, I find that people are more of a distraction than a
benefit.
Do I use a laptop or desktop? If you already have a modern laptop and
dont want to spend money on a desktop, then just get a separate hard
drive and connect it to the appropriate port on the back of the laptop.
This is called a hub, and enables you to store and update your laptop
continually.
Is online day trading safe? From a technology point of view, trading
online is safe. These online systems have security features that make
them secure. Technology aside, day trading online can become very
expensive for people who are not properly prepared. Remember that
every trading mistake is a loss in both funds and confidence.
What options are there for online connections? The area you live in
will determine what services are available. For common connection
methods, see Chapter 6.
How do I select an Internet Service Provider (ISP)? ISPs vary in speed
and reliability. Important questions to ask as you search for providers
are:
Do they have a local toll-free phone number?
Do they experience bottlenecks?
Will you get busy signals when you dial in?
Do their servers run at less than 75% total capacity?
Do they offer uncapped Internet bandwidth?
Does such uncapped bandwidth have a slower speed than a
personalised service?
Does their service automatically disconnect you after 20 minutes? If
so, can the disconnect feature be disabled?
Do I need more than one monitor? While you really dont need more
than one monitor, multiple monitors will make your day trading job a
lot easier.
If you are day trading stocks using a direct access broker and level II
software, you will need at least two monitors possibly even three.

10

If you are trading across world exchanges, I suggest that you have at
least two monitors.
It is always easier to have your live-trading platform on one monitor,
while you use another to watch market news and yet another to
conduct your research.
Do I need ADSL/DSL? Stock-trading software always requires a lot
of data and statistics to be constantly downloaded to your trading
platform via the Internet.
Consequently, you are better off getting an uncapped broadband
Internet service if you are planning to trade stocks.
My advice is to start off with the best and fastest available Internet
connection. You do not want to experience data-download delays,
where the data being displayed on your computer screens lags the
actual market data. Not a very pleasant thing to experience.
What does day trading software cost? The price of day trading software
can vary greatly. Make sure that the software you use for day trading
provides charting, as well as order execution built into the platform.
I always prefer technical systems that are more fundamental than
technical in execution.

Taxes

Do I have to pay taxes in day trading? The quick answer is yes, but
there are various regimes in different markets.
If you are a US citizen or resident, you do have to pay income
taxes on your day trading profits. The amount of taxes you pay will
depend on whether you trade in your personal capacity or through a
legal entity.
If you are a non-US resident with a registered trading account in
the US, you will be happy to hear that you can trade without paying
any taxes to the US Tax Revenue Services. This is one of the best
incentives offered by the US to foreigners who trade in stocks,
futures and currencies.
I recommend that you check with a tax professional. In South
Africa, for instance, you have to pay taxes on any trading profit
made in any country; see Chapter 5.
Does currency trading have more tax benefits than trading stocks?
This answer is that this is indeed true for US residents or citizens.

11

Currency day traders have a tax advantage over stock traders in the
US.
60% of the capital gains from trading currencies are taxed at the
lower long-term capital gains tax, and only 40% of the profits are
taxed at the higher short-term rate.
However, all profits made from share-trading are considered shortterm and are taxed at the higher short-term rates. In other words,
stock traders do not enjoy the favourable 60/40 split that currency
traders have when it comes to taxes.
In South Africa all trading is considered as either capital gains or
full personal tax.

Trading basics

What is the best time to day trade? While there is not really a best
time of day to trade, there are certain hours that provide greater
opportunities for a day trader.
Most stock markets open at between 09:00 and 09:30 and close
between 16:00 and 17:00.
The prime time for day trading stocks is between 10:00 and 12:00 and
between 14:00 and 15:30.
When the stock market opens, there is a lot of volatility, so it is
difficult to assess general market direction.
By around 10:00, there is usually a better indication of market
movement and trend.
Between 14:00 and 15:30, many traders and other market
participants are out to lunch and trading usually quietens.
Consequently, the more professional traders do not initiate new
trades during this time.
After 16:00, trading activity starts picking up and builds until the
close.
During the last half-hour of official trading, the market may get
chaotic, so professional traders are usually out of the market by
then.
Even though some people will argue that it is possible to day
trade in the pre-market and after-hours trading sessions, in many
countries these times are restricted to institutional traders only.
Depending on what timezone a day trader lives in, he or she may

choose one or various ranges of hours during the day to execute

trades.
Can I predict what prices are going to do? The day traders job is to
have completed his or her own analysis, to have a strategy in place
before a trade, and then to carry out that strategy. This includes having
a buy-and-exit strategy.
Novice traders often hesitate before placing a buy order. Many also
hesitate before selling a stock. The inability to carry out your own
strategy simply means that you are not ready to be a full-time trader.
You will only become a successful trader when you can carry out
orders without thinking; when you realise that winning and losing is
part of day trading, which can only be minimised through thorough
research.
Can I day trade only a few hours a day? The more time you spend day
trading the better but you dont have to be glued to your computer
every minute of the day.
If you are only going to trade for a few hours a day, I recommend
that you should concentrate on the first part of the trading day, ie
from when the market opens until lunchtime. These are prime-time
hours for day traders who concentrate on equities.
Therefore, global day traders need to choose a market which
is convenient to their trading style, and then be consistent in
maintaining trading during those times.
Global day traders can also operate during the hours of the day
when more than one exchange is open, such as Asian and European
markets.
Where can I find a good online day trading company? There are
many of them, and they are discussed in Chapters 5 and 6. A word of
warning: since these online trading platforms make commissions from
their traders, they usually try to get them to trade more frequently.
Dont be lured into overtrading by online trading platform
brochures.
Overtrading can be severely detrimental to the trader and his or her
account.
Should I use news to day trade? The release of important and crucial
financial and economic news will normally cause the market and
specific stocks to fluctuate more than they normally do.
This increase in volatility makes it more interesting for day traders,
since opportunity comes with volatility. For that reason, the

12

13

professional trader will take a position before the announcement of

crucial data. If you have done your research, both fundamental and
technical, you should benefit from the release of financial data.
Lets look at simple rules and strategy in Chapter 2.

Chapter 2: Looking for Tips? Become a Waiter

Day Trading Reality No. 2:

The strongest markets have multiple companies, sectors and varieties
of securities; the weakest exchanges have fewest choices
While traders can profit from speculating in smaller stock exchanges,
the real day trader looks at the strength of a market, its underlying
trend and large daily volumes of trades.
Larry, an old trader colleague, once told me the story of how he was sitting
in a restaurant working on his laptop when a complete stranger approached
him. Hey, arent you the guy you know, the stockbroker I saw on TV
last night?
Larry looked at the stranger, nodded his head and went back to working
on an Excel spreadsheet. Not to be deterred, the stranger sat down at his
table and again asked if he was the stockbroker or not. Now annoyed, Larry
looked at the stranger and said: Yes how can I help you?
Still not getting the hint, the stranger said: Come on then, gimme a tip.
Before I do that, what do you do for a living? Larry asked.
I work at the car wash just down the street.
Okay, said Larry, adding: Heres your $5 tip. Now go and wash my
car.
So, instead of giving you tips, lets call the following popular essentials,
which will help you to hone your personal trading skills.

TESTING YOUR APPETITE TO BE A TRADER

I have used the following questionnaires with young people who come to
me and ask me to mentor them.
I really, really want to be a trader, they say, but after a mere 30 minutes,
they realise that their perceptions of what it takes to be a stockbroker and
international trader are very different to reality.
Therefore, when it comes to the mental game of trading, its important
to look at yourself and your ability to accept risk as your friend. After all,
you will be spending most of your trading day weighing up risk-to-reward
issues. No one can tell you about you better than you can, but I stress

15

that trading on the international stage is not for everyone. The following
aptitude profiles should get you thinking about personality, risk tolerance
and lifestyle:
This may help you assess whether you really have the temperament to be a
trader, or whether youre better suited to being a long-term investor.
Let me start by stating that, if you enjoy strategising and have the patience
and the discipline to adhere to that strategy, such as stop-losses or exit
strategies, you may find that youre a trader at heart.
Note: The following aptitude profile is only a guide to help assess your
risk tolerance and attraction to trading. Your score is in no way a guarantee
of success or failure, but it is at least a start.
HOW THE FOLLOWING ANSWERS APPLY TO YOU
A: The statement NEVER applies to you
B: The statement RARELY applies to you
C: The statement SOMETIMES applies to you
D: The statement OFTEN applies to you
E: The statement ALWAYS applies to you

Test 1: Are you a trader?

For each question, check a reply from 1 to 5 points
I dont like the way markets move irrationally
I only enjoy large profits; average-sized ones are
not for me
I dont need to develop a daily strategy to succeed
People think Im a success when I trade large
quantities
Being disciplined in trading does not increase my
chances of making consistent money
I view the markets as presenting an equal chance of
winning on every trade

A
1

B
2

C
3

D
4

E
5

16

I believe the longer a market trend lasts, the better

the chance it will continue
The excitement of trading draws me to becoming a
trader
I view the market as one giant game in which I
participate
I am in the market to be proved correct
I am in the market to make money
I want to be a trader because its a great lifestyle
I am patient enough to wait for my analysis to
work, even if it means holding on to trades
I feel most comfortable exploiting short-term
market swings during each trading day
You dont have to work very hard to be successful
as a trader
I like to use gut-instinct for trading decisions
When I gamble or play games of chance, I use a
system for betting and money management
When I decide to put on a trade, I know I am right
Exit plans are not necessary
If I am watching business television and an
analyst tells me what to buy, I will follow his/her
recommendation, because they know more than I do
I plan out my activities before the start of each day
I am likely to go to a restaurant that serves wild
game just to try it
After noticing a pattern in the market a few times, I
can trade off that pattern the next time I see it
When I lose money on a trading decision, my first
thought is how to get it back
If the market is in a sideways pattern, I wait to
trade until volatility increases
TOTAL

17

Add your score and review your profile:

INDICATION
This score indicates that ideas of trading may be
inconsistent with the daily stresses of trading.
Re-evaluate ideas about trading through a process of
systematic elimination of all negative misconceptions
about trading.

80+

SCORE

40 to 60

The ideal make-up to be a trader.

An aggressive personality that can handle the emotional
swings of this business.

20 to 40

This score indicates that you are too short term in your
time horizon, which may lead to indecisiveness.
You may need to develop an effective system of trading
that you believe in.

1 to 20

This score indicates you may be too extreme for trading.

You may need to work on analysis and outlook before
succeeding as a trader. This can be done through goalsetting and achievement plans.

60 to 80

This score indicates a longer-term business outlook for

trading.
In fact, if you choose to trade, perhaps you should
consider developing a style suited towards longerduration trades of three to eight weeks.

Test 2: Determine your trading beliefs

Many new traders underestimate the learning curve, especially with the
advent of online trading. Too many simply do not accept that they will not
make a profit the first year. In fact, any expectation of making money has
the danger of undermining both discipline and your own prescribed trading
strategy.
State which of the following are TRUE and which are FALSE:
The main motivation for trading is to make money.
All traders must be able to handle extreme risk.
One of the keys to being a good trader is to know yourself.
Ego is an important trait for traders. Otherwise you wont have enough
nerve to place a trade.

18

When you trade, you must make your trading decisions based on prices,
technical analysis and your designated strategy.
Focus on letting your profits run. In the end, profits will make up for
any losses.
It is crucial to make as many trades as possible every day.
Losing trades teach you more than your winning trades.
The more you lose, the more you should trade. This is the way to
overcome losses.
Every trader should find and use an indicator or methodology that will
apply virtually every time. This system will help to raise their chances of
success.
Making a profit on virtually all your trades is a realistic goal.
Trading with stops is a hassle; they take you out of the market too soon.
The biggest challenge for many traders is selling a losing trade.
When youve had a big day, you must withdraw some of your profits
from your account to reward yourself.
If youve had a string of profitable trades, you must look to increase
your trade size.

Test 3: Level of skill

If you do not know the answers to the following questions, it means that
you have a longer learning curve. It does not mean that you are not suited
to being a trader.
How do I know which stocks to buy?
What determines a stock's price?
What is a bear market?
What is a blue chip?
What is a bull market?
What is a dividend?
What is a margin account?
What is a market crash?
What is a mutual fund?
What is a penny stock?
What is a share?
What is a small-cap stock? Mid-cap? Large-cap?
What is an NAV?
What is insider trading?
What is a bear trade?

19

What is the ask price?

What is the bid price?
What is the DCM Board?
What is the Dow Jones or the DJIA?
What is the JSE Main Board?
What is the NASDAQ?
What is the P/E ratio?
What is the S&P 500?
What is the VCM Board?
When is an open-outcry system used?

In fact, Lore of the Global Trader is a good starting place to learn the answers
to the above questions.

Test 4: Profile your objectives

The following questions will help you to set up the objective statement in
your trading plan.

ANSWER THE FOLLOWING QUESTIONS:

What annual rate of return do you want?
Do you want to speak to portfolio managers or dealers when you trade?
Can you handle the stress of speaking to a portfolio manager or dealer
every trading day?
Do you have the patience for long-term trading?
What kind of personality do you have?
Do you need lots of action?
Do you need to be in control of market orders (make decisions) all the
time?
Can you take advice from a financial mentor while you gain experience
in trading?
What trading books have you read; which top traders do you most
admire, and why?
Would you insist that a portfolio manager or dealer copy their style of
trading?
Remember that up to 90% of traders are on the losing side of every trade
taking place in global markets. So maybe if many of these losers trade
in the opposite direction, they will all have the perfect system to become

20

spectacularly wealthy.
More sensibly, Lore of the Global Trader will be able to help you trade
intuitively, but in the way a professional does. So, if you didnt take the
above questionnaire seriously go back and start again.

HONE YOUR TRADING SKILLS

Although statistics tell different stories, depending on where you find and
interpret them, there is one fact that is horrendous, no matter how you look
at it:
95% of all global traders fail to consistently produce enough profits to
make trading a sustainable career.
Part of the problem is that people see the stock market as an easy way to
change careers. So, to start off with, look at the following:

Simple rules

Trading is a business, so have a trading plan before you start trading;

much like an entrepreneur has a business plan to run his or her
business.
Trading is a profession, so dont expect a simple conversion from one
career to another to be easy. It is like saying that if a dentist can easily
change to trading, then surely a stockbroker can just as easily start
pulling out teeth. Neither is a pretty sight.
Make sure that the strategy you select matches your personality. If you
are a high-risk trader, stay away from conservative stocks.
Have realistic profit expectations.
Include all the costs associated with your trading business as part of the
trading costs; ie if you buy a share for 100 cents and the costs of trading
is five cents, then you have effectively paid 105 cents for the share. This
means that you have to wait for the share to rise to 105 cents before you
can start to make money. The term used is being in the money.
Develop your own risk-to-reward ratio.
If you are increasing your trading position, make sure that your strategy
warrants such a move.
Don't confuse trading and stock markets with gambling and casinos.
If you develop trading rules, why dont you follow them?

21

Be flexible to sudden changes in market conditions. When you see

the market as it is, you have a much better chance of managing your
portfolio, asset allocation and risk-to-reward ratios, and therefore of
reducing the chance of losses, which should improve profits.
Taking responsibility for your actions does not mean that you have
control of everything that happens. It means that you have a choice of
how to react to trading conditions, which are sometimes rapid, violent
and hostile.
Keep track of your performance by keeping a trading journal. This is a
way of objectively looking at how you are doing, what you did right and
what you have learnt from mistakes made.
Consequently, ask yourself why you really want to be a trader.

Establishing your own strategy

One of the biggest problems I see with new traders has very little to do with
global technical software packages or their ability to use such systems. Or,
in fact, whether they have an online brokerage firm or deal directly with a
broker. It has nothing to do with buying too high or selling too low; or with
not having enough money or reserves to survive hostile trading days.
The problem is easy to solve: Too many novice traders operate without
a properly formulated trading plan or a logical, simple-to-use strategy.
A good trading plan will go a long way towards solving problems which
are too often repeated. Remember that ultimately your plan must reflect
who you are as a trader. You have to learn to trust your own analysis and
to make trades based on your own strategy dont follow someone elses
recommendations; too many times these are pure guesswork.
Do you want to risk your capital on mere guesswork? Are you are too
lazy to conduct basic analysis? Or do you simply not care?
In the long run, I do not believe you can make a living following other
peoples advice. The biggest problem in following a mentors or other
traders advice is being too far behind trends; ie when someone tells you
about a stock, by the time you buy that stock the expected movement is
usually gone. The reason is that you are following and not leading the
trade. Each and every trader has to become the very best trader he or she
can possibly be, on their own. You need to learn to be independent of all
environmental influences. Following the advice of an experienced mentor

22

is a means to this end and can help get you started, but it cannot sustain you
as a career trader. This takes planning, so get a mentor on your side to help
you to avoid making unnecessary and usually erratic errors.
In essence, whether you are a day trader or not, a basic trading plan
must always include a long-term vision and objectives. Youll have to
decide if you want to try to make a career out of trading, or whether to
do it to earn extra cash. Understand that your financial ambitions have to
be realistic, continuous, always evolving and eventually contain time-frame
strategies; ie how many days, weeks and hours you need to trade to meet
stated financial objectives. It should be as detailed as possible, as this will
become all the more important when you start making profits and losses.
Losses

How can you avoid making the same mistakes over and over
again?

Profits

What did you do correctly, and how can you replicate such
trades?

Investment formulas should be flexible

Choosing an investment formula is only one of many tools which can help
you to trade efficiently, and therefore profitably. Remember, formulas can
be changed at any time to fit your changing needs or level of confidence.
Never let an investment formula overrule sound research, or your own gut
instinct and comfort level. Essentially, have a set of formulas to mirror your
investment time frame. It is no use to have short-term technical indicators
for a long-term portfolio.
Investment formulas help you with risk, but certainly cannot tell you
what stocks to buy or sell or when such strategies should be carried out.
They are merely guidelines to help you decide in what direction you would
like to go in your investment endeavours.

Develop your own trading system

All successful traders have a uniquely developed trading system. They stick
religiously to such systems, even when it seems as though the system might
be working against them. You have to determine exactly what is wrong
with a trading system before you can change it. If you repeatedly change a
trading strategy, you cannot compare trades and systems, and so you cannot
find out what you are doing right or, more importantly, why bad trades are
made.

23

Successful traders find a successful strategy, and stick to it. They know
that real success means discovering two or three techniques that work
dependably, and then using them repeatedly. This does not mean
that they dont tweak their systems; it simply means that they do not
overhaul strategies.
Successful traders do not focus on the profit or loss of an individual trade.
They feel successful when they identify and perfect a technique that works.
Get this right, and profits will inevitably be made.
Ultimately, a successful trader is not necessarily the one who makes
huge profits from few trades. Rather, it is the trader who is consistent in
making profits over time. These may be small profits, but if consistent, they
have been successful in developing a trading method and choosing technical
indicators which focus on money management and implementation
strategies. They only feel successful when they have identified an overall
strategy for success that they can use to generate money continually.
A series of losses may actually be more profitable in the long-term if
the trader learns how to improve his or her system, or if it helps them to
identify a particular technique that ultimately works. This is what it means
to keep a long-term perspective, and the most successful traders know that
the long-term is the only thing that matters in day trading.

Know what to expect

In previous books, I have set out questionnaires to establish what your true
trading mindset may be. To develop the right mindset, you need to know
what to expect when day trading. You must be prepared for a variety of
emotions, so that you can monitor them instead of letting them control you.
At South African stockbrokers Global Capital Securities, my office had
a large floor-to-ceiling window looking onto the trading floor. One day in
1999 I was instructing an IT consultant, when I noticed that his focus had
shifted from me to the trading floor. I turned just in time to see a trader
stand up, screaming. He continued to scream, picked up his chair and
threw it over the computers and the traders beneath them. The chair hit
the opposite wall, tearing wallpaper, chipping plaster and shattering glass.
What happened next will remain part of the mystique of stockbroking.
When I started writing Lore of the Global Trader, I approached many old

24

colleagues in stockbroking and asked them what they considered the key
to successful trading. Many simply said that by keeping your emotions in
check, you can stay focused on your profitable long-term strategy. This does
not mean that you cant make profits from short-term market movements.
If you can stay focused when fluctuations are overly distracting, you will
gain the discipline to be a successful trader. There will be days when your
trading exceeds your expectations, and there will be times when trading
results are worse than expected. Stated differently, successful traders do
not fear losses, and they know that profitable trades are based on privately
developed analytical systems and not on guesswork or rumours.
Understand this: There will be days of absolute chaos. There will be days
of unnerving calm. If the Dow Jones closes 1 000 points lower on a single
day, what happens to the South African JSE or the UKs FTSE 100? Often,
they will open lower than the previous days closing price. This is called a
gap, and there are trading methods to take advantage of such days. This is
discussed later in the book.
Its therefore always essential that you maintain a long-term perspective.
There is a theory that a new trader needs to have completed about 40 trades
before he or she can evaluate their strategy as an effective one or not.
Successful traders realise that nothing is completely foolproof but, at the
same time, they dont rush into new trades just because theyve experienced
a few losses and want to quickly recoup them. Neither do they stay in a
losing trade hoping that things will turn around.
Set goals, gain experience and start trading with more focus and
discipline. Be patient and develop a system which is based on
fundamentals. Trading out of panic, greed or hope is not trading
according to a strategy which can be repeated consistently.

Knowing when to trade

Know when to trade and when not to trade. That might seem like an obvious
point, but people too often forget it and are overcome by market emotions.
Some trade simply out of hope!
Having a system does not mean that you have to trade. A trader should
never be forced to trade by his or her system, by temporary circumstances,
or the outcome of a few trades. It is hard to keep control when youre

25

experiencing losses, but this is also the most crucial time to be disciplined
and consistent. Otherwise, you wont know how to avoid downturns in the
future, or how to prevent them from becoming too severe and ultimately
damaging to your capital.
Losses can cause a trader to do one of the most destructive things he or
she can do: to rush into trades.
Successful traders take their time while selecting trades. They dont place
orders in a moment of chaos to try to compensate for recent losses, nor
do they trade just for the sake of always having a position in the market.
In fact, the most successful traders usually have only a handful of open
positions at any one time.
If I dont have a position in the market, my wife thinks that I am not
working. How can I avoid this? This question was posed to me during a
conference/workshop I held in Cape Town in 2008. I asked him what he did
when he didnt have a position in the market.
I play golf. That answered that question. What you should be doing
when you dont have a position in the market is assessing what your
next position should be. There is always time for more fundamental and
technical analysis.
At the same time, successful traders do not stay in a losing trade. They
always honour the stop-losses that they set, and they do not hold their
position in the hope that the market will turn. Too often, people make bad
decisions based on hope, rather than on a predetermined set of acceptable
losses. Know what youre willing to lose, and then lose it if you have to.
Remember that the individual trade is not what matters, whereas your
overall strategy is. In fact, think of a loss as a gain: what can you learn from
it that will prevent you from getting into the same position in the future?
Every time I set a stop-loss and the share hits that point, I get closed
out of my position and then the share bounces back up. How do I avoid
this repeated scenario? another trader asked at a 2009 conference in Port
Elizabeth.
Firstly, a falling share that hits a stop-loss often does bounce. It does
so because too many traders have the same stop-loss. For instance, traders
buying a share that is trading at 100 cents will have a stop-loss set at 95 cents
or 90 cents.
When a falling share hits the 95-cent price level, many traders get

26

stopped out, and the lower level triggers a buy signal. The share then
bounces back. To avoid this, set your stop-loss at 93 cents or 87 cents. That
way, when the share hits 95 cents, you wont get sold. If the share continues
to fall, at least you have a stop-loss at 93 cents.
Always set stop-losses on a three or a five.

Bits of wisdom

Understand raw economic and market information. Just knowing facts

wont necessarily make you any wiser or any richer. Information must
be assessed, and its potential effect on shares and sectors determined.
Then act on your conclusions.
Trying to time markets does not work. Moving in and out of stocks
based on anticipated changes in price as opposed to fundamental
changes in value is speculation, and not an investing technique which
you should consider. Remember that you need to achieve more than
9% growth in each trade to be profitable. This is discussed in more
detail later in the book.
Investing requires discipline, patience and objectivity. A clear,
documented investment plan is crucial to success as a trader.
Keep a clear and simple focus. Many investors fail to see the wood for
the trees, and lose perspective. Emotions will always run high during
volatile trading periods. Simultaneously, the quality of your trading
decision could become illogical. It is therefore crucial to learn how to
react to your own emotions, and thereby increase your profits.
In Chapter 3, you need to make a conclusive decision to set up a
trading plan. Without one, you are headed for financial disaster.

Chapter 3: Stop! Have you Developed a Trading Plan?

Day Trading Reality No. 3:

No trading plan = financial ruin
A plan allows you to follow a trading template, which you eventually
turn into a private set of trading rules. Without such a plan, you will
be bound to make irrational decisions. It is not true that rules prevent
you from following your instincts; rather, rules allow you to be more
thorough and better researched, so that more opportunities come to
the fore.

GUIDELINES FOR WRITING A TRADING PLAN

Aim of a trading plan
Ultimately, a trading plan enables you to make good trades. So, the question
is what is a good trade?
In simple terms, a good trade is one with which you are satisfied.
Essentially, it is a trade in which you had complete control. You begin by
doing your research (fundamental and technical), selecting a security to
trade, outlining (among other things) your entry/exit levels, implementing
the trade and monitoring its outcome.
Thats a good trade.
Not necessarily because you made a profit, but because you maintained
control. If the trade had drifted aimlessly or started to fall, you could have
sold the security with a small loss, broken even or even made a profit. If the
price fell, your stop-loss order would have taken you out of the trade and
it would still be a good trade. Again, you kept to your plan and executed it
without emotion.
As simple as it may sound, a good trade is the outcome of creating goals
and strategies that address how you will achieve those goals. And you do
this to suit your personality and emotional risk-to-return make-up. There
is no point in having only long-term goals if you want to the bulk of your
trades to be daily. Conversely, it is pointless to have day trading strategies if
your emotional make-up is to be a long-term investor. A key issue in a solid
trading plan is always discipline.

28

Therefore, part of your written plan must contain your acknowledgment

that you could conceivably lose all the trading funds and savings. When you
read your trading plan to your business partner or spouse, you will realise
how risk-averse you really are. Somehow, reading your plan aloud seems to
make it all the more real.

A vital element for success

A solid trading plan is vital for your trading success. I have spent a great deal
of time setting out the mechanisms of creating a trading journal during my
mentoring sessions around the country, so I would like to use this section
of Lore of the Global Trader to stress that creating a solid trading plan takes
time, and is not a task that you should complete in a few minutes.
Its like an entrepreneur setting out a business plan for his or her
business. He or she has to spend time on corporate shareholder structure,
governance, setting out a board of directors, establishing operational and
financial strategies, sales, share incentive schemes, cash flow management
and implementation methodologies. Similarly, a trading plan will help you
with your daily work schedule, trade execution, and also with your decisions
regarding the trading strategies you should apply, given current market
conditions. Trading without a plan is simply foolish, and can be likened to
gambling.
Before reading any further, you need to understand that you should not
rush the trading plan. Many novice traders are too keen to trade, and often
end up on the novice trader's scrap heap.
Obviously, from the title of this chapter, you know that I expect you
to put your plan in writing. Heres where all too many traders balk. The
common response is often: Preparing a written plan is a waste of time time
I could use more productively for trading. It is therefore common to see
new traders start trading without any fundamental understanding of the
basics; hence the reason many newcomers last less than three months in
the market.
The reason I insist that you put your thoughts on paper is that there is
no better way of totally exploring and fully understanding the challenges
ahead of you. In fact, with my clients, I get them to email their plan to me.
We then review this plan every quarter, and it is amazing how often the
client has traded in complete contravention of his or her own rules.

The following is an example of a kick-start trading plan:

NAME:

DATE:

GENERAL TRADING RULES

Implement a stop-loss on the support line.

Speculation

Speculate only with single stock futures.

Stay away from forex and CFDs.

Short-term
trades

Must show a 3% to 5% growth within four weeks.

If not, close out the entire position.

Filter

Trade values stocks.

Strategy must be long-term growth of 10% + CPIX.
Long-term is defined as three years.

Long-term
strategies

If trade increases by 10%, increase the position by

the same amount as the original position.
Increase the stop-loss to the support line.
Reduce the stop-loss to 10%.
Have a trailing stop-loss.

Short-term
strategies

If a trade has increased by 15%, reduce your trailing

stop-loss to 10%.
Use only value stocks but these must be in the Top
80 listed stocks.
Buy small quantities with a large number of trades.
Cut your losses and let your profits ride.
Look at percentages and not monetary values.
Sell shares when resistance line is reached.
Assess and focus on shares that are involved in
take-overs, mergers and strike action; these provide
volatility.
Ensure there is a plan for every trade (buy and sell).
Follow the trend: Trade according to the main trend
only.
Under no circumstances must a position be
increased in a share that is showing a loss.
On small corrections, add to the main trend.
Trade only according to the long-term trend.

Stop-loss

29

30

Determine main trend: look at the slope of the longterm moving average.
Look at where short-term moving averages are
relative to long-term moving averages.
Look at the trend patterns.
Draw trend resistance and support trend lines.
Technical indicators must include: RSI, stochastic,
MACD and volume.

Technical
analysis

The development of a written trading plan will substantially improve your

chances of surviving, and it will guide you through your entire career as a
trader, because it prepares you for unforeseen market obstacles. Writing
down a plan is also about making a commitment. When you put your
thoughts in writing, it makes them more real. You are more responsible for
them, and must live up to them.

DEVELOPING A COMPREHENSIVE TRADING PLAN: A FOUR PHASE, TEN

STEP PROCESS
Use the following phases and steps to draft your trading plan:
STEPS TO CREATING A TRADING PLAN
1. DIY FINANCIAL ANALYSIS

SETTING UP THE
TRADING PLAN

2. CHOOSE A MARKET

Phase A

3. CHOOSE A TRADING TIME

FRAME
SELECTION OF A
SPECIFIC TRADING
STRATEGY

4. SELECT A TRADING
STYLE

Phase C

TRADE EXECUTION
METHODOLOGIES

5. DETERMINE YOUR
ENTRY PRICE STRATEGY

Phase B

6. DETERMINE YOUR EXIT

PRICE STRATEGY

7. EVALUATE YOUR
STRATEGY

8. IMPROVE YOUR SYSTEM

MONEY
MANAGEMENT AND
REASSESSMENT OF
STRATEGIES

9. APPLY MONEY
MANAGEMENT RULES

Phase D

10. CONTINUALLY ASSESS

YOUR SYSTEM AND
STRATEGY

TASKS

FOCUS

Set goals.
Work out available
trading funds.
Assess your risk
tolerance.
Establish how much
time you have to trade
each day.

Getting your house in

order prior to trading.

Equities.
Futures.
Warrants/options.
Forex.
Combination of the
above.

Local markets.
Global exchanges.
Combination.

Determine your available

time frame:
Daily.
Weekly.
Fortnightly.
Monthly.

To determine whether
you should be trading
equities or alternative
markets.

Trend-following.
Trend-fading.

End-of-trend.
Candlesticks.

Are you bullish?

Are you bearish?

Long-entry strategy.
Short-entry strategy.

Profit target.
Stop-loss.
Time stop.

Is it 3%? 5%? 10%?

STEPS TO CREATING A TRADING PLAN

STEPS

31

 Number of trades per

month.
Average time in trade.
Maximum draw down.
Most consecutive
losses.

Reassess your trading

plan.

Include:
Original plan.
Objectives.
Move into new
markets?

How much money

have you set aside to
trade?
How much will you
place per trade?

Movement of funds
between accounts.

10

Regularly assess the methodology used to trade.

Keeping strategies fresh

and current.

Set out details relating

to your trading
platform.
Can your trading
platform support your
strategies?

STEPS TO CREATING A TRADING PLAN

32

The phases and steps are outlined as follows:

Phase A: Setting up the trading plan

Step 1: DIY financial analysis
When it comes to trading, many novice traders ignore the basics and all
the other warning signs and simply want to jump right into the markets
with their first trade. If that trade is profitable, then they turn around and
say: See, there is nothing to this! One good trade, unfortunately, does not
turn you into a trader. I suggest that you take a step back and determine
what your trading goals are. What do you hope to achieve with your trading
activities?
Knowing what your goals are will help you stay motivated when you are
facing losses during tough trading times. In essence, knowing what your
goals are will help you to make informed investment decisions in the longterm.

33

Ask yourself: How much money do I want to make per year by trading?
Too often people believe that day trading is a means to becoming an
overnight millionaire. I hear people say, I want to get rich! all the time.
Many want to be rich, but the question is rather, How do I intend to get
rich? Will you be reckless, or will you undertake the venture with diligence
and knowledge?
Decide how much you will invest, and then plan to invest that money
wisely.
Everyone has a risk tolerance, which cannot be ignored. Any good
mentor knows this, and they can help you determine what your risk
tolerance is and work with you to find investments that do not exceed that
risk tolerance. Some years ago, a client told me that he was a high risk
taker. Give me the highest risk you can find, he said.
I placed US$10 000 in a penny stock. The share fell by 2% overnight
and he gasped, telling me to get rid of the stock immediately. I couldnt
sleep last night, he claimed. Obviously, he wasnt as high a risk taker as he
imagined himself to be.
Determining your risk tolerance involves, among others, the following:
Determine how much money you have to invest.
Understand and develop a specific strategy for investing this money.
Work out what your investment and financial goals are for the short-,
medium- and long-term.
How many hours per day can you dedicate to trading? The answer to
this question is crucial to determining your trading strategy. For instance,
if you can only watch the markets for two hours per day, then you cannot
obviously apply a trading strategy that requires watching markets all day
long. As such, you need to apply different trading strategies if you can watch
the markets in the mornings, or only during the overnight trading session.
At what time of the day can you watch the markets? If you want to
trade world markets, understand that there are some significant time
differences between the major countries stock markets. So, if you want
to trade the Asian markets, you will find it difficult to also trade the Dow
Jones effectively.
Step 2: Choose a market
With the unbelievable growth of online trading, new financial instruments
are becoming available to trade almost daily. You have a variety of choices,
from equities and options to futures and contracts for difference. In recent

34

years, financial instruments like exchange traded funds (ETFs), single

stock futures (SSF) and the foreign exchange markets (forex) have become
available to the private investor, across the globe.
To make trading even more interesting, existing financial instruments
have been enhanced. Exchanges across the world have started introducing
commodity trading in mini-contracts, unheard of in the past. These include
contracts in gold, silver, crude oil, natural gas and grain.
These futures contracts have become very popular among day traders,
and the volume of electronic contracts has quickly surpassed the volume of
the more common open-outcry traded commodities.
These days, you can trade almost anything. For example, if you want to
participate in the real estate market without owning properties, you can
invest in real estate investment trusts (REITs), or even real estate futures.
Most traders, however, focus on one of the following markets:
Stocks.
Forex.
Futures.
Options (called warrants in some countries).

In your trading plan, you must be specific, and give detailed reasons for
your decision. When you start trading, your journal statements will provide
you with guidelines. Every market and every timezone can be traded
with a well-thought-out system. However, time constraints will limit your
trading time frames, as each trade has to be well thought out, analysed, and
technical indicators applied.
For instance, it would be impossible to trade over 50 securities daily,
whatever form they may take.
Here are some hints on how to limit your choices:
Start with shares and only when you have gained sufficient knowledge,
move to trading futures: that way, you limit choice by having to choose
shares with a longer investment time frame.
Choose shares or markets that are liquid: there is no point in buying
a share even if it can double in value if you cannot sell it. Buying
highly liquid stocks will enable you to enter and exit trades with relative
ease.

35

Step 3: Choosing a trading time frame

The following provides you with a starting point to choose a trading time
frame:
Choose a time frame to suit your personality: Smaller time frames
of less than three hours will provide you with many more trading
opportunities than those with time frames of days or weeks. However,
you need to understand that the hourly time frame strategy offers
lower potential profits, as you are looking for many small movements.
Alternatively, when trading on a larger time frame your profits per
trade will be bigger, but you will have fewer trading opportunities. Its
up to you to decide which time frame suits you best.
Time frames = risk: The converse to the previous bullet point is
that smaller time frames do mean smaller profits, but this is usually
accompanied by smaller risk. When you are starting out and have a
small trading account, you may want to select a small time frame to
make sure that you are not overtrading your account. I recommend a
day time frame, which gives you the opportunity to track movement
during one trading day.
Most profitable trading systems use larger time frames like daily and
weekly, but be prepared for less trading action. When day trading, you are
going to want to watch the markets on 60-minute, 30-minute and 15-minute
charts. You might even decide to use candlestick charts to derive your entry
signals (see Chapter 15).

Phase B: Selection of a specific trading strategy

Step 4: Select a trading style

Lets keep it simple: Money is made if you buy when the market is going
up, and sell when the market is going down. Thats why many traders hold
to the motto the trend is your friend. However, this statement is always
easier said than done. As a trader, you can choose between a number of
approaches, explained in detail from Chapter 7 though to Chapter 15.
This section forms the basis to trading global markets, and is the
pinnacle of your success as a trader. There are numerous styles, so assess
the following, determine which you prefer, and then base your trading
actions accordingly:
Among all the available indicators in any charting program, there are
really only two basic trading styles:

36

Trend-following: This style aims to trade simply with price

direction.
Trend-fading: This styles aims to trade against price movement by
trying to pick tops and bottoms. When prices are trading at the top
of a trading band or channel you sell, and when the price moves to
the bottom of the band or channel, you buy.
End-of-trend: Technical indicators are used to determine when trends
could be changing. The trader then either sells short or buys long,
depending on the predetermined strategy.
Candlesticks: This is the use of an ancient method to identify market
movements and to carry out trades.
It is important to understand what each of the above styles mean. Then,
determine whether they suit your personality. Remember that you can, of
course, use more than one style simultaneously.
Here are some examples of popular trading approaches:

Williams %R.
Relative strength index (RSI).
Bollinger bands and channels.

Moving averages.
Crossover of moving averages.
Turtle trading.
Moving average convergencedivergence (also called the
MACD; pronounced Mac-D).

TREND-FADING

TREND-FOLLOWING

1.2.3.
Fibonacci.
Elliot Wave.

Self-contained strategies.

CANDLESTICKS

END-OF-TREND

Phase C: Trade execution methodologies

Step 5: Determine your entry price strategy

While there are various other entry setups, the following two styles are
common among day traders:
Trend trading: When prices are moving up, you buy, and when prices
are going down, you sell.
Swing trading: When prices are trading at the upper end of a channel,

37

you sell, and you try to catch the small move while prices are moving.
The same applies for selling.
It is the opinion of many experienced traders that swing trading is actually
one of the best trading styles for the beginner trader. By contrast, trend
trading offers greater profit potential if a trader is able to catch a major
market trend, but few traders have sufficient discipline to hold a position
for the required period without getting distracted.
Most indicators that you will find in your charting software belong to
one of these two categories. You either have an indicator for identifying
trends (eg moving averages), or indicators that define overbought or
oversold positions, and therefore offer you a trade setup for a short-term
swing trade. Be warned not to become confused by all the possibilities of
entering a trade. Just make sure that you understand why you are using a
certain indicator, or what the indicator is measuring.
Recommendation: Keep entry rules specific, but simple to implement.
The best trading strategies have entry rules that can be specified in less
than five lines.
Example

Long

Specify longentry technical

signals.

Short

Specify shortentry technical

signals.

Aim is to use:
MACD with the standard settings
of 26, 12 and 9.
The MACD must also be above
both the zero line and exponential
moving average.
Bollinger bands with a moving
average setting of 10 and standard
deviation of 2.

Journal Entry

Entry

Step 6: Determine your exit price strategy

As stated in the above section, keep it simple. There are two different exit
rules to apply:
Establish a stop-loss to protect your capital from a stock continuing to
fall.
Set a profit exit to take profits.
Both exit rules can be expressed in four ways:

38

Fixed monetary growth in dollar terms: You sell when the security
increases by a fixed dollar amount, ie you buy a share for US$1,00 and
determine to sell when it reaches US$1,20.
Fixed monetary growth in percentage terms: You sell when the growth
in the security climbs by a predetermined percentage (current price
divided by entry price as a percentage).
Based on market volatility: You sell when the growth is a
predetermined percentage of the securities market volatility (eg 30% of
the average daily movement).
Based on a time frame: You sell the security after three hours, or two
days, or one week. You decide on the time frame.
Market experts dont recommend using a fixed dollar amount, because
markets vary greatly around the world. For example, some commodities,
like Brent Oil, change by a few thousand dollars a day per contract, while
other commodities change by only a few hundred dollars a day per contract.
You actually need to test a variety of systems on different markets. I always
believe that using percentages for stop-losses and profit targets are a better
and easier method of determining exit strategies.
Alternatively, a time frame system does get you out of a trade if it is not
moving in any direction, thereby freeing your capital for other trades. Some
experts suggest that you set a stop-loss based on a percentage, but limit the
trade to a specific time frame.
Next, specify your exit signals. As stated under entry levels, keep rules
specific, but simple to implement.
Examples

Profit
Target

Specify your
profit target.

When my share rises by 15%, I will

sell.
When my security climbs by 15%,
I will sell enough of the security to
recoup my original investment.
I have placed a trailing stop-loss on
the security, so I will only sell if the
share falls by 10%.

Journal entry

Exit

I will sell the share if it falls by 10%

on the trailing stop-loss.
If the security has climbed by more
than 15%, I will reduce the trailing
stop-loss to 8%.

Time
Stop

What is your
time stop?

If neither my stop-loss nor my

profit target is hit, I am selling my
security after 30 minutes.

Specify your
stop-loss.

Stop-loss

39

Step 7: Evaluate your strategy

You should continually review your strategy and get someone else to assess
it. It is suggested that you send it to your mentor, who will review it before
you buy securities. Some traders suggest that you add to your trading rules
as time evolves, for example:
I will not trade the day before a major public holiday, or during the
whole of the summer season.
I will only trade in the morning.
I will only trade single stock futures.
I will only trade the US and UK markets.
I will stop trading for one full day if I make three losses in a row.

Phase D: Money management and reassessment of strategies

Step 8: Improve your system
As with any business, you must make a profit to enable you to continue to
operate. So, the first figure which you must look at is net profit. While it
is understandable that the start-up phase will usually see a negative figure,
you need to turn the situation around quickly. Remember that net profit is
not just on the cost of each trade, but on the overall business.
For instance, there is a cost to setting up a company; you have to
buy computers, software packages and register the name of your trading
company, etc. Each trade must ultimately make an overall profit for the
company.

40

Consider the following:

EXPENSES

COST

(8 000.00)

COMPANY

TRADING

TOTAL

SALE

PROFIT/
LOSS

(8 000.00)

Registration of
company

5 000.00

Monthly rental

2 000.00

Research

500.00

Data feed

500.00

(4 000.00)

5 880.00

Trading security 1

1 000.00

1 400.00

Trading security 2

1 000.00

1 200.00

Trading security 3

1 000.00

980.00

Trading security 4

1 000.00

2 300.00

1 880.00

(6 120.00)

Obviously you want your system to generate profits. But dont be frustrated
when, during the development stage, your trading system shows a loss;
try to reverse your entry signals. In the above simplistic table, you made a
trading profit of US$1 880, but the cost to run the company and the cost of
acquiring the shares means that you made a total loss of US$6 120.
The next figure you want to look at is the average profit per trade.
Make sure this number is greater than commissions, and that it makes your
trading worthwhile. Trading is all about risk and reward, and you want to
make sure you get a decent reward for your risk. Many traders also forget
that they have to pay capital gains tax on profitable trades.
Now, look at the profit factor, which is calculated by dividing gross
profit by gross loss. This will tell you how many dollars you are likely to win
for every dollar you lose. The higher the profit factor the better the system.
A system should have a profit factor of over 1.5, but become cautious when
you see profit factors above 3.0, because it might be that you over-optimised
the system.

41

For novice traders, look at the following, as the net profit system can be
disillusioning when you are starting out.
Many trades, small profit: When you are starting out, it is not a bad
strategy to make many small trades. This will get you used to trading
methodology, but you need to decide how many trades you can handle.
In addition, you also need to decide how many losses you can handle.
For instance, can you stand six losses out of every ten trades? Learn
from your mistakes, and improve the ratio.
Number of trades per month: If you want to see something happening
every day, then you should pick a trading system with a high number of
trades per month. Many profitable trading systems generate only a few
trades per month.
Average time in trade: Some people get really nervous when they are
in a trade that does not seem to be going anywhere. You might want to
choose a system that does not hold any positions overnight. That way,
you start each day fresh and with new challenges ahead.
Most consecutive losses: The amount of most consecutive losses has a
huge impact on your trading and your trading confidence. Five or six
consecutive losses can cause you a lot of trouble when using aggressive
money management. Set the maximum of consecutive losses at three. If
you have three losses in a row, reassess your strategy and your system.
Improving your system: There is a difference between improving and
finding excuses for failure. You can improve your system by testing
different exit methods: If you are using a fixed stop, try a trailing stop
instead. Add a time stop, and evaluate the results again. Dont look
only at the net profit; look at the profit factor and average profit per
trade. Many times you will see that the net profit slightly decreases
when you add different stops, but the other figures might improve
dramatically.
There is no doubt that developing a trading system is not easy, but its never
as complicated as many vendors make you think. Ask around before you
buy an expensive package.
Step 9: Apply money management rules
What are your exact trading rules? How do you determine the size of each
trading position? When do you increase or decrease the amount placed into
each position?
Be as specific as possible, because poor money management can quickly

42

wipe out your account, while proper money management can be a boost for
your trading account.
I believe that the first consideration, if you really want to become a
full-time trader, is how you are going to support yourself during the
transition period, which could last for many months. If you have family
responsibilities, you should also have a basic financial foundation sufficient
to meet your normal monthly household expenses.
All your expenses need to be addressed in your trading plan, and you
need to include a back-up plan in case your change of career to trading does
not work out.

Step 10: Continually assess your system and strategy

This is explained in greater detail in Part 4 of this book.
Many successful traders share one important habit: they regularly test
their trading strategies. Testing your trading strategy is not a guarantee
that you will become profitable, but it is a giant step in the right direction.
Testing does not imply finding excuses for the losses made in the past.
Rather, you need to place greater-than-normal stress on the system to see
if there are built-in faults or not.
In this book, we examine some potential issues that can creep into your
system testing, and we will look at how to minimise the impact of these on
your trading funds. There are many problems that can occur when you test
your trading system, but most problems fall into one of three categories:
Retrospective errors.
Too many variables.
Failing to anticipate drastic changes in the market.
Each of these errors is explained, along with methods of avoiding errors.

DIY QUESTIONNAIRE
Relating to

Questions

Trading
psychology

What do I want to accomplish as a trader today,

in the medium- and long-term? How will I
achieve this?
Why do I want to trade for a living?
Can I realistically become a trader? Part-time or
as a career? Do I know enough about trading to
make such important life decisions?

No.

43

What is the single most important material

goal I expect to accomplish? How will I do
this?
Do I need to be a trader to achieve my desired
goals?
What are my weaknesses and how will I deal
with them, particularly as a trader?
Have I completed a SWOT analysis on myself
as a trader?
How does my family feel about me becoming a
trader? Will they support me?
Market
education
and trading
knowledge

Do I understand how stock markets and

securities work?
How do I determine what my trading skills are?
Do I know how to conduct company and
market analyses?
Do I understand what fundamental and
technical analyses are?
Do I have trading software, connectivity,
Internet, etc.?
Do I know what my risk-to-reward ratio is?

Discipline
and work
ethic

Am I disciplined enough to stay on track and

take trading seriously?
Have I set out trading rules that apply
specifically to me?
Do I have a mentor?

Money
management

What are my budgets? Personal? Trading?

Can I afford to start as a full-time trader?
What are my loss limits per trade, per day,
or per week?

It is always better to be absolutely and brutally honest and to be forthright

with yourself. If your answers are more negative or I dont know, then you
are not ready. Anything less than finding a mentor and starting again will
end in financial ruin. If you are in this position, then contact a mentor who
can help you on two fronts:
Provide information on the markets, from shares to general trading

44

conditions; books and newsletters.

Assist you with trading techniques and risk profiling.
Remember: Your trading plan must be all-inclusive.
Your trading journal must describe every aspect of your life, including
personal, work, trading, financial, psychological and even recreational.
You must answer all the key questions: How, when, where, what, and, most
importantly, why you want to be a trader.
In Part 2, global markets are described and the mechanics of setting up
a global trading account and desk are explained.

Part 2
Become A Global Trader

Wall Street has a uniquely hysterical way of

thinking the world will end tomorrow, but be
fully recovered in the long run, then a few years later
believing the immediate future is rosy but that the
long-term stinks.
Kenneth L Fisher
Best-selling author of Super Stocks

46

Chapter 4: Magliolos Lore of Global Trading

Day Trading Reality No. 4:

The norm is for markets to return to an average
In laymans terms, this means that periods of market hostility and
volatility seldom last. Whether its extreme optimism or pessimism,
markets eventually revert to long-term valuation levels. For individual
investors, the lesson is clear: do your analysis and keep to it. Dont get
sidetracked by daily market movements.

It is never easy to give a speech on day trading but it is even more difficult
to talk to people who want to be traders, but who have become disillusioned
by the extreme volatility of global markets.
In 2008 I was asked to give a lecture on trading in hostile markets. The
lecture was interesting in that the financial crises had just hit international
exchanges, and traders everywhere were disillusioned.
The lecture became one of my most interesting and interactive
workshops on trading.
I stood for a minute before the 400-strong audience, being completely
quiet. After a mere 60 seconds, they started to get restless. Still I waited.
Another 30 seconds went by, and the group became truly uncomfortable.
After two very long minutes, I walked right up to the seating area and said:
How can you be traders, when simple silence unsettles you?
The audience continued to shuffle in their seats. Now, not only were
they restless, but I had insulted them. Indignation was rapidly taking over.
Now how can you be global traders if a single person can make you
feel so uncomfortable so quickly?
I stopped. I waited. Then I said: To succeed in the global arena, you
need to throw away conventional ways of thinking. Grow a thick skin.
Change your long-term perspective to a new and more . . . I paused.
What came next really upset a number of people in the audience,
especially some women.
. . . hostile demeanour. To become really, really stinking wealthy in the
global playground of day trading you must embrace all that is wrong with
our world.
Love violence and embrace poverty.

47

Adore floods and terrorism. Take heart that there is famine in the
world.
Some of the people in the front row thought that this was funny; some
left. But I really had their attention.
The aim was not to shock the audience, but to point out that, to be a
day trader, you need to see the opportunity that disaster offers. If you only
think long-term, you will equal or better the market average, but you wont
be truly successful as a trader. I am not suggesting that violence and floods
are good, or that terrorism is right. I am merely pointing out that these are
the things that move markets. The aim of the day trader is to make money
out of volatility. When markets dont move, you dont make money.
Take famine, for instance. Someone has to deliver food aid to such
regions. Someone has to rebuild war torn areas. I have followed war and
disaster around the world with day traders and I can stress that these are
the factors that make or break the day trader.
Therefore, this chapter looks at some of the more radical approaches
to day trading. Not in the sense of trading techniques, but in the lores that
make up successful day traders. The word lore, after all, means facts and
traditions about a particular subject that have been accumulated over time
through education or experience.
I will keep this section short, as I know that you are more interested
in the old-style techniques of trading. Nevertheless, they offer a good
precursor to the more traditional mechanisms of trading, as outlined in
later chapters.

LORES TO LIVE OR DIE BY

Lore 1: Discipline and work ethic
It is extremely easy for day traders to fall into bad habits. You start out by
getting up early, but slowly you start your working day later and later. After
all, nothing happens before nine oclock anyway, does it? If you dont keep
to regular hours, your spouse will start to see you as unemployed and,
therefore, easy to ask to fetch groceries or the children from school. I have
an office that is less than ten metres from where I live, but every day I get
up at the same time, get dressed for work and go to the office. I take regular
breaks, but my work day is established.
I think there are some important steps you can take before you start
your life as a trader. Establish a pattern. Do as much of the groundwork
yourself as you can and focus on the activity that you need to really improve.

48

Learn the rules. Once the rules are ingrained and mastered, you develop a
sixth sense of when you can get away with stretching or even violating the
occasional rule.
Personally, I set two full days aside not to trade. This takes me away
from the green and red flashing lights (sell and buy orders) on my computer
and permits me to do research. After all, if I am to succeed, I need to be
ahead of the pack.
One last word on the subject: take responsibility for your own trading
decisions. Ignore tips. Do not listen to anyone but your mentor. Even then,
you must ultimately make up your own mind on what and when to trade.

Lore 2: Viva famine! Viva war!

One of the most basic and most important concepts a day trader must fully
comprehend is supply and demand. If there is a demand for a product,
someone will fill it. You have to find that demand and work out who will
fill it.
For instance, in 1998, while head of research at Global Capital Securities
in South Africa, the newspapers were filled with Africas worst famine
in decades. The demand was obvious food. Someone had to deliver the
goods.
My analysis showed that there werent many companies that could do
the job efficiently and immediately. A few phone calls revealed that I was
indeed correct. A particular company in South Africa had won a tender to
assist world aid groups to deliver food to famine regions. So, think of supply
and demand in terms of buyers and sellers.
Even though supply and demand is the basis of fundamental analysis,
you, as a trader, must have a solid understanding of simple economics and
its impact on price trends and support-resistance levels. The other side of
the coin is that too much analysis can kill any potential deal.
Dont forget that patience is a definite virtue in day trading, and a
strong belief in yourself the ultimate weapon to succeed. The only absolute
certainty is that share prices will fluctuate.

Lore 3: Start with future goals

What are you working for? Is day trading a hobby or a career? If it is the
latter, you need to build wealth for your retirement. How you do this
will depend on a number of factors, including your age, time horizon for
investing, personal and family situations and your attitude towards risk.

49

Income may be the goal for retired people, leading to a selection of

shares with a focus on dividend payment. Accumulation will probably suit
people planning for retirement or for their childrens education. A goal to
get rich quick indicates a desire for higher risk, and therefore an aggressive
trading strategy.
Your planning should define what kind of investor you are, and set clear
financial goals. The worst approach is to change your investment strategies
continually. Stick to one good plan unless exceptional and unforeseen
circumstances arise.

Lore 4: Develop a gut instinct

Undertaking in-depth fundamental analysis and understanding the
complexities of technical analysis will help you make informed decisions on
what to buy and what to avoid. But will it make you rich?
When markets become chaotic and extreme volatility becomes the norm,
technical analysis and fundamental variables become useless. Irrational
behaviour cannot be analysed or predicted. Your instincts are often all you
have to rely on under such conditions. It is at such times that good trading
instincts, together with experience, become the mainstay to success.
Finding opportunity during times of volatility depends on you. If, for
instance, you know that Company X has a net worth of 100 cents and a
prolonged strike action sees the share fall to 82 cents what do you do?
Do you hold stock which you have in your portfolio, or do you buy more in
an averaging-down strategy? Do you expect the strike to continue or not?
I must stress that all hard work and practice will ultimately pay off.
Eventually, you will look at the market and just know what it is going to
do. Even when you are out making poor trades and seem to be out of sync,
you will know whether to hold, buy or dump the stock. Despite stressful
conditions, you should have the discipline to stand aside.

Lore 5: Survival of the fittest

I like to point out to new clients that stockbrokers have spent many years
studying and preparing for day trading. It is not reasonable to think that
someone without experience can simply come into a new industry and make
millions of dollars.
You must be prepared for the reality that most individuals who feel
they have the skills to trade will fail dismally. Successful traders, contrary to
popular belief, tend to be conservative in their approach to taking risk. The

50

true art of trading is knowing when to buy, when to sell and when to stay out
of the market, and to do this without being influenced by emotions.
Understand this: you are competing against every professional trader
and every online novice and semi-professional in your country and around
the world. You certainly have tough competition.
How can a trader get an edge on his or her competitors in the markets?
One method is to develop and follow a strict routine. The purpose is to
drive everything from the mind except trading. You cannot focus if you are
thinking about golf, or if your partner or children keep interrupting you at
work.
Many market commentators say that trading is more about being
mentally prepared than it is about the markets. Poor concentration in an
active market can and often does see you make poor decisions and lose
money. In a geared environment, like the futures market, you will lose even
more than your money: you could end up with everything being taken away
from you.
Be blunt. Be absolutely clear about your intentions to become a trader.
You owe it to your family and to yourself.

Lore 6: The market is your guide

As much as you may love your family and friends and their opinions,
ignore these every single time. A professional will follow the analytical
route every time, and use the market as guide. So, start by understanding
four environmental factors that influence markets: economic conditions,
political factors, business trends and changes in technology. My point here
is only to trade what you understand; the more you know, the more you can
use technical analysis to find opportunities.
My recommendation is to open up a folder on your computer and
to create names of companies as you assess them. I dont expect you to
undertake analysis; rather, simply, know what these companies do. Look
at the share price graph. Over time you will gather additional information;
your depth of knowledge will increase, and understanding of the market
will itself be a guide to what to buy.
Some time ago, I was standing in a major supermarket checkout line
and, for the first time in ages, saw people with two trolleys. This simple
observation led me to looking at the retail sector, and in particular food
company shares. It was a gut instinct, but using the market as a guide I found
very rewarding stocks. These companies started to bring out cautionary
announcements, stating that their net profits would be higher than 30%.

51

Shares rocketed.
Only use technical analysis to hone in your purchases. In fact, technical
analysis can show you in a picture format when to enter a trade and exactly
when to sell. Such analysis gives you that edge. Four types of charts are in
common use today; line, percentage, bar and candlestick charts. These are
discussed throughout this book.

Lore 7: Basics are sacrosanct

Stock markets lead the economy: This means that what you saw
happening in the stock market six to ten months ago will influence
the economy today. Stated differently, traders follow the trend, so
understanding how the market works allows them to enter and exit
trades more effectively.
Contrarians trade against the trend. They buy when the crowd is
selling, and sell when others are buying. This strategy is not one that
should be attempted by novice traders, who must stay with the basics
and only attempt more complex strategies as their knowledge base
grows.
Sentiment drive markets: The very first question I was asked when I
joined a stockbroking firm in 1990 was: What is the difference between a
companys net profit and its share price? Ask yourself the same question
every time a company releases excellent financial results, but the share
price falls. Or, even stranger, when a company releases poor results,
but the share price climbs.
The difference is in the sentiment of investors in the market. If a
company does well, but the market doesnt understand or believe
the company, the share price will seldom move up. Alternatively, if a
company does poorly, but there are signs of a turnaround, the share
price will often rise.
Another weird explanation: If a company is expected to do badly,
but the poor results are not as bad as expected, sometimes the share
price rises. Conversely, if a company is expected to do well, but its
positive results are not as high as expected, the share sometimes
falls.
One way to ascertain the sentiment of the market is to look at share
price and price earnings ratio graphs.
Trends and volume go together: New traders want too much, too
quickly. So, they rush into a trade and often sell too late. With

52

experience, you will be able to size up market movements better and

more effectively. Most of your successful trades will come out of the
middle of a move. For example, you dont enter a trade when the
nine-day moving average flattens out and begins to move higher. This
is usually too soon. A better time is when the 21-day moving average
crosses the nine, giving some confirmation of a trend change.

Lore 8: Do or die never hesitate

If you cant afford to take losses, the pressure to win will be too great for
you to be able to function efficiently. When all indicators are confused, go
with your instinct. There will be times when you will win, and there will be
times when your stop-loss will kick in and you will have limited your losses.
Confusion does beget hesitation, which can be very expensive for a
trader. A good trader never lets anything emotional prevent him or her
from hitting the buy or sell button. Losing is an integral part of trading.
You will lose at the beginning of your trading career, in the middle of your
career and even when you have become a professional trader.

Lore 9: Sometimes, just walk away

There will be times when trading becomes truly and unbelievably, mindblowingly boring. You may not believe this, which is part of the mystique
of stockbroking. However, there will be times when markets move sideways
for months, not moving up or down enough to make trading profitable.
During such times, the answer is to walk away. Shut down your trading
monitors and go back to reading and researching.
Or you can contact the company secretary of a company you wish to
analyse and tell them that you are a shareholder. You may only have a
single share in that company who will know? Many companies have tours
of their factories, etc. A visit may give you new insight.

Lore 10: Be paranoid

Throughout my years in stockbroking, I have seldom seen analysts give a
sell signal on a share. Experts tell me that it has something to do with
the owners of the brokerage also being shareholders in the company being
analysed. What I have seen, which is tantamount to a sell signal, is a
recommendation that suggests that investors should buy below a certain
amount. This suggests that if the share price is over that particular amount,

53

then it is overpriced and should be sold.

When Enron took its dive in 2002, only one analyst warned that
something was amiss. The terminology used by analysts reinforces the
bullish slant of their advice. Everything is a strong buy, a buy, an accumulate
or a hold. An analyst who screams sell is brave in the world of trading.

Lore 11: No short cut to wealth

There have been times when clients have said: I know nothing about
trading, but I want to do this for a living. I want to start with US$2 000 and
turn this into US$1 000 000 by the end of one year.
What is wrong with this statement?
With absolutely no stockbroking education or trading plan, no idea
of what it takes to become a day trader and so little money, they want a
miracle. My answer is almost always the same: If I could turn US$2 000
into US$1 000 000 I would be a billionaire or at least turn water into wine.
My recommendation is simple. If you have US$2 000, use it to learn.
Start with gathering information, books and trading manuals. Join share
mentoring programmes and go to lectures and workshops.

NOT LORES, BUT SAGE ADVICE

Some experts have labelled markets as chaotic systems. According to one
such expert, mathematicians have shown that chaotic markets are not
random. The essence in relation to stock markets is that market chaos is
always followed by greater efficiency and controls. For instance, the JSE
and world markets crashed in 1987 by more than 40%, with many countries
facing the worst recessions since the Second World War.
Many economists and industrial experts on global markets made the
following statement: chaos only focuses on a narrow aspect of the problem.
There is certainly a world inflation problem but the problem is
concentrated in specific industries, and not in all sectors across the globe.
In fact, World Bank economists say that this is not a consequence of
globalisation, but rather internal excesses of the past that were promoted
by first world demand.
However, global traders continue to declare that they want to buy
shares only in a country with sustainable, long-term GDP growth of 3% to
5%. In other words, excesses of the past had caught up with world markets.
Unsuccessful and frustrated equity dealers want to believe there is an
order to the markets. They think prices move in systematic ways that are

54

highly disguised. Many want to believe they can somehow acquire the secret
to the price system that will give them an advantage. They think successful
trading will result from highly effective methods of predicting future price
direction.
The truth is that the markets are not predictable, except in the most
general way. Successful trading does not require effective prediction
mechanisms. Successful trading involves following trends in whatever time
frame is chosen, and the trend is an edge. If an investor follows a trend with
proper investment strategy methods and good market selection, he or she
will make money in the long run.
Therefore, is market price movement highly random? Or is there a
long-term trend component attached?

There are two related problems for traders:

Following a good method consistently.
Following the method consistently.
Analyse personal trading behaviour and keep to strategic plans. Investors
move funds into equities with a view to making money, but often do this
without devised long-term plans. After a while some investors speculate
and find that they are making money faster than their financial advisors
have recommended. For these investors, the trading process has become
a betting game and often the motivation to make money becomes almost
subordinated to the desire to make even more money.
The norm is that the market will ultimately catch up with speculators. In
addition, investors must be wary of depending on others for their success.
As recommended by experts, be part of the entire planning system.
Obviously, traders need help from stockbrokers and analysts to assess
statistical databases. It is important not to become obsessed with failure,
which is an easy trap to fall into. Therefore, you are responsible for the
ultimate result. Until you accept responsibility for everything, you will not
be able to change your incorrect behaviours.

Trade only with proven methods

When applied consistently and diligently, many simple trading methods
do work, but traders must acquire the ability to test any trading method
before these are used. It is also important to become proficient in the use of

55

computer systems that test a particular approach or a variety of approaches.

Learn the correct way to test and evaluate trading approaches.
Investors must develop an approach that works for them, and one which
makes them feel comfortable.
There are four basic rules in trading:
Trade with the trend.
Cut losses short.
Let profits run.
Manage risk.
We will look at the above in greater detail throughout Lore of the Global
Trader.

Ask questions
The first step is to find out whether you really want to be a trader. If the
answer is yes, then start with a long-term portfolio. Buy shares and learn
how to balance and diversify a small portfolio. Simultaneously, save to build
up a cash balance of at least US$50 000. Then, when you have learnt the
basics of buying and selling, move some of the cash to a futures account.
Make sure that the futures account is based on the same shares youve
been buying and selling. My personal bias is to trade with actual cash, and
not to start with a simulated package. The latter gives false hope, and
therefore skews the learning curve.
When you begin, you must devote much thought to the selection of
the stocks or futures contracts you want to trade. When starting, use local
exchanges, as you know the market and, in that, you will find a level of
comfort.
When you progress to trading foreign markets, use the US as a launchingpad, as liquidity is high and this makes it easy for you to get in and out of
trades. Another recommendation is to start your US$2 000 portfolio with
low-priced stocks, as the volatility and higher-risk element will force you to
have a highly developed and thought-out plan. On average, choose shares
that fluctuate by 10% a day, and stocks whose daily volume averages over
one million shares per day.
In Chapter 5, an overview of global markets is set out.

56

Chapter 5: Key world markets

Day Trading Reality No. 5:

Moving from virtual to real trading takes discipline and mental
courage
Novice traders who use virtual trading systems often feel comfortable
even when a loss is made, as there is little emotion tied to losing virtual
money. Your true skill as a trader is therefore not determined.

ITS A BIG WORLD OUT THERE

GLOBAL EXCHANGE WEB RESOURCES

www.natcorp.com/foreign.html
www.tdd.lt/slnews/Stock_Exchanges/Stock.Exchanges.html
There are more than 200 stock, futures and options exchanges around
the world.

Over the past two decades, the idea of a global stock market has evolved
from mere concept to an unbelievable reality. Instantaneous global
communications, fund transfers and electronic buy/sell systems have
created a unified market which ultimately never closes, where:
Currencies can easily be exchanged between stock markets in different
timezones.
Futures trading can take place seamlessly and simultaneously between
exchanges in various multi-conglomerates.
Traders can open accounts in numerous foreign countries and
participate in a variety of securities and crossover securities, including
equities, futures, bonds, options, commodities and interest-rate
markets around the world.
The reality of global trade is more impressive for those who have worked in
financial services. In 1998, it was impossible for individuals to trade anything
on their own. You had to have a stockbroker, dealer and portfolio manager
to conduct trades on your behalf. Today, computer technology brings faroff shores exchanges to the individual traders personal desktop. In fact,

with the growth of wireless networks in many parts of the world, a trader
can execute trades using his or her notebook and always be online.
Yet, despite this unbelievable development in technology, most US
traders still only trade the New York, NASDAQ and Chicago exchanges,
while UK traders concentrate on the FTSE 100. Yet sound and safe
technology exists today to enable anyone, from anywhere in the world, to
link up to an online brokerage and to take advantage of opportunities from
all markets. Consequently, Chapters 5 and 6 outline the issues relating
to opening a foreign account and what might await those who decide to
connect to the global trading village.

Become a financial globetrotter

Trading foreign markets has several definite benefits.
First, it allows investors to spread risk among different economies in
different timezones. I can already hear the cries: So what? I can trade global
unit trusts right from my own country. I agree. There are many domestically
available foreign-related instruments, from emerging markets to First
World to a combination of these. Yet, to be a professional global day
trader you need to be able to take advantage of fluctuations in other stock
exchanges and between these exchanges.
For instance, if youre a South African trader buying US stock in an
environment where the rand is depreciating against the US dollar, you could
increase your income if your stock selection was profitable. So, access to
international markets allows professional traders to use spread or arbitrage
techniques to take advantage of discrepancies between different foreign
markets. This can be done by trading the indices or specific stocks, where
a company is listed on several exchanges. For instance, Anglo American,
BHP Billiton and Aquarius are listed on multiple exchanges.
International futures markets offer traders access to highly liquid stocks
from many of the worlds largest exchanges, and not just the US.
More than 50% of the highest-volume futures contracts are not traded
on US exchanges.
Consistently, the top three exchanges are the Korean Stock
Exchanges Kospi 200 options, Eurexs Euro-bund futures and the
Chicago Mercantile Exchanges Eurodollar futures.

58

Some foreign-traded contracts have more volume than similar US

counterparts, such as the Singapore Exchange and the Osaka Securities
Exchange.
Another attraction of foreign markets is their greater volatility, which
forms the basis of the day traders ability to reach true wealth. For example,
many US traders have switched from S&P 500 and NASDAQ 100 E-mini
futures to foreign stock-index futures, because the volatility in the E-minis
has decreased and foreign futures often offer a greater daily trading range.
As such, one of the essential rules to trading is to buy securities which move
in wide trading ranges and have clear entry and exit signals.
In fact, a Chicago trader recently contacted me to organise the sale of
my books and trading newsletters to his colleagues and clients. He said that
they prefer to trade DAX (Germany) or SAFEX (South Africa) futures
between 02:00 and 10:30 (Chicago time), because:
The DAXs and SAFEXs minute-to-minute price gyrations are ideal for
scalpers [see Chapter 10], as these markets have a lot more playing field to
work with.

Global futures
FUTURES EXCHANGES

WEBSITES

The Amsterdam Exchange

www.euronext.com

Bombay Stock Exchange

www.bseindia.com

Eurex Deutschland

www.eurexchange.com

EURONEXT

www.euronext.com

Hong Kong Futures Exchange

www.hkex.com.hk

International Futures Exchange

(Bermuda) Ltd

www.bsx.com

Italian Stock Exchange

www.borsaitalia.it

JSE Securities Exchange South

Africa

www.safex.co.za

London Exchange

www.londonstockexhange.com

London International Financial

Futures and Options Exchange

http://www.euronext.com/
landing/liffeLanding-12601-EN.
html

March des Options Ngociables de

Paris

www.monep.fr

Montreal Stock Exchange

www.me.org

The National Stock Exchange of

India

www.nseindia.com

OM Stockholm Exchange AB

http://www.nasdaqomxnordic.
com/beta/Nordic.aspx

Osaka Securities Exchange

www.ose.or.jp

Productos Financieros Derivados

SA (Spain)

www.meffrv.es

Sydney Futures Exchange Ltd

www.sfe.com.au

Taiwan Futures Exchange

www.taifex.com.tw

Tokyo Stock Exchange

www.tse.or.jp/english/index.html

Toronto Futures Exchange

www.tse.ca

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It is the norm that products traded on one exchange are exclusive to that
exchange. Put differently, if you want to buy a South African companybased future (eg BHP Billiton), you have to acquire the future through the
JSE Limited and SAFEX. However, if the company is also listed on another
exchange, you can buy the futures security in that country. It all depends
whether that exchange offers a futures contract.
There are exceptions where the futures relate to a commodity, such as
petroleum. You can buy these futures on numerous exchanges. There is
also overlap on the financial side, where currencies are traded on a similar
basis on different exchanges. For instance, Eurodollar and Euroyen futures
have multiple listings on the US, Singapore and Japanese exchanges.
So, how do you assess when it is more beneficial to trade on one exchange
rather than another? The answer is to find out what the correlation between
two exchanges is.
One basic way to determine which two global exchanges you want
to trade is to do a simple correlation test. For instance, if you are South
African and want to trade the JSE and the Dow Jones Industrial Index,
you could assess what the correlation between the two exchanges is. If the
JSE has a +2% correlation over the Dow, then if the Dow climbs by 2%

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overnight you could expect the JSE to climb by 4% during its trading day.
JSE VS DOW JONES
Correlation
%

2-year

5-year

0.024342
Average
Time frame

0.018576
Average
Time frame

In the above graphs, the two-year correlation is 2.43% and the five-year
correlation is 1.86%. This means that short-term traders on the JSE would
look to an increase of 2.43% above the Dow Jones, and longer-term traders
would expect a 1.86% increase in the JSE above the Dow.
To derive this correlation you need to use a technical package. I need
to stress that correlation analysis is merely indicative of what could occur
between markets, and is only an indicator of whether you should entertain
investing between markets or not.
For instance, if the correlation between two markets is 0.001% would
it be worth investing between these markets? Another point to remember
is that if the Dow fell by 2%, the JSE would fall by 4%, which would be an
opportunity for short-sellers.
Again, I stress that correlation analysis is only an indication of market
direction. What do you think would happen if the USs Dow Jones fell by
2%, but overnight positive financial results were released by major Asian
corporations? What would happen to these markets and, by implication, to
the JSE?

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RULES OF THUMB: USING CORRELATION TO SELECT STOCKS

1. IDENTIFYING STOCKS
a. At the end of any of the JSEs trading days:
i. Choose 10 blue chip shares which have fallen the most.
ii. Choose 10 blue chip shares which have risen he most
2. THE US DOW JONES PERFORMANCE CORRELATION
a. Check the US Dow Jones performance overnight.
b. If the Dow has risen assess the five 10 JSE stocks which fell the
most.
c. If the Dow has fallen assess the five 10 JSE stocks which rose
the most.
d. Check technical, and choose three of the stocks to trade on the
JSE.
3. FIND A CONFIRMING INDICATOR
a. Assess the Asian markets, eg Hong Kong, Korea, China and
Australia.
b. If the Dow was up and Asian markets are also up, then you
can assume that correlation rules of thumb will be on a
preponderance of probabilities positive for the JSE.
c. If the Dow was down and Asian markets are also down, then
you can assume that correlation rules of thumb will be on a
preponderance of probabilities negative for the JSE.
4. ENTER YOUR TRADES
a. If the US and Asian markets were both up, it can be assumed that
the JSE will also be up.
i. Long strategies should be used, ie you should buy three of the
five JSE stocks that were down the previous day.
b. If the US and Asian markets were both down, it can be assumed
that the JSE will also be down.
i. Shorting strategies would then apply, so go short on three of
the five JSE stocks that were up the previous day.
c. Therefore, if you choose the stocks which were down, these blue
chips are expected to bounce. The opposite would be expected if
the stocks were up the previous day.
5. KEEPING TO THIS STRATEGY
a. Buy only blue chips.
b. Look for small gains in the market.
c. Ensure that you have your exit strategy in place.

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While the above rules should apply to any exchange from which you are
operating, some countries do not find global stock-trading popular. This
is simply due to a lack of availability of various exchange-traded funds
(ETFs). Essentially, you have to assess the availability of the various forms
of securities offered by different exchanges before you decide to invest in
those exchanges.
Once you do: Find two correlating markets, and then find a confirming
correlation market.
The next chapter shows you how to open up a foreign trading account
which permits you to trade across borders.
A reason many US traders avoid overseas exchanges is that they
have easy access to a multitude of the top global stocks via another form
of security, called American Depository Receipts (ADRs). These are
negotiable certificates listed on a US exchange, representing ownership of
shares in a non-US company.
For instance, JSE-listed Sasol could issue an ADR in the US instead
of issuing more shares. In this way the company can raise foreign funds
without diluting their shareholder control over their company. In addition,
this ADR provides US traders with access to a Sasol financial tradable
instrument.
EXAMPLE: If you wanted to trade Swedish telecoms firm Ericsson, you
could do so by acquiring the actual share through the Stockholm Exchange,
then do an arbitrage of that stock on NASDAQ. The question, then, is: Is it
better to buy Ericsson in the US, or through the Swedish exchange?
The answer is neither simple nor complex. Remember that traders are
disciplined creatures of habit: Firstly, they will never buy illiquid stocks.
Secondly, they know that stocks tend to be more liquid in their primary
listing markets.
So, if a stock trades with greater liquidity in a foreign exchange, the day
trader would choose the foreign (higher liquidity) market, while the longterm investor would look at the home market for share price stability.
Another method to find the same share (in various forms of security)
across the world is to use a market-maker. My only concern is that trading
foreign stocks through the market-maker is usually more expensive,
especially if the trade takes place after hours.

Practicalities of global trading

At the outset, it may seem easy to find an international online broker
offering global access to stock markets. After all, it is a decade since the

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process of creating online trading began. In fact, it is not an easy process,

as many brokerages face problems in setting up the necessary linkages
between their countrys exchange and that of foreign institutions.
I have approached firms that operate multiple linkages and they
generally claim that the process of setting up the required links between
exchanges is getting easier. The problem, they claim, is usually with the
brokerage clearing-houses. I suggest that you check with your online broker
as to which exchanges you will be able to trade without delays in getting
your securities transferred into your name. For instance, if you buy a share
in the UK, will that share be transferred to your account immediately, or
will there be a delay?
How can you be a day trader if the stock isnt in your account?
As a global trader, you must know whether a brokerage does offer this
service, or you may have to open up several accounts around the world.
A good starting point, therefore, is to check that your chosen online broker
is a member of numerous exchanges. This will offer you easy access to
global markets. The following should help you get started:
SOURCES

Interactive brokers associate company Timber Hill is a member of

many foreign exchanges: http://www.interactivebrokers.com.
Futures Industry Association: www.futuresindustry.org/
memberfi-2147.asp. This list includes exchanges, brokers and firms
related to the Futures industry.
National Futures Association database: www.nfa.Futures.org/basicnet.
This website provides a means to see if a brokerage has received any
complaints or fines.

Yes, you have to pay taxes

Although the tax implications of living and trading in different countries
seem like potential accounting, financial and other nightmares, they are
not. Traders do not have to worry about paying taxes in both countries, as
double taxation treaties have been signed between many countries.
These treaties set rules for taxpayers who have business interests in one

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or more countries. The norm is for you to pay taxes in the country where
you reside. In other words, if a South African trader has traded profitably
on the Canadian exchange, his or her tax responsibilities are to South
Africa, for the sum total of his or her earnings.
It is therefore important to find out whether the countries exchanges
you intend trading in have such treaties. It is also crucial to know whether
the foreign country has withholding taxes. If this is the case, though, the
taxpayer can take a deduction for foreign taxes paid.
As with anything else tax-related, it is always best to discuss such issues
with a tax expert, particularly one well versed in international trading.

GLOBAL STOCK EXCHANGES

The following are some of the worlds largest exchanges, which global
traders prefer. These are by no means the only exchanges which can be
traded; a more comprehensive list is available in the Appendices to this
book.

US STOCK EXCHANGES
The two largest US stock markets are the New York Stock Exchange
(NYSE) and the National Association of Securities Dealers Automated
Quotation System (called NASDAQ).
The NYSE is the largest US stock market, and is located on Wall
Street in New York City. The stocks traded on the NYSE are generally
referred to as listed securities, representing established companies with
large capitalisation. In contrast, NASDAQ is the second-largest stock
market in the US, and hosts emerging companies whose stability may
not be quite up to NYSE standards.

NYSE
The NYSE is not an electronic-based system. Considered by many to be
antiquated, it uses specialists (in South Africa these were called Dealers in
the old open-outcry system) who represent the sale of a particular share.
Since all business conducted at the NYSE is open-outcry, the specialist
opens trades by talking to buyers and sellers, and negotiates a final price for

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the stock. While specialists can represent many shares, only one specialist
can represent the stock itself.
The advantage of this system is that there is always someone who
represents a share, and therefore that person has a benefit in making
markets for that share. Consequently, liquidity is improved and the share
becomes more attractive to traders.
US traders often prefer to trade the NYSE, as larger, well established
companies with massive capitalisation and long profit histories are listed
under this exchange. Prices tend to be more stable, and therefore easier for
traders to predict possible market movements.

NASDAQ

Traders tend to use the NASDAQ for quick daily deals, as ownership
of securities is traded electronically and is less laborious than using
specialists.
NASDAQ is a negotiated market, where buyers and sellers from
around the world compete for the best prices.
Unlike the NYSE, companies listed in NASDAQ tend to be relatively
young, with a technology bias. Consequently, these have shorter profit
histories, are more price-volatile and speculative. These offer benefits
for global day traders.
NASDAQ comprises two levels of trading.
Level I trading: This market is has the best current buying and
selling prices, and is used by stockbrokers and online investors who
are committed to longer-term stocks.
Level II: This market is used by professional day traders, and this is
where the real action takes place.
The next section looks at the NASDAQ Level II System. If you want
to get a copy of the NASDAQ Trading Manual, send a request to
mentor@magliolo.com.

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NASDAQ Level II
EXAMPLE: LEVEL II QUOTE WINDOW
Company Name

Current Price (up/down in %)

High Bid

Low Ask

Details of Latest and Historic Bids

and Size of Bids

Details of Latest and Historic Ask and

Size of Ask

In the above basic diagram, a Level II quote display system shows:

The company name.
The current price.
Details of buyers and sellers.
Historic and latest bid and ask prices.
These are separated into bid and ask columns.
Each price level is differentiated by a different colour.

Trading on NASDAQ is more complicated than on the NYSE, especially at

Level II, which highlights who the buyers and sellers are. The formal name
for these electronic systems is electronic communication network, or ECN.
An ECN is a computerised system that matches orders for buyers and
sellers for a stock. Since ECNs work electronically, executions through
ECNs are instantaneous, and this is one of their big advantages over the
NYSE. The JSE operates along similar lines.
Another difference between NYSE and NASDAQ is the use of specialists
and market-makers. While NYSE has specialists, NASDAQ has marketmakers.
These market-makers must:
Establish a market which has fair-to-high liquidity.
Execute traders deals, whether they represent private or institutional
investors.
Be able to trade for their own accounts.
Many day traders see market-makers as competitors with unfair market
information. If they trade for many clients, they surely must have pricesensitive knowledge? I suggest that, given that they will be around for many
years to come, you use that knowledge to confirm your own trades, ie if

67

market-makers are buying a share, then assess why they are buying that share.
As a NASDAQ trader you can buy and sell securities either indirectly
(through a broker) or directly (online) as follows:
Through a broker: Place an order by phone or Internet with your
broker, who will then send your order to the market-maker to fulfil the
order. Your broker will then inform you of the completed order.
Online: Bypass the broker and place orders online yourself.
Be wary: Level II data may be useful for day traders, but it is not
pertinent for long-term investors.
Day traders must note that their trades appear immediately on the
Level II screen. If the order does not appear at the top of the Level
II window within seconds, you have not completed the deal.

American Stock Exchange

The American Stock Exchange (Amex) website can be accessed via www.
amex.com. Amex is the second-largest open-outcry stock market in the
US, and provides trading in equities, index shares and equity-derivative
securities. Trading is conducted through a centralised system that combines
computerisation with specialists overseeing the process of bid and sell orders.

The London Stock Exchange

The London Stock Exchange (LSE) (www.londonstockexchange.com) is
the leading stock market in the UK, but more importantly is considered by
global traders to be the most international of all exchanges.
Similar to the NYSE and NASDAQ indices, the LSE uses the FTSE
100 Index as the basis for market comparison. The LSE consists of the
unbelievably successful AIM market (the basis for the launch of the JSEs
AltX) and the techMARK market.
As the worlds leading exchange market, the LSE website is considered
by many global traders to be the standard by which other exchanges
should be measured.

Hong Kong Stock Exchange

The Hong Kong Stock Exchange is the eighth-largest stock exchange in the
world, with a market capitalisation of US$1 063.9 trillion.

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The trading system of the exchange is an order-driven system, with two

trading platforms:
The Main Board: This is a market for the more established companies,
which need capital growth.
The Growth Enterprise Market (GEM): This market targets highgrowth, high-risk companies, with a bias towards technology industries
and venture capital investments.
In October 2000, the exchange developed a trading system consisting of
four components: the Trading terminal, Multi-workstation system, Brokersupplied system and Order-routing system. Global traders should look at
the latter, which allows them to place orders electronically.

Tokyo Stock Exchange

The Tokyo Stock Exchange is one of the most important world exchanges,
trading an average of 1.5 billion shares per day. While this exchange is the
largest in Japan, with over 2 000 companies listed, it must be noted that
there are five additional exchanges in that country.
The exchange uses an electronic, continuous auction system of trading,
where brokers place orders online. When a buy-and-sell price is matched,
the trade is automatically executed. Deals are made directly between
dealers and, as such, no market-maker is required.
Note: Global traders need to be aware that the exchange does use price
controls to limit stock volatility and thereby prevent dramatic swings in
prices that may lead to market uncertainty or stock crashes. The exchange
also has a significant market for derivatives, which has been operating for
20 years.
Theres no question that electronic technology increases trading speed,
opportunities and diversification across world markets. Nonetheless, its
important to know what obstacles youll face if you decide to trade across
timezones. I have said this before; an educated trader stands the best
chance of succeeding.
Chapter 6 sets out issues which need to be overcome to open a global
online trading account.

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Chapter 6: Connecting to Global Exchanges

Day Trading Reality No. 6:

When market experts agree, be wary
When traders seem to agree that a share will climb, they often (mostly)
have a position in that security. Their sentiment that a share will climb
must therefore be questioned. Do they really believe the share will
continue to climb, or are they trying to increase buy orders to offload
their positions? Could the market actually be ready for a reversal?

SETTING UP A GLOBAL ACCOUNT

Opening up accounts of any kind across international borders requires
the patience of a saint. Opening offshore trading accounts is even more
difficult, with mountains of paperwork to be completed. To make matters
worse, there are forms which have been translated from other languages
and which make no sense at all.
A client came to me to help him fill in a form: one part of the form dealt
with Internet setup and connections etc. The question stated the following:
Do you want to trade futures or equities or both from your ordination? After
much querying, it transpired that the form didnt require you to be ordained
as a priest or minister, but had been translated from French. The disputed
word had actually been ordinateur, which is the French word for computer.
So dont be embarrassed if you need help, or if you encounter any
problems. These are common in international forms. Contact me and I will
help you through the process.
In South Africa, all trading accounts have to be FICA (Financial
Intelligence Centre Act) compliant. This means that you have to prove
who you are and where you live by providing specific documents, such
as a Telkom or Council bill and a copy of your identity document. You
can download a document explaining FICA from www.magliolo.com. On
the international front, it is now a requirement that all foreigners trading
accounts (particularly in the US or Canada) have a linked offshore banking
account in the name of the company through which funds can be sent to and
from the trading company.
First step: know what you want. Do this before you approach an online

brokerage firm, as there are different kinds of brokerages offering a variety

of online software and services, from equity trading to futures or forex.
In other words, know how much you want to invest, have a personallydeveloped trading style, and understand your own risk profile. These basic
issues will make it easier for you to find a pertinent and more relevant
online broker. Think about this scenario: you spend two months completing
documentation just to find out that the broker doesnt offer forex trading.
What a waste of time!
So, when you open an account understand the following:
Mountains of documents: This is the same anywhere in the world
where the problem lies in the interpretation of questions from foreign
websites. If you have problems understanding the question, dont guess.
If you are incorrect, it is time wasted. Many of these websites have call
centres to answer your questions, so make use of them.
Read everything carefully: Make sure you have a sound knowledge of
how to buy and sell online, and what happens after you click the buy
or sell button.
On a number of occasions traders have called me to say that they
wanted to buy US$10 000 worth of a stock, only to discover that
they had acquired one-tenth of the purchase. What had happened?
The answer to this common problem is simple: all stocks are quoted
in cents, which means that when you want to buy US$10 000 in
Company A, you need to state the amount of shares multiplied by
100.6
Example: You want to spend US$1 000 on Company A at a price of
US$1 per share, so you need to state on your online programme that
you want to buy 100 000 shares in Company A.
It may seem simplistic, but many traders forget that shares are
quoted in cents and would consequently place an order for 1 000
shares, thinking that they are buying 1 000 shares at US$1.
If the online brokerage has a demo facility, I suggest that you use
it. The brokerage may have unbelievable pamphlets about their
systems, but these may be cumbersome and difficult to use. Dont
waste time trying to use a system which you dont enjoy.
What services do you want? Of course, online brokerages around the
world offer a vast array of services, from shares and futures to other
crossover forms of securities. Consider the following carefully:
Can you transfer your funds to and from the online brokerage easily,
or is it a time-consuming issue? If it takes too long, you as a trader

71

will lose trading opportunities. Essentially, no cash in your trading

account means no trades.
Will you trade IPOs and/or mutual funds?
Do you want to buy unit trusts?
Do you want to trade options/warrants?
Do you want to speak to a broker?
Do you want an electronic-based system to place orders?
Will you earn money-market-rate interest on your account balance?
Can you trade at the time that suites you? Can you trade after
hours?
Which ECN systems are available to you?
Is the online system easy to use and understand?
Does the online system provide information about markets and
companies?
Does the system offer live prices, or is there a time delay?
Do you have Level II access?
Is the online broker affiliated to a major stock exchange?
Is your account insured against fraud?
To rank online websites, go to the following sites:
www.smartmoney.com.
http://www.jdpower.com.
www.gomez.com.

Offshore trading accounts

There are two main choices when you want to trade world markets. These
are:
Directly: You can open an account yourself and trade from your
desktop. Remember that countries such as South Africa have exchange
controls, and therefore as a citizen of that country you are limited
to the amount of funds which you can legally transfer between your
domicile and the online brokerage.
Indirectly: You can apply to trade via a stockbroking firm. This means
that you would give instructions to a broker to carry out your deals.
Be aware that online brokerages do not have the same minimum funding
or trading requirements. Most standard discount brokers require between
US$1 000 and US$2 000 to open an account, while some brokers will not
require an initial balance, as long as payment is received within three days.

72

Traditional full-service brokers require a much higher minimum account

balance. This can be as high as US$25 000.
I suggest that you do not wait to activate your online account. Many
analysts suggest that you first complete extensive fundamental and technical
study and virtual trading, and that you have undertaken a thorough test
on your strategy and trading system. As stated above, there is a lot of
paperwork that needs to be submitted before you are permitted to trade.
I suggest that you do both at the same time, ie do your analysis and start
the paperwork immediately. This is effectively outlined in the remainder
of this book.
Brokers have traditionally been divided into two basic categories:
Full-service managed accounts: The most expensive includes extensive
trading advice and support, as well as access to a wide range of related
financial services. These accounts are managed for you by professional
fund managers, who on most occasions do all the trades for you in
accordance with your instructions. Examples of this type of firm include
Merrill Lynch and CitiBank.
Discount and self-managed accounts: While this type of broker is
less expensive than the full-service firms, they do offer fewer services.
I have noticed that over the past three years there has been fiercer
competition for clients. Instead of reducing commissions, these firms
have been extending their range of services.
The following are (in alphabetical order) among the more respected
online brokers:
Online brokerage

Website

Ameritrade

www.tdameritrade.com

Charles Schwab

www.schwab.com

eTrade

www.uk.etrade.com

Interactive Brokers

www.interactivebrokers.com

Your personally chosen trading style will determine the kind of broker you
need, who will consequently provide you with a selected number of options
relating to services and costs. For instance, it is crucial for global traders to
have direct access to the markets in order to buy and sell instantly.
Ultimately, you will find out that direct-access brokers are generally
more expensive than traditional online brokers. I suggest that you open

73

accounts with both types of broker, as it is a good idea to have more than one
trading account in place in case of problems with the online system of one
broker. A communications breakdown and other technical problems need
to be avoided by a global trader. Please note that some online brokerages
only offer certain types of securities. In other words, while one brokerage
may offer futures, another may not.
For example, a trader who uses a direct-access broker may have a Webbased broker as a back-up.
ONE ACCOUNT TO TRADE ANYTHING ANYTIME
An exception to the above is the universal account, which some brokers
offer. This type of account allows you to trade all products, foreign or
domestic, equity or future from a single account.
You can simultaneously trade multiple countries from one account,
which makes account maintenance much easier than if they had four or
five different accounts. Also, anyone can open a universal account, and
there are no minimums or trade requirements.
Take your time to investigate various options and see whether
minimum investments and per-trade fees meet your needs at a
specified period in time. Your requirements should change as you gain
experience and skills. For instance, traders starting out tend to trade
known countries exchanges, like the American and European markets.
As you gain experience, why not look at the Russian, Bolivian or
Ukrainian markets?
When the account has been set up, you then need to transfer funds into it
before you can begin to trade stocks online. The norm is for you to have
a reference number when transferring funds from your private account to
your trading account.

Direct-access broker
When you buy or sell securities directly through the online broker, you are
able to execute trades more expeditiously and your strategies begin to
equate to the trades. For instance, if your strategy is to buy a share at 100
cents and sell it at 120 cents, you would expect to earn 20% on that deal.
However, if the execution is slow, you may only get the share at 110 cents
and sell it at 120 cents. The poor trading technique reduced your earnings

74

by half. The latter is more pertinent when you order securities through an
online broker, eg RealTick: www.realtick.com.
ONLINE VS DIRECT-ACCESS

Online broker: Every time you trade, you manually enter a ticker
symbol, as well as the number of shares to buy or sell, set the type
of order and, if you wish, set a limit price. Then you press the send
button.
Direct-access: The process is simple: you just click on a stock price
that you want on Level II, and it automatically appears as the price
you want to buy or sell. The order is automatically carried out.
The benefit of having multiple places to execute orders is crucial.

Commissions and fees

Though futures commissions vary, trading foreign futures is often cheaper
than trading foreign equities. In addition, trading on foreign exchanges can
also be cheaper. Note that it is generally more expensive to trade Asian
futures contracts, while European exchanges have comparable rates to
other international exchanges. Other main issues that affect commission
prices are the size of the account and trading volume.
Most direct-access brokers charge commissions based on a sliding
scale. The more trades made, the lower the commission per transaction.
Commissions can typically range from US$15 to US$25 per transaction,
depending on the broker. I have set out a list of brokerage fees, downloadable
from www.magliolo.com.
The trader must also pay the fees charged by various global exchanges.
For instance, in South Africa, brokerage, VAT and market securities tax
are added to the trade, while in Europe and America individual ECNs also
charge a fee.
Another fee associated with trading is the technical software fee, which
includes the cost of the package and monthly download price-feed. These
can range from US$100 to US$400 a month. The broker passes this cost to
the day trader if the trader does not make a pre-set number of trades per
month.
Therefore, using a direct-access broker will often be the best decision
a global trader can make. They offer faster executions and greater control
over your trades.

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Regulations
I spent a lot of time trying to put together a list of which exchanges you
can or cant trade, but that varies between countries. For instance, if you
are a US citizen, you have different restrictions to someone who is a South
African citizen.
You must therefore personally contact the global exchanges you wish
to trade and see what they offer. This is the starting point for any global
trader who wishes to have a global desk. Essentially, exchange controls may
prevent you from trading in certain countries.
In the case of legal disputes, some exchanges use arbitrators, and not
judges or magistrates. They use a different set of guidelines in making their
decision on disputes; what might seem like a clear-cut situation to a judge
wont necessarily be to an arbitrator.
Example: a South African global trader buys Nikkei futures on the
Osaka Exchange, but is registered through the foreign affiliate of a USbased futures commission merchant (FCM). He or she may have to deal
with the US Commodity Futures Trading Commission (CFTC), Japanese
and South African regulators.
Now do you realise that global trading can be filled with complexities?
Ultimately, though, as long as your brokerage has linkages to foreign
exchanges, and as long as you have an account with the proper currency,
there shouldnt be too many problems.

Opening a US futures account

Most futures and options brokers who offer access to foreign exchanges
will let you open a US-based account. While global exchanges require
transaction fees to be paid in their currency, brokerages may charge you in
any currency. Check that there isnt a currency conversion fee.

SETTING UP A GLOBAL TRADING DESK

An effective office always consists of more than merely computer

equipment. You will need everything that a business office has, including
filing cabinets, whiteboards, desks, telephones, etc. For the global trader,
software and share-price-streaming is critical. Before buying expensive
computers and share-trading software, consider the following:
How will you monitor markets? Will it be end-of-day or live-pricing?
What will your investment time frame be? Long-term or daily?

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Will your trading be single-market or across timezones?

How will you back up information?
The hobby trader does not need specialised systems, but active traders
should seriously consider adding multi-monitor system setups for their
trading to enable them to view more stocks and market indices in real-time.
In addition, assess whether futures and options brokers will require
specific mathematical systems through a variety of software packages to
connect to an exchanges central electronic platform. The type of system
you will ultimately need will depend on the country and the exchange you
wish to trade. Advice will be available directly from the exchanges media
liaison officer.
The system requirements for real-time trading charting software and
data vary according to the amount of real-time analysis of financial data
that is required to be done on your PC locally. Some brokerages offer
access to their real-time technical systems, which means that you dont have
to download share prices to your computer.
CONCLUSION
You need a reliable computer and Internet connection. These are
essential to achieving a trouble-free trading system. This will free you to
concentrate on fundamental and technical analyses and strategy.

Share price downloads

There are three types of share-price trading charting software:

End-of-day share-price downloads: Your technical analysis package is
updated at the end of trading every day, which is only suitable for longterm investors.
Live-streaming prices: This system provides live share prices and
indices. As stated above, you enter the data supplier and access the
charts, but no data is physically stored on your PC. The features vary
widely; from basic charting capabilities to Level II quotes.
The computer system requirements to run live streaming data
are very basic. An entry-level Pentium 4 with at least 256MB of
computer memory (RAM) will suffice.
Real-time trading charting software and data: This is the
recommended system for global traders, whether you are a professional

77

or semi-professional trader.
You are able to conduct real-time analysis of shares and, while
costly, this does provide you with the ability to carry out your
strategy timeously as trends develop.
I recommend the latest computer with twin hard-drives (of 1TB
each), and software to enable you to store your research.

Computer equipment

Monitors: Use two flat-screen monitors. The first is for your PC, and
the second for live-price and data transfers. The size of your PC and
data screens should be at least 48cm (19 inches).
I suggest that you have at least one additional television in your
office, tuned in to a world news channel such as CNN, CNBC,
Reuters or BBC.
Serious traders usually have two screens for share data and price
monitoring, because multiple monitors enable them to split (and
see) different timezones.
Video Graphic Adapters: Go with graphics adapters that are designed
for business use and have excellent graphics.
PCI Video Graphics Card solution: If your current system is only
equipped with the older PCI slots and your present VGA card is PCIbased, then all you need to do is to add additional PCI graphics cards
for each additional monitor you want to add.

I am often asked to outline what computer systems I have, and how I store
my data. The following is a brief outline:
Computers: Two notebooks (a local one and another one for international travel) and two desktops:
A main control and a spare computer. The spare is an exact replica
of the main computer, including back-ups. The main computer has
two terabyte hard-drives and two linked external drives.
I have software which continually keeps all the hard-drives with the
same data.
If the main hard-drive crashes, the secondary drive takes over. If
the entire main computer explodes, the external hard-drive can
be plugged into the second desktop and I can continue to work
unhindered and uninterrupted.

78

I have over 200 000 private research files, so you can understand the
paranoia of having four hard-drives.

PLACING ORDERS ON GLOBAL EXCHANGES

A new customer signed up for my service in 2008 and asked me about stops
and different types of market orders. They were good questions, and they
reiterated that I have subscribers who range from novices to seasoned
trading professionals, to those testing the futures trading waters for the
first time.
One thing I always like to point out to less-experienced traders: There
are no dumb questions, and there is no shame in being inexperienced. This
section, therefore, briefly outlines types of market orders and is a refresher
for those who are more experienced, but should also be valuable to newer
traders.
Market order: Frequently used by futures traders, it is simply an order
for the purchase or sale of securities at the current market price.
Limit order: Unlike the market order, this is an order to buy or sell at
your stipulated price.
A limit buy order is placed below the market.
A limit sell order is placed above the market.
Orders designated as or better: Traders tend to use or better if they
expect the market to rise at the time of entry. In many instances, such
orders are not filled.
Market if touched (MIT) orders: MITs are the opposite of stop orders.
Buy MITs are placed below the market.
Sell MITs are placed above the market.
An MIT order is often used to initiate a trade, but will not be filled
if the market fails to touch the MIT-specified price.
Stop orders: Stop orders can be used for three purposes:
To protect against major losses on long or short positions.
To protect a profit on an existing long or short position.
To initiate a new long or short position.
Stop-limit orders: This lists two prices, and is used to gain better
control over the price at which your stop is filled.
Stop-close only orders: The price on a stop-close will only be triggered
if the market touches or moves ahead of the stop during a specified
period of time. This is usually set by the exchange at the days close of
trading.
Market on opening order: This is an order which you set for execution
during the next days opening range of trading. Not all exchanges

79

recognise this form of order.

Market on close (MOC) order: This order will be filled on close at
whatever price is available at the end of the trading day.
Fill or kill order: This order is used if you want to fill your order at a
specified price immediately. In the case where a floor broker has to fill
the order, he or she will bid or offer the order only three times.
One cancels the other (OCO) order: This combination of two orders
instructs the floor broker that once one order is filled, the remaining
order should be cancelled. By placing both instructions on one order,
you eliminate the possibility of having two orders carried out. This
order is not acceptable on all exchanges.
Spread orders: This is taking a simultaneous long and short position in
order to profit via the price differential or spread between two prices.
Also called pairs trading, this can be undertaken between exchanges,
commodities and stocks (see Chapter 18).
A spread order can be entered at market prices or prices designated
by you, ie you set the order to be filled when a price difference
between the commodities reaches a certain point.
Good till cancelled orders: These orders will remain valid until you
cancel them.
Of course, the above really relates to orders you place with a broker. If the
ordering system is electronic, the buy-and-sell system is more simplistic. As
stated in this book, not all exchanges have electronic systems, so you may
have to deal with a broker at some time in the future.
I need to stress: Todays communication technology is unbelievably
fast, efficient and global, but there are times when systems are simply not
available. Traders should therefore back up every part of their trading
strategy: from computer, software, and Internet connection to trading
platforms and personal data files and research.
Communication disruptions are a cost of doing business, and if trading
is your business, ensure that you have back-up.
In Part 3, trading styles are discussed in more detail.

Part 3
Creating An Inter-Market
Trading Plan

Financial genius is a rising stock market.

John Kenneth Galbraith
American/Canadian economist

81

82

Chapter 7: Introducing Trading Styles and Methods

Day Trading Reality No. 7:

Strategies should equal your personality
At the very outset of your trading career, understand that not all
trading styles will suit you. Ask the question: Does it match who you
are, your lifestyle and your trading style?

CHOOSING YOUR TRADING STYLE

The term day trader gives the impression that all trades are opened and closed
within the same business day. While this may be true for many forms of trading,
there are some that could actually last from months to years (see Chapter 10).
In international trading, it is often difficult to open and close on the
same day, despite the old axiom: Never go to bed with an open position.
However, I propose a compromise: you decide what a business day is. For
instance, if you want to trade across world markets, then your personal
trading day may reach across timezones.
After all, if the Hang Seng closes 500 points down on the day, there
is a strong likelihood that the South African JSE will open lower than its
previous days close. This is called gap analysis (outlined in Chapter 9), and
is itself a trading opportunity.
Throughout my years in stockbroking, I have found that there is no single
one-fits-all strategy and style, because we all have different risk tolerances,
financial objectives and goals. One of the easiest and most popular styles
of trading global markets is to simply follow the trend, and you have a set of
indicators to signal a downward or upward movement.
I have clients who prefer trading according to longer-term indicators,
such as Elliot Wave or Fibonacci. Essentially, everyone is different and your
mentor should first assess your risk profile before recommending any form
or style of trading. You should try various trading styles before you decide
which one best fits you. The following table highlights the work-flow for
traders. The first issue which needs to be highlighted is that I have placed
fundamental and technical analyses on the same line. This implies that I
accord each of them the same level of importance.
Let me clarify the statement by following the steps below:
Step 1: The importance of fundamentals and technicals. Once you
are familiar with the environmental factors that influence securities in a

83

particular country, then technical analysis is used to determine which

security to buy, when to buy it and when to sell. Consequently, each is
equally important: while fundamental analysis identifies weaknesses and
strengths inherent in an economy or sector/companies, technical analysis
shows you patterns and trends which confirm or contradict your analysis.
In both instances, focus your mind before making a decision.
FUNDAMENTAL ANALYSIS

TECHNICAL ANALYSIS
MARKET FOCUS

GLOBAL

COUNTRY-SPECIFIC
TRADING STRATEGY STYLES
Trading methods and
technical indicators used
Main strategies: Scalping,
swing, core and position
trading
Technical indicators:
Moving averages
Crossover moving averages
Turtle
MACD

1. TREND-FOLLOWING

2. TREND-FADING

PATTERN IDENTIFICATION
FINDING GAPS

IS THERE A TREND?
Use: Average Directional
Movement Index (ADX).

Technical indicators:
Williams %R
RSI/Stochastic
Bollinger
Channels

3. END-OF-TREND

Technical indicators:
1.2.3
Fibonacci

4. CANDLESTICKS

Own strategy and indicators

84

Step 2: Choose your market. The second step is to choose whether you
want to trade securities in your home country, on the global platform, or
in both markets. This decision must be based on the specific issues you
are analysing. For instance, if you conclude from your research that the
maritime industry is in trouble, ask the question: Is it restricted to your
country, or is it a worldwide problem?
Step 3: Identify a trading style. The third issue is to determine which
trading style would suit you best.
There is one additional fact, however, that needs to be highlighted: If
your style relates to trends, then first assess whether there is a trend. This
is set out in Chapter 11.
Trading styles are split into four distinct categories, as set out in the
diagram above. These are each discussed in separate chapters that follow
this one, including technical indicators, which are recommended per style.
Remember, however, that trading styles do have similarities:
Similar patterns occur across styles: You need to understand what
these are and how each develops. This is set out in Chapter 8.
Gaps occur: You need to know what types of gaps there are, what
these mean and how to trade them. Gaps are discussed in Chapter 9.
As the above is discussed in the following chapters, the remaining part
of this chapter focuses on fundamental and technical analysis.

MARKET ANALYSIS

Media Sites

Fundamental analysis
INFORMATION SOURCE

WEBSITE ADDRESS

ABC News

www.abcnews.com

CBS Market Watch

www.marketwatch.com

CNBC

www.cnbc.com

CNN Money

www.cnnfn.com

Dow Jones Newswires

www.dowjonesnews.com

MSN MoneyCentral

www.moneycentral.com

Trading Sites
Online Magazines

The New York Times

www.nytimes.com

TheStreet.com

www.thestreet.com

Wall Street City

www.wallstreetcity.com

Bloomberg.com

www.bloomberg.com

The Daily Trader

www.dailytrader.com

Daytraders Online

www.daytraders.com

Etrade.com

www.etrade.com

Financial Centre

www.tfc.com

Interactive Investor

www.zdii.com

Invest-O-Rama

www.investorama.com

Investor Words

www.investorwords.com

MassLive.com

www.masslive.com

The Motley Fool

www.fool.com

Online Trading Academy

www.tradingacademy.com

Pristine Day Trader

www.pristine.com

Quote.com

www.quote.com

The Raging Bull

www.ragingbull.com

Silicon Investor

www.techstocks.com

TradingMarkets.com

www.tradingmarkets.com

Better Investing

www.better-investing.org

Bloomberg

www.bloomberg.com

Business Week Online

www.businessweek.com

Financial Times

www.ft.com

Fortune

www.fortune.com

Traders World

www.tradersworld.com

85

86

For many years, starting even before I joined the stockbroking fraternity
in 1990, I have followed the debate between technical and fundamental
analysts. The question is: Which discipline is better to use as a trading
mechanism?
As a former head of research at a South African stockbroking firm,
I have always advocated fundamental analysis as a means to creating a
diversified and balanced equity portfolio. However, the advance of futures
trading in the global arena has necessitated that I rethink my position and,
admittedly, my attitude. In a globalised trading world, you need to have
a system devoid of emotions, but one which helps you to identify trends
clearly before you buy or sell.
I have subsequently become a proponent of both disciplines.
Admittedly, the significant advancement in technical analysis and its
availability to the general public has helped me change my perceptions of
such analysis. In addition, the opening of global exchanges to electronic
trading has expedited the need to help clients move funds between markets.
I have always been sceptical that traders would continue to use
fundamental analysis once they had started to use computers to make
trading decisions. However, there is new technology on the horizon to
use computers to conduct fundamental analysis in a much broader sense
than simply receiving statistical and economic data. Such new systems are
expected to merge technical and fundamental analytical approaches into a
combined strategy, to give you a more integrated view of global markets.
Called neural computing technology, you will be able to identify
complex market patterns and significant relationships within technical and
fundamental data which could not be done in the past.
This technology is still at an early stage, and will possibly be discussed
in detail in future books.
Fundamental analysis is the study of the interrelationship between
economic, business, political and technological variables, which ultimately
affect stock markets around the world. Thats why investors and traders
look for price-to-earnings ratios (P/E), discrepancies between similar
companies. This figure can be derived by dividing the share price by its
earnings per share, and is well documented in my previous books, The
Millionaire Portfolio and Become Your Own Stockbroker.
Effectively, the so-called fundamentalists concentrate more on the wellbeing of a company than on whether the share price is moving up. As an
old colleague used to say to entrepreneurs: Look after your profits, and the
share price will look after itself.
I found that many traders simply do not like fundamentals, because
it takes time and effort to research which shares could do well in future.

87

However, true professional traders will admit that fundamental knowledge

is crucial to building long-term wealth.
Fundamental knowledge of shares, sectors and markets enable you to
interpret news events to determine a price movement, and therefore
trading patterns. It is also significant when you cannot conduct
technical analysis, ie in IPOs, where there is no price data upon which
to base your technical indicators.
I believe that a combination of technical and fundamental analysis
does increase trading knowledge and skill. The ability to make complex
interpretations in short time frames will place you ahead of other traders
and, in essence, set professionals apart from amateurs.

Technical analysis

The basis of technical analysis is to use a share price timeline in graph

form to assess trends in specific shares, sectors and general markets. As
prices change all the time, it is crucial to have well-formed trading plans to
take advantage of quick news flashes and thereby beat all the other traders
before the information spreads to the major global markets.
News that can radically change technical indicators includes:
Share splits or consolidations.
Announcements of strike action or lawsuits.
Cautionary announcements relating to a possible merger or acquisition.
Share buy-backs.
International disasters or terrorist attacks.
Trading updates.
The objective is to be able to interrupt such events quickly and to take
advantage of such opportunities. Again, let me remind you that the best
time to increase your profitability is in uncertain, unpredictable and hostile
markets, as it is wild fluctuation that drives profitability.
Combining fundamental and the technical aspects of trading will set
you apart from the novice trader.

88

There is no doubt that it will take a great deal of practice before you start to
feel confident that you have created your own trading plan and momentum.

DEFINING ACTIVE TRADING

The best way to define active trading is to differentiate it from the long-term
investor, who buys and holds his or her investments for an extended period
of time (line A to B). This means that the long-term investor ignores daily
market fluctuations (like that highlighted under the magnifying glass). The
above graph depicts a long-term share price, and the close-up highlights a
market fluctuation (line C to D).
Share
price
B
D
C

A
Time

While it is often perceived that long-term traders make more money than
short-term traders do, this is not strictly true. To outperform any market,
traders must look for profit potential in the markets temporary trends or
anomalies, which means determining where a trend will form and predicting
where it will go in future.
With the introduction and subsequent revolution of online global
trading, many changes have taken place in the way traders conduct business.
Previously, only stockbrokers and market-makers had personal access to
the market to place orders, but now practically anyone can have access to
stock markets.
In 1992, I was living in Cape Town, conducting research and writing
reports for stockbrokers and newspapers. To do the same work today, I am
able to go online, download practically anything relating to my research,
and then conduct my analysis.

89

Example: Conduct analysis on Company X. I would need to get their

annual reports, profiles and industry trends. Today this is easy, and within
minutes I can have enough industry analysis for ten reports. Back in 1992,
I had to phone the company secretary and ask for an annual report to be
posted to me. Next, the public library and newspaper archives were good
places to conduct research. A single report could take weeks, as you had to
use the postal service.
Today, the number and variations of online resources can cause
information overload. I recommend that you find resource sites that are
convenient for you, and that complement your trading style. As such, the
easy availability of online trading is changing the working day.

Going long vs going short

While going long pertains to buying a stock which you believe will rise, going
short is the opposite. Also called shorting a stock, this is when you sell stock
you dont own with the intention of buying it back later at a lower price. So,
in the first instance, the concept is easy to understand: you buy a share and
sell it later. The second concept is more confusing.
Many experts believe that understanding this basic concept is the factor
that will determine whether you want to be a day trader or not. Assume
that the trend is not always up, but that the companys share trades in a
band as follows:
Share
price
D
B

C
A

Time

90

A short-term trader would like to buy at A and sell at B. What if he could

sell the share at B without owning the share, to buy it back at the lower
price of C?
Let me explain: assume the price was 100 cents at B. He sells 10 000
shares at 100 cents, which means that he receives US$10 000 worth of the
share at 100 cents. When the share falls to level C, at 80 cents, he buys
the stock back at a cost of US$8 000 (10 000 shares at 80 cents). He has
made US$2 000 for the investment. This is called shorting the market; see
Chapter 17 for more information.
The disadvantage to short-selling is that the market will eventually
swing back up, which increases the price of the stock you intend to re-buy
at a lower price. There is no guarantee that the share will fall, in which case
the trader will make a loss.
It is important to note that you cannot short all stocks. In other words,
if the institution offering stock for shorting cannot get the stock, they will
withdraw the shorting allocation. If they do offer shorting and dont have
stock, that is fraud, and the penalties will be severe.
One clear way to tell whether or not to go short is by using Bollinger bands.
These are exponential bands with two standard deviations, measuring high and
low volatility levels. A stock price at the top of a Bollinger band is very likely to
drop down to its lower Bollinger band a good indication to go short.
Here are a few issues to consider prior to going short:
Stay away from strong up-trends. Fluctuations are unlikely to provide
shorting opportunities.
As a novice trader, avoid scalping until you are more experienced.
Stay away from shares that are illiquid, ie stocks with daily volumes of
less than 300 000.
Let me whet your trader instincts: An active trader will strive to trade (buy
and sell) at the two extremes of a trend within a given time frame. When
buying a stock, try and buy near a bottom and sell when near the highest
point. The more you want to make money by taking advantage of all trends,
the more aggressive and risky your strategy will be.
While consistency is very important to succeed in the stock market, it is
also detrimental to be inflexible.
The basic styles of scalp, swing, core and position trading are outlined
in the next chapters. While all of these trading systems have particular
characteristics, you are likely to ultimately develop your own specific style.
As a starting point, you must understand what these trading styles do, then

91

discuss them with your mentor before using them in the market.
Even though it would be wonderful if every trade you made was
profitable, you must be prepared for times when losing cannot be avoided.
Consequently, the day trader must know exactly when to exit a trade if it goes
against him.
Before we proceed to trading styles, we need to look at patterns and how
they apply to various forms of trading. These are set out in Chapter 8.

92

Chapter 8: Trading Patterns Basics Uncovered

Day Trading Reality No. 8:

Recognise your emotions
All traders experience greed, fear, and a host of emotions in between.
Successful day traders, however, learn to recognise and minimise such
influences on their trading.

IDENTIFYING CHARTING PATTERNS

Also called channels, trading patterns warn traders of a multitude of
different events, from entry to exit points; from aggressive to moderate
trading techniques. A simple look at patterns can tell you whether a major
trend is changing and, therefore, patterns become an important money
management tool.
However, before you start trying to identify patterns, lets recognise that
there are literally thousands of possible variations of patterns, so it makes
sense to limit your search to those more pertinent to your trading style.
Ask the question: Am I going to trade multi-week or intra-day? Once
this question has been answered, you can begin to search for trading patterns
in the right time frame for your trading style. Trading within your defined
timeline has a host of implications; discussed in this book. For instance,
swing traders use 65-minute and daily charts, while investors use weekly
and monthly charts. Intra-day traders often use 5-minute, 13-minute and
30-minute technical charts, while scalpers often use 1-minute and 3-minute
share price charts.
Consequently, all patterns are used in the same manner, but differ in
speed and timeline.

Some basic pattern definitions

Start with a long-term trend: A longer market time frame of ten years
provides a better perspective on a market. Once this data has been
downloaded, hone in on monthly, weekly, daily and intra-day charts,
but use the long-term chart as your guide. A short-term market view
can be deceptive if used independently.

93

Identify the trend: Market trends come in many sizes, so determine

which one youre going to trade and use the appropriate chart. For
instance, if youre day trading, use daily and intra-day charts.
Always let the longer-range chart determine the trend.
Use the shorter-term chart for timing.
Support and resistance levels are easy to determine: Stated
simplistically, the best place to buy a security is near its support levels,
while the best place to sell is near resistance levels. After a resistance
level has been broken, it often provides support on subsequent
pull-backs. In other words, the old high becomes the new low.
Simultaneously, when a share falls through its support level, the fall will
encourage more selling; the old low can become the new high.
Draw trend lines: Trend lines are a simple and effective way to identify
the general direction of a shares movement visually. Draw a straight
line touching at least three points:
The top three lines identify resistant levels, and the bottom three
lines highlight support levels.
The two lines signify the shares trading band, also called a channel.
Prices will often move back to trend lines before new trends develop.
The breaking of trend lines usually signals a change in that trend.
Some advice from Fibonacci: Outlined in later chapters, Fibonacci
ratios state that, when a share falls or rises quickly usually based on
overreaction to a market announcement it will correct by a predicable
percentage, ie market movements usually retrace a significant portion
of the previous trend. You can measure the corrections in an existing
trend in simple percentages.
A share often retraces a fall or rise by 50%. For instance, if a share
falls by 80 cents, it will often bounce by 40 cents. Alternatively, if a
share climbs by 120 cents, it will fall by 60 cents.
A minimum retracement is usually 33% of a prior trend, while the
maximum retracement is 66%.
Fibonacci retracements of 38% and 62% are avidly used by day
traders.
Stated differently, when a share falls after a rapid climb, you should
be buying that share after it drops by 33%.

94

DEFINED PATTERNS
D

C
A

Lower highs
E

Higher highs
Lower lows

G
H

L
J

K
Higher
lows

Lets look at a share differently: It is easy to see that a share has climbed on
a graph, but if you focus on the points of a graph, you can see that when a
share price is in an upward trend, higher highs and higher lows are achieved
line A-B-C and J-K-L. This means that the highest price achieved in the
market today will be lower than tomorrow and the next day and so forth.
This forms a resistance level.
Similarly, you can see when a share is in a downward trend. Looking at
the individual points, however, you can say that a share has achieved lower
highs (Line D-E-F) or lower lows (G-H-I) in the market over a number of
consecutive days.

Double-tops and -bottoms

DOUBLE-TOP
Stop

Buy

Sell

Stop
DOUBLE-BOTTOM

The expression often used by traders is a share has hit a double.

In fact, a double-top or -bottom is achieved when two peaks are rapidly
made, either upward or downward.
A double-top warns traders that there is a possibility that a price could
fall. It is also possible that the upward trend is levelling off, known as a
reversal pattern. Similarly, a double-bottom is defined as two low points after

95

a downward trend, and indicates a possible reversal or that the downward

trend is levelling off. It is also known as a reversal pattern.
Entry levels

Double-tops

Double-bottoms

ENTRY
POINT

At the point where the

price hits the resistance
level for the second time.
Go short at this point, with
your stop-loss set at the
resistance level.

At the point where the

price hits the support
level for the second time.
Go long at this point, and
set your stop-loss at the
support line level.

Head and inverted head and shoulders

HEAD AND SHOULDERS
Head
Left shoulder
A

B
Right shoulder
C

F
D
Left shoulder

Neckline

Right shoulder

Head
INVERTED HEAD AND SHOULDERS

The head-and-shoulders pattern is generally regarded as a reversal pattern;

whether the trend is up or down. The influences of environmental factors
tend to be responsible for the formation of a head-and-shoulders pattern.
The following highlights a bearish head-and-shoulders formation
(points A-B-C). Points D-E-F represent a bullish head-and-shoulders
pattern, also called an inverted head-and-shoulders pattern.
The market has roared to point A, where a surplus of sellers over buyers
drives the share price down towards the support level, called a neckline.
At the support level, more buyers enter the market, driving the price
toward Point B, called the head.
However, the head signals that the share has run its course, and the
share then falls back to test whether there is shareholder support at the
neckline.

96

Again, some value in price draws buyers back, and the share will often
rally for a short time (the right shoulder), before buying patterns turn
into bearish traders and the neckline is traversed.
The use of a volume indicator is extremely important in determining a
head-and-shoulders pattern, as it generally follows a higher demand for
the share on the left shoulder. However, the head is formed on falling
volume, which declines even further on the right shoulder.
This warns traders that the buyer interest is rapidly waning, and the
pattern is complete when the market breaks the neckline.

Descending, ascending and symmetrical triangles

F

D
Share price
A

Buy

Buy

G
E

Buy

Sell

Sell
B

In the above pattern, lines A-C and B-C form a definitive pattern, with the
latter share price reaching consecutive higher lows, while the former sees
the share price bounce off a resistance level. The share is actually testing
the resistance level, while getting stronger, finally breaking through line
A-C. This is called a descending triangle.
Volume will only increase once a more obvious direction is established
by the share price.
The weird issue is that, while the descending triangle acts as a continuation
pattern in a downward trend, it is also a reversal pattern in an upward trend.
In the above graph (lines A-C and D-E), a pattern of lower highs and
higher lows is formed, and is called an ascending triangle.
Higher lows create an upward trend line and draw day traders into the
market.
This triangle is bullish. Many traders call it a reversal of a downward
trend and, as such, it can be a low risk investment if you place your
stop-loss under the most recent bottom.
Lines F-G and E-H highlight a symmetrical triangle, which is formed as the

97

share effects lower highs and lower lows to form a trend which is difficult to
read. Some analysts say that the way to determine a trend is to look for a
serious change in volume, ie more buyers than sellers, and the break should
be up, while more sellers than buyers should see the share fall.

Flags and pennants

FLAGS
C

PENNANTS
2

A
Bull flag

Bullish pennants
Bear flag

B
E
G

H
4
Bearish pennants

Flags and pennants are categorised by many professional traders as

continuation patterns, because these patterns only pause within a strong
trend and tend to occur after a quick upward movement. After a pause,
the market usually resumes in the same direction, ie a bullish trend, which
pauses and then resumes a bullish trend, with the same situation applying
for bearish trends.
Professional traders also point out that such patterns are usually reliable
as signalling a trend which should continue, despite a pause in its direction.
Bullish flags: These are characterised by lower highs and lows (lines
A-B and C-D), with parallel resistance and support trend lines, before
the trend is resumed (line 1-2).
Bearish flags: These comprise higher highs and lows (lines E-F
and G-H). Like bull flags, bear flags run parallel before a breakout
(continuation) takes place (line 3-4).
Pennants: While it is easy to confuse pennants with symmetrical
triangles, pennants are smaller in size, more volatile and usually shortlived.
Chapter 9 explains liquidity, volume and gaps as a precursor to
establishing your trading style.

98

Chapter 9: Understanding Liquidity, Volume and Gaps

Day Trading Reality No. 9:

Excess in one direction = excess in the opposite direction
When greed gives way to fear, you find that the reverse ultimately
does happen. Professional traders are disciplined and patient to take
advantage of such market movements.

VOLATILITY, LIQUIDITY, VOLUME AND GAPS

Lets start this chapter with two seemingly obvious questions: Will an indepth understanding of volume and liquidity boost trading profits? Is there
a difference between liquidity and volume? When you really know the
difference, you will grasp that liquidity is more than merely a means of
determining whether a trade should be made. This will take you beyond
the status of novice, and finally push you into the realm of the professional.
The professional day trader should know that there is a link between
volatility, liquidity and, in fact, share price gaps. The latter should not be
confused with market gaps, which imply the ability of an entrepreneur to
take advantage of a business opportunity which others have missed. Trading
gaps are explained below, starting with liquidity and volume, followed by
an explanation of gaps, and finally the inter-relationship between these
indicators.
Remember, the day trader has a very short window of opportunity to
assess what to trade and to carry out the trade.
Volume and liquidity: Simply put, a share or security which trades in
high amounts is called liquid. This means that there are many traders
buying or selling that specific security. Technical analysis always works
better on liquid stocks, because the trader is better able to identify
trends, which are clearer. Market experts in South Africa deem a stock
to be liquid if more than 250 000 shares trade weekly. I suggest that you
find out what the average market trading numbers are in the country
in which you intend trading. These are likely to be different for sectors
and markets.
High volume: This often suggests that sufficient traders are in the
market to see a trend continue for a period of time. Generally

99

speaking, a trader looks for a share in which volume is increasing as the

share price approaches a resistance or support level. The trader can
then confirm his or her signal to:
Go long: if the price breaks resistance level.
Go short: if the price breaks support level.
Average volume: To determine the average trading volume, you need
to have a technical analysis package which allows you to download
the data to assess the days trading activity relative to its highs, lows
and average. In the following example, the company shares trade at
between 100 000 and 232 400 shares a day. The global day trader always
looks at volume as part of his or her technical indicators. The average
volume in a market or stock will depend on the stock exchange which
you are trading.

Example: Volume highs, lows and averages

High: 1 100 00

Ave: 232 400

Low: 100 000

Volatility: You need to know the difference between liquidity and

volatility. For instance, if a share moves up over three days, should the
trader prepare for a fall-back?
The higher the risk aspect of a share, the greater the chance of that
stock moving fast up or down. When it does, there is often a high
probability that there will be an opposite movement.
Therefore, the cheaper the share, the greater the risk of the share
having a volatile share movement.
This higher volatility leads to larger price swings, which in turn lead
to illogical market movement. If a movement is difficult to predict, it

100

becomes more gambling than trading.

For this reason, many traders prefer to concentrate on only the
top 40 shares of an exchange, as measured by market capitalisation.
Risk tolerance: You must define your trading risk profile before you
start trading, including the amount of money you are willing to risk and
the time frame needed to achieve your financial returns.
Understand:
The more money you have to set up your portfolio, the more
choices you have; ie you can diversify across countries, securities
and sectors. To achieve the same results with less cash implies you
having to take on higher-risk stocks with correspondingly greater
volatility.
If you still feel the need to trade such shares, I suggest that you
trade in smaller amounts per trade. Remember that you need to be
consistent in generating profits to become a trader. One larger trade
with high-risk shares could make you instantly wealthy. It can also
make you financially bankrupt.

TRADING GLOBAL MARKET GAPS

Gap trading is a simple and easy starting point for disciplined novice traders
to learn how to strategically go long or short. The aim is to find stocks that
open with a price gap from the previous market close. The second step is
to watch the first hour of trading to identify a potential trading range. Step
three is then to see if the share will rise above or fall below that range.
If the share price rises above the range, it is a buy signal.
If the share price falls below the range, it is a sell signal.

What is a gap?

A gap is exactly what the name suggests. It is the price difference between
a shares closing price and the next days opening price. For instance, Share
ABC closes at 100 cents on Day 1 and opens the next day (Day 2) at 110
cents. This is a gap of 10 cents.
There are four simple forms of gaps, namely:
Common gaps.
Breakaway gaps.
Runaway gaps.
Exhaustion gaps.

101

Opening price 110

cents
Gap
Closing price 100 cents
Day 1

Day 2

At this point it is crucial to note that the different types of gap can only be
identified after a stock has started to move. However, before we assess the
various forms of gaps, here are some general concepts:
When the opening price is higher than the previous days close
(highlighted in the above diagram), the term used is full gap up.
All four gap types have potential long and short trading signals.
It is suggested that traders wait for at least 60 minutes after the market
opening bell before trying to identify a range.
Many factors can cause gaps. The most common reason for a gap
forming is when a company releases financial results after the market
closes. If the results are better than expected, the share often opens
higher than the previous days closing price. If the news is significantly
worse than analysts forecasts, the share often opens lower than the
previous days closing price. In both instances you have a gap.
Note: the norm in global markets is to release results after the
closing bell.

It is easier to identify a gap if you use daily charts. Gaps on weekly or

monthly charts are quite difficult to determine. Heres how such gaps are
found:
Weekly charts: Look at Fridays price relative to Mondays opening
price.
Monthly charts: Look at the last day of the months closing price
relative to the first day of the next months opening price.

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CATEGORIES OF GAPS
Common gaps

Common gaps
Common gaps are also called trading gaps or area gaps. These occur often
during the course of a trading day and are uneventful, influenced by small
volumes and small in size.
Example: A company announces that its dividend has gone ex-div. The
norm is for the share to fall by the amount of that dividend, leaving a small
and uneventful gap between the price before and after the announcement.
Closing the gap occurs when traders take up the new share price (ie
they close the gap between the last price and the new price). The above
graph highlights two common gaps that have been filled, and it is important
to note that, while common gaps usually appear in a trading range, they
seldom offer trading opportunities.

Breakaway gaps
Upward breakaway gap

Downward breakaway gap

Higher volumes

103

This form of gap offers real trading opportunities, with identifiable entryand-exit points. These gaps highlight some significant development in a
company or market, which could have major implications on the direction
of the share ie an event which could see a major price jump or fall.
The gap occurs when the share price moves rapidly away from a trading
range. The main identifying feature is that the share moves on higher
volumes and above recent highs or lows. The increased activity in trading
signifies a heightened state of greed or fear about the companys future, ie
when a merger, takeover or significant restructuring is announced.
When a critical decision is made by a company to undertake a corporate
action, two trends tend to emerge:
If the market is positive about the change, more buyers than sellers will
cause an upward breakaway gap.
If the market is negative about the change, more sellers than buyers
will cause a downward breakaway gap.
Decisions to trade must be made rapidly, as such gaps disappear quickly.

Runaway gaps
Runaway gaps

Higher volumes

Runaway gaps are also called measuring gaps, and are best described as gaps
caused by increased interest in the stock, as identified by increased trading
volumes.
Unlike the breakaway gap, which occurs as a consequence of a major
announcement, the runaway gap takes place as a result of increased greed
or fear. When a share has risen or fallen quicker than expected, you will
find some traders trying to take advantage of a trend which has become
obvious. For instance, a share price moves fast from 100 cents to 120 cents,
and some traders become greedy and try to take advantage of the trend.
The increased number of buyers over sellers causes an upside runaway

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gap. When sellers exceed buyers, fear causes a downward runaway gap.
Another distinguishing factor is that these gaps are not filled quickly, and
tend to continue on the next trading day.

Exhaustion gaps
Exhaustion gaps

Higher volumes

The best way to describe an exhaustion gap is as a gap in a price trend that
has run its course. The essence of the gap is that it is a warning to traders
that the strong trend is coming to an end. Another way to look at this gap
is as an indication of a shares high or low at the end of a trend. Exhaustion
gaps are characterised by high volume and a shift in direction.
Of importance for global traders is the fact that such gaps offer fade
trade opportunities (see Chapter 12), as the trend shifts from up to down
or vice versa. In the above diagram, the exhaustion gap was filled quickly,
propelled by high volumes, and marked the high for this share.
Many traders believe that exhaustion gaps are the easiest to trade and
from which to profit.
There is an old saying that the market abhors a vacuum and all gaps will
be filled. While this may have some merit for common and exhaustion gaps,
holding positions while you wait for breakout or runaway gaps to be filled
can be devastating to your trading portfolio.
Likewise, waiting to ride a trend by waiting for prices to fill a gap can
cause you to miss the big move. Gaps are a significant technical development
in price action and chart analysis, and should not be ignored.
Candlestick analysis is filled with patterns that rely on gaps to fulfil their
objectives. This is discussed in Chapter 15.
In Chapter 10, the first of four trading styles is outlined.

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Chapter 10: Trading Strategy Style 1 Trend-following

Day Trading Reality No. 10:

If you cannot see the wood for the trees, you will lose perspective
I have met many novice traders who believe that it is easy to make
money trading. They are inspired by a few good trades, which lure them
into a false sense that anyone can be a professional trader. Reality is a
different story few positive trades can turn into losses, and suddenly
the market is a lonely place. Trading really is much more complex than
guesswork.

Many professional traders will tell you that the easiest form of strategy is
simply to follow the trend. As they say: The trend is your friend. The idea
behind this trend-following strategy is to stay invested with an uptrend for
as long as possible, then move onto the next trend. Timing can be from a
few hours to some months to even some years. Traders with this strategy
open a position when they have identified not just a trend, but an obvious
trend.
The next step to this strategy is to use an averaging methodology, which
means that the trader keeps adding to his or her position as long as the
share keeps rising. So, if your strategy is to buy 1 000 shares every time
the share rises by 100 cents, then your total exposure would be lower than
the sum of the acquired shares. Then, when the trend is near a perceived
end, you sell your entire shareholding. The following example highlights
this averaging strategy.
Trader A bought 50 000 shares in Company X at a total cost of
US$63 300. So, divide this cost by the number of shares bought (50 000),
and you get a share price of 126.6 cents a share. He then sells the entire
holding at 152 cents a share, which means that he received US$76 000,
which is a profit of US$12 700 or a 20% profit margin.
Often during share-mentoring workshops, I am told that trendfollowing is only for long-term investors, which is just not true, as many
futures traders today use this method of trading. The basic system is to go
long before positive news events and to go short before negative ones. The
trick, of course, is to know whether news events will be positive or negative.
Example: Day trader A has the following share purchases:

106

Trade
no.

Quantity of
Company X
shares bought

Share price
(cents)

Cost
(dollars)

10 000

100

10 000.00

10 000

120

12 000.00

10 000

125

12 500.00

10 000

138

13 800.00

10 000

150

15 000.00

TOTAL

50 000

152

63 300.00

This is the domain of the all-too-important field of fundamental analysis,

which I have discussed in numerous books. If you need information about
such books, go to www.magliolo.com.
The main benefit of trend trading is that an obvious trend is easy
to spot: It allows the trader to ride a security for easy-to-identify
gains.
The main disadvantage of trend trading is that an obvious trend is one
that has already offered other traders the same growth opportunity.
So, if you expect to achieve 20% growth from a particular strategy,
expect less than half the growth. This usually translates into a strategy
which is only half as beneficial as first forecast.
Another misconception is that a scalping strategy is the preferred territory
of day trading. In fact, if you want to associate time frames with strategies,
then scalpers will usually hold positions for up to several hours, while
another form of trader the swing trader will hold his or her positions
for a few days at a time, while position traders will hold them from several
weeks to years.
One way of determining which type of trader you are is to choose a time
frame with which you are comfortable. Defining your style is very important
to your success as a trader, so look at the following time frame forms of
trend traders.

107

FORMS OF TREND TRADING

There are four types of traders, if style is related to time frame and related
strategies. The scalpers strategy is to hold positions the shortest, followed
by swingers, core traders and finally position traders. These are set out
below:

Scalpers

The aim of scalp trading is to make a continuous stream of small profits

throughout the day. The strategy is deemed successful if you are able to
make small profits with less risk per trade. As a result of making many
trades, it becomes difficult to monitor all positions, so the advice is to have
a tight stop-loss on each position.
However, this form of trading does require strict discipline and focus,
which can make a trading day tense. So, if you cannot concentrate on many
trades, spread across global exchanges, then scalping is not for you.
Scalping is, therefore, fast, exciting and requires an ability to make
decisions without hesitation. My recommendation is to use scalping to
profit from anomalies in price and a companys true value. So, before you
even begin to scalp, research which sectors on global markets are at their
most volatile. Ask whats happening in the world economies. Then look
at correlations between shares, sectors and general markets. Once youve
done this, check daily charts to identify resistance levels.
Remember that you are looking for opportunities with low risk and high
earning potential.
If the objective of scalping is to trade in and out quickly, are there
strategies? Do you, in fact, actually need strategies?
A choice is to trade breakouts (see Chapter 19), but such trading is
difficult and requires absolutely perfect timing. There is a substantial risk to
being long or going short too quickly and, therefore, you risk the possibility
of the trend not being as substantial as you expected. In fact, what if the
trend turns against you at the very start of a trend? One strategy is to offset
this risk by having a two-stage approach to acquiring stocks: Scalp only 50%
of your intended funds and the remainder when the trend is confirmed.
As part of your trading journal and strategy objectives, use the following:
Objective: Achieve regular small profits on small price fluctuations.
Trading time frame: Trade an average of seven to ten times a day,
but never more than 12 times, and a minimum of three times. Hold
positions for at least two hours, but a maximum of six hours.

Before scalping, check the following:

CHECKLIST

COMPLETED

YES

NO

Do you know what yesterdays highs and lows were?

What are todays highs and lows?
What was the shares 12-month high?
What was the shares 12-month low?
Can you take advantage of a gap?*
How do these relate to the companys net asset value?
*See Chapter 9

Trade execution: Only trade in electronic markets with auto-queuing

systems.
Network connections: I will get the fastest and most efficient system
available anywhere in the world.
Continual research: After hours and specifically before markets open,
prepare by undertaking market research, so that your trading decisions are
made with sufficient knowledge. I will always analyse key drivers that may
prevent a stock from moving, staying neutral or rapidly rising or falling.
Never chase: My stock choices will be based on my research and
experience, and I will not chase the market or conduct popular trades.
Closing positions: As scalping is quick, I will not hold overnight
positions. Before the end of the day, I will take profits or losses.
True scalpers exit positions quickly if the market doesnt go their way.
Dont hold on to a losing position hoping it turns around!

Swingers
Swing trading, in my opinion, requires extreme patience, as you need
to combine fundamental analysis with daily bar charts to help time your

109

market entry. In addition, most swing traders are well capitalised, which
allows them to diversify among different global markets and thereby reduce
risk of declines in any single market. Being well-capitalised means, of
course, that you have substantial funds available to you to trade.
I have spent much time trying to find out what funds a professional
swing trader has at his or her disposal, with little luck. In the UK, many
swing traders use 100 000, while US traders use US$100 000 both the
same in number, but different in value.
As a corporate finance advisor, I like this form of trading because it
frees me from my trading screen for long periods. So, if you can place a
trade and walk away from the screen without being nervous or anxious, I
would strongly recommend this style of trading.
Compared to scalping, swingers hold their trades in the market for
longer, and therefore tend to be less intense people. In fact, while scalpers
look for small profits from many trades, swingers search for intra-day trends
or trend reversals to capitalise on price moves.
New technical analysis packages enable you to compare and crossreference, among others, daily charts with intra-day chart patterns.
If you like this form of trading, I recommend that you keep your eye on
factors which influence investor sentiment. Start with sector analysis and
move onto assessing peer companies price-to-earnings ratios. Under such
conditions, weaker companies often see share prices fall, while the strong
peers share prices rise.

Core trading

Unlike the above two traders (scalpers and swingers), core trading takes
advantage of anomalies in the market that take time to become established.
Professional core traders assess after hours the environmental factors
of business, economics, technology and politics in order to make trading
decisions. The challenge with core trading styles is the ability to inherently
understand markets and what influences such markets.
Consequently, you need to be more experienced as trader and analyst
to succeed under difficult global market conditions. With patience great
profits are, however, possible.
As part of your trading journal and strategy objectives, use the following:
Mindset: Keep abreast of the long-term trends which influence global
markets. Understand that many global factors do not transcend
between exchanges.

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Have accounts related to different securities: As an active day trader,

you need to have separate accounts for intra-day transactions and
longer-term equity positions.
Daily analysis of indices: Daily analysis of global market indices is
required: S&P 500, NASDAQ, Dow Jones, FTSE 100, Nikkei, Hang
Seng and the JSE All Share Index.
Look at global crossover markets as potential targets. If the Hang
Seng breaks a support level at the end of its trading day, will the
FTSE 100 do the same?
Ask the question: Is the breakout a movement towards a longerterm bull or bear trend?
Always keep to your own developed rules.
Manage risk by buying stronger stocks and selling weaker ones.
Analysis:
Technical: Follow daily and weekly charts based on technical
indicators. Use resistance levels, moving averages and volume
trends.
Fundamental: Follow business and economic analysis and news. This
is very beneficial if you assess your own analysis relative to those
expounded on the news channels. The aim is to determine whether
such news can create or promote a dominant trend in the stock
market.
General knowledge: Core trading does require more in-depth
knowledge of a company before you buy its shares. In addition, you
need to assess a company relative to its peers, sector and the overall
market. As such, this from of trading requires more research and
analysis than swingers or scalpers need to undertake.
Stop-loss strategies: Keep reward-to-risk and stop-loss ratios wide. I
suggest starting at 15% and closing that ratio to 8% as your long-term
position moves into profit. Relate your stop-loss to resistance levels.
Greater profits: While core traders are focused on longer-term trends,
there is an obvious strategy to improve profits: use entry-and-exit
points based on intra-day price swings and resistance levels. Essentially,
if you are able to buy before an upward price movement and sell once
the trend has been expended, you will make more profits.

111

Position trading
Position traders will hold positions for months to years. Usually associated
with institutional buyers, position traders require extreme patience.
Position traders are often short-term traders as well. Essentially, they have
several accounts, including a long-term portfolio and a trading account to
buy/sell futures, options and forex.
Remember, institutional traders often have large, billion-dollar
positions, so they can influence the movement of shares with large orders.
These traders use technical analysis (weekly and monthly charts) and
fundamental analysis to manage their portfolios.

Discretionary and system trading

Once you have determined what trading time frame and style you wish
to adopt, you need to define whether you are a discretionary or a system
trader.
Both are defined hereunder:
Discretionary trading:
Definition: Trading decisions are based on your research and
analysis.
Such traders still follow a trading plan. Ultimately such traders use
fundamental analysis to determine what to buy, and then confirm
the trades with technical analysis.
Consequently, they decide what and when to buy.
System trading:
Definition: Trading is based strictly on technical rules.
As such, the trader follows rules without any discretion. This is also
called black box trading, and can lead the trader to making erroneous
decisions.
Many fund managers use these systems to trade and, as such, you
need to keep an eye on institutional trading, as these will influence
market conditions.
So, if a black box trade is made in error as happened in 2010, when
the Dow Jones was hit with an erroneous trade of US$X-billion
instead of US$X-million the market will be influenced.
Under such conditions you can make significant profits from system
traders miscalculations.

112

By identifying and adopting a style and time frame to trade across global
markets, you establish a formula to remove emotions from your trading
plan. The alternative to not having a time frame is to allow yourself to trade
at will, and ultimately you will see more losing than profitable streaks.
In Chapter 11, we set out how you can associate your trading style with
technical indicators.

113

Chapter 11: Trend-following Technical Indicators

Day Trading Reality No. 11:

When markets rise or fall exponentially, they do not correct by going
sideways
Institutional investors understand market emotion: they hold when
steep climbs happen and are not lured when sharp falls happen. The
lesson is to be decisive in trading fast-moving markets, and always to
place stops on your trades to avoid emotional responses.
This section concentrates on technical indicators that follow trends. These
are popular, as many traders believe the old adage that the trend is your
friend. The first step is therefore to determine whether a share price
movement is in fact a trend.

IS IT A TREND?
One of the preferred indicators used to determine whether a share, sector
or market index movement is a trend is to use the average directional index
(ADX). This indicator is found on most technical analysis packages.
The ADX line helps to measures the degree of trend or direction in the
market.

Some basic rules:

A rising ADX line suggests that a strong trend is present.
A falling ADX line is used by dealers to trade, as it means there is no
determinable trend.
Day traders use the direction of the ADX line to assess which trading
style is suited to that market and, if that style is not compatible with
their chosen style, they stay out of the market.
The alternative is to use the ADX as a secondary indicator to assess if the
stock is in a trend, rather than whether their style is effective enough to
trade in that market.

114

Many traders use ADX as a warning signal:

If the ADX turns after a rapid rise or fall, the trend may be changing
direction, and that momentum may last months.
As the ADX is slow-moving, it should not be used as the determining
trading signal. I suggest that you use the ADX to confirm your other
indicators.
How the ADX works:
It is an oscillator, and fluctuates between a level of zero and 100.
Professional traders note that the ADX line is seldom above the 60
mark.
A line below the 20 mark warns of a weak trend.
When ADX begins to move from below to above the 20 mark, it is a
warning signal that a trading range is nearing its end and that a new
trend is developing.
Readings above the 40 mark highlight a strong trend, either down or
up.
The indicator is not used to determine whether the trend is bullish or
bearish, but to assess the strength of the current trend.
When the ADX line falls from above the 40 level to below 40, it is a
sign that the current trend is losing strength and that a trading range
could develop.

Positive/negative directional indicators

For traders interested in the mathematics of how the ADX is derived, the
following is just for you. The ADX is made up using two other indicators,
called the positive directional indicator (written as +DI) and the negative
directional indicator (-DI).
When the ADX indicator is selected, many technical software packages
plot the +DI, -DI and Average Directional Index (ADX).
When you buy your technical analysis package you must ask whether the
ADX is included in the package, as not all technical packages have it.
When you set up your ADX, use the default setting of 14 periods, but I
recommend that you modify the settings after you have used the ADX to
suit your trading style and timeline.
In its most basic form, buy-and-sell signals can be generated when the
+DI and -DI cross each other:

115

A buy signal: +DI moves above -DI.

A sell signal: -DI moves above the +DI.
However, the +DI/-DI intersections should be used simultaneously with
other aspects of technical analysis. I suggest the use of moving averages, as
set out hereunder. The reason is that the ADX combines +DI with -DI, and
then smoothes the data with a moving average to provide a measurement of
the strength of a trend. As a trader, you need to know both trend direction
and strength. As such, the ADX should be used with other technical
indicators.

USING SIMPLE MOVING AVERAGES (SMA)

A
B
Share price

10-days

120
110
100

20-days
A

90
80
70

50-days

60

More commonly called moving averages, the MA is a measure of the

average price over a specific time frame. The most commonly used time
frames for moving averages are 10, 20, 50, and 200 periods on a daily chart.
For medium-term trading, especially for investing across world markets,
nine- and 21-day moving averages can be used. Note that the longer the
time frame, the more reliable the indicator. However, shorter-term moving
averages react more quickly to market movements and will provide earlier
trading signals. I suggest that you use only three MAs as indicators; too
many may give false signals if the share is in a tight range. Some technical
analysts also suggest that you use exponential moving averages.
If you want a 10-day moving average line on an hourly chart, you would
need a 240-hour MA (that is 10-day multiplied by 24 hours).

116

The MA indicator can signal a buy on two occasions, namely when

a strong share movement reverses to the moving average line, and
when there is a moving average crossover, ie one MA line crosses
another MA.

Gauging moving average trends

Moving averages display smooth lines of overall trends. The longer the time
frame used to calculate the moving average, the smoother the line will be.
I suggest that you plot 10-, 20- and 50-day MAs to gauge the strength of a
trend. These MAs are simple input data on any technical analysis package.
As highlighted in the graph on the previous page, when a share is
climbing (line A), the shorter-term averages should be above the longerterm ones, and the current price should be above the 10-day MA. Using
the above graph as an example, as a trader you should be looking for
opportunities to buy when the price moves lower, rather than taking a short
position. The chart above line A indicates a bullish pattern.
Sell signal: When a shorter moving average crosses a longer one (ie if
the 20-day MA crossed below the 50-day MA), this is an indication that the
share could move downwards (see area B). Accordingly, should the short
MA cross back above the longer MA (ie if the 20-day SMA crosses above
the 50-day MA), this would be a bullish signal.
Therefore, when the short MA crosses over and above the longer
MA, it can be assumed that an upward change in trend is about to occur.
Alternatively, if the short MA crosses down and below the long MA, a new
downward trend may be taking place.
Moving average crossovers generate reliable results in a trending
market.

Some rules in using MA:

MA provides objective buy-and-sell signals.
They warn you if a change in trend is about to occur.
The use of two or more MAs is a popular way of finding trading signals.
Some popular combinations are 9-, 21- and 21-day; 5- and 20-day; and
10-, 20- and 50-day MAs.
Signals are given when the shorter average line crosses the longer.

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Since MA chart lines are trend-following indicators, as they work best

in a trending market.
Earlier, I stressed the importance of using a well-defined trading plan. The
basic MA crossover strategy provided in this section is an example of how a
specific trading strategy can be created and applied.
Crossover strategies are used by many stock, currency and futures traders
because of their simplicity and easy visual effect. It also clearly illustrates a
point I have made many times before: In trading you need to be specific and
not merely general in your strategic approach to buying or selling securities.
All moving average crossover strategies have certain similarities.

BUY SIGNAL: When the shorter-term moving average crosses

over the longer-term moving average, it is a buy signal.
SELL SIGNAL: When the shorter-term moving average crosses
under the longer-term moving average, it is a sell signal.
Therefore, I suggest that you always use MAs in all your trading strategies,
as it easily defines a shares trend. However, the warning signal provided
by MAs is not strong enough for day traders, and particularly global day
traders. I suggest you need additional indicators before a true buy-or-sell
signal can be confirmed.

TURTLE TRADING
This was the name of a group of traders who took part in an experiment
in 1983 run by traders Richard Dennis and Bill Eckhardt. The aim was to
assess whether people could be taught to become great traders, or whether
it was simply a gift with which you were born.
They tested the idea by setting up groups of 10 to 12 people, and
provided them with cash to trade. Over time it became clear that trading
could be taught. The title, Turtles, was based on a 1989 Wall Street Journal
article, where Dennis was quoted as saying, We are going to grow traders,
just like they grow turtles in Singapore.
The importance of Turtles is that they were taught very specifically how
to implement a trend-following strategy. The instructions were that, since
the trend is your friend, you should buy when a share breaks a ceiling and sell
(go short) when a share falls though a support level.

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Lessons learnt from Turtle trading include:

Look at prices instead of relying on media information to make trading
decisions.
Be flexible when you plan entry-and-exit points.
Be less risk-averse in less volatile markets and more so in more volatile
markets.
Never risk more than 2% of your total account on any single trade.
The Turtle story is one of the great stock market legends, but it is also a
great lesson in how sticking to a specific trading plan can result in greater
returns.

The MACD
The MACD seems to be the most spoken-about and promoted indicator,
yet many traders cannot tell you what the MACD actually is and how can
you use it to make money in the market.
The MACD (moving average convergence/divergence) is in fact a
technical oscillator, based on a mathematical formula which, in turn, is
based on price movement. The indicator aims to give you overbought and
oversold signals for a given stock.
When the MACD enters the overbought territory, it is a signal to buy.
When it enters the oversold territory, it produces a sell signal.
In my opinion, the real benefit of using the MACD as an indicator is its
link to investor confidence. In other words, when traders lose faith in the
direction of the shares price, demand for the share falls. It will continue to
fall until the market perceives that too many investors have sold, and this is
called creating an oversold position. The norm is that, at this point, traders
re-enter the market to buy that share. The MACD was first introduced
in 1960, and has been hugely successful as an indicator since then. Many
professional traders consider it a great way to make money in the markets.
The secret to using the MACD is to associate it with other indicators.
Essentially, the MACD is not a stand-alone indicator, but should be used as
an means to confirm your decision to trade. It will also help you to isolate
false buy signals.
Before we start, there are a number of important elements that must

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be noted:
The MACD, a very simple and reliable indicator, is based on long-term
historical data.
Professional traders tend to use weekly and not daily charts to get
trading signals.
The MACD is calculated by using moving averages; 50- and 200-day
MA for longer term charts and 10- and 20-day MA for shorter-term
charts.
A MACD histogram plots the difference between the two lines and
gives warnings of potential changes in trends. As such, this indicator is
turned into a momentum oscillator by subtracting the longer moving
average from the shorter moving average. Your technical package will
do this for you.
It is crucial for novice traders to use the MACD, as it is one of the
more important indicators for global trading.
The visual effect is an oscillating line above and below a zero base.

How traders use MACD

I know that the following will seem impossible to comprehend, but most of
the work is done for you by a technical package. For those more numerate,
the MACD is measured as the difference between two exponential moving
averages (EMAs).
A positive MACD indicates that the short-term EMA is trading above
the longer-term EMA. If MACD is positive and rising, then the gap
between the short-term EMA and the longer-term EMA is widening.
In essence, the indicator would be telling you that the rate-of-change
of the faster moving average is higher than the rate-of-change for the
slower moving average.
If positive momentum is increasing, it would be indicating a bullish
period for the price.
If MACD is negative and declining further, then the negative gap
between the faster moving average and the slower moving average
is expanding, highlighting a bearish period of trading. Stated simply,
when the MACD crosses above the zero baseline, it is indicating a
buy situation, and if it crosses below the zero line, it highlights a sell
position.

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MACD

0
Overbought
Oversold

9-day MA

21-day MA
Share price
A

Note that, in the above chart, the MACD is a solid black line oscillating
around a zero line. In addition, note that the MACD moves faster than the
moving averages. In this example, the MACD provides a few good trading
signals:
In Block A: the 9-day MA crossed the 21-day MA, signalling a buy.
The MACD is oscillating above the zero line, confirming a buy
signal. However, notice how the MACD starts to fall in line with the
overbought position? This indicates that buyers are losing interest.
In Block B: The 9-day MA breaks through the 21-day MA again,
stimulating demand. This is confirmed by a stronger MACD.

Positive divergence
Share price

B
0

MACD
D
C

A positive divergence occurs when there is a conflicting signal between the

share price and the MACD. In line A-B, the share price is dropping, but the

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MACD has started to rise (line C-D); forming a series of higher lows. This is
a strong indication that the share should start to move up.
While positive divergences are often ignored by long term traders, this
form of technical indicator can be used to determine new large market
movements. As such, if you can identify a positive divergence using the
MACD, then you will have an advantage over other traders; being first to
identify a trend usually leads to more profits than other traders.

Bullish moving average crossover

A bullish MA crossover happens when the MACD moves above its 9-day
EMA, but it must be used with other technical indicators, as such crossovers
can lead to false signals. Bullish MA crossovers are used occasionally to
confirm a positive divergence.
A positive divergence can be considered valid when a bullish MA
crossover occurs after the MACD line makes its second higher low.
Professional traders use a price-determining filter as a final buy/sell signal,
eg buy if MACD is above the 9-day EMA for more than three days. The buy
signal would then commence at the end of the third day.

Bullish centreline crossover

MACD
B
Bullish centreline crossover

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A bullish centreline crossover happens when the MACD moves above the
zero base and into positive territory (line A-B). This is a clear signal that
shareholder demand has changed from bearish to bullish.
The bullish centreline crossover can, in fact, be used as a confirmation
signal or filter.

Combining signals

Resistance level

MACD (12, 26, 9)

Positive divergence

Bullish centreline
crossover

Bullish MA crossover
While professional global traders do use a combination of indicators (as
above) to generate and confirm signals, there is no harm in only using the
MACD with moving averages.
In the above example, all three signals highlight a strong bullish signal.
The stock formed a lower low and the MACD formed a higher low, therefore
creating a potential positive divergence.
The MACD then signalled to traders that a bullish moving average

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Crossover had occurred when it moved above its 9-day EMA. The final
filter occurred when the MACD moved above the zero line to form a
bullish centreline crossover.

Bearish signals

The MACD can be used to generate bearish signals from three main
sources:
Negative divergence.
Bearish moving average crossover.
Bearish centerline crossover.

Negative divergence

Trend lines
Resistance line

Share price

Negative divergence

MACD (12, 26, 9)

Negative divergences form when a security moves up or sideways, but the
MACD declines. This divergence in MACD can take shape as either a lower
high or as a straight decline. Despite such divergences being uncommon,
they are the most reliable and can warn of an impending peak.
The chart above shows a negative divergence when MACD
simultaneously formed a lower high, and the share a higher high; the signal

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is that momentum is slowing. Soon thereafter, the share broke through the
resistance level and the MACD formed a lower low.
Negative divergences can be confirmed as follows.
The MACD forms a lower low and indicates the upward trend for
MACD has changed from bullish to bearish.
By using a bearish moving average crossover. When the MACD breaks
below its 9-day EMA, it signals that the short-term trend is weakening,
and that the share has reached a maximum; this may however be
temporary.
Negative divergence signals a fall in momentum and a change in trend
is imminent.

Bearish moving average crossover

Many global traders in the forex market like to use the moving average
crossover. A bearish moving average crossover happens when the MACD
falls below its 9-day EMA. While many traders do use this signal, it must
be noted that they do produce the largest number of false signals. To avoid
false signals, forex traders use a confirming filter.
There are times when a stock is moving strongly upwards, but the
MACD stays above the zero line. In such cases, it is unlikely that a negative
divergence will develop. The answer is simply to have an additional signal
to identify a potential change in a securitys momentum.
Consequently, when a bearish moving average crossover occurs, it can
show you that a shares momentum is slowing down. This should be an
obvious warning that the share may start to decline. If the share breaks
through its trend line and the MACD declines below zero, the share is
expected to fall sharply.

Bearish centreline crossover

When the MACD moves below the zero line and into negative territory,
a bearish centreline crossover has developed. This is a clear indication
that traders interest in the share has changed from bullish to bearish. The
centreline crossover can act as an independent signal or confirm a prior
signal, such as a moving average crossover or negative divergence.
However, in order to assess the significance of a centreline crossover,
you must use a technical analysis package to see if there has been a change
in trend.

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Combining signals
Similar to bullish MACD technical indicators, a bearish signal can also be
obtained by combining indicators to create clearer signals.
By using the MACD, you can spot potential weakness in a shares
growth, which should enable you to take a more defensive position when
necessary. This is also used by traders to hedge positions in the market
which they do not want to change.
Reasons

Benefits

Incorporates aspects of both momentum and trend in

one indicator.
As a trend-following indicator, it is reliable.
The use of moving averages enables you to confirm
MACD movements. Using exponential moving
averages (EMAs), you narrow market lags.
MACD divergences can be key factors in predicting a
trend change.
Negative divergence: signals a fall in momentum
and a change in trend is imminent.
Traders use this to take profits or to go long.
MACD can be applied to any time frame.
MACD is a convergence and divergence of two
moving averages; setting is the difference between
the 12 and 26-period EMA; any combination of
moving averages can be used.
During volatile periods, use slower-moving averages
to smooth out data.
Recommendation: Adjust the MACD to suit your
trading style, objectives and risk-tolerance.

Drawbacks

Despite using EMS, lags persist when using MACD.

MACD is not a good method to identify overbought
and oversold levels. I recommend using an
overbought/oversold indicator with the MACD.

MACD

Chapter 12 outlines trend-fading trading styles.

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Chapter 12: Trading Strategy Style 2 Trend-fading

Day Trading Reality No. 12:

Both mistakes and successes build trading experience
There is no secret to making money in the market: You can always do
so if you can keep your emotions in check. Learn from both mistakes
and successes; repeat wins and lessen losses to gain trading experience.
Becoming significantly wealthier, however, is accompanied by higher
risk, which takes courage and a strong belief in yourself and in your
skills.

NO FREE MEAL
Some years ago, while on holiday in Cape Town, I was invited to lunch by
Hugo, a highly successful global trader. Arranged by my publisher, I felt that
I couldnt turn down the invitation. After all, I had just started researching
this book and it would be correct and polite to speak to someone who was
already a global trader.
Taking a ten-day break from a wildly crazy schedule of workshops,
lectures, writing weekly financial newsletters, completing two new books
and finalising corporate finance-related due diligences for conglomerates
as well as finalising an AltX listing, I was seriously reluctant to go.
So, would it really be worth my going to a lunch?
To put it simply: by the end of the meal I honestly had to ask him
whether he was crazy. This trader claimed to use 32 technical indicators
and analyse over 300 economic and political data-ratios from the Far East,
Europe and the Middle East, never mind those set out in the USs Beige
Book (http://www.federalreserve.gov/fomc/beigebook).
At first, he thought I wasnt being serious. Imagine if I told you to set up
30 technical indicators before you could start becoming a day trader? To find
research on international ratios would take you weeks, in addition to the
time it would take to complete your trading strategies.
I thanked my host and left. As the classic statement goes, there is no such
thing as a free lunch time frame.
If you are looking to become a serious global day trader, there are only
a few critical questions which have to be answered:

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What are you going to trade? Equities, options or futures?

What is your primary trade setup, and do you have a second setup?
What is your competitive edge?
If you copy the market, you end up at best with mediocre results. In
addition, many novice traders tend to have only one trading strategy, which
they end up using for all (and any) market movements. I have spent many
hours and read literally hundreds of books on technical analysis to try and
understand what the idea is behind many experts reasons for advocating a
single trading strategy.
I admit that some single-strategy setups do have merit, but these usually
succeed only if you correctly predict the direction that the market will move.
A truly professional trading strategy should be established to meet various
potential market movements, ie does your trading setup give you flexibility to
meet market conditions that are flat, bouncing, volatile, bullish or bearish?
One easy-to-use-and-understand strategy is called trend-fading.
Let me quickly stress: there are many books, booklets, websites and
blogs on the subject of fading, but few offer and explain fading as part
of a more comprehensive personal strategy. I suggest that you go back
to Chapter 7 and refresh your trading style before reading any further.

STARTING WITH A DEFINITION

Definition: Trend-fading is a strategy to buy or sell when prices of

securities are trading close to either the upper or lower channel.
If the price is close to the upper channel, you sell to take advantage
of a potential downward movement.
If the price is close to the lower band, you buy to take advantage of
a potential upward movement.
As outlined in previous chapters: In trending markets you should use trendfollowing methods, and in non-trending markets you need to use trendfading systems.
Let me explain: Many traders use an easy strategy; that of following the
trend, declaring that the trend is your friend. Traders who are brave use a
strategy that suggests that markets do actually go up and down and often

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do not follow a trend.

Lets start with a more complex trend-fading indicator for those traders,
who like Hugo like the comfort of a mathematical formula, as expressed
in the following MFI.

Market facilitation index (MFI)

The MFI is calculated by taking the trading range and dividing it by that
securitys volume. Logically, the MFI actually measures the price movement
of a security and expresses it as a unit of volume.
So what does the MFI really tell you?
The objective of the MFI is to highlight a change in trend, which will tell
you that a price is reaching the lower/upper part of a trading band.
MFI

VOLUME

RESULT: SIGNALS

High

Low

A weak trend that will reverse

Low

High

A new trend in either direction

Low

Low

A weak market and a trend reversal

High

High

A strong trend

Note that not all technical analytical packages include the MFI.

THE CONTRARIAN OPTION

When you trade against an existing market or share trend, you are actually
fading the market. Or, more poetically, you are called a contrarian trader.
In essence, fading means that you are taking a position in the market
which is counter to (or against) the main and predominant trend. In Day
Trading Reality No. 12, I stressed that to become wealthier than other
traders you need to take more risks. If you are super-disciplined and able to
handle greater associated market volatility without becoming emotional, then I
recommend this trading strategy.
The reason for the need to be disciplined is that fading strategies are usually
quick, and gains are made in the first part of a movement. Traders following a
trend are often left standing when the share breaks through the channel, either
up or down. So, when you have timed the share properly, others are scrambling
to get in on the act and are too late to profit from the break.

Z
Going short: Fade the breakout
A

Going long: Fade the breakout

Fading long
The contrarian trader using fading as a technique knows that upper channel
lines can be broken temporarily. In the above graph, the trader would sell at
point Z, ie go short. He or she would then buy at point X.

Fading short
When a stock has fallen through a support level (line C-D) instead of
selling, the contrarian will buy the stock, ie the trader goes long. The trader
assumes that there will not be sufficient volume for the downward trend to
continue. He therefore buys at point Y and sells at point Z.
To succeed with this strategy, always look for stocks with little buying
volume and use an oscillator as set out in the next chapter to confirm
the fading opportunity. For instance, a day trader would use a MACD to
confirm that a down-trend is losing momentum, go long and then wait for
the shift in trend to occur.
Chapter 13 sets out trend-fading technical indicators.

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Chapter 13: Trend-fading Technical Indicators

Day Trading Reality No. 13:

Be realistic
Many novice traders assume that it is easy to succeed in day trading.
Unrealistic expectations, insufficient funds and poor risk profiles often
conspire to rid the market of the ill-prepared.
If you believe that you are a contrarian, now is the time to put your money where
your mouth is! In using the more radical technical indicators outlined in this
chapter, such as in trend-fading you need to combine more complex trading
methods and styles. So, do you really believe that you can take a position in
the market which goes against the primary trend? When using the indicators
in this chapter, global traders prefer to combine these with other techniques,
such as gap analysis, which is my personal preference (see Chapter 9).
First, lets look at basic trend-fading technical indicators, followed by
fading and gap indicators.

THREE FADING INDICATORS

As set out in Chapter 7, these are the Williams %R, relative strength index
(RSI) and Bollinger bands/channels.

Indicator 1: Williams %R
Overbought
20.00
40.00
-60.00

Oversold

80.00
100.00

450
400
350
300
250
200
150

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The Williams %R (pronounced percent R) is a momentum indicator

that measures overbought and oversold levels. Williams %R was developed
by Larry Williams.
Interpretation
While the Williams %R is similar to the stochastic oscillator, the main
difference is that %R is plotted upside-down, while the stochastic oscillator
has internal smoothing.

Indicator range:
80% to 100% = oversold
0% to 20% = overbought
My problem with this indicator is that you must wait for the price to change
direction before you can place your trades. For instance, when you see that
an overbought position has been established, you should be patient and
wait for the price to fall before selling the security. Often, by this time it is
too late to sell!
Global traders like to use this indicator as it is a warning signal of major
price-trend reversals. These traders point to how the line always forms a
peak before it turns down, and it does so days prior to the security reaching
a price peak.
The number of periods used to calculate Williams %R can be varied
according to the time frame that you are trading. A rule of thumb is that,
for intermediate cycles, the indicator window should be 14 days.
Signals

Trading rule

Go long

When Williams %R falls below the oversold level

Go short

When Williams %R rises above the overbought level

If you really want to use this indicator, it is advisable to have a longer %R

period to reduce volatility and false signals. One preferred method is to
wait until %R crosses the -50 level:
Go long when %R falls below the oversold level; then rises above -50.
Go short when %R rises above the overbought level; then falls below -50.

Indicator 2: Relative strength index

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I recommend that you use an oscillator, instead of a momentum indicator.

Both aim to tell you whether a share is overbought or oversold, but the RSI
warns you in advance that a market has rallied or fallen too far, and could
turn. Two of the most popular oscillators are the relative strength index
(RSI) and stochastic.
They both work on a scale of 0 to 100.
With the RSI, a level above 70 indicates that the share has been
overbought, while levels below 30 indicate oversold positions. The
overbought and oversold values for stochastic are 80 and 20 respectively.
Generally, if a stock moves into an oversold position it indicates that traders
could be entering the market as the share should be below its true value.
Conversely, if the RSI falls below 70, it is a bearish signal. Some traders
identify the long-term trend and then use that information to determine
entry points, eg if the long-term trend is bullish, then any oversold level
should mark an entry level.
Most traders use 14 days or weeks for stochastic and either nine or 14
days or weeks for RSI.
The RSI is also extremely useful for comparing the magnitude of gains
relative to losses.
Divergences: Trading signals are generated by identifying divergences
between RSI and underlying stock.
Example: If a share falls rapidly from a RSI level of 10 to 50, the RSI
would warn that the underlying share should reverse its direction.
Divergences that occur after an overbought or oversold reading
usually provide more reliable signals.
Centreline crossover: The centreline for RSI is 50.
Readings above and below 50 can give the indicator a bullish or
bearish movement.
A reading above 50 indicates that average gains are higher than
average losses, and a reading below 50 indicates the opposite. Some
traders look for a move above 50 to confirm bullish signals, or a
move below 50 to confirm bearish signals.

Indicator 3: Bollinger bands

MA: 20
+SD: 2
SD: 2

50000

45000

Middle
band

Upper band

40000

35000

Lower band

30000

25000

Bollinger bands are avidly used by day traders, as they can easily be
incorporated into market analysis and trading methods. They are made
up of three bands, namely UB (upper band), LB (lower band) and MB
(middle band). Experienced day traders use a setting of a 20-period moving
average; used in examples provided below.
Here are a few rules for beginners:
Bollinger bands provide a relative definition of high and low.
This can be used to compare prices to an indicator, which provides buyand-sell signals.
Bollinger bands can also be used to clarify price patterns.
Price can cross the upper Bollinger band and down the lower Bollinger
band. Such closes are continuation signals, not reversal signals.
Bollinger bands are based on simple moving averages.
Bollinger bands provide important information:
They identify levels of volatility. This can be determined by
measuring the difference or the width between the upper and lower
band.
They identify whether prices are high or low. This price comparison
is relative to past prices, and within the context of the Bollinger
bands themselves.
Global traders, particularly those who arbitrage world indices, like to
watch for low-volatility conditions, as these often precede high-volatility
strong trend runs. The best part of using such bands is easy to see whether

134

the share is overbought or oversold. In a strong upward trend, the share

price can touch the upper Bollinger band, but it is suggested that you use
additional indicators to confirm buy or sell signals.
The recommended mix is to use Bollinger bands with volume.

Head flakes
Upper band

C
Middle band

Support
point

Lower band

Head fake
Money flow index

Bullish
50
Divergence
B

The graph above combines Bollinger bands with the money flow index (MFI).
This is similar to the RSI oscillator, with an additional volume component.
For novice day traders, I suggest that you use a straight RSI indicator.
When Bollinger bands narrow, the expected warning of a breakout may
be false. New lows, established after the bands narrow, appear to signal
the start of a downward trend, but it is just a head fake, and the share
price reverses quickly.
The diagram above shows the MFI diverging as the price falls to new
lows. This chart is a good example of a head fake; this is a false breakout,
following a narrowing of the Bollinger bands. Between lines A-B and C-D,

135

the Bollinger bands narrowed and the share fell to a new low. However,
the price did reverse quickly, which pushed the MFI into bullish territory;
indicated by a level of +50.
Following the strong upward momentum, the share touched the UB
several times. Note that this implies a sign of market strength, and that
touching the LB was merely a support level.
This highlights another valuable use of Bollinger bands.
When a share is bullish, prices tends to trade between the UB and a
20-day moving average.
Conversely, during strong bearish trends, prices fluctuate between the
moving average and the lower band.
Strong trends are often characterised by price moving between the
moving average and UB and LB. The moving average functions as a basis
support or resistance level, depending on the direction of the trend.

Key points:
I recommend that you use the default Bollinger band indicator values:
A 20-period moving average.
Bands should be set two standard deviations above and below the
average.
If you use Bollinger bands, always use a confirming technical tool as
part of your trading strategy.
I have stressed this before: Bollinger bands are not a tool to be used in
isolation.
Choose indicators that combine well with Bollinger bands, but do not
replicate indicators. For example, using RSI and stochastic (another
oscillator) along with Bollinger bands simply gives you the same
information from the two oscillators.
Combine volume, an oscillator and the Bollinger bands for a more
rounded market perspective.
The essence of Bollinger bands is a tool to identify a price level; is it high or
low? They can be used for identifying price targets, swing points, exhaustion
moves and fundamental shifts in trends. You can also use Bollinger bands
to see when volatility could be falling as reflected by narrowing bands or
when volatility is low.

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FADING AND GAPS

How do you assess when a market has reached its zenith? When will the share
climb until it cannot go any further? Spotting a markets top or bottom is
nearly impossible in a world where institutions generally dominate trading.
Another issue is that shares sometimes give false signals before they change
trends. There are many instances when a share hits its all-time high or low,
but simply continues in the same direction.
One way is to trade in the opposite direction of opening gaps.
For some reason traders often panic when markets climb to historic
highs or lows. As emotions rise, markets tend to become more volatile, and
that volatility often increases in intensity as long-term investors vacillate
before taking a position. Consequently, the trading spread between buyers
and sellers widens and gaps are formed.
In fact, large opening gaps often form after major news hits the market
before it opens.
Some rules include:
An idea is to trade in the opposite direction of an opening gap.
Do this if its opening price exceeds the last days of highs or lows.
Exit at the close.
Go long if price opens below the lowest low of the past: 10, 20, 30 100
days.
Go short if price opens above the highest high of the past 10, 20, 30
100 days.
Sell at the close.
To boost performance, add a filter:
Enter a trade only if the percentage difference between todays
opening price and yesterdays closing price is at least 50% of the
20- day average range (high-low).
The idea is that market tops and bottoms should be accompanied by
relatively wide daily ranges.
Such large opening gaps suggest fairly volatile markets.
Chapter 14 outlines end-of-trend strategies.

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Chapter 14: Trading Strategy Style 3 End-of-trend

Day Trading Reality No. 14:

Bear markets have three stages fall out of the window, slight rebound
and fundamental downward trend
Technical analysts find common patterns like the simple 1-2-3 pattern in
both bull and bear markets.

THE 1-2-3 CHART PATTERN

It's amazing how novice traders quickly move from using basic indicators
like moving averages to asking, How can I combine a few indicators to
identify major trends? And I want to have clear and easy methods, please.
Their answer is both simple and complex. If you want to be different
to other traders and desire one method to highlight a significant change
in the direction of the market then using the 1-2-3 method (outlined
below) without additional indicators is simple. However, If you need to feel
relatively safer in your decision, you will need to use additional indicators,
which makes using 1-2-3 more complex.
Both methods are set out in this chapter.

Method 1: The easy use of 1-2-3

Bearish: 1-2-3
1
3

Bullish: 1-2-3

1
The 1-2-3 chart pattern occurs often, is easily identifiable and can be traded
very successfully. The importance of trading such patterns is that they warn
you that a trend is about to change and that the change will be significant
and should last a long time.

138

So, the first issue is to set out some basic steps to help you to find such
patterns, which exist for both a change in trend from bearish to bullish, and
vice versa.

Steps in finding the 1-2-3 pattern

The following steps highlight a change in trend from bearish to bullish, and
you must therefore look at the bullish graph above.
Step 1: A fundamental change occurs in the economy, assessed by
analysts to be significant and pertinent to a change in the direction of
the market. Professional traders will tell you that the aim is to look at
trends before an announcement is made. Such news can be economic,
business or socio-political, and can be either bad or good.
Step 2: In a trend change from bear to bull, the start of the 1-2-3
pattern is characterised by a sharp share price increase (bullish 1-2-3:
line 1-2).
Step 3: The rise is usually too sharp, becoming volatile.
Step 4: The share price rallies and falls (line 2-3).
Step 5: The fall does not make a new low, ie the share falls, but does
not reach the level of number 1.
Step 6: The share then moves into a bull market.

At step 6 above, both traders and long-term investors enter the market,
which creates additional interest from the public. This, in turn, creates more
strength in the share, and the share therefore gains momentum. There are
times when the 1-2-3 pattern is not a sharp movement, but can be lengthy,
which means that the setup of the pattern from point 1 to 3 (bear or bull)
can take place over days or even weeks.
One way to identify the 1-2-3 pattern more easily is to use candlesticks.
While the rules remain the same whether the share movement is rapid or
not, using candlesticks has advantages:
The more candlestick bars involved in the pattern, the larger the
expected move.
Always let the 1-2-3 pattern move before you trade. There are traders
who enter a perceived 1-2-3 pattern before the pattern has actually
been established.
When a pattern forms extremely slowly, the simple solution is to
stay out of the market, as the trend is really not confirmed and could
ultimately turn either way.

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Bearish and bullish candlestick 1-2-3 patterns

Bullish 1-2-3
A

Bearish 1-2-3
3

1
3

C
In the above bearish 1-2-3 graph, you can see that the price has moved from
an upward trend (line A-1) to a sudden fall (line 1-2). This is your first warning
that a new trend could be starting, ie not just a bounce in share price. In this
new down-trend, you could decide to go short or wait for point 2 to form as
the share consolidates at this level. While you have two initial points of a
possible 1-2-3 formation, you really cannot be sure if the share is bouncing as
traders rush to take advantage of a possible new trend or whether this is just
a minor consolidation before a continuation to the downside.
The confirmation comes when price turns and moves sharply up (line
2-3) and consolidates at point 3, which is lower than the high of point 1. This
tells the trader that the price does not have the momentum to break the
previous high, therefore highlighting and confirming a 1-2-3 bear pattern
(line B-C).
You must have a stop-loss at point 2 if you do not intend to go short.
Remember that profits will be limited if your system doesnt include
confirmation indicators (method 2) and how long a new trend (method
3) will last.

Method 2: More complex technique to confirm 1-2-3

The aim is to have two indicators that will confirm your visual proof that a
1-2-3 pattern has started.

0
A

MACD: 12 & 26

Over bought

Over sold
MA: 6 & 12

B
2

Share price

4
3

In the above diagram, you can see the formation of a 1-2-3 pattern:
The share has moved from 1 to 2 and fallen to 3, which is not as low as
point 3.
You need to see if:
There is momentum in the share to carry the trend past point 3 and
move strongly to point 4.
There is interest in shareholders to buy/sell the share in increasing
amounts.
To see if there is momentum in the share, I recommend the use of moving
averages and a MACD. To assess the state of shareholder interest, use an
overbought/oversold indicator. Some traders will add a RSI to the equation,
but this is not necessary.

Divergence with the share price indicates an end to the current trend
in the above diagram:
Point A: The MACD line has crossed and moved above the signal
line (line 0) to generate a buy signal. The time periods for the
MACD are often given as 26 and 12.
Point B: Shareholder interest indicates an oversold position and
the moving averages generate a BUY signal.
THE 1-2-3 PATTERN HAS BEEN CONFIRMED.

141

Method 3: Identifying length of new trend

If you could determine how long the new trend might last, you would be able
to estimate the length of time your investment would be tied up for. After
investigating the immeasurable number of technical indicators purporting
to know when a trend will end, I have chosen the Fibonacci set of numbers
to indicate time frames.
Of course, being a day trader you should be reviewing your investments
and therefore graphs daily. If this is the case, then the same indicators used
above can be used to indicate the end of the new trend and therefore a
sell signal, ie the MACD would fall below the zero zone, the share would
become oversold and the 1-2-3 pattern would be bearish.
Fibonacci numbers and, in particular, what are known as Fibonacci
retracements can also be used to determine when a shares trend could end.
In the Fibonacci series, two percentages are commonly used, namely 61.8%
and 38.2%. However, global cross-exchange day traders say that the magic
number to watch is 88%. These traders stress that the 88% retracement
level often marks the end of a significant move.
At the 88% point, the share is likely to run out of momentum. If it does
move to the 90% mark, the risk of a major reversal is deemed too great not
to sell.
Consequently, Fibonacci retracements are warning signals that a share
has moved by a certain percentage and is expected to change direction until it
finds support or resistance at the next key Fibonacci percentage. Your computer
technical package should have the ability to create a trend line between two
extreme points and then highlight the key Fibonacci ratios. These are 23.6%,
38.2%, 50%, 61.8% and 100%.
In the following diagram, the share fluctuates and hits the key percentages
until the 88% mark is hit, at which point the share makes a major reversal.
100%
88%
61.8%
50%
38.2%
23.6%
0%

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As such, Fibonacci numbers provide traders with warning signals of a

significant change in trend.
Chapter 15 examines using candlesticks as technical indicators.

143

Chapter 15: Trading Strategy Style 4 Candlesticks

Day Trading Reality No. 15:

Warning: Volatility can be addictive
Some traders get bored when the market is flat. Under such conditions,
dont trade. Conduct research and analysis. Trading is careless and
irresponsible.

WEST MEETS EAST

Unbelievably, the Japanese developed a method of technical analysis to
analyse the price of rice contracts as far back as the 1600s. Called candlestick
charting, it is a simple way to assess price and price relative to itself. Let
me explain: Instead of a price chart depicting the closing price at the end
of a trading day, a candlestick price shows you the price at which the stock
closed, but also the shares high and low of the day and the extent of these
prices relative to the previous day.
What I am stressing is that candlesticks give emphasis to the relationship
between close price and open price, which is a crucial tool in day trading. In
fact, once you get used to using candlesticks, you will see that they provide
clear and easy reading of prices. In addition, trading with such charts
enables speculators to see and assess market sentiment with a greater depth
of information than traditional bar charts.
Day traders tend to use candlesticks to predict reversals or continuations
in trends, which is recognised as one of the most difficult aspects of trading.
Forex traders in particular like using candlesticks to assess patterns to
select entry-and-exit points.
On the next page are examples of candlesticks, and a definition for each
candlestick component:

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Upper shadow
High

High

Close

Open

Real body

Open

Close
Low

Low
Lower shadow

While candles use the same price information as standard price charts,
they highlight bullish and bearish activity, which means that you can
assess investor sentiment at a glance. As shown in the above diagram, a
shares high and low are displayed by the highest and lowest points of the
candlestick, while the opening and closing prices are represented by the top
and bottom of the candlestick. The thin lines at the tops and bottoms are
called shadows, and the wider parts are called real bodies.
The candle is white if the close was above the open, and black if the
close was below the open.
NAME

SYMBOL

MEANING

Doji

A doji is a candle formed when open and

closing prices are virtually unchanged; ie no
dominant force in the market.

Hammer

A hammer is displayed when a share which

has started to fall reverses in a bullish
pattern.
The body of a hammer is very small, and
either black or white.

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Inverted
hammer

An inverted hammer is a candle with a small

real body near the bottom of its range and a
tall upper shadow.
It actually shows that the price opened
near the low of the trading session, moved
higher during the day, but declined to close
near the candles open and low.

Harami

A harami is a candle pattern that suggests no

dominant force between bulls and bears.

High-wave
candle

A high-wave candle has a small real body

halfway between tall upper and lower
shadows.

Black
marubozu

A black marubozu is a tall black candle with

no upper or lower shadows.

Tweezer

A tweezer top consists of consecutive candles

with the same (or almost the same) highs.

Bearish
engulfing
line

A bearish engulfing line is a tall black candle

highlighting a share that is climbing.

Before online trading became the norm around the world, technical
analysts were promoting candlestick charts independently of other
technical indicators. In the past decade, candlestick patterns have become
well established in the West, but in conjunction with other indicators. The
essence is that simple candlestick patterns are easy to combine with more
traditional patterns, but more complex candlestick patterns are used mostly

by professional global traders.

However, if you are serious about making global trading your preferred
career, you will need to understand some of these more complex indicators.
Two of these patterns are tower tops/bottoms and rising/falling threes. These
two sets of candlesticks will provide you with explanation of reversal and
continuation patterns.

Figure 1: Tower tops and bottoms

DEFINING THE TWO PATTERNS

Figure 2: Rising and falling threes
C
Falling three
A

Tower
top
Rising three
Tower bottom

CANDLESTICK
PATTERN

HIGHLIGHTS

MOVEMENT
IDENTIFIED

Figure 1

Tower tops
and tower
bottoms

Reversal patterns

The last candle

in each pattern
reverses the
direction of the
first candle.

Figure 2

Rising threes
and falling
threes

Continuation
patterns

The last candle

in each pattern
reaffirms the
direction of the
first candle.

Both patterns consist of:

A tall candle.
A series of candles with small real bodies.
Another tall candle.

147

The main difference between the two sets of patterns is that the last candle
in a tower top/bottom is the opposite colour of the first candle (candles A
and B), and the last candle in a rising/falling three is the same colour as the
first candle (candles C and D). Therefore, the last candle in a tower top/
bottom reverses the trend indicated by the first candle, while the last candle
in a rising/falling three signals a resumption of the first candles trend.
BULLISH OR
BEARISH

HOW TO IDENTIFY THE PATTERN

Bottoms

It is a bullish
reversal pattern
in a down-trend

First candle: A tall black candle.

Second candles: Several smaller
real bodies.
Either white or black.
Trade sideways.
Third candle: A tall white candle.

Tops

It is a bearish
reversal pattern
in an up-trend

First candle: A tall white candle.

Second candles: Several smaller
real bodies.
Either white or black.
Trade sideways.
Third candle: A tall black and
white candle.

THREES

BULLISH OR
BEARISH

HOW TO IDENTIFY THE PATTERN

Rising

A rising three
is a bullish
continuation
pattern

Begins with a tall white candle in

an upward trend.
Three smaller real bodies form
within the tall white candles
trading range.
The number can be as little as
two and a maximum of five.
The small real bodies are
usually black, but colour isnt of
consequence.

TOWERS

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The general direction of the series

is downwards.
A tall white candle closes higher
than the first tall white candle
This completes the pattern.

Begins with a tall black candle

Three smaller real bodies form
within the tall black candles range.
Two to five smaller candles are
acceptable.
Not all candles have to close higher
than the previous candles close.
The last candle in the pattern is a
tall black candle that closes lower
than the first candle.

A falling three
is a bearish
continuation
pattern

Falling

Candlesticks 1: Tower tops and bottoms

Figure 3

Bearish belt-hold line

Hammer

B
Tower bottom
Reversing the trend

Figure 4

A B
Tower bottom
Ordinary tower bottom

The tower bottom in figure 3 consists of six candles:

Candle A, a tall black candle highlighting an increasing level of bearish
sentiment.
Jargon: A bearish belt-hold line is a candle that opens higher than
the previous days close.
Next four candles form small real bodies.

These trade sideways and within the range of candle A.

The next candle after A is a hammer.
The hammer is the first indication of a bullish reversal.
Candle B completes the bullish pattern.
It closes above the high of candle A and warns of a possible strong
upward trend.
A classic tower bottom is highlighted in figure 4.
Candle A: bearish belt-hold line
Six candles follow: these highlight a decrease in volatility.
These trade sideways and form small real bodies.
Candle before B is an inverted hammer.
Candle B therefore confirms that the inverted hammer is bullish and
completes the tower bottom.

B
A
Tower top

Tower
top
Figure 5 Trend reversal

Figure 6 Multiple
patterns

The tower top in figure 5 is highlighted as follows:

It starts with a tall white candle.
The next six candles have small real bodies.
The candle following A is called a doji.
This warns traders that there is an end to the sharp price rise and
the beginning of a bottleneck in trading.
The second and third candles after A represent a tweezer top and
warn traders that in the short term there will be resistance to the
predominant upward trend. The sixth and ninth candles after A are
haramis; stagnation between bullish and bearish traders.
The candle before B is a high-wave candle. This signifies a short-term
last sideways movement.
B is a tall black candle, positioned below candle As low price.
This is a clear signal that a new downward trend has started.

149

150

Figure 6 displays another tower top.

Note the gap preceding candle A.
This is an exhaustion gap; as set out in this book.
This is an indication that the current trend is about to end.
Four small candles follow candle A; all within As trading range.
The first small candle is a harami. This is a signal that the current
strong bullish trend may be temporarily stalled.

Candlesticks 2: Rising and falling three patterns

Note that these patterns look like tower tops and bottoms in that the rising
and falling threes also start with a tall candle, followed by a series of smaller
candles, and end with another tall candle.
DIFFERENCE
The last candle of a tower pattern reverses the direction of the
preceding trend, while the last candle of a rising and falling three pattern
continues in the direction of the preceding trend.
Many novice traders tell me that the names of the two forms of candlestick
trading are confusing. Think about it: the series of small real bodies in the
rising three pattern is falling, and the series of real bodies in the falling three
pattern is rising.
The confusion is caused by looking at the direction of the actual small
bodies and not the trend itself, ie the rising three appears in a bullish trend,
the falling three in a bearish trend.
Figure 7 shows a tower bottom that starts five days before candle A.
You can see a tall black candle in a bearish trend, which is followed by four
smaller real bodies and a tall white candle at A.
Candle A is effectively the first candle of a rising three pattern.
Candle A is displayed by a tall white body, which is followed by three
falling smaller black real bodies. These are still within candle As trading
range.
Candle B is tall and white, and completes the rising three and closes
higher than candle A.

Figure 7 Reversing/
continuing trends

151

Tower bottom

A
A

Rising
three

Rising
three

Figure 8 Confirming direction

Falling three variation

Falling three
Figure 10 Flexible pattern
A

Figure 9 Falling three

pattern

Falling three
A
B

Two falling three patterns occur in figure 9. The first begins four days before
A with a tall black candle in a bearish trend.
The tall black candle before A ends this charts first falling three.
The second falling three begins with a tall black candle at A and
continues with three rising smaller real bodies, ending with a tall black
candle at B.
In figure 10 traders can see a brief three-day bullish trading rally between
A and B.
Yet, when I showed this graph to candlestick traders, I was told that
the rally did not constitute a short-term bull movement. After all, all you
need to do is look at the following 42% decline to know that the three small
bodies did not warn of a bullish long-term trend.

152

This is what I was told: An engulfing line is a highly sought-after signal

to warn us of the end of a corrective wave.
If you understand this statement, you have indeed mastered the art of
candlestick trading.

Trading like a Japanese demon

The only way to gain an advantage over other traders in global markets
is to outsmart other traders and to do this by having a better grasp of
fundamental and technical tools. So, use candlestick charts as part of your
overall trading strategy, and not in isolation.
To succeed in trading you need to elevate your skills to a level beyond
that of your competitors. Learn simple patterns and move to establishing
more complex systems as your experience, insight and judgment grow.
Only then will you have your best chance to become as the Japanese
call it a detestable market demon.
Part 4 offers a different approach to trading for more advanced traders,
who have mastered the above trading styles.

Part 4
Developing Advanced Trading Skills

The key is consistency and discipline. Almost anybody

can make up a list of rules that are 80% as good as
what we taught. What they cant do is give (people) the
confidence to stick to those rules even when things are
going bad.
Michael Covel
Best-selling author of The Complete Turtle Trader: The
Legend, the Lessons, the Results

153

154

Chapter 16: Finding the Market Bottom

Day Trading Reality No. 16:

Never be a bull or bear all the time
Bull markets are more fun than bear markets, unless you are a shorttrader.

FINDING MARKET BOTTOMS

Back in 1997, during the emerging market crash, a young trader stood
staring at the monitors at Global Capital Securities. It was close to the end
of the day and, as usual, it was the task of the head of research to walk onto
the trading floor to speak to the portfolio managers and traders about the
days events. It had been another disastrous trading day, so I hardly noticed
that the young man was staring so avidly at the screen, but what caught my
attention is that he had cranked up the volume to unnecessary levels.
What are you doing? I asked him.
With complete seriousness he answered: Im listening for the bell to
signal that the market bottom has been reached. While that would certainly
save us all a lot of trading time, I looked at his laughing fellow traders,
shaking my head. Jovial attitudes during a time of chaos!
Volatile market conditions are great for making money as a global day
trader, selling short and long on the same security; jumping in and out of
positions with geared instruments can be highly profitable. Still, if you
could always find the bottom of the market, you could plan your long-term
portfolio better and certainly be prepared to take advantage of market
anomalies.
That said, the young mans statement about a bell being rung when
the market reached its bottom got me thinking: What if there was some
indicator or combination of indicators that could be used to warn us that
the bottom of the market was close? Note that I said close to the bottom
and not at the bottom, because too many traders wait for the elusive market
bottom, and end up losing a major portion of crucial trades.
A simple reason for this is that when shares are falling, institutional
investors pile in with billions of dollars when they perceive that the bottom
is near, and the trend is reversed before your expected market floor is
reached.

The following combination of chart indicators could help in

spotting rallies that are slowing and therefore assumed to be reaching
a market bottom. If you have better combination of charts, send your
recommendations to mentor@magliolo.com.
The two suggested combination of indicators are:
Slow stochastic: use the standard defaults of 14, 3, and 3.
The MACD: use the standard defaults of 12, 26, 9.
The following graph shows a weekly chart of Company A as a market
bottom evolves. The stochastic has been plotted in the middle scale, the
MACD on top and the share price at the bottom.

Company A
MACD

Stochastic

Company A: Share price

Company A made its first of a series of bottoms on line A.

Note line B-B: The MACD and stochastic moved up, signalling a
potential uptrend for the share price. The logic is that, if indicators are
telling you that the share should rise, then that share must be close to the
bottom of the trend.
Longer-term investors could conclude that the MACDs slow upward
movement relative to the stochastic and share price is an indication that
a bottom level may have been reached. In line D-D, a bottom occurred;
Company As share price moved into an uptrend, and the start of a bullish
trend can be noted. Both the MACD and stochastic confirmed that the
move would be upward.

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Forecast bottom reversals

The following graph shows a daily chart of Company B.

Company B
200-day moving average
A

50-day moving average

F

Share movement
C

Stochastic
MACD

On line A-A, Company Bs slow stochastic was up, but the MACD fell. This
confusing double indicator was a warning to traders that the rally could be
short-lived. In fact, the share rose marginally (C to D), before falling back
to previous levels (D to E). At the lower level, the stochastic highlighted a
buy signal at line B-B, and this time the MACD confirmed the signal. The
indicators had signalled a market bottom and the share moved strongly up
(E to F).
CONCLUSION
When used with discipline and logic, a combination of technical
indicators can provide traders with early warning signals. In the case of
a combined stochastic and MACD, it can set a caution that a potential
market bottom is near and that a strategy/action is needed.
Chapter 17 explains shortening techniques.

157

Chapter 17 Shorting Techniques

Day Trading Reality No. 17:

Be flexible to market conditions
It is very important to see the markets as they are, and not as you wish
them to be.

BASICS OF GOING SHORT

While there are literally thousands of books expounding the benefits

of short-selling, many are just too complex for in-depth explanation in
this book. An easy explanation of shorting is that you, the trader, takes
advantage of a fall in the market.
A more formal explanation: Also called going short, short-selling means
selling any form of security which is not owned by the seller. In turn, the
seller must purchase the security previously sold.

Still confused?

In laymans terms:
Your analysis shows you that Company Xs profits will be down and
you believe that, consequently, the share price will fall.
There is obviously no point in buying the share, as you know that it will
decline.
What if you could sell this security at the current price and then when
you believe that it has hit the bottom buy it back at the lower price?
Example: Company Xs share is trading at 100 cents.
You sell the stock at 100 cents and wait for the fall in price.
The share falls to 80 cents, at which point you see this as the lowest
point the share will fall to before rising again.
You buy the stock at this price of 80 cents a share.
If you had sold 1 000 shares in Company X at 100 cents, you would
receive US$1 000.
If you bought Company Xs stock back at 80 cents, you would have
to pay US$800.
You made 20 cents profit per share; a 20% profit in this example.

158

Going short or short-selling has several important uses. Firstly, it enables

traders to profit from both bear and bull trends. Secondly, it enables traders
to conduct more complex trades. Imagine if your research shows that a motor
industry company is about to be bought out by another. Take that scenario
further and assume that the acquirer is a Japanese company, and that it is
about to buy out a UK-based motor company. The aim would be to:
Go long on the Japanese company; and
Go short on the UK company.
In this scenario you have used bear and bull tactics, global stock market
movements and exchange rate trading skills. This is the essence of being a
global trader.

The mechanics of going short

Note that the following applies only in certain countries, as automated
trading has obviated your need to find a broker holding the stock you wish
to short. In other words, if you wanted to short Company Z, you need to
find someone who is willing to sell Company Z stock to you at the lower
levels.
Today, the short-seller merely selects stocks which are designated as
being available for short-selling and then he sells. The automated market
systems find institutions willing to offer stock at the lower levels.
Trader A
(short seller)

Broker X

Broker clients

Institutional
stock lenders (Box list)

159

In countries where electronic trading is not an option, the following explains

the process of shorting:
Trader A decides to go short; set out in the opposite diagram.
Trader A needs to borrow the stock from a broker; called Broker X in
the opposite diagram.
Broker X has a list of institutions that are willing to borrow stock for
short-selling clients. This list is sometimes called a box list.
It is Broker Xs task to ensure that different institutions and clients
offer shares to the box list to be used in shorting positions. These
clients are outlined in the above diagram.
Having found a broker, Trader A can now short the market, but only
when Broker X confirms that Trader A can borrow stock from the box
list.
The proceeds from Trader As sale of shares is used as collateral on his
or her borrowed shares.
Broker X invests the cash, but uses a portion of the interest to cover
brokerage and other fees.
Most major exchanges have a three-day limit before you must settle the
account, which means that you can only short a share for three days.
On the third day, Broker X closes the position and the transaction is
completed.
If the short-sale trader fails to deliver his or obligation, he or she can
be forced to repurchase the securities to reduce or eliminate the short
position.

Why go short?

If you believe that markets fall three times as often as they rise, is it not
obvious, therefore, to stress that going short must be part of any day traders
global strategy? Many long-term investors will say that shorting is only
needed when there is emotional (panic or greed) trading in the market, and
therefore this only provides them with a hedging strategy. However, day
traders say that all stocks rise and fall constantly. It is therefore the true
ability of a trader to take advantage of both trends.
Here are some recognisable conditions to go short:
Violent protest, strike action and bad news; general market or
company-specific news.
Global news: International disasters, such as terrorist attacks and

160

natural devastations; earthquakes, floods etc.

Business news: Fraud, profit losses, mergers and take-overs, sharesplits and any other news that creates a negative investor perception of
the company.
Trends as set out in this book: Declining patterns are easier to identify
than up-trend ones.
Analysts sometimes bend to shareholder pressure to only give buy
signals. This means that companies doing badly tend to be ignored by
the analytical fraternity.
Not all exchanges offer a short-selling service. In fact, even in
exchanges which do offer such a service, not all institutions will comply
with such trading techniques and, even more disconcerting, traders are
limited in the number of stocks which can be shorted.

Market balance
Stock markets are all about continually restoring a balance between price
and value, whether through arbitraging currencies or commodities across
global exchanges, or through options or futures. To state it bluntly, these
techniques correct market inaccuracies. If a market is too highly-priced,
traders correct the situation by selling or shorting the market. If the market
is under-priced, demand for the share will exceed supply and the market
corrects value-to-market discrepancies.
By going short, traders effectively assist investors to see which shares
are over- or under-priced, which usually leads to a reassessment of the
companys financials by analysts and financial journalists. This is one way
of rooting out companies with poor financial structures. I have personally
witnessed shares being pushed to unbelievable heights by marketing
companies during IPOs. Short-sellers come in at a point near the top and
correct share prices back to fair market levels.

Offsetting risk

In order to protect your capital, have and always use stop-losses.

If your stock falls, your broker may insist that you commit more funds
to the short-selling position. If you cannot inject more funds, he or she
may liquidate your short position. The term used by brokers is margin
call.
If there is a share split, your short position increases by the amount of
the slip.

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Only trade in liquid stocks and those which display a general bearish
sentiment.

SIMPLE SHORTING STRATEGIES

The following three strategies take advantage of both bull and bear trends,
and are highlighted in the following graph using volume, moving averages
(200 and 50 days) and candlesticks.

1
2
50-day moving average

200-day moving average

1
Volume

While there are a multitude of ways to find shorting opportunities, the

following are three of the simplest methods used by global traders. While
the above graph only uses moving averages and volume, you could add the
MACD and a stochastic or RSI to help in identifying shorting trends.
Shorting option 1: In line 1, you can see that the stock was down after
the gap, broke through the 50-day moving average, and this was done
on increased volume.
Recommendation: When you go short on a gap you must have a
stop-loss on the previous days highest price.

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Shorting option 2: in line 2, the share fell below the 200-day moving
average without volatility or increased volume.
Recommendation: A fall below a 200-day moving average is a good
place to go short, as such shares will often be moving out of a longterm up-trend.
Shorting option 3: In line 3, a massive gap had been formed after the
moving averages crossed.
Recommendation: Short on a crossover of moving averages, but
increase your investment if this is combined with higher volume and
bad news.
As stated many times in this book, I strongly believe in keeping technical
indicators to a minimum, but the use of a MACD and RSI does provide
additional shorting opportunities.
In the next chapter, pairs trading is explained and used by traders to
take simultaneous advantage of shares moving in opposite directions.

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Chapter 18: Pairs Trading

Day Trading Reality No. 18:

Risk must always be limited and controlled
When traders are making losses, many want to jump in and make their
money back immediately. The first reaction is to buy more shares
without thinking about the risk/rewards.

MATCHING STOCKS
When I first used pairs trading in stockbroking in 1998, it was called market
neutral strategy. This is a method enabling you to identify and take advantage
of two companies (or futures contracts) with similar characteristics, but
which are expected to move in the opposite direction.
The simple definition of pairs trading is buying one instrument and
selling the other. There are occasions when one company will win and
another will lose. For instance, if Company X wins a contract (or tender)
that Company A wants, there will be a winner and a loser. So, while a longterm investor would want to buy Company X or sell Company A, a global
day trader would want to be the true capitalist and take advantage of both
trends.
B
Company X

Long-position
Short-position
Market
neutral

Profits

Company A
C

How do you do this? You go long on Company X and go short on Company

164

A. If the trade goes exactly as planned, you would earn twice as much as if
you only carried out one of the trades. Essentially, long-term traders would
benefit from profits made from line D-B and short term traders from line
D-C.
Pairs traders would profit from line C-B.
The question I ask clients is: Are you prepared to take the chance of getting
both trends wrong? What if a white knight came on the scene at the last
minute and helped Company A win another (even more lucrative) tender
or contract?
Pairs trading, in effect, attempts to start at a market-neutral position
and then capture the rapid growth spread between two correlated stocks
as they move after an expected announcement is made. It is also known as
statistical arbitrage.

STEPS TO PAIRS TRADING

Step 1: Find and choose a pair
While this may sound like a complex process, its actually quite simple,
as there are numerous easy methods for choosing a pair. I suggest that
you start by looking for two stocks in the same sector which could be
correlated through some form of economic, financial or political alliance.
For instance, two companies bidding for the same government tender, or a
highly successful managing director moving to a competitor.

Step 2: Use your technical charts to confirm correlation

If your technical package permits, download the prices of two selected
companies share prices and plot them on the same graph. In the following
example, Company A has the stronger share price, but Company B has the
better infrastructure to get a contract, which Company A has also tended
for. So, what do you do next?
Look at a two-year price chart for both companies, move to Step 3 and
create a price ratio from the downloaded share data.

165

Company A

Company B

Step 3: Create a price ratio chart

This is another seemingly complicated, but actually simple, procedure.
Most charting platforms can do this for you automatically.
A price ratio chart is defined as a chart of both stocks plotted together,
but as a ratio of one share to the other. The ratio is calculated by dividing
one share price by the other share price. These are normally line charts,
and measure deviation from the mean or average spread between the two
stocks in the pair.
B
0.7

0.65

Mean or average

0.6

0.55

C
E

In the above diagram, we see that Company A divided by Company B

provides an interesting set of options. Line A-B tells us that the market
is indicating that we should go long with Company A and go short with
Company B, while the opposite is true for line B-C.
In the above example, the market perceived that Company A was the
likelier company to be awarded the tender, but Company B fought back by
buying out the managing director, which led to the market selling Company
A and buying Company B.

166

The global trader would use the diagram on the previous page to
conduct a pairs trade at A-B, B-C, D-E, E-F and F-G.
A more mathematical way to use digrams is to use a standard deviation
to be more accurate in terms of buy-sell timing. This can be done using
formulas in an Excel spreadsheet.

Step 4: Carry out the trade

When the price ratio line moves away from the mean or average line
(see the diagram on the previous page), its time to enter the trade.
Long Position

Lagging stock

Short Position

Over performer

Your profit is anywhere in the spread as the ratio moves back to the mean
line. Another recommendation is to buy-sell in the same amount, ie if you go
long with US$1 000 on Company A, then you should go short on Company
B with the same dollar amount. This keeps things equal in the moves.
This is pairs trading in its most simple form. If you are able to use
deviation points using an Excel spreadsheet, note that two lines form
around the price-ratio line. The pairs trade would be determined to either
long-short the market or the opposite short-long the market. These would
depend on the price ratio and the variables used for the standard deviation.
Its not a foolproof method and global traders do lose money. However,
pairs trading is a recognised method for consistently achieving profits. It is
still important to use stop-losses when using this strategy. It is possible that
both sides of the trade could move against you, so know how much you are
willing to lose prior to executing your pairs trades.
Chapter 19 sets out strategies to take advantage of breakout trends.

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Chapter 19: Breakout Strategies

Day Trading Reality No. 19:

Take responsibility for your actions
When a trader does not achieve his or her desired results, they
often blame markets, circumstances, mentors, etc. When you take
responsibility for your trading decisions, you can learn from mistakes
and successes and, with experience, react differently to future trading
circumstances. Then you can become the success you know you can be.

PROS, CONS AND MISCONCEPTIONS

When asked what trading a breakout means, novice traders often say that it
has to do with shares making daily highs or lows. Some believe that it means
trading a share which has broken through daily highs or lows. Yet these
same traders will hold shares that have hit intra-day highs.
The point I am trying to make is that technical terminology means
different things to different people. I have said this many times: novice
traders tend to complicate issues. There really is no secret to trading
breakouts successfully, so this chapter sets out the basics for you.
Lets start with this statement: A breakout is the most common form of
day trading style.
The essence of trading breakouts is to identify pivot points first and
then to trade to earn quick profits as the stock exceeds a new price level.
In fact, breakouts should be the starting place for novice traders, as it is a
trend-following style, with the added advantage of having clear entry levels.
The following pros and cons highlight the effectiveness of breakouts as a
trading indicator:

Pros and cons

Advantages and disadvantages of trading breakouts

Quick trades with potentially quick profits.

Breakouts are also easy to identify. This is done by
tracking stocks relative to their daily highs or lows.

Pros

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You can take advantage of a market bounce when the

first-level stop-losses are triggered, ie when a share
falls and hits a general market stop-loss, the share
normally bounces. You can take advantage of this rise
in price.
A true breakout trade is made only when volume and
price move simultaneously.

Difficult to differentiate your trade from your

competitors, which means small profits per trade.
Every day trading technical system has the option of
having highs and lows displayed with the share-price
day, ie anyone can use this as a trading style.
Not all breakouts are true, which means that a vast
number of daily breakouts will fail to make you a
profit.
Requires focus and discipline.
Such trading is rapid, so huge losses are always
possible.

Cons

Breakout misconceptions
When new clients approach me, at times I am horrified at their trading
strategies. In 2009, Kevin Jones, a share mentoring client, wrote in his
trading journal: I will buy shares on breakouts and go short on breakdowns.
If he had followed this system, he would be back to his old job as a petrol
station owner.
Then there is Sandy Owen, who wrote down in her trading journal: I will
wait for the share to fall through a resistance level and, if trading volume is
high, I will buy the stock. I will go short if the share breaks through a ceiling
with volume.
While the two above statements may sound the same, the difference
is that Owen is also looking at trading volumes before making the trade.
Owen is one of my success stories today, trading futures and forex around
the world. Professional traders combine a break through a resistance level
with a flow of buy-or-sell orders. Only then do they place their personal
orders to buy or sell.
Remember that in electronic order systems, a queuing of orders takes place.
So, higher bids jump the queue for buy orders and lower bids jump the queue

169

for sell orders. In laymans terms, if I want to buy a share, I place an offer
that is higher than the competing bids. I jump the queue and my order is
filled. It doesnt have to be much higher just a few cents.
Using the above method, the way to get out of a position is to sell the
stock at slightly less than everyone else.
The following are some misconceptions, which cause confusion among
novice traders:
Nothing happens after lunch: One so-called professional trader told
me that nothing happens after lunch. Really? In a globalised market,
there is no midday lunch. I have seen the US markets roar in the
morning, just to be hammered in the afternoon as economic data
or corporate news is released. Similarly, in South Africa, the annual
budget, interest rate announcements and other economic data is mostly
released in the afternoons.
The misconception derives from a belief that institutional investors
always buy after their morning EXCO meetings. Remember what I
said earlier? A breakout must be accompanied with buyer volume.
There is no doubt that institutional investors will sell at some stage
but it is unlikely to be on the same day as their stock accumulation.
Breakout strategies are easier with penny stocks: There are many
traders who believe that trading penny shares will make more profits
as they can trade more often. This logic ignores inherent risk, share
volatility and the unpredictability of the small-cap market.
Breakouts and fading are not compatible: If you chose to trade
breakouts as a trading style, you need things to happen quickly and
precisely. While it is easier to go with the trend, there is no reason why
you cannot have a fading trading style as well.
In a globalised market, there will be breakouts throughout your
designated trading day, even if that day crosses over timezones. This does
not mean that every day will be profitable, but you should on average make
more profitable deals than losses.

TRADING BREAKOUTS
Many of my trading colleagues believe that to succeed with a breakout
strategy you must use a combination of technical indicators. I believe
that breakout strategies should not be your primary trading style, but an
opportunistic method of taking advantage of short-market volatility. The
easiest way to identify breakouts visually is to have your support and

170

New high
candlestick

Resistance line
1

Three-bar
breakout
C

Increased volume

D
Reversal
candlestick
bar

resistance lines set up on a graph, as highlighted by the bars 1, 2 and 3 in

the above diagram.
In addition to resistance lines, we use a three-bar breakout strategy, which
obviously and as stated above focuses on the breakout of a share through
key support and resistance levels. The reason for using a three-bar strategy
is simply to avoid false breakouts. Some traders use two bars to, as the more
speculative traders say, get in the market early.
Typically, if you only use two candlestick bars to make an investment
decision, you could be risking making a trade on a weak market movement;
even if the movement has broken through a key support or resistance level,
ie you are guessing that the movement is the start of a new trend. Using a
three-bar candlestick movement (as set out in the above diagram: A, B and
C) enables you to detect whether the market movement is the start of a
strong new trend or simply a temporary change in the current trend.
It is also important to remember to use candles instead of a line
chart. In the above diagram, candlestick bar A shows that the share price
hit a new high. A breakout strategy is identified, but not immediately
implemented. When candlestick bar B shows a weakening share price, it
is assumed that a three-bar downward strategy can be implemented. The
trader looks at the level of volume of trades and, if satisfied that there are
enough trades, goes short at this point.
At candlestick bar C, the traders exits the trade at the beginning of
candlestick bar D and waits for the next breakout.

171

Conclusions

The above set-up consists of the following key elements:

Step 1: Identify a bar (candlestick) with higher trading volume breaking
through a key support or resistance level. This is bar A in the above
diagram.
Step 2: Identify an indicator where the price is higher than the previous
days price, ie the new high candlestick point.
Step 3: Ensure that bar B has a lower price than the previous day, ie
that the price is weakening and a down-trend is confirmed.
Step 4: Buy at bar B and sell at the third bar, bar D.
Step 5: For professional traders:
Add a 20-period exponential moving average to the above diagram.
Take a long position if this moving average is in an up-trend.
Go short if the moving average is in a downward trend.
If the moving average is sideways, stay out of the market.
FOR NEW TRADERS
If volumes are low on either of the first two bars, stay out of the market.

How to enter a breakout

Lets not forget the above breakout strategy setup, but think about a
comment made by Owen when she made her first million dollars: I like to
stack the odds of potential of profits over losses, so I look for opportunities
where I am more likely to succeed.
There are a number of market situations where you can use breakout
strategies, but if you know when to enter and exit, you will maximise your
profits or lessen losses. Consequently, and as a prelude to discussing entry/
exit methodologies, I would like to outline some general perceptions which
are used by some of the more successful global traders.
Thoughts for you to consider

Trade when market signals meet your trading

criteria, as set out in your trading plan.

Personal
criteria

Perceptions

172

Stay out of the market until all your

predetermined signals are aligned.
Only act when the above has been
established.
Dont be rushed global markets offer
traders many opportunities on a consistent
basis.
Patience

As explained in this book, tradingDwith

the trend is the safest, but not the most
profitable.
The market will always ultimately show you
its short-term direction; be vigilant and you
will pick up the trend.
Wait for short-term trends to break support
and resistance lines before analysing the
potential profitability of the trend.

Market
commitment

Volume is the determining factor to a trends

real commitment to a change in direction.
Volume also provides a safety-net in liquidity.

Ensure you
know what
you want

Before you trade you need to be sure that

the market is moving in the direction that
you want it to, ie if you are a go short type of
person, ignore the up-trends.

Aggressive vs
conservative
personalities

How you see a trend and your perception

of whether the trend can break through a
resistance point highlights certain aspects of
your trading personality.
Conservative traders always want more
proof that the market is moving in their
predetermined direction.
You need to trade in small amounts at first
to establish your psychological profile, which
in turn will determine your entry-and-exit
strategies.
These can be aggressive, conservative or
moderate.

173

Entry styles
There are three possible forms of trends:
Basic trading rules for entry points

Retraces

Identify support and resistance levels.

Trade with the current trend.
Look for an increase in volume and a change in the
speed at which the trend is developing.
Place your entry-point.

Continues

Consolidates

Trend

Only use if there is a strong and definitive trend.

Wait for the resistance level to be broken.
Volume at this point must be normal to strong.
Place your entry-point.

Wait for a breakout to occur.

Trade with the direction of the breakout.
Identify where the market will consolidate.
Wait for a break in that consolidation.
Look for higher and increasing rate of trade
(volume).
Place your entry-point.

Exit styles
Basic trading rules for exit points

Basic rules

Exit rules are determined by your personal strategy and

must be set out in a trading journal before you start to
trade. Such rules can include:
Sell when a target profit is reached: either as a
percentage or as a $ return.
Sell when a resistance level is reached.
Sell if your identified trend is stopped or broken.
Sell if you make a profit.
Your choices may also change, depending on
whether the share is trending or ranging.

Styles

174

There are a number of ways to determine a change in a

trends direction:
A break in the trend line.
Use of technical indicators (moving averages etc.)
to pinpoint a break in the trend.

Ranging
(channelling)
or trending

Some traders prefer to sell (take profit) towards

the upper end of a resistance level.
Some prefer to wait for a change prior to taking
profits.

Hybrid
theories

In true capitalistic style, why not create a unique

exit strategy that suits your style?
This could be to selling 50% of your holding and
allowing the rest of the trade to run until a break of
trend is firmly established.

Identify
a change
in market
direction

CONCLUSIONS

Stops and exits:

Always keep to your own preselected stop-losses.
Base your stops on your predetermined risk-to-reward ratio.
Set your stop-loss to a trailing stop-loss.
Set the initial stop to 15%.
If your stop-loss is reached:
Sell your entire position.
Sell enough to recoup your original investment in the security
and let the position run.
If your position climbs by 10%, reduce your stop-loss from 15%
to 10%.
If your position climbs by 15%, reduce your stop-loss to 8%.
If there is an opportunity to sell 50% of your total position when your
security has climbed above the resistance level, I recommend that you
do so.
Keep the remaining half of your investment for the next phase of the
up-trend.
However, you should only do this if the security is expected to move
above your break-even, which is calculated by adding all the costs (ie
the cost of buying the security, plus VAT, market taxes, brokerage
and all other costs related to your purchase). For instance, if a share

costs 100 cents and a further 5 cents in brokerage and other fees,
then you should wait until the security has moved past 105 cents
before selling.
Remember that you must lock in profits by letting winners run.

Chapter 20 discusses an extremely important step in every traders road

to success testing your strategy to perfect your own system.

175

176

Chapter 20: Testing and Troubleshooting Systems

Day Trading Reality No. 20:

Valuation always matters
Should you be concerned if valuations are above share price levels?
Good companies will always be good companies, but if the share price
remains below the valuation, then investors are placing a discount
over true worth. Dont ignore this basic premise, as investor sentiment
ultimately determines share price.

TESTING YOUR TRADING STRATEGY

Phase 1:
Common human errors

Phase 2:
Troubleshoot errors

Step 1: Incorrect assumptions

Step 2: Variable overload
Step 3: Trading in hostile markets

Sorted
No

Sorted

Step 1: Log all problems

Step 2: Analyse identified problems
Step 3: Find solutions
Step 4: Apply solutions

No
Phase 3:
Testing your indicators

Step 1: Reflective indicators

Step 2: Extrapolative indicators
Step 3: Secondary indicators

S
Sorted
No

System needs further assessment

Problem solved

How often have your heard someone say: If only I had I would be rich.
In hindsight, anything is always easy, even setting up a perfect trading
plan. The question is: Can you develop a method or methodology to test
how perfect your strategy is before you start spending your hard-earned
cash?
The short answer: No perfect trading plan exists anywhere.

177

However, your personal plan can be close to perfect if you can regularly
test it and make necessary changes and tweaks to hone it down to your
specific personal needs. However, you must ensure that your near-perfect
system accommodates radical market trends and volatility. In essence, the
trading system which you will rely on entirely to carry out your deals
must be flexible.
Consequently, before you can test the efficacy of your trading style and
system, you need to be aware that most novice traders make three common
errors when testing their systems.

TROUBLESHOOTING PROBLEMS
Many novice traders believe that their lovingly designed systems are errorproof. Even after spending many months constructing and adjusting a
working trading system, you may find that some problems simply wont go
away, or even more frustratingly that they keep being repeated without
plausible or logical reason.
Is there an easy way to fix such problems? In my book Corporate
Mechanic I set out troubleshooting methods for entrepreneurs, showing
them how to optimise their research and business models to be effective in
resolving problems. A similar approach can be used to troubleshoot errors
appearing during trading, thereby minimising losses and maximising profits.
Lets start by outlining common human errors, followed by a three-step
troubleshooting exercise to identify general system problems, and, finally,
assess problems with market indicators.

Phase 1: Common human errors

These relate to your depth of knowledge and understanding of your own
system.
Error 1: Incorrect assumptions
There is nothing wrong with looking at a loss or profit made from a trade
and wondering why the result is different to what you expected. If the
difference is due to a basic mathematical or formula problem, the answer
is simple: fix it. For instance, if you buy a share at 100 cents and you have
a stop-loss at 95 cents, you would expect your system to sell the stock if
the share fell to 95 cents. As such, if it was sold at 96 cents, the solution is
simple find the error in the formula and change it.

178

However, it would be unrealistic to expect your system to sell the share

at 95 cents if you had forgotten to place a stop-loss on the share price. Many
systems have stop-loss facilities, but these are only warning signals and will
not carry out the sale if the stop is hit.
Another problem is that too many novice traders test past performance
using current data. In other words, you cannot assess a system on
information you didnt have at the time you acquired the stock. This error
is easy to make, and is mostly found in your trading rules rather than your
trading system. The best method to avoid such an error is to make sure
that when you test your system, you restrict the information you use to that
which is available at the date of purchase.
As such, this is really just a human error in thinking, and not a systems
inaccuracy.
Error 2: Variable overload
The use of too many ratios or technical indicators may give you a false buyor-sell signal.
The solution is to have few personal technical indicators that are based
on fundamentals, such as business, political and economics ones. For
instance, keep it simple and use a moving average and an oscillator. In fact,
the more indicators you have, the easier it becomes to make trading errors
through confused signals.
As you gain experience, you will find that you need to make decisions
expeditiously. There is simply no time to assess 30 indicators continually, as
highlighted by Hugo in Chapter 12.
If this isnt your problem, move to Error 3 and look at market volatility
to determine if your system needs to be tweaked to account for more irregular
market movements.
Error 3: Trading in hostile markets
There is no method on earth to determine whether a market will become
extremely volatile in future! When your system doesnt perform to your
satisfaction or according to your understanding accept that there will
be times when the markets will behave erratically and, consequently, so will
your system.

179

For instance, you buy 100 000 shares on NYSE at a price of US$10,
which equates to a total value of US$1 000 000 (excluding brokerage).
After the NYSE has closed, the Asian exchanges crash. What do you
think will happen to the NYSE the next day if the Asian markets fall by
25%?

In all likelihood, the NYSE will open substantially below the previous
days closing prices and the gap formed could mean that your stop-loss is
bypassed. What can you do when extreme conditions prevail akin to those
in the 2008 global financial crisis?
To alleviate such problems, consider incorporating the following in
your trading plan and, therefore, in your system:
Always expect your losses to be higher than expected: Test your system
to see if you could still make a profit under extreme trading conditions.
For instance, if your trading plan has a 10% stop-loss on all securities,
can you still make a profit if the stop-loss is 15%? If your trading system
is still profitable under these conditions, you are able to continue to
trade when, for instance, gaps form.
Recommendation:
Support-line signal: Your stop-loss should include a sell signal if
the support-line is hit. This way, if the support line is less than your
stop-loss, you are warned that the security is at risk of possible
further declines.
A US$ signal: Always include a US$ amount with your stop-loss.
This way, if the share falls by that monetary amount, you are warned
that the security could fall further.
Always expect trading risk to be worse in future: We have stated
in this book that your portfolio should always be balanced and
diversified to reduce market and trading risk. To add to such
strategy, ensure that your trading plan and, consequently, your
trading system has a maximum risk loss factor of 1% of your capital
on each trade. As such, if a security falls by an amount which
equates to 1% of your total funds, sell immediately.
Recommendation:
If you believe that markets will be extremely volatile in the near
future, make your trading risk loss ratio 2%.
Have a 2% risk ratio on the entire portfolio. If your total portfolio
falls by 1% in a day, reassess how your securities are diversified

180

and balanced. Do this per sector, form of security, and the balance
between local and international investments.
Have a SELL EVERYTHING plan: Do you really need such a
plan? If the market falls by 20%, should you have sold everything or
be contrarian and accumulate as much as you can?
Recommendation:
If this is how you are thinking, you shouldnt be in the market.
If you lose 20% of your account in a single day, will you stop
trading?
The best way to avoid extreme and rapid losses is to do extensive testing
on your trading system to determine what sort of historical losses your
trading system experiences, and then plan for even worse market falls in
the future.
Anticipating drastic changes in the markets is the single best way to
preserve your equity.

Phase 2: Troubleshoot errors

This should be an extremely important feature of your system development,
and must always be incorporated in the review process. A workable trading
system should be profitable under bullish, bearish or simply sideways market
conditions. However, if you sometimes cannot understand why a large loss
occurs, you should be able to identify and solve the system problem in four
easy steps.
Step 1: Log all problems
When a problem occurs, log that problem in your trading journal. Make
detailed notes about the problem, including time and date that the problem
occurred. Include what happened and what you expected to happen during
the trade. Common errors may be found in price series, volumes and the
spread between the ask/bid prices.
When you download a price series, you may find a value stated as zero.
If there was a public holiday on a particular day, the chart may give you this
value. The easiest is to delete that date from the statistics. In addition, look
for irregular volume data and varying spreads between asks and bids.
These are indicative of data problems, and need to be corrected or
deleted from your system.

181

Step 2: Analyse identified problems

Use the information you gathered to determine exactly what caused the
system to give you inaccurate information which could have resulted in
losses. This is often done by using common sense, or by analysing your
personal trading logs. You need to assess whether the problem was a
computer-generated one, or a misunderstanding of technical indicators.
Step 3: Find solutions
To find possible solutions relating to the price of a security, set your trades
to be carried out only if there is price stability. This can be done by using
a stochastic, which looks at the strength of a price relative to the previous
days price.
When volume is identified as being the problem, you can state in your
trading plan that you will not carry out a trade if liquidity is below 400 000
shares traded each week.
Step 4: Apply solutions
After applying a solution, I suggest that you test your trading system with
virtual trades before returning to live trading. Remember that the aim is
not just to resolve problems, but also to optimise the solutions to deliver
higher profits from trading. However, you need to test your system changes
by keeping other parameters constant in order to assess the changes made.
Once your changes yield the highest possible profitability, implement
the change into the trading system.
Troubleshooting is an integral part of any sound and workable trading
system. It is important to identify problems as they occur, logging them
in great detail, evaluating how a change could correct the problem
and implementing the change. Common errors often occur with price
indicators, volume, spreads and in the case of derivative trading
margins.

Phase 3: Testing your indicators

Step 1: Reflective indicators
Charts are subjective, and only reflect past performance. While many
technical analysts will proclaim that investor sentiment is already inherent
in the share price and therefore the graph, it is not strictly true. During
share trading workshops I often give the clients the same graph and ask

182

them to interrupt the trends. The essence is that many people see charts
with a multitude of differences, so you cant really program subjective
indicators into a trading system. Most technical indicators arent perfect,
so beware and always start with fundamentals. I always recommend you
use technical as a timing mechanism instead of as a system to choose stocks.
Step 2: Extrapolative indicators
Indicators, such as Elliott Wave and Fibonacci tend to be more proactive
than traditional indicators. While these are still based on past prices, they
are more proactive about analysing future potential movement of a security,
sector or overall markets.
Step 3: Secondary indicators
Volume: An example of a secondary indicator is volume, as this highlights
the number of securities which have been traded, either bought or sold,
during a given time frame.
When assessing volume look at trends and patterns, including the number
of trades per day. At times, you can overlay this with director dealings.
Economically speaking, if supply of shares exceeds demand for such shares,
the price of the security will fall until it becomes attractive enough to entice
buyers to enter the market. Consequently, volume increases.
Open interest: Derivative traders must look at open interest positions,
as these represent the number of contracts not yet filled and are indicative
of market sentiment.
More importantly, look at volume and open interest as an interrelationship. While these are individually important, together they form a
relationship that highlights possible price action. Essentially, if volume and
open interest are high and rising, the trend is strong and prices should rise.
If these are low and falling, the trend is weak and the price is expected to
fall.
The table opposite highlights possible combinations and price movements relating to these two secondary indicators. Note that the two bearish
combinations can see prices rise, but if volume and open interest are down,
it shows receding interest among buyers and sellers. If both indicators are
up, but prices fall, it means more traders are going short.

Volume

Open Interest

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Price

Bullish

Up

Up

Up

Neutral

Down

Up

Up

Bullish

Down

Down

Down

Neutral

Up

Down

Down

Bearish

Down

Down

Up

Neutral

Up

Down

Up

Bearish

Up

Up

Down

Neutral

Down

Up

Down

Note that there are times when volume data is distorted as hedge funds
and large institutional traders move funds from equities into commodity
markets. Under such conditions, volume will rise, but may not be indicative
of what prices will do.
The final chapter provides closing thoughts to a book which has
covered a vast number of fundamental and technical issues.

184

Chapter 21: Final Thoughts

Day Trading Reality No. 21.

A well-balanced portfolio is diversified among securities and sectors;,
locally and internationally
A traders portfolio must have cash investments spread among
different sectors and between growth and value stocks and this should
be both domestic and international. Remember that success comes with
experience, skills and a well-thought-out trading plan.
A truly successful international trader is always able to find a trading
opportunity in different markets and in various guises. He or she has an
entry-and-exit strategy, and knows that with patience there will always be
opportunities. This is true whether the market is bullish or bearish.
This trading style is sometimes referred to as guerrilla trading, which
would have been the title of this book, except that I have used a similar
title for a university textbook on project management, called The Guerrilla
Principle. This book is targeted at Masters students. In the book I describe
how project managers can control all projects by using a number of basic
strategies. Similarly, day traders tend to complicate their lives with too
many strategies, technical indicators and worrying too much about what
other people think about their trading styles and plans.
In 1997/8, I was tasked with analysing emerging markets to determine
whether there were any investment opportunities for South African
stockbroking and investment institutions. The research took some three
months to complete, and when I presented the report, a number of
stockbrokers were appalled by my findings. I must stress that they were
not disgusted by the amount of poverty or war in emerging markets, but
because I had stated that we could take advantage of these situations.
We cant do anything about violence in Congo, or the civil war in Liberia,
or the dictatorships in innumerable developing countries, I remembered
saying, to stares of disgust. We can, however, buy shares in the companies
that are supplying guns or food or medical aid to these countries. After all,
the more wars there are, the greater the demand for goods and services.
I didnt get to present the final section of my research, as the meeting
was called to a halt. The second part concentrated on investing in emerging

185

markets that were building new and sound economies, like Vietnam, which
has since become a country with one of the worlds highest GDPs.
After the meeting had broken up, two traders approached me and
said: That has to be the most capitalistic presentation we have ever been
privileged to attend. They saw the opportunities and we did do some work
together, buying up shares in transport companies (both land, sea and air);
we looked at building and construction companies with experience in Africa
(post-war means a need to build bridges, hospitals, roads, etc.), and we
bought shares in companies which built warships and satellite technology.
I had effectively combined project management techniques,
fundamental analysis and technical indicators. I tracked these investments
over a period of two years, and profitability was staggering. But these stories
are for another time.
What I can state is that this is the essence of my trading style and strategy.
Logic dictates that, to be successful as a day trader, you have to have a
competitive edge over other traders and the market as a whole. When I
decided to add this chapter to Lore of the Global Trader, my motivation
was to openly and truthfully tell you how I feel about trading on the
international stage.
Simply put: I detest losing. I know that this must be incorporated in
every traders strategy, and the goal must be to win more and make more
profits than loses. With this in mind, the following general rules should help
you to achieve profitability.

THE GLOBAL TRADER: TAKE NO PRISONERS

Based on direct involvement in research, portfolio management, trading,

corporate finance and general stockbroking activities since 1990, the
following is my personal list of observations of day trading. You may think
that some are market clichs, but they will nevertheless help you as you get
started down the road of global trading.
Every single trade must be planned, or you will lose focus, trades and
funds. This includes entry-levels and exit strategies.
You only have a few choices when you are in a potentially loss-making
position:
Do nothing.
Sell everything immediately.
Double your position.
Spread your risk by buying other shares.
Hedge your position with a derivative.

186

When you doubt your research, the market or your plan, stay out. In
other words, stick to your strategy!
Don't tell anyone about your trades. Its none of their business, and it
could get you into trouble. There are times when starting a rumour can
be construed as market manipulation just dont do it.
Focus. Know your markets, when they trade and what reports will
affect the market price. Shares are influenced by rumours, threats and
trends in competitors.
Have stop-losses, and never remove them.
Buy into volatility and sell when the facts become clear.
Buy the security when nobody wants it, and sell it when everybody has
to have it!
Be patient and believe in yourself!
For many years I have been studying trading markets, both from a South
African and an international perspective, and I can conclude that it is
always difficult to change your mindset from your current job to that of
a long-term investor and then to day trading. Global trading takes all the
above and adds a multitude of additional risks, cultural differences and
political and economic trends.
Take time to study trends. There is no short cut, so start slowly and
build confidence and your own trading style and methodologies.

Without adversity you cannot become fantastically successful as an

global day trader.
Learn from your mistakes.
Dont repeat them.
Dont forget them.
Rather, profit from other peoples trading mistakes.
Good luck!

187

Appendices
REFERENCES
Bentley, K. Getting Started in Online Day Trading. New York: John Wiley and Sons,
2000
Bergen, K. New opportunities, but dangers still lurk for many investors. Chicago
Tribune, 1999
Bierovic, T. Playing for Keeps in Stocks and Futures: Three Top Trading Strategies that
Consistently Beat the Markets. New York: John Wiley and Sons, 2001
Bloom, H. The Lucifer Principle. New York: Atlantic Monthly Press, 1995
Bookstaber, R. Option Pricing and Investment Strategies. Chicago: Probus Publishing,
1991
Briese, S E. The Inside Track to Winning. New York: Financial Trading, 1993
Buckman, R. These days, online trading can become an addiction. The Wall Street
Journal, 1999
Carrie, L. The Wall Street Journal, Interactive Edition, 1998 to 2007
Chande, T S and S Kroll. The New Technical Trader. New York: John Wiley and
Sons, 1994
Cook, J and Szwec, J. Day Trade Part-time. New York: John Wiley and Sons, 2000
Costello, M. Day Trading Gurus Tell All. CNNfn: The Financial Network, 1998 to
2007
Covel, M. The Complete Turtle Trader. London: Harper Collins, 2007
Dee, L. Charting Commodity Market Price Behaviour. Homewood, IL: Dow Jones
Irwin, 1989
Donnell, C. Ten trading rules to live by. Career Day Trader, 1999
Douglas, M. The Disciplined Trader. New York: New York Institute of Finance, 1990
Douglas, M. Trading in the Zone. Englewood Cliffs, NJ: Prentice-Hall, 2001

188

Edwards, R D and J Magee. Technical Analysis of Stock Trends. New York: New York
Institute of Finance, 1992
Ehlers, J. Rocket Science for Traders. New York: John Wiley and Sons, 2001
Elder, A. Roubles to Dollars. New York: New York Institute of Finance, 1999
Elder, A. Study Guide for Come into my Trading Room. New York: John Wiley and
Sons, 2002

Emshwiller, J. Scam Dogs and Mo-mo Mamas: Inside the Wild and Woolly World of
Internet Stock Trading. Toronto: Harper Business, 2000
Farrell, C. Day Trade Online. Toronto: John Wiley and Sons, 2001
Fischer, K L. Super Stocks. New York: McGraw-Hill, 2007
Gordon, M. Day trader misled. The Detroit News, 1999
Hamilton, W. The day trading craze: whose crisis is this?. Los Angeles Times, 1999
Lefvre, E. Reminiscences of a Stock Operator. London: John Wiley and Sons, 1994
Lynch, P. Beating the Street. New York: Simon & Schuster, 1994
Magliolo, J. Become Your Own Stockbroker. Cape Town: Zebra Press, 2005
Magliolo, J. Richer than Buffett. Cape Town: Zebra Press, 2007
McCafferty, T. All about Futures. Chicago: Probus Publishing, 1992
Meyer, M. Rolling the dice with the click of a mouse. Newsweek, June 1999
Morris, G. Candlestick Charting Explained. New York: McGraw-Hill, 1992
Nison, S. Japanese Candlestick Charting Techniques. New York: New York Institute
of Finance, 1991
Peter, L. Against the Gods. New York: John Wiley and Sons, 1996
Samuelson, P and W Nordhaus. Economics. New York: McGraw-Hill, 1998
Schwager, J. A Complete Guide to the Futures Markets: Fundamental Analysis,
Technical Analysis, Trading, Spreads, and Options. New York: John Wiley and
Sons, 1984
Sloan, A. Masters of their own universe?. Newsweek, 1999

189

Smith, J. Every day trader will have his day. The London Independent, 1999
Steinhardt, M. No Bull: My Life in and out of Markets. New York: John Wiley and
Sons, 2004
Thomas, F. Panic-proof Investing. New York: John Wiley and Sons, 1994
Turner, T. A Beginners Guide to Day Trading Online. Holbrook, MA: Adams Media
Company, 2000
Wahlgren, E. Day trading gaining global following. The Toronto Star, 1999
Zarb, F. NASD Letter to All Member Firms. NASD, 1999

190

GLOBAL STOCK EXCHANGES

The following are by no means the only stock exchanges available in the
selected regions.

African Stock Exchanges

Botswana

Botswana Stock Exchange

Ghana

Ghana Stock Exchange

Kenya

Nairobi Stock Exchange

Malawi

Malawi Stock Exchange

Morocco

Casablanca Stock Exchange

Nigeria

Nigerian Stock Exchange

South Africa

The South African Futures Exchange

The South African Bond Exchange
JSE Securities Exchange

Zambia

Lusaka Stock Exchange

Zimbabwe

Zimbabwe Stock Exchange

Australasian Stock Exchanges

Australia

Sydney Futures Exchange

Australian Stock Exchanges

China

Shenzhen Stock Exchange

Hong Kong

Stock Exchange of Hong Kong

Hong Kong Futures Exchange

India

National Stock Exchange of India

Bombay Stock Exchange

Indonesia

Jakarta Stock Exchange

Indonesia NET Exchange

Japan

Nagoya Stock Exchange

Osaka Securities Exchange
Tokyo Grain Exchange
Tokyo International Financial Futures Exchange
Tokyo Stock Exchange

Korea

Korea Stock Exchange

Malaysia

Kuala Lumpur Stock Exchange

New Zealand

New Zealand Stock Exchange

Pakistan

Karachi Stock Exchange

Lahore Stock Exchange

Singapore

Stock Exchange of Singapore

Singapore International Monetary Exchange Ltd

Sri Lanka

Colombo Stock Exchange

Sri Lanka Stock Closings

Taiwan

Taiwan Stock Exchange

Thailand

The Stock Exchange of Thailand

European Stock Exchanges

Austria

Vienna Stock Exchange

Belgium

Easdaq

Croatia

Zagreb Stock Exchange

Czech Republic

Prague Stock Exchange

Denmark

Copenhagen Stock Exchange

Finland

Helsinki Stock Exchange

191

192

France

Paris Stock Exchange

Les Echos
Nouveau March
MATIF

Germany

Frankfurt Stock Exchange

Greece

Athens Stock Exchange

Hungary

Budapest Stock Exchange

Italy

Italian Stock Exchange

Lithuania

National Stock Exchange of Lithuania

Macedonia

Macedonian Stock Exchange

The Netherlands

Amsterdam Stock Exchange

Norway

Oslo Stock Exchange

Poland

Warsaw Stock Exchange

Portugal

Lisbon Stock Exchange

Romania

Bucharest Stock Exchange

Russia

Russian Securities Market News

Slovenia

Ljubljana Stock Exchange

Spain

Barcelona Stock Exchange

Madrid Stock Exchange
Spanish Financial Futures and Options Exchange

Sweden

Stockholm Stock Exchange

Switzerland

Swiss Exchange

Turkey

Istanbul Stock Exhange

United Kingdom

FTSE International (London Stock Exchange)

London Stock Exchange: Daily Price Summary
Electronic Share Information
London Metal Exchange
London International Financial Futures and
Options Exchange

Middle-Eastern Stock Exchanges

Israel

Tel Aviv Stock Exchange

Jordan

Amman Financial Market

Lebanon

Beirut Stock Exchange

Palestine

Palestine Securities Exchange

Turkey

Istanbul Stock Exchange

North American Stock Exchanges

Canada

Alberta Stock Exchange

Montreal Stock Exchange
Toronto Stock Exchange
Vancouver Stock Exchange
Winnipeg Stock Exchange
Canadian Stock Market Reports
Canada Stockwatch

Mexico

Mexican Stock Exchange

United States of
America

AMEX
New York Stock Exchange (NYSE)
NASDAQ

193

194

The Arizona Stock Exchange

Chicago Board Options Exchange
Chicago Board of Trade
Chicago Mercantile Exchange
Kansas City Board of Trade
Minneapolis Grain Exchange
Pacific Stock Exchange
Philadelphia Stock Exchange

South American Stock Exchanges

Bermuda

Bermuda Stock Exchange

Brazil

Rio de Janeiro Stock Exchange

Sao Paulo Stock Exchange

Cayman Islands

Cayman Islands Stock Exchange

Chile

Chile Electronic Stock Exchange

Santiago Stock Exchange

Colombia

Bogota Stock Exchange

Occidente Stock Exchange

Ecuador

Guayaquil Stock Exchange

Jamaica

Jamaica Stock Exchange

Nicaragua

Nicaraguan Stock Exchange

Peru

Lima Stock Exchange

Trinidad and
Tobago

Trinidad and Tobago Stock Exchange

Venezuela

Caracas Stock Exchange

Venezuela Electronic Stock Exchange

195

GLOSSARY
Acceptance date: Time limit given to a prospective shareholder to accept an offer of
shares in a rights issue.
Account: A trading period whose dates are fixed by the stock exchange authorities.
Accounts payable: Bills that have to be paid as part of the normal course of business.
Accounts receivable: Debt owed to your company from credit sales.
Aftermarket performance: A term typically referring to the difference between a
stocks offering price and its current market price.
Agent: Where a member acts on behalf of a client and has no personal interest in
the order.
AIM: The UK-based AltX version, called the Alternative Investment Market.
All or nothing: The full order must be executed immediately or, if it is not possible to
do so, the order must be routed to the special terms order book.
Allotment letter: Formal letter sent by a company to investors to confirm that it will
allocate them shares in a new issue.
AltX: The new Alternative Exchange launched in South Africa in October 2003.
American depository receipts (ADRs): Non-US companies who want to list on a US
exchange offer these. Rather than constituting an actual share, ADRs represent a
certain number of a companys regular shares.
Annuity: A contract sold to an individual by an insurance company that is designed to
provide payments to the holder at specified intervals, generally after retirement.
Arbitrage: A purchase or sale by a member on his or her own account of securities
on one stock exchange, with the intent to sell or buy those securities on another
stock exchange, in order to profit from the difference between the prices of those
securities on such stock exchanges.
Arbitrageur: Someone who practises arbitrage.
Asset allocation: The process of dividing investments into different categories, such
as stocks, bonds, cash and real estate.
Asset swap: A transaction which complies with all the requirements of the South
African Reserve Bank in respect of an asset swap.
Asset turnover: Sales divided by total assets. Important for comparison over time and
to other companies of the same industry.
At best: Orders to be transacted in a manner that will, in the discretion of the member
executing the order, achieve the best price for the client.
At market: An order to be transacted immediately against the best opposite order in
the order book at the time of making such entry.
At the close order: An order which is to be executed as close to the end of the trading
day as possible.
At the money option: An option with an exercise price equal to that of the underlying
security.
At the opening order: An order to buy or sell at a limited price on the initial
transaction of the day.

196

Authorised/issued share capital: While the authorised share capital is the maximum
number of shares a company is permitted to issue over time, the issued share
capital is the actual number of shares in issue.
Average: A select sampling of stocks used to reflect the basic trends of the market or
a specific portion of the market, for example the All Share Index. The average is
derived by taking the sum of the market value of the selected stocks and dividing
that number by the number of issues or by a divisor that allows for stock splits or
other changes in capitalisation.
Bad debts: An amount the firm determines is irrecoverable amd which is then
payable by debtors.
Balance order: The pairing-off of buy-and-sell orders of the same security to
determine the net balance of securities to receive or deliver. This information
allows the market to be opened appropriately.
Balance sheet: A statement that shows a companys financial position on a particular
date.
Bar chart: A chart used to plot stock movements using vertical bars to indicate prices.
Bear sales: The sale of listed securities of which the seller is not the owner at the
date of sale.
Bear trend: When supply of shares outstrips demand and prices start to fall. If this
trend continues for a number of weeks, the general sentiment becomes bearish
and prices continue to fall.
Bearish: Used to voice an opinion in the belief that the stock market or some aspect
of it is going to decline in price.
Bid (buyer's price): Offer to buy a number of securities at a certain stated price.
Bid (not offered): When shares are sought, but none are available. The opposite
would be offered, not bid.
Big Blue: Nickname for the IBM Corporation. Derived from the colour of their logo.
Big Board: Nickname for the New York Stock Exchange.
Black Monday: A name given to October 19, 1987, when the Dow Jones Industrial
Average dropped a record 508 points which represented a decline of almost 23%.
Block: A large amount of securities bought or sold.
Blue chip stock: A stock that is from a well known, stable, prestigious company with a
long and successful track record of profit growth and dividend sharing.
Book value: The net amount of an asset shown in the books of a company, ie the cost
of purchasing a fixed asset less the depreciation on that asset.
Bottom fishing: Investing in stocks whose prices have dropped dramatically based on
the belief that the stock has reached bottom and will now rebound.
Breakout: Used to describe when a security rises above or falls below a particular
level, generally its previous high or low point.
Broker: The name given to a natural person recognised by the official stock exchange.
Institutions have, since 1995, been able to become corporate members.
Brokerage: Commission charged by a member for the purchase or sale of securities.

197

Broker's note: A note that a member is required to send to a client recording the
details of a purchase or sale of securities.
Bull market: A market where the dominating trend is one of rising prices.
Bull trend: When demand for shares outstrips supply and prices start to rise. If this
trend continues for a number of weeks, the general sentiment becomes bullish
and prices continue to rise.
Bullish: Used to voice an opinion in the belief that the stock market or some aspect
of it is going to rise in price.
Buy stop order: A buy order that is not to be executed until the market price reaches
the customers defined price, known as the stop price. When this occurs, it
becomes a market order.
Buying power: The amount of additional securities that a customer may purchase
using the existing equity in his account.
Call option: A call option establishes the right to buy a specified quantity of the
underlying security at a specified price any time during the duration of the option.
You would buy a call option if you expect prices to rise. In South Africa, these
are called warrants.
Called away: Describes a stock option that was sold, because the stock was at or
above the strike price.
Capital expenditure: Spending on capital asset (also called plant and equipment, or
fixed asset).
Capital input: New money being invested in the business. New capital will increase
your cash, as well as the total amount of paid-in capital.
Capital structure: Usually refers to the structure of ordinary and preference shares
and long-term liabilities.
Capital: This is also known as total shares in issue, owners equity or shareholders
funds.
Cash flow: A statement that shows the net difference between cash received and paid
during the companys operating cycle.
Cash: The bank balance, or chequing account balance, or real cash in bills and coins.
Churning: When a broker processes excessive trades, regardless of the clients best
interest, in an attempt to maximise commissions.
Circuit breaker: When a halt to trading is implemented for one hour by a major stock
or commodity exchange when an index falls a predetermined amount in a session.
This is done to prevent further losses.
Closing period: The last hour or two of trading before the stock market closes at the
end of the day.
Closing price: The last sale price or a higher bid or lower offer price for a particular
security.
Collection days: See Collection period.
Collection period (days): The average number of days that pass between delivering
an invoice and receiving the money.

198

Commission percentage: An assumed percentage used to calculate commissions

expense as the product of this percentage multiplied by gross margin.
Commission: The brokers charge a fee for buying and selling shares, which is
brokerage or commission earned on a deal.
Commodity futures: A contract to buy or sell a commodity at a specific price and on
a specific delivery date.
Common stock: A securities holding that affords the possessor to have ownership in
the company which provides benefits such as voting rights and dividend sharing.
Consumer price index: An inflationary indicator that measures the change in the cost
of goods and service that the average consumer purchases.
Convertible and redeemable preference shares: An alternative mechanism to
ordinary shares. It enables companies to issue other shares, which can either be
bought back from investors or converted into ordinary shares at a later date.
Corporate finance transaction: A transaction that is entered into in writing and
requires public notification in the press in terms of the listing requirements of
the JSE.
CPI: Abbreviation for consumer price index.
Creditors: People or companies that you owe money to. This is the old name for
accounts payable.
Crossed market: Where a bid price is higher than the offer price for a security.
Cum- or ex-dividend: After a company has declared a dividend, it would close its
books to start paying dividends. The share will be marked ex-div, which means
that any new shareholder will be omitted from the past years dividend payout.
Before the company declares a dividend payout, the share will be assumed to
include possible dividends, or to be cum-div.
Current assets: Those assets that can be quickly converted into cash, including
accounts receivable, stock and debtors book. These are often called liquid assets.
Current debt: Short-term debt, short-term liabilities.
Current liabilities: A companys short-term debt, which must be paid within the
firms operating cycle, ie in less than one year.
Day order: A transaction order that is valid only for the day on which it was entered.
Day trading: The practice of buying and selling a security on the same day.
Dead cat bounce: A quick, moderate rise in the price of a stock following a major
decline.
Debentures: A bond that is not secured by fixed assets.
Debt and equity: The sum of liabilities and capital. This should always be equal to
total asset.
Debtors: People or companies that owe your company money. It is the old name for
accounts receivable.
Deep in the money option: A call option with a strike price that is significantly below
the market price or a put option with a strike price that is significantly above the
market price.

199

Delayed opening: An intentional delay in the start of trading in a stock until a large
imbalance in buy- and sell-orders is eliminated.
Deleted or delisted: A security that has been removed from public trading.
Delta: The change in price of a call option in relation to the change in price of the
underlying security.
Depreciation: An accounting and tax concept used to estimate the loss of value of
assets over time. For example, cars depreciate with use.
Descending tops: A chart pattern where each new high price for a security is lower
than the previous high.
Dip: A small temporary drop in price during an overall upward trend.
Divergence in charting: When two charting lines are heading in opposite directions,
generally after a crossover point.
Diversification: Investing in a wide variety of investments so as to reduce overall risk.
Dividend yield: Ratio of the latest dividend to the cost or market price of a security
expressed as a percentage.
Dividends: Money distributed to the owners of a business as profits.
Double bottom: When a security has twice declined to its support level.
Double top: This technical assessment is formed when a stock advances to a certain
price level only to retreat from that level, and then rallies again back to that level.
The up moves are accompanied by high volume, and the recession from the top
comes on receding volume.
Dow Jones Averages: The most widely used averages to track overall market
conditions. There are four Dow Jones Averages: industrial, transportation,
utilities, and composite. The composite is simply the previous three combined.
Dow Theory: A theory which is based on the belief that the fluctuations in the stock
market are both a reflection of current business trends as well as a predictor of
future business trends.
Downtick: A transaction where the stock price is lower than the previous transaction.
Earnings per share: Total earnings divided by the number of shares outstanding.
Earnings yield: Ratio of net earnings per security to the market price expressed as
a percentage.
Earnings: Also called income or profits, earnings are the famous bottom line: sales
less costs of sales and expenses.
EBIT: Earnings before interest and taxes.
ECN: Electronic communication networks used by day traders and institutions to
post bids in the NASDAQ market.
Elliott Wave: A theory of price movement cycles identified by Ralph Elliott. This
theory claims that the stock markets follow a pattern of five waves up and three
waves down.
EPS: Abbreviation for earnings per share.
Equity: Business ownership; capital. Equity can be calculated as the difference
between assets and liabilities.
Ex-dividend date: The date at which the Ex-Dividend period begins.

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Exercise date: The date when the sale or purchase of an option occurs as agreed
upon in the contract.
Expiration date: The date on which an option becomes worthless if not exercised.
Fair market value: A price that both the seller and buyer agree represents a valid
price based on current market conditions.
Fill or kill (FOK): The full order must be executed immediately or otherwise
cancelled.
Financial notes: Information explaining financial figures (balance sheet, income
statement and cash flow).
Fixed assets: Includes all fixed (immovable) assets, namely property, vehicles,
machinery and equipment. It cannot usually be converted into cash within the
firms operating cycle.
Flipping: This is when an investor has acquired an IPO at its offering price and sells
it immediately for a quick gain soon after it starts trading on the open market. A
practice discouraged by underwriters, it can lead such investors to unfavourable
relationships with their underwriters with future IPOs.
Float: The number of shares of a common stock that are outstanding and therefore
available for trading by the public.
FOK order: Abbreviation for fill or kill order.
Fundamental Analysis: A method of determining a securities value based on the
analysis of several factors, such as a companys earnings, sales, assets and growth
potential.
Futures: A contract which requires the delivery of a commodity at a specific price on
a particular date in the future.
Gap and trap: The price of stock gaps, buyers purchase the stock. Market-makers
bring the stock price down, therefore trapping the buyers who bought at the
higher gap price.
Gap: When the range of a stock price on two successive days does not overlap.
Going concern: A company that is operating ie has not stopped producing goods
or providing a service, and one which has not been placed under liquidation or
curatorship.
Going public: When a private company first offers shares to the public.
Good till cancelled order (GTC): An order which remains valid until executed or
cancelled by the customer.
Goodwill: An intangible asset reflected in balance sheets, which indicates an excess
over market value for assets paid by the firm.
Gross margin per cent: Gross margin divided by sales, displayed as a percentage.
Acceptable levels depend on the nature of the business.
Gross margin: Sales less cost of sales.
GTC Order: Abbreviation for good till cancelled order.
Hammering the market: Excessive sale of stocks which drives the market down. us.
Just feel

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Head and shoulders: This technical pattern is typically characterised by one

intermediate top, followed by a second top higher than the previous top and a
third rally that fails to exceed the head.
Hedge: Taking an investment position in which some investments are designed to
offset the risk of others.
Hit the bid: Immediate sell to the current bid price.
Hit the offer: Immediate buy from the current ask price.
Immediate deal: A transaction in a listed security where settlement is to take place
the next business day.
In the money option: A call option where the strike price is less than the market price
or a put option where the strike price is greater than the market price.
Income statement: A statement showing net income or loss for a specified period.
Index fund: A mutual fund that tries to mirror the performance of a specific index.
Index: A select sampling of stocks used to reflect the basic trends of the market.
Indexes are derived from a broader number of stocks than averages.
Indicator: Statistics which provide an indication of the trends of the financial world
or the economy in general.
Initial public offering: The first issue and sale of stock by a company to the public.
Insider: A person who is privy to corporate information that is not available to the
general public.
Institution: A large organisation which is in the business of investing in securities.
Institutional investors: An entity with a considerable amount of money to invest.
Interest expense: Interest is paid on debts, and interest expense is deducted from
profit as expenses.
Intra-day: Within a single day.
Intrinsic value: The amount of money that an option is worth if it was exercised.
Inventory turnover: Sales divided by inventory. Usually calculated using the average
inventory over an accounting period, not an ending-inventory value.
Inventory turns: See Inventory turnover.
Inventory: This is another name for stock. Goods in stock, either finished goods or
materials to be used to manufacture goods.
Investment banker: An individual or institution which provides services, such as
underwriting and counselling, but does not accept deposits or make loans.
IPO: Abbreviation for initial public offering.
Jobbers: These are the markets share merchants. They deal only with brokers and
other jobbers (ie not with dealers), and their main function is to maintain a
market by quoting a price.
Last sale: The most recent stock trade.
Letter of acceptance: The investor may receive such a letter if the company accepts
his or her application for shares.
Leveraged buyout: Taking over a controlling interest in a company, using primarily
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Liabilities: Debts; money that must be paid. Usually debt on terms of less than five
years is called short-term liabilities and debt for longer than five years is longterm liabilities.
Limit order: an order that may only be affected at prices equal to or better than the
price on the order.
Limit price: The price specified in a limit order.
Liquidity: A companys ability to pay short-term debt with short-term assets.
Listed stock: A stock that is traded on a major exchange.
Listing: Official granting of a listing of a companys shares on the JSE.
Local counterparty transaction: A transaction where a member trades as a principal
with a person in South Africa other than a member.
Locked market: A highly competitive market in which the bids and prices are the
same.
Lockup period: A period of time when a company first goes public during which
major shareholders are prevented from selling their shares.
Long position: When the stock owner waits for a price move in order to sell at a
higher price.
Long-term assets: Assets such as plant and equipment that are depreciated over
terms of more than five years, and are also likely to last that long.
Long-term interest rate: The interest rate charged on long-term debt. This is usually
higher than the rate on short-term debt.
Long-term liabilities: This is the same as long-term loans. Most companies call a
debt long-term when it is on terms of five years or more.
MA: Moving average.
Margin call: A call from the brokerage to the customer requesting that the customer
deposit additional funds into their account in order to return the balance to its
required level.
Margin: The amount of money that a customer must deposit with a broker to secure
a loan from that broker. In the case of futures, the amount of money that must be
deposited to protect the buyer and seller from default.
Market capitalisation: Used to denote a companys size, and is calculated by
multiplying a companys issued share capital by its current share price.
Market indicators: Statistics that give an overall picture of how the market is
performing.
Market-maker spread: The difference between prices of the market-maker closest
to the inside bid and the market-maker closest to the inside ask, excluding ECNs.
Market-maker: A member who negotiates dealings in blocks of securities.
Market-makers: A brokerage or bank that maintains a bid and ask price in a given
common stock by always being available to buy or sell at publicly quoted prices.
Market on close order: An order to buy or sell that is to be executed during the
closing period of the market at the best price available.
Market on open order: An order to buy or sell that is to be executed during the
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Market order: An order to buy or sell stock at the markets current price.
Market value: The latest trading price.
Marketable securities tax (MST): The tax imposed in terms of the Marketable
Securities Act of 1948 in respect of every purchase of marketable securities
through the agency of or from a member at the rate of 0.25% of the consideration
for which the securities are purchased.
Materials: Included in the cost of sales. These are not just any materials, but
materials involved in the assembly or manufacturing of goods for sale.
Midday period: The hours between 11:30 am and 1:30 pm for any trading day. Trade
during this time generally slows down as people break for lunch.
Momentum trading: Short to moderate length investments that are made to
capitalise on the sudden rise or drop in a stock price that follows certain technical
indicators.
Monopoly: When one company controls and dominates a particular market sector
or product.
Most active: Stocks with the days highest trading volume.
NASD: National Association of Securities Dealers, an organisation responsible for
regulating the NASDAQ stock market.
NASDAQ: Abbreviation for National Association of Securities Dealers Automated
Quotations.
Net cash flow: This is the projected change in cash position, an increase or decrease
in cash balance.
Net profit: The operating income less taxes and interest. The same as earnings, or
net income.
Net worth: This is the same as assets minus liabilities, and the same as total equity.
NYSE Composite Index: An index that measures the market value of all NYSE
traded stocks.
NYSE: The New York Stock Exchange where stocks are traded in an open floor
market.
Odd lot: Any quantity of securities that is less than a round lot (krugerrands do not
have odd lots).
Offer (seller's price): Price at which a dealer is prepared to sell securities on the
market.
Offering price: This is the price set by the sponsor, at which the companys stock is
sold to the first round of investors.
Offering range: This is the price range in which the company expects to sell its stock.
This can be found on the front page of the prospectus. As with everything traded,
market conditions and demand dictate the final offering price.
Oligopoly: When a few companies control and dominate a particular market.
Open interest: The number of contracts outstanding at the end of the trading day.
Open order: An order which remains valid until executed or cancelled by the
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Opening price: This is the initial trading price of the companys stock on its first day
of trading.
Order: An instruction to buy or sell a specified quantity of a security.
Ordinary shares: Commercial paper issued by investors to raise capital. Investors
hold these shares as part owners in the firm.
OTC: Abbreviation for over the counter.
Other short-term assets: These are securities and business equipment.
Other ST liabilities: These are short-term debts that dont cause interest expenses.
For example, they might be loans from founders or accrued taxes (taxes owed,
already incurred, but not yet paid).
Out of the money: A call option where the strike price is greater than the market
price or a put option where the strike price is less than the market price.
Overheads: Running expenses not directly associated with specific goods or services
sold, but with the general running of the business.
Over the counter market (OTC): A market made up of dealers who make a market
for those securities not listed on an exchange. The over the counter market is
made between buyers and sellers over the telephone, rather than the electronic
market found on the JSE.
Paid-in capital: Real money paid into the company as investments. This is not to be
confused with par value of stock, or market value of stock. This is actual money
paid into the company as equity investments by owners.
Paper profit: A surplus income over expense, which has not yet been released, ie
share prices that have increased above the price at which they were bought, but
have not yet been sold.
Paper trade: Trading stocks for pretend with no real money, to practise or test
theories.
Par value: The nominal value of a share. It is an arbitrary amount placed on the share
by the company.
Partial fill: An order that has been implemented for only part of the requested share
size.
Payment days: The average number of days that passes between receiving an invoice
and paying it.
Payroll burden: Payroll burden includes payroll taxes and benefits. It is calculated
using a percentage assumption that is applied to payroll. For example, if payroll
is R1 000 and the burden rate 10 per cent, then the burden is an extra R100.
Acceptable payroll burden rates vary by market, by industry and by company.
P/E ratio: Abbreviation for price/earnings ratio.
Penny stocks: Low priced, high-risk stocks, usually with a price of less than a dollar
per share.
Point and figure chart: A chart which shows price movements of a security, without
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Poison pill: Any action taken by a company designed to avoid a hostile takeover. For
example, issuing preferred stock that can be redeemed at a premium if a takeover
does occur.
Portfolio: A schedule, normally computer generated, listing the relevant details in
respect of the securities held by an investor.
Preferred stock: A stock holding which provides a specific dividend that is paid before
any dividends are paid to common stockholders. In the event of liquidation, their
rights come before common stockholders, but after other holders, such as bond
and debt.
Previous close: The last reported price from the previous trading day
Prints: A price and size report of actual trades in real-time.
Price/earnings ratio: The market price of securities divided by its earnings. It
expresses the number of years earnings (at the current rate) that a buyer is
prepared to pay for a security.
Primary market: Where shares are distributed at the offering price to investors.
Principal transaction: A member trades with a counterparty or another member.
Principals: The major investors in a corporation. They, generally, have equity
interest, voting privileges, access to management records as well as receiving
dividends.
Private placement: An offering of a limited amount of shares or units, in which the
recipients receive restricted stock from the issuer.
Product development: Expenses incurred in development of new products: salaries,
laboratory equipment, test equipment, prototypes, research and development,
etc.
Profit before interest and taxes: This is also called EBIT, for earnings before interest
and taxes. It is gross margin minus operating expenses.
Profit taking: Action by short-term securities traders to cash in on gains created by a
sharp market rise. This results in a temporary drop in market prices.
Program trading: A computerised trading system that allows for large volume
securities trading.
Prospectus: This document is an integral part of a documentation that must be filed
with the JSE. It defines, among many things, the companys type of business, use
of proceeds, competitive landscape, financial information, risk factors, strategy
for future growth, and lists its directors and executive officers.
Proxy: A person who is authorised to represent another person. For example, a person
who is authorised to vote in behalf of another stockholder at a stockholders
meeting.
Rally: A substantial rise in the price level of the overall market, following a decline.
Range: The difference between the highest and lowest prices that are traded during
a specific given time frame.
Real-time trade reporting: When all transactions are instantly requested.
Receivable turnover: Sales on credit for an accounting period divided by the average
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Registration: A new shareholder is registered when his or her name is placed on the
role of shareholders for that specific company.
Renunciation date: The company sets a date by which the shareholder has to decide
whether he or she will take up the rights issue.
Resistance: Inability of a stock to rise above a certain price. This is generally due to
an abundance of stock being available at that price.
Retained earnings: A figure that shows the sum of a companys net profit less
dividends paid to shareholders.
Return on assets: Net profit divided by total assets. A measure of profitability.
Return on investment: Net profits divided by net worth or total equity, yet another
measure of profitability. Also called ROI.
Return on sales: Net profits divided by sales, another measure of profitability.
Reversal: When the overall market changes directions after a trend in the other
direction has occurred.
Reverse head and shoulders: This is the same pattern as a head and shoulders, except
that it has turned upside down and indicates a trend change from down to up. A
buy signal is given when prices carry up through the neckline.
Rights issues: There are a number of methods that a company can use to increase the
size of its share capital. If it decides to offer its existing shareholders first option
on the issue, it is called a rights issue. The dealers would note that such an issue
is in progress, as it would be quoted as cum-capitalisation, and after completion
of the issue it would be noted as ex-capitalisation.
ROI: Return on investment; net profits divided by net worth or total equity, yet
another measure of profitability.
Rolling option: Buying options on a stock that shows a consistent pattern of travelling
up and down between two levels.
Round lot: The standard unit of trade in all equities: 100 shares.
Round trip: The completion of a transaction, which includes both entry into the
market and exit.
Rounding bottom: A chart pattern in the shape of a saucer. Suggesting a new trend
upward.
Rounding top: A chart pattern in the shape of an inverted saucer. Suggesting a new
trend downward.
S&P 500: The standard and poor index that represents the top 500 value-measured
companies.
Scrape value: An amount left after an asset has been fully depreciated, ie if an asset
of R115 is depreciated by R10 per month over 11 months, the scrape value would
be R5.
SEC: Abbreviation for Securities and Exchange Commission (The USA official stock
exchange body).
Secondary market: Better known as the stock market, where shares are openly
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Securities: Includes stocks, shares, debentures (issued by a company having a share

capital), notes, units of stock issued in place of shares, options on stocks or shares
or on such debentures, notes or units, and rights thereto, and options on indices of
information as issued by a stock exchange on prices of any of the aforementioned
instruments.
Sell stop order: A sell order which is not to be executed until the market price
reaches the customers defined price, known as the stop price. When this occurs,
it becomes a market order.
Selling off: Selling securities to prevent losses from continued price declines.
Selling on the good news: Selling a stock right after good news has driven the price
very high.
Settlement: Procedure for brokers to close off their books on a particular transaction.
The client is expected to pay for his or her new shares on or before the settlement
date and he or she, in turn, can expect to be paid (on selling shares) within the
same period (also called the settlement period).
Short interest: The total number of shares of a security that have been sold short and
not yet repurchased.
Short position: The position that results from short-selling that has not yet been
covered. Often defined in terms of the number of stocks that are sold short.
Short sale: Borrowing a security from a broker and selling it, with the understanding
that it must later be bought back and returned to the broker.
Short term: Normally used to distinguish between short-term and long-term when
referring to assets or liabilities. Definitions vary because different companies and
accountants handle this in different ways. Accounts payable is always short-term
assets. Most companies call any debt of less than five-year terms, short-term debt.
Assets that depreciate over more than five years (eg plant and equipment) are
usually long-term assets.
Short-term assets: Cash, securities, bank accounts, accounts receivable, inventory,
business equipment, assets that last less than five years or are depreciated over
terms of less than five years.
Short-term gain: A capital gain on an investment which was held for less than six
months.
Short-term notes: This is the same as short-term loans. These are debts on terms of
five years or less.
Slippage: The difference in price from when an order is placed to when it is actually
carried out.
Specialist: A stock exchange member who specialises in particular securities. The
specialist must maintain an inventory of those securities and be available to buy
and sell shares as necessary to equalise trends and provide an orderly market for
those securities.
Splitting of shares: Sometimes a share could become too expensive for the private
investor, at which time the company may decide to split or subdivide the shares

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into smaller denominations. The aim is often to make the shares more tradable
and, at times, this increases the share price on positive sentiment.
Spread: The differential between a bid and an offer price.
Stag: An investor who buys shares in a pre-listing or rights offer with the intention of
selling those shares at a profit as soon as trading starts.
Standard deviation: A statistical measure of the volatility of a mutual fund or
portfolio.
Starting year: A term to denote the year that a company started operations.
Stock Exchanges Control Act of 1985 (as amended): An Act of Parliament in terms
of which stock exchanges in South Africa are governed. The Financial Services
Board administers the Act.
Stocks: A certificate that signifies an ownership position in a company.
Stop limit order: An order to buy or sell which is not to be executed until the market
price reaches the customers defined price, known as the stop price. When this
occurs, it becomes a limit order.
Stop-loss order: A sell stop order for which the specified price is below the current
market price. Done to prevent further losses or to lock in profits.
Stop order: A buy-or-sell order which is not to be executed until the market price
reaches the customers defined price, known as the stop price. When this occurs,
it becomes a market order.
Straddle: The simultaneous purchase of an equal number of puts and calls, with the
same strike price and expiration dates.
Strike price: The specified price at which a call option buyer can buy the underlying
security or a put option buyer can sell the underlying security.
Subsidiary: A company in which a majority of the voting shares are owned by another
company.
Support: Over time, a stock tends to become attractive to investors at specific prices.
When a stock starts to decline to one of these prices, investors tend to come
in and purchase the stock, thereby halting its decline. When buyers outnumber
sellers, the price of the stock tends to go up. This point at which buyers enter the
market is called support.
Surprise: The price difference between what a trader expects to earn and what they
actually earn.
Switch order: An order to sell one security and buy another. Generally, the proceeds
from the sale of the first security are used to finance the purchase of the second.
Tax rate per cent: An assumed percentage applied against pre-tax income to
determine taxes.
Taxes incurred: Taxes owed but not yet paid.
Technical analysis: Analysing previous market trends and stock prices in the belief
that done properly it can be an indicator of future trends.
Tender offer: A public invitation to stockholders to sell their stock, generally, at a
price above the market price. This is done primarily in relation to a takeover.

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Tick size: The specified parameter or its multiple by which the price of a security may
vary when trading at a different price from the last price, whether the movement
is up or down from the last price.
Ticker symbol: A system of letters used to identify a stock uniquely.
Time of sales: The actual time and price of transactions as they occur. This
information is present on a Level II screen.
Time value: The difference between an options intrinsic value and the current
market price, the hope being that the intrinsic value over time will go above the
market value.
Trading halt: An interim stop on the trading of a particular stock because of news
that might affect either the price of stock, the flow of orders, or even regulatory
rule violations.
Trailing stops: A stop-loss order that is to be executed when a stock being followed
up, dips down below a specified amount or when a stock being followed down,
goes up above a specified amount.
Triple bottom: A chart pattern that shows that a stock has attempted to penetrate a
lower price level on three different occasions.
Two-sided market: The NASD and NASDAQ requirement that appropriate bids and
offers are made on each security.
Underwriter: An individual or institution which acts as a middle man between
corporations issuing securities and the investing public.
Unit variable cost: The specific labour and materials associated with single unit of
goods sold. Does not include general overhead.
Units break-even: The unit sales volume at which the fixed and variable costs are
exactly equal to sales.
Uptick: A transaction where the stock price is higher than the previous transaction.
Volume: The number of shares traded during a defined period.
White knight: An investor who prevents a hostile takeover, by taking over the target
company himself.