DaveLandrys10Best Swing Trading Patterns and Stratigies

The following article was written to update the information from my first book, Dave
Landry on Swing Trading. It’s also relevant to this book, Dave Landry’s 10 Best
Strategies & Patterns.
Dave Landry On Swing Trading, 10 Years Later
From The Greatest Bull To A Very Impressive Bear
It’s been nearly ten years since I wrote Dave Landry on Swing Trading. This book was
written at the end of the greatest bull market in history. Eight years later the market
enters what would turn out to be the one of the worst bear markets in history. And, it’s
possible that it isn’t over yet. Considering these abrupt changes plus the fact that I still
field quite a few questions about the book, I thought it would be a good time to discuss
how my approach has changed. The good news is, the patterns still work and trend
following is alive and well. In fact, I’m still using virtually all of the patterns from this
book. There are a few caveats though. It’s not as easy as it once was. Moves now take
time to develop and you can no longer trade in a “textbook” fashion any more. Let’s take
a look at these and other subtle but important changes.
How I’ve Changed
Before we get into what’s changed with my book and the markets, I think it’s important
for me to discuss how I’ve changed. No, I’m not talking about the increased number of
gray hairs and my larger girth. I referring to my approach to the markets. Although my
wife Marcy will argue that in my case age doesn’t guarantee maturity, I do think I have at
least matured as a trader. I’ve learned more and more that the real money is in longer-
term trends. Although I’ve always been willing to stay with a position as long as it moves
in my favor, I’ve become more and more patient in recent years. I’m willing to give
stocks more room to breathe and more time to work. I’m also willing to do nothing as
long as that’s what the market is suggesting that I should do.
Part of this newer patience is my realization where the real money is and part of it is
changing market conditions. Trends don’t show up every day. And when they do, they
take time to develop. Keep in mind there’s nothing wrong with super active trading. I
admire those that can do it. It’s just not my style. I’d rather ride out a longer term trend
than “chase my own tail” by trying catch every zig and zag.
One thing that hasn’t changed is my goals. My goal on each and every trade is to pick
only those stocks (and other markets) that I think have the potential to make a quick
short-term move but also have the potential for a longer-term homerun.
Now that we know how I’ve changed, let’s look at what’s changed since the book was
published.
When in Doubt, Get Out

If I could only take one line out of the book, “When in doubt, get out” would be it.
Within the context of the raging bull market, you were foolish to stick with any position
that wasn’t initially moving in your favor. Nowadays, trends take time to ensue. You
have to be willing to give positions time to work. It also seems that even on your biggest
winners, you have to be willing to take a little heat (i.e. initial losses).
5% Max Per Risk
My publisher encouraged me to put a maximum risk amount per trade. I initially

submitted 10% and then later agreed to 5%. Again, within the context of the greatest bull
market in history, since most positions moved in your favor anyway, I figured 5% would
probably work. Nowadays, many stocks move well over 5% in a matter of minutes and
often not in the intended direction. Therefore, that rule should be ignored. In fact there is
no fixed percentage that you should apply to all stocks. If a stock bounces around 10% a
day, then your stop has to be well outside that range. Otherwise, you will certainly be
stopped out on noise along. Keep in mind that with larger stops, you have to adjust the
amount of shares traded to keep risk in line. See articles under lessons at
www.davelandry.com for more on this.
Enter Right About The Prior Day’s High
Within the context of the great bull market, you wanted to be in a position as quickly as
possible. It was a “snooze ya lose” situation. Now, stocks often fake out above the prior
day’s high (for longs) and then sell off hard. Therefore, I have become more and more
liberal with my entries. I often place them well above the prior day’s high and/or above
multiple highs. This helps to ensure, but of course not guarantee, that I avoid false
moves. In fact, in the service (email me if you need archives) we have avoided many
losing trades over the past several years (and especially last year!) by giving entries a
little “wiggle room.” Below is one of them. Notice that a textbook entry would have
resulted in a loss whereas a “wiggle room” entry would have avoided a loss. For more on
entries, see “How to Enter a Trade” under lessons and also see the webcasts.
Put The Stop Right Below The Low Of The Pullback
Ahhh, let me reminisce about the good ole days. If you were around in 99 you too
probably have fond memories. It’s was great going to bed at night because you couldn’t
wait to wake up to see how much money you made while you were sleeping.
Trading was easy, you entered right above the prior day’s high and put your stop right
below the low of the pullback. You then sat back and relaxed as the stock rallied.
Unfortunately, the good old days are long gone. More often than not, if a pullback does
work, it seems to have to first dip to stop you out. Therefore, you have to give stocks
more breathing room, often putting your stop well below the low of the pullback. See my
articles on stops for more on this.
ADX
In my first book, I was encouraged to show mechanical means of determining trend. This
would help the beginners who needed fixed rules and would also appeal to those who
required things to be quantified. Inadvertently, I put too much emphasis on the ADX
indicator. Although I used ADX for scanning back then, it never was a prerequisite for
qualifying trend. In fact, if you dig deep enough in the book, you’ll see where I say “I
don’t plot it on each and every chart…” I have always “eyeballed” charts to determine
trend. I no longer use ADX, not even when scanning. I simply prefer to look at the charts
and only the charts. Email me for more on scanning.
Focusing On Price Movement Vs. Percentage Movement
Short-term traders tend to focus on the amount of points they can “pull out” of a market.
They’re not so much concerned with the percentage move. A point is a point to them.
They tend to generally focus on higher priced stocks because they move around more on
a point basis. When my book was published, I was much more short-term oriented. I too
was concerned with “pulling points” out of the market vs. percentage gains. As I’ve
become longer-term oriented, I find myself more concerned with percentage moves than
points. Although I still prefer somewhat higher priced stocks (especially for shorts), I
have loosened my parameters here and am willing to now consider stocks in the single
digits. Part of this is my changing my investment horizon, looking for percent gains vs.
point gains and part of this is a function of the lingering bear market---there just aren’t
that many higher priced stocks left. At the time this is being published, my minimum
price in my scans is set to $6 per share.
Mechanical Market Timing Systems
In the early 90s, I spent many years researching mechanical systems, especially for
market timing. I figured since I had a degree in computer science, I might as well use it. I
assumed that there had to be a way to mechanize trading. And, if I looked hard enough, I
would find the “holy grail.” Since there are those who will only believe something if it is
quantified, I was encouraged to put some of my mechanical systems research into the
book.
I’ve been a 100% discretionary trader for years. I no longer try to mechanize things. I’ve
learned that there is no “holy grail” and common sense is your best friend. I found that
mechanical systems are great within a certain context of the market. However, conditions
change and so must the trader. As an example, the Volatility Index (VIX) used to be a
great predictor of stock prices and then it just seemed to stop working for a few years. I
later discovered that this could be attributed to a large degree of leverage funds using
spreads. This greatly compressed the volatility of the market. Although I don’t run the
systems any more, I do occasionally take a “peek” at the VIX. I would venture to say that
the VIX systems are once again working now that volatility has increased. This increase
in volatility could possibly be due to a de-leveraging of the aforementioned spreaders.
I haven’t run the numbers on the other systems either. However, I would venture to say
that they’ve probably had some period of spectacular returns followed by extended
periods of under performance.
Keep in mind that I am not taking a shot at those who use and develop mechanical
systems. It’s just that after many years of research, I’ve come to the realization that it’s
just not for me. I think markets change and traders must adapt. I think that we can use
our heads to make much better decisions than a computer.
Micro Patterns
Again, within the context of a raging bull market, most all patterns worked. At that time,
I was experimenting with “micro” patterns—smaller versions of classics such as cup and
handles, double bottoms, etc… Although I still pay attention to these micro patterns, I no
longer trade directly off of them. I prefer to stick with my main patterns and combine
them with bigger picture technical analysis. This is not to say that micro versions of
technical analysis no longer work. It’s just that I’m more and more focused on capturing
longer-term moves therefore, I focus mostly on bigger picture patterns.
In Summary
Market conditions change and so must the trader. Although my patterns published nearly
10 years ago still work, the trader must adapt the application of them to current
conditions. Traders also change. For me, this meant learning to focus more and more on
where the real money is. Further, I’ve learned to be more patient.
Looking Ahead
When you read this book, consider the above. I suggest that you read the book then re-
read this article to make sure you fully understand the subtle but important changes.
If you have questions, I can be reached at dave@davelandry.com or by phone at 1-985-

898-4993.
DAVE LANDRY’S 10 BEST
SWING TRADING PATTERNS
AND STRATEGIES
A Workbook for Professional Swing Traders
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
David Landry
Sentive Trading, LLC

www.davelandry.com
Copyright © 2002, David S. Landry
ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of the publisher and the author.
This publication is designed to provide accurate and authoritative information in regard to the
subject matter covered. It is sold with the understanding that the authors and the publisher are not
engaged in rendering legal, accounting, or other professional service.
Authorization to photocopy items for internal or personal use, or for the internal or personal use
of specific clients, is granted by Sentive Trading, LLC, provided that the U.S. $7.00 per page fee
is paid directly to Sentive Trading, LLC, P.O. Box 298 Abita Springs, LA, 70420. 1-985-898-
4993.
ISBN 1-893756-09-2
Ebook created in United States of America

To my girls Suzie and Isabelle,
for showing me what’s really important in life.
CONTENTS
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
PREFACE vii
ACKNOWLEDGMENTS ix
INTRODUCTION 1
SECTION I PRIMER 5
Chapter 1 PRIMER: WHAT EVERY SWING TRADER

NEEDS TO KNOW 7
SECTION II TREND RESUMPTION PULLBACKS 59
Chapter 2 PERSISTENT PULLBACKS 23
Chapter 3 TREND KNOCKOUTS 33
Chapter 4 WITCH HATS 41
Chapter 5 FALSE RALLY PULLBACKS: TREND PIVOT

PULLBACKS AND SECOND ENTRY PULLBACKS 51
SECTION III TREND ACCELERATION 61
Chapter 6 ACCELERATING MOMENTUM STRATEGY 63
Chapter 7 EXPLOSION GAP PIVOTS 71
v
vi Contents
SECTION IV TREND TRANSITION 83
Chapter 8 FIRST THRUSTS 85
Chapter 9 BOW TIES 93
Chapter 10 REVERSAL GAP STRATEGY 103
Chapter 11 THE GATEKEEPER 111
SECTION V PATTERN APPLICATION 125
Chapter 12 MONEY MANAGEMENT, VARIATIONS, AND

REAL-WORLD SCENARIOS 127
Chapter 13 GETTING THE MOST OUT OF MY PATTERNS 161
GLOSSARY 165
PREFACE
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
In my first book, Dave Landry On Swing Trading, I confessed that I was a

“setup junkie.” Well, it’s three years later and I have to admit that nothing
has changed. Every day, as I tool through hundreds—if not thousands—of
charts, I continue to look for patterns that would have caught all that
moved. Although I occasionally stray to the arcane and esoteric, I keep com-
ing back to the simpler concepts. The simplest—yet most effective—pattern
has been and continues to be “thrust followed by correction.”
Considering the above, when asked the common question, “What’s your
favorite way to trade?” my reply remains the same: pullbacks, pullbacks,
and pullbacks. And after studying the markets for more than a decade, I
have found that the 10 strategies based on the pullback concept and out-
lined in this manual work the best.
These are the exact patterns that I use on a day-to-day basis in my own
trading and in my market analysis. As I stated in my first book, these
techniques are not rocket science. If you’re looking for a book with com-
plex magical formulas, then you’ll surely be disappointed. However, if
you’re interested in straightforward, conceptually correct ways to trade
the market, then this book is for you.
vii
ACKNOWLEDGMENTS
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
As I said in my first book, Dave Landry On Swing Trading, in markets, many

come to the same conclusion through observation and experience. Over the
years, I’ve come up with many “discoveries,” only to later find out that oth-
ers came to the same conclusions years prior. I have striven to give credit
where credit is due, to those who have influenced me. For those of you who
have come to similar conclusions and are not recognized, I can assure you,
it’s simply an oversight and I apologize.
The following people were instrumental in the publication of this manual
and/or have influenced me in life as well. Words alone cannot thank
them enough.
To Larry Connors, for teaching me how to think “conceptually correctly”
when it comes to the markets. And, for providing me with venues to
share my research.
To traders who have inspired me over the years including (but certainly
not limited to!) Linda Raschke, Joe Corona, and all of those of Market
Wizards fame.
To Derrik Hobbs, for graciously sharing research with me.
To Eddie Kwong, for all work that was necessary in getting this manual
published. And, for putting up with me during the process.
To the readers of my columns at Davelandry.com, you inpire me to become a better trader.
ix
x
To fellow traders, Steve Fast, Rob Dobos, and Michael Nunez who gra-
ciously critiqued this manual.
To Judy Brown of Brown Enterprises, for turning a rough draft into
something worthy of publishing.
To Michael Adams, for being a lifelong friend.
To my parents Anna Marie and Sentive Joseph (S.J.) Landry, for their lov-
ing support throughout my life.
To my girls Suzie and Isabelle, for showing me what’s really important in
life.
To my wife Marcy, for believing in me in good times and bad.
INTRODUCTION
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
I have studied thousands and thousands of charts, looking for patterns that
would have captured each and every major trading opportunity. Unfortu-
nately, after years and years of hunting for this “holy grail,” I have discovered
that there is none. This was not an exercise in futility, though. Through look-
ing at all of these charts, I have learned that the majority of a market’s move-
ment occurs during brief periods of time. Therefore, like life itself, success as a
trader is a matter of being in the right place at the right time. While there is
no holy grail, I believe the 10 patterns I teach you in this book, together with
their accompanying trading strategies, best accomplish this goal.
WHAT YOU WILL LEARN IN THIS BOOK

I am a momentum-based swing trader. This means that I seek to identify
a trend and look for a place to enter it, in order to capture a short-term
move (and the occasional longer-term “home run”). There are three
phases of a trend that can be traded: trend resumption, trend accelera-
tion, and trend transition. I view the fourth phase, a sideways or choppy
market, as not being tradable.
This book is divided into five sections.
Section I: Primer
This section essentially gives you a base of swing trading knowledge from
which to work. In it, I will teach the nuts and bolts of my style of trading.
1
2 Introduction
From there, we get into the strategies. Of these 10 strategies, six are new
and this is the very first time I have published them in a book. These strat-
egies are: Persistent Pullbacks, Witch Hats, Accelerating Momentum Strat-
egy, Explosion Gap Pivots, First Thrusts, Reversal Gap Strategy, and The
Gatekeeper. As for the other three, TKOs, Bowties and Trend Pivot Pull-
backs, I wrote about them in my first book, Dave Landry On Swing Trading.
However, I firmly believe they deserve to be featured in this book, newly
revised along with recent trade examples, because of the way they have
held up especially well over the course of time and challenging markets.
My goal is that you will gain new insights into the application of these
three patterns, even if you already learned them in my first book.
Section II: Trend Resumption Pullbacks

The trend resumption patterns are essentially the foundation of my
methodology. Everything is built from here. The goal is to identify a
trend and look to enter it after a correction, provided that the trend
shows signs of resuming.
When a market pulls back after a persistent trend, there is a high likeli-
hood that the original trend will resume. In Chapter 2, Persistent Pull-
backs, you’ll learn a simple technique to identify and trade these
high-probability trends.
Although it was one of my first swing trading patterns published, Trend
Knockouts has stood the test of time. This is especially true when com-
bined with concepts such as persistency. In Chapter 3, I’ll show you how
to get the most out of this oldie but goodie.
Markets in strong trends can often have sharp reversals but then quickly
resume their original trends. These “V” shaped false bottoms often shake
out existing players and attract eager bottom pickers. When the trend re-
sumes, these players often get forced back in or are shaken out, respec-
tively. In Chapter 4, Witch Hats, I will show you how to take advantage
of these traders’ predicament.
Markets that pull back in a strong trend can often have a false start be-
fore resuming their trend. This rally draws in, and subsequently shakes
out, the “fast money.” Once these players are cleared out of the market,
the stock often resumes its uptrend. And, if it doesn’t resume its trend, a
potentially losing trade is avoided. In Chapter 5, Trend Pivot Pullbacks
and Second Entry Pullbacks, I’ll show you how to identify and enter
these false moves after they occur.
Introduction 3
Section III: Trend Acceleration

Stocks in established trends can often accelerate higher as news flows
into the market or quite simply, the momentum of the stock itself catches
the eye of more traders. Although many view stocks in this situation as
overbought, they can often make another leg higher—their trends can go
much further than most expect. In Chapter 6, Accelerating Momentum
Strategy, I will show you how to recognize and enter these accelerating
moves.
There’s a common Wall Street myth that all gaps are quickly filled. This
simply isn’t true. Gaps in the direction of the trend at new highs (lows)
often signify the beginning of a new accelerated trend. However, you
can’t simply buy (or sell short) a market simply because it is gapping. In
Chapter 7, Explosion Gap Pivots, I will show you how to properly trade
these momentum gaps.
Section IV: Trend Transition

Trend trading is not as easy as it used to be. The bursting of the stock
market bubble in 2000 and lingering bear market that followed, cleared
out many market participants. The “buy and hold” (or as some joke “buy
and hope”) crowd was hit especially hard, leaving only smarter, more
nimble traders. These traders are not willing to hold out for top dollar.
As soon as a trend is well established, that sector becomes a “source of
funds.” A new trend then emerges in an area that has been under-per-
forming. Therefore, if the last few years are any sign of things to come, in
order to survive as a trend trader, you must be able to recognize these
transitions early.
Markets making major transitions in trend often begin with a “bang”—
they have a sharp thrust in the new direction. And once this occurs, they
often only pull back very briefly before resuming their new trend. In
Chapter 8, First Thrusts, I will show you how to enter these major trend
changes at the earliest possible point.
Markets can also make a more gradual change in trend and then acceler-
ate in the new direction. Through the use of multiple moving averages,
my Bow Ties pattern, Chapter 9, remains my favorite pattern for catching
these major trend shifts early.
When a market gaps down after a strong trend, it catches many traders
off guard. And quite often, a major change in trend can then develop. In
4 Introduction
Chapter 10, Reversal Gap Strategy, I will show you how to recognize and
trade these gaps.
Markets forming tops after a strong trend often have a sharp sell-off and
then make one last attempt in vain to resume their longer-term uptrend.
When this occurs, a true top is then formed. In Chapter 11, The Gate-
keeper, with the help of Fibonacci expert Derrik Hobbs, I will show you
how to quantify both in time and price when a market is making this
“last gasp.”
Section V: Pattern Application

The best way to become successful with patterns is to study success. In
Chapter 12, I show real-world scenarios, money management techniques,
and variations of some of my favorite patterns.
Finally, in Chapter 13, I discuss how to get the most out of my favorite
patterns.
SECTION I
PRIMER
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
5
CHAPTER 1
PRIMER: WHAT EVERY

SWING TRADER NEEDS
TO KNOW
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
To those new to swing trading, this chapter contains a brief introduction to

my approach to the markets. It is not intended to be a complete methodol-
ogy. Rather, it’s a base upon which one can build. For a more thorough ex-
planation of momentum-based swing trading, refer to my first book, Dave
Landry On Swing Trading.
SWING TRADING DEFINED

Swing trading is simply short-term trading. Positions are held, on aver-
age, for two to seven days. Under ideal conditions, positions can be held
much longer, creating the occasional “home run.” My style of swing trad-
ing is momentum based. This means that I first seek to identify a trend
and then look for a place to enter. Although I do have some transitional
patterns (early trend), I do not attempt to pick tops or bottoms.
7
8 Chapter 1
TRADING PULLBACKS
I believe “The Trend Is Your Friend” is the truest market adage. And, the
best way to enter trends is on pullbacks. Therefore, momentum pullbacks
and variations thereof are my favorite patterns. Referring to Figure 1,
they consist of a market in a strong trend (a) that has begun to correct
(b). An entry is triggered when the trend begins to resume (c) and a pro-
tective stop is placed below the low of the setup (d). As the trend contin-
ues, partial profits should be taken (e) and the stop on the remaining
shares should be trailed higher (f).
Figure 1
Let’s break it down.
IDENTIFYING TREND
The great thing about stocks that are trending is that they leave clues be-
hind. I have dubbed these clues “Trend Qualifiers.” They include base
breakouts, gaps, laps, wide-range bars, strong closes, new highs, and
how much a stock moves over a given period of time on a percentage or
point basis. The behavior of moving averages can also be used to help
determine a trend.
Primer: What Every Swing Trader Needs to Know 9
Let’s look at an example of trend qualifiers.
1. The Nasdaq Biotech Ishares (IBB) gaps to new 1-month highs out of a
low-level base. Notice the move is on a wide-range bar and the stock
closes well (in the top of its range).
2. The stock gains over 20% in 16 days as the trend gains strength.
3. Notice that this strength began with a wide-range bar higher that
closed strongly.
4. Also notice that the stock is hitting new multi-month highs during
this period.
5. The stock has an orderly pullback.
6. The trend resumes.
7. The stock has an extreme wide-range bar higher. Although this is a

sign of strength, at this point, you have to begin to question if the
10 Chapter 1
move has exhausted itself. This is normally a good time to take some
profits and tighten your stop on your remaining shares.
8. The stock gaps to new 1-year-plus highs.
9. The stock reverses and closes poorly. At this point, you have to begin
to question if the trend has ended and a new trend in the opposite di-
rection is emerging.
Now let’s look at the same chart with the moving averages. My favorite
moving averages are a 10-period simple and a 20- and 30-day exponen-
tial. These are explained further under Chapter 9, Bow Ties.
1. The moving averages are sloping downward.
2. The moving averages come together and turn up. This action forms a
“Bow Tie” (see Chapter 9).
3. Notice that there is “daylight” between the stock’s lows and the mov-
ing averages (i.e., the lows are greater than the moving average). This
is a sign of strength as the stock gains momentum.
4. Notice that the slope of the moving averages is positive (up).
5. Also notice that the moving averages are in “proper order”—the faster
moving averages (shorter periods) are above the slower moving aver-
ages (longer periods).
12 Chapter 1
The Trend Should Be Obvious

I’m amazed at how many traders try to make a trend exist where there is
none. The trend should be obvious. Quite simply, if the right side of the
chart is higher than the left, then it’s in an uptrend. Conversely, if the
right side of the chart is lower than the left, then it’s in a downtrend.
Said another way, if you can’t draw a big arrow pointing in the direction
of the trend, then it’s probably not a trend. I realize that I have trivialized
this in Figure 2 below, but again, the trend should be obvious.
Uptrend Downtrend No Trend

(sideways)
Figure 2
The Correction
Referring to Figure 3, the correction (i.e., pullback) can be defined in
terms of width (number of days since the new high was made) and
depth (how far the stock pulls back). In general, the width should be 2 to
7 bars. More than that and it’s possible that the stock is losing momen-
tum. As far as depth, too deep and it’s possible that the trend has ended
and a new trend (i.e., reversal) is emerging. Conversely, if it’s too shal-
low, it’s possible that the stock has not corrected enough. Therefore,
“depth” can be arbitrary. And, it can vary greatly depending on the price
and volatility of the stock. Higher-priced and more volatile stocks can
have deeper corrections before their trend resumes. Whereas the same
move in a lower-priced or less volatile stock would be viewed as a trend
reversal.
New
High 1
2
3 Depth
4
Width
Figure 3
Entries
By placing your entry above the market for longs, you will only get filled
if the stock begins to move in the intended direction. Of course, there’s
no guarantee that it will continue to move in your favor but at least you
won’t get filled if a rally never materializes.
As a general statement, for longs, entries should be around 10 cents
above the prior day’s high. This allows some wiggle room, should the
stock barely get past the prior day’s high (a possible target for market
makers) before reversing.
Keep in mind that where you enter will also depend upon market condi-
tions. In very good conditions, you might actually look to enter early if it
appears that the trend is resuming (i.e., an intraday rally or reversal).
Conversely, in poorer conditions, you might look to enter the stock at a
higher level. Further, you might even want to let it trigger and wait to
see if it continues to follow through before entering (i.e., a second entry).
14 Chapter 1
THE ART OF THE INITIAL PROTECTIVE STOP

Placement of the initial protective stop is as much of an art as it is a sci-
ence. Too close and you will almost surely guarantee yourself a loss as
the “noise” of the market will stop you out. Placing it further away in-
creases your chances of a winning trade should the trend resume, but ob-
viously increases your risk if it doesn’t.
Ideal Reality
Entry
Entry
Stop
Stop
Figure 4
When trading pullbacks, the low of the pullback is the obvious place for
a protective stop. However, because this is common knowledge, it be-
comes a target for market makers. Therefore, I like to use a somewhat
looser stop (especially if the low of the pullback is fairly close), taking
into consideration the volatility and price of the stock (higher priced/
more volatile stocks require a looser stop).
The following table is a general guideline for where initial protective
stops could be placed (from the entry) based on the price of the stock.
This should help to keep you from being stopped out prematurely. Keep
in mind that tighter stops can be used on less volatile stocks. Conversely,
more volatile stocks will require looser stops.
Stock Price Protective Stop (amount risked)

$10–$15 $1
$15–$20 $1–$1.50
$20–$30 $1.50–$2.00
$30–$50 $2.00
$50–$70 $2.50
$70–$100 $3.00
>$100 $3–$4
MONEY MANAGEMENT
Initial Profit Taking

On most swing trades, the profits will be small and have the potential to
quickly erode. Therefore, as soon as your profits (a) are equal to or
greater than your initial risk (b), you should lock in half of your profits
and move your protective stop on your remaining shares to breakeven
(c)—(near your original entry).
(c)
Entry
Profit (a)
Initial Risk (b)
Protective
Stop
Figure 5
16 Chapter 1
Locking in half of your profits and moving your stop to breakeven when
your profits are greater than or equal to your initial risk, will help to gen-
erate income for your account. This income will help to pay for the inevi-
table small losses associated with swing trading. Further, barring
overnight gaps, this gives you, at worst, a breakeven trade and a chance
at a home run on the remaining position. Larry Connors, in Connors On
Advanced Trading, dubbed this simple, yet effective, form of money man-
agement, 2-for-1 Money Management.
Keep in mind that this is just a basic money management system. You
can (and should) build from here. Also, conditions will help dictate
where profits should be taken. For instance, in strongly trending markets
where the sector and stock are also in gear, you might look to let profits
ride a bit on the first half after the profit target is hit (e.g., trail a stop
intraday on those shares). Conversely, in choppy markets, you might
look to take profits more quickly and move your protective stop to
breakeven.
Trailing Stops
Stops can be trailed higher on a point or pattern basis. Using a point ba-
sis, one would simply follow the guidelines outlined in the table on page
15, provided of course, that the volatility of the stock is taken into con-
sideration. For pattern-based trailing stops, one could place their stop be-
neath support levels or beneath recent lows. For instance, placing a stop
below a two-to-three bar low can often catch the majority of a strongly
trending market.
My goal with every swing trade is to have it turn into a longer-term play.
Therefore, if I am fortunate enough to capture a short-term move in a
stock and have already taken partial profits, I will trail a somewhat
looser stop on the remaining shares. Ideally, this will allow the stock
enough room to have an orderly correction (or form a base) and then re-
sume its uptrend. Each time a stock does this, I then tighten to the level
of the last base/correction.
(a)
Longer-Term
Original Stop
Swing Trade
Stop
Figure 6 Once a stock moves strongly in your favor, occasionally a longer-term

move can be captured by trailing a stop more loosely, placing it below the last
base/pullback (a).
18 Chapter 1
Q&A
Q. When trading pullbacks, how do you know that this pullback
won’t be the last?
A. You don’t. You have to keep playing the stock as if the trend will last
forever. Hopefully you won’t get triggered on a pullback that turns
into a major reversal. Or, at worst, you’ll get stopped out with a
modest loss. The good news is that markets often offer many oppor-
tunities before they eventually fail.
Q. You didn’t mention ADX as a determinant of trend. Do you still

use ADX?
A. In my first book, I felt that I had to quantify a trend for those new to
trading or those who needed more of an objective-type analysis. In-
advertently, I think too much emphasis was placed on the indicator.
I don’t use ADX to quantify a trend for a potential setup. I “eyeball”
a chart and look for Trend Qualifiers. I do use ADX for research pur-
poses, especially when working on contra-trend market timing sig-
nals. However, on a day-to-day basis, I simply prefer looking at the
charts.
Q. Do you use actual or mental stops?

A. If I am distracted or have many positions on, I will place an actual
stop. If I can watch a screen and not be distracted, I will use mental
stops. I will look to exit after my mental stop is hit. In other words, I
will “trade out” of the position. In some cases, I end up risking
slightly more than intended, while in other cases the trend resumes,
and I end up with a winner. Mental stops do require discipline
though. I’m amazed at the number of people who ask me for advice
on what to do with a position after they have losses of 5, 10, and
even 15 points or more. For these people, they should place actual
stops in the market. This makes controlling losses a passive decision
and not an active one.
Q. Do you carry stops overnight (i.e., good till canceled orders)?

A. No, I allow the stock to open and then place my protective stop. This
allows me to “trade out” of adverse moves. Again, this requires dis-
cipline. If you find yourself being a “deer in the headlights,” hoping
for a stock to come back, then you’re much better off carrying the
stop overnight.
Q. You mention that the low of the pullback is a target area for mar-
ket makers. Can you elaborate?
A. Yes. The “textbook” place to put your initial protective stop is right
below the low of the pullback. However, if this is fairly close to the
entry, for instance, less than those parameters given in the table on
page 15, then there is a high likelihood that it could be hit.
Q. You mentioned that the initial protective stop should be varied de-
pending on volatility of the stock, but you didn’t define volatility.
A. It’s beyond the scope of this text to get into complex volatility mea-
surements. The good news is: One of the best ways to gauge volatil-
ity is to simply “eyeball” the chart. A hot technology stock that
moves several points a day is volatile. And, you’re kidding yourself
if you think you will be able to trade that stock with a tight stop.
Conversely, REITs or certain utility stocks that might only move a
point or two over several weeks are not. Therefore, on stocks like
these, tighter stops can be used.
Q. Where could one find more information on volatility?

A. I covered it in my first book (Dave Landry On Swing Trading) and in
articles on the Website (www.tradingmarkets.com). A lot of this re-
search came from Larry Connors (Connors On Advanced Trading).
Q. You seem to imply that people use stops that are too tight to cap-
ture swing moves. Are there cases where a tight stop can be used?
A. Yes, if everything is “in gear”—the market is rallying, and the sec-

tors and most stocks in it are rallying, then a stock should trigger
and not look back. In these cases, you could use a tighter-than-nor-
mal stop and be willing to re-enter or find a better candidate if
stopped out. Also, there are patterns (e.g., Witch Hats, Gatekeepers,
etc.) where you can look to enter intraday on the first sign of a rever-
sal and use a fairly tight stop. If you are right, there’s the potential to
be right big. But if you are wrong, you are only risking a small
amount.
20 Chapter 1
Q. Doesn’t “2 for 1” money management have a negative expectancy

since you are really only getting “1 for 1” at your initial profit tar-
get?
A. If you got stopped out on every winning trade after you took the ini-
tial profit at breakeven, then yes, it would have a negative expec-
tancy because you are risking twice as much as you are making.
However, by trailing a stop higher on the remaining shares, you po-
sition yourself for a potential home run. And, one or two home runs
will take care of a lot of losing trades. Also, as mentioned in this
chapter, this is a basic money management system. Use it as a base
to build upon. For instance, this system can be “beat” by using sim-
ple techniques like taking profits early in choppy markets and letting
them ride in momentum markets.
SECTION II
TREND RESUMPTION
PULLBACKS
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Entry
Protective
Stop
As I wrote in Dave Landry On Swing Trading:

Although I emphasize trading with the trend, this does not mean blindly buying a stock
simply because it is in a strong uptrend. Strongly trending markets are prone to correct.
And, you never know when what appears to be a correction, may in fact be the end of a
trend. Therefore, it’s much wiser to wait for the correction to occur and then look to en-
ter if (and only if) the original trend begins to re-assert itself—this is the theory and es-
sence of the pullback. In my opinion, this is the single strongest way to trade.
21
CHAPTER 2
PERSISTENT PULLBACKS
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
“What’s your favorite pattern?” is the most common question that I’m
asked. My reply is always the same, “Pullbacks, pullbacks, and pull-
backs.” “What kind?” is the next question that inevitably follows. “Per-
sistent Pullbacks” is my answer. In fact, if I had to trade only one
pattern, this would be it.
Persistency is simply a stock’s ability to follow through from one day to
the next. This can be measured by complex methods such as linear re-
gression or by simply “eyeballing” a chart.
23
24 Chapter 2
Persistency
Uptrend Downtrend
My favorite way to define persistency is to draw a trend line through as

many bars as possible. This simple technique, in effect, is the same math-
ematically as a linear regression trend line. Ideally, I like to see at least 20
bars where the stock has persisted in one direction. Essentially, this
means that a stock has trended for at least a month. I also like to see the
stock move at least 10 points during that period. This suggests that the
trend is strong and a resumption of that trend after a pullback would
make swing trading the stock on a point basis worthwhile.
Persistent Pullbacks 25
Here are the rules for buys, and they are really quite simple. Short sales
are reversed.
1. The stock should have moved one month, approximately 20 bars, in
one direction. Ideally, a trend line drawn through the bars should inter-
sect as many bars as possible. This can be done by hand (my favorite
way) or by using a linear regression trendline. During this period, the
stock should have moved at least 10 points in the direction of the
trendline (more or less depending on the volatility and price of the
stock).
20 Bars
26 Chapter 2
2. After Rule 1 has been satisfied, look to enter on a pullback or pullback

related pattern. One of my favorite patterns that occurs out of a persis-
tent move is a Trend Knockout (TKO) (see next chapter for details).
Entry
Pullback
20 Bars
The above will be quite obvious after a few examples.

In the spring of 2003, the Homebuilders were in a persistent uptrend.

Here is an example of Ryland Group, a stock in that sub-sector.
1. Ryland Group (RYL) moves over 14 points in 29 trading days (and

over 21 points in 49 trading days—not shown). Notice a trendline
drawn through the bars intersects nearly every one.
2. The stock pulls back.
3. Go long as the trend resumes.
4. The stock gains over 18 points over the next 10 days.

28 Chapter 2
Here’s an example on the short side. In early 2003, Insurance-related

stocks were in persistent downtrends.
1. XL Capital (XL), in the property and casualty insurance sub-sector,

drops nearly 15 points in 23 days. Notice that a trendline drawn
through the bars intersects all of the bars.
3. We short the stock as the trend resumes.
4. The stock drops over 7 points over the next 12 days.

The concept also works on indices. In fact, the best time to trade is when
the indices themselves are in persistent trends.
1. From 04/10/2003 to 05/16/2003, the NYSE Composite (NYSE) rises

over 450 points in 25 trading days. Notice that a trendline drawn
through the bars intersects nearly every bar. Also of interest is the fact
that those bars that are not intersected are above the trendline (a sign of
strength).
2. The index pulls back, creating a Trend Knockout-like setup (defined in

the next chapter).
3. Go long as the trend resumes. Note: Although you can’t trade this in-
dex directly, the signal could be used for index-related products such
as Ishares or could be used to help time entries on individual stocks.
4. The index rises nearly another 450 points over the next 11 trading
days.
30 Chapter 2
Here’s an example using the Ishares Russell 2000 Index. Again, when in-
dex or index-related products are setting up, it’s usually a good time to
be trading.
1. The Russell 2000 Ishares climb over 10 points in 24 trading days. No-
tice that trendline drawn through the bars intersects nearly every bar.
Also of interest is the fact that those bars that are not intersected are
above the trendline (a sign of strength).
2. The stock forms a TKO/Pullback.
4. The stock rises over 10 points over the next 11 days.

DAVE LANDRY’S TRADING TIPS

GENERAL: I like the pattern equally well on both the long side and
short side of the market.
MARKET ACTION: Best trades occur when major indices are also in
persistent trends.
SECTOR ACTION: In general, the sector should confirm trend direc-
tion. Ideally, it too should be in a persistent trend.
STOCK ACTION: The trend of the stock should be obvious. There
shouldn’t be any guesswork involved. Also, ideally, other stocks in the
sector should also be setting up as persistent pullbacks (i.e., there should
be confirming action).
32 Chapter 2
Q&A
Q. Isn’t this pattern common sense?
A. That’s what I originally thought. However, after showing it to many
people, I was amazed at the response that I received. I suppose
many think that something has to be complex in order to work in
the markets.
Q. You mention that if you only had to trade one pattern, this would
be it. Can you elaborate?
A. The nemesis of momentum-based swing trading is choppy markets.

So, if you only used this pattern, it would be very difficult to find
setups (especially with confirming sector action) during those times.
Therefore, you would be trading less when conditions are at their
worst. Also, although the pattern is somewhat discretionary, I think
it’s one of the most obvious patterns out there. In fact, if a trader is
having trouble choosing setups or having problems with trading in
general for that matter, I recommend that they focus exclusively on
this pattern until they gain confidence.
Q. You mentioned that the trendline you draw to judge for persis-
tency should go through as many bars as possible. Have you quan-
tified how many can lie outside of the trendline?
A. Not exactly. I take each stock on a case-by-case basis. Ideally, the

trendline should go through all of the bars. A few can lie outside.
Also, I am more lenient on those that lie outside of the trendline on
the same side as the trend.
Q. Explain same side as the trend.

A. Sure. In an uptrend, bars above the trendline would be seen as a
sign of strength as the stock is trying to accelerate out of its persis-
tent trend. Conversely, on the downside, bars that lie below the
trendline would be a sign of weakness. This is illustrated in several
of the examples.
CHAPTER 3
TREND KNOCKOUT
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
In spite of its simplicity, the Trend Knockout remains one of my favorite

patterns.
While it’s a good idea to trade in the direction of the trend, I’ve learned
you’re much better off waiting until the weak hands are knocked out of
the market before entering yourself. The reason is that you never know
when these traders are going to dump their positions and take you out
with them. Trend Knockouts (TKOs) identify strong trends from which
the weak hands have already been knocked out. By placing your order
above the market, you have the potential to capture profits as the trend
resumes.
1. The stock should be in a strong uptrend and ideally, a persistent
uptrend.
2. The stock should take out (trade below) at least the two prior lows.
33
34 Chapter 3
3. Go long above the high of (2).
4. Place a protective stop below the low of (3), taking into consideration
those concepts discussed under Primer.
Let’s look at three examples.

Trend Knockout 35
In early summer of 2003, metals and mining stocks were in strong

uptrends.
1. Freeport Mcmoran C&G (FCX) is in a strong uptrend.
2. The stock trades below the prior two lows (five total).
3. Go long above (2) as the trend resumes.
4. The stock gains over 10% over the next few days.
36 Chapter 3
Here we have two back-to-back examples.
1. Tol Brothers (TOL) is in a longer-term uptrend.
2. The stock trades below the prior two bars, creating a TKO.
3. Go long above the high of (2) as the trend resumes.
4. The stock trades below the prior two lows, creating another TKO.
5. The stock trades above the high of (4), creating a second entry.
6. The stock gains another 12%.

Trend Knockout 37
In early summer of 2002, the semiconductors were in a persistent down-

trend. Many stocks here set up as TKO shorts.
1. Novellus Systems (NVLS) is in a persistent downtrend (1).
2. The stock trades above the two prior highs, creating a TKO. Also of in-
terest is that this creates a “micro” Witch Hat (Chapter 4).
3. Go short below the low of (2) as the trend resumes.
4. The stock drops over 7 points over the next six days.
38 Chapter 3

GENERAL: The pattern works equally well on both sides of the market.
However, because it is a very common pattern, you have to be very se-
lective.
MARKET: Should be in a strong confirming trend unless you are trad-
ing an issue that can trade contra to the overall market (e.g., a commod-
ity-related stock). Ideally, the market itself should be set up as a TKO (or
a similar confirming pattern).
SECTOR: Should also be in a strong trend and ideally, also set up as a
TKO (or a similar confirming pattern).
STOCK: Ideally, the stock should be in a very strong and persistent
trend.
Trend Knockout 39
Q&A
Q. How did you discover this pattern?
A. Many times I would get stopped out of positions, only to watch in
frustration as the trend resumed.
Q. Why not just re-enter when the trend resumed?

A. I now know that second entries, after being stopped out, are often
the best entries but I didn’t always know that. Someone once said
that a loss is not a loss as long as something is learned from it. I
learned TKOs from getting stopped out.
Q. So the losses were painful?

A. Yes. I found it aggravating that I sold stock or futures at a bargain to
someone who was now making money. I would eventually “throw
in the towel” and jump back into the market, only to get knocked
out one more time. I knew I had to come up with a better way to en-
ter strongly trending markets.
Q: This seems like a very common pattern. How do you go about

choosing the best setups?
A: Yes, it is a common pattern if you follow the exact rules. However, in

addition to taking out two bars, the “knockout” move should be
meaningful. For instance, if you look at a chart and can honestly say
that you would have been stopped out if you were in a position, the
chances are, it’s a “meaningful” move. Also, as previously men-
tioned, trend is also vitally important. The best trades occur when
the stock is in a strong persistent trend. And, as I always preach, it
helps if the market and sector are also in trends and ideally, set up
too.
Q. The setup calls for “at least” a two-bar low. Does a three-bar low
or greater work better?
A. Yes, in general, the more players that are knocked out, the better.
You are just less likely to get filled.
CHAPTER 4
WITCH HATS
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Markets in strong trends can often have sharp reversals but then quickly
resume their original trends. These “V” shaped (inverted “V”) false bottoms
(tops) often shake out existing players and attract eager bottom (top) pick-
ers. When the trend resumes, these players now are faced with the decision
of re-entering the market or are forced out, respectively. The objective of the
Witch Hat pattern is to take advantage of these traders’ predicament—to
catch a resumption of the trend off these false “V” bottoms (tops).
41
42 Chapter 4
The pattern uses a “pivot point.” This is described in Figures 1 and 2 be-
low.
or
Figure 1: Pivot Low. A pivot low is simply a low (or in some cases two or
more equal lows) “surrounded” (the day before and the day after) by two higher
lows.
or
Figure 2: Pivot High. A pivot high is simply a high (or in some cases two or
more equal highs) surrounded by lower highs.
Witch Hats 43
Here are the rules for Short Sales, buys are reversed:
1. The stock should be in a strong downtrend, ideally an accelerating
downtrend.
(1)
2. Stock must make a pivot high (for more information on pivot points,
see Chapter 5, Trend Pivot Pullbacks and Second Entry Pullback).
Note: The pivot high is often “obvious” after the stock begins to retrace
(Rule 4).
(2)
(1)
44 Chapter 4
3. The stock must then resume its downtrend—the sharper the resump-
tion, the better.
(2)
(1)
(3)
4. The stock must then retrace sharply to near the level of the pivot high
(2). This action completes the “brim” of the hat.
(2) (4)
(1)
(3)
Witch Hats 45
5. Go short .10 below yesterday’s low (4). Aggressive daytraders may

look to enter early (intraday) and use a tight stop should the stock be-
gin to reverse at the prior pivot point (2).
(2) (4)
(1)
(5)
(3)
6. The pivot points, the “brim” of the “hat,” become a resistance point—a
minor double top. Therefore, if filled, place a protective stop .10 above
the pivot point of (2) or the high of (4), should that point be slightly
higher—or follow the guidelines for initial stop placement outlined un-
der Primer.
(2) (4)
(6)
(1)
(5)
(3)
46 Chapter 4
In the summer of 2002, retail stocks were in persistent downtrends.
1. Best Buy (BBY) is in a strong downtrend.
2. The stock rallies but stalls out to form a pivot point.
3. The sell-off resumes.
4. The stock rallies back to the area of the prior pivot point (2). This ac-
tion forms the brim of the hat.
6. Place a protective stop above the pivot points—the brim of the hat.
7. The stock drops over 10 points before reversing. Note: When a stock
gaps sharply in your favor, it’s often a good time to take some profits.
Witch Hats 47
During the summer of 2002, the Oil Service Stocks (OSX) were in strong
downtrends.
1. Schlumberger (SLB) is in a strong downtrend, which is actually part of

a longer-term downtrend (not shown).
2. The stock rallies but stalls out to form a pivot point.
3. The sell-off resumes. Note: This sell-off is actually from a “micro”

Witch Hat.
4. The stock rallies back to the area of the prior pivot point (2). This ac-
6. Place a protective stop above the pivot points—the brim of the hat.
7. The stock drops nearly 6 points over the next three days.
48 Chapter 4
On the long side, I prefer more “micro” versions—both in depth and

time.
1. Ivax Corp. is in a longer-term uptrend and in more recent times, an ac-

celerating uptrend.
2. The stock makes a pivot low.
3. The uptrend resumes.
4. The stock sells off to near the area of the prior pivot low (2). This ac-
5. Go long above the high of (4) as the trend resumes (on 05/09/03).
6. Place a protective stop below the brim of the hat.
7. The stock gains over 12% in four days. Note: When a stock gaps in
your favor, it’s often a good time to take some profits.
Witch Hats 49

GENERAL: Since markets in downtrends are more prone to sharp
retracements (e.g., a short squeeze), I prefer this pattern on the short side.
On the long side, I prefer “micro” versions of the pattern.
The “point” of the hat—the old lows/highs—is a good place to take par-
tial profits.
MARKET: Ideally, the overall market should be forming a deep pull-
back into resistance/support (i.e., a Witch Hat or pattern similar to a
Witch Hat).
SECTOR: Ideally, the overall sector should also be forming a deep pull-
back into resistance/support (i.e., a Witch Hat or pattern similar to a
Witch Hat).
STOCK: The stronger the downtrend, the better. Ideally, the “V” of the
Witch Hat should be very “sharp” (well defined).
50 Chapter 4
Q&A
Q. At what point does the setup stop being a potential false top/bot-
tom and become a real “V” top/bottom?
A. Well, obviously if it gets past the “brim,” you have to reconsider.

Also, sometimes you’ll get an initial move out of this pattern and
then it will go on to complete the V-top/bottom.
Q. At this point, does the chart become more of a transition pattern?

A. Yes, sometimes a Witch Hat buy can turn into a pattern such as
Gatekeeper sell (Chapter 11) if it fails to follow through (see Chapter
12, More Examples, Variations, and Scenarios for an example of this).
Therefore, like any pattern in this book, money management is im-
portant.
CHAPTER 5
FALSE RALLY
PULLBACKS: TREND
PIVOT AND SECOND
ENTRY PULLBACKS
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Like the Trend Knock Out, here’s another pattern born out of frustration.
Often I would enter pullbacks and find myself quickly stopped out a few
days before the market mounted a major move. This was difficult as I was
“right,” but too early. It’s now obvious to me that the correction wasn’t over
and I should have been looking to re-enter the market as the trend resumed.
Trend Pivot Pullbacks and Second Entry Pullbacks seek to identify pull-
backs that have had an initial false rally. This rally draws in, and subse-
51
52 Chapter 5
quently shakes out, the “fast money”—traders without staying power

(money) and/or patience. Once these players are cleared out of the mar-
ket, the stock often resumes its uptrend. Should the trend not resume, a
potential losing trade is avoided by waiting for a “second entry”—above
the false rally point (which may also turn out to be a pivot point, see
Chapter 4, Witch Hats for an explanation of pivot points).
Here are the rules:
1. Stock should set up as a pullback by hitting a new high and pulling
back for 2 to 5 bars.
(1)
False Rally Pullbacks: Trend Pivot and Second Entry Pullbacks 53
2. Stock should then trade above the prior high (the lowest high of 1).
This action triggers a “normal” entry for the pullback pattern.
(2)
(1)
3. The stock must then close below the prior high. This means that anyone
who bought the pullback has a loss and may have already been shaken
out or may be looking to exit. This action could either clear the way for
the stock to go higher or create additional selling, which would keep
you out of a potentially losing trade.
-OR-
On the subsequent day(s), the stock trades below the high of (2), form-
ing a pivot point.
Pivot
Point
(2) (2)
-OR-
(3) (3)
(1) (1)
54 Chapter 5
4. Go long if the stock can trade above the high of the false rally.
(4) (4)
(2) (2)
-OR-
(3) (1) (3)
(1)
Let’s look at some examples.

1. Express Scripts (ESRX) is in a longer-term uptrend.
3. The stock rallies, triggering an entry on a pullback but sells off to close
below the prior day’s high. This false rally creates an opportunity for a
second entry. Go long tomorrow above today’s high.
4. The stock makes a lower high. Because this action creates a pivot point,
the setup is now also a Trend Pivot Pullback. Continue to look to go
long above the high of (3).
5. The stock trades above the high of (3) and we go long.
6. The stock gains over 8 points over the next nine days.
56 Chapter 5
1. Seagate Technology (STX) is in a longer-term uptrend (only part of

which is shown here).
2. The stock pulls back for five days and then on 05/21/03 trades above
the prior high but closes below it. This action creates a false rally out of
a pullback.
3. Go long as the stock trades above the high of (2). Note, at this point the
setup is now a Trend Pivot Pullback since the high of (2) is a pivot
point.
4. The stock gains over 15% over the next three days.
Here’s an example on the short side.
1. Nationwide Financial Services (NFS) is in a strong downtrend and, in

more recent times, a persistent downtrend (my favorite).
2. The stock pulls back for three days.
3. The stock triggers an entry by trading below the prior day’s low, but
reverses to close above that low, creating a false entry.
4. The stock trades below the low of (3) and we go short.
5. The stock loses over 10% of its value in two days.

58 Chapter 5
One advantage of the pattern is that you occasionally avoid a losing

trade by waiting for a second entry.
1. Bausch & Lomb is in a strong uptrend.
2. The stock pulls back and on 06/12/03 has a false rally. This action cre-
ates a pivot point.
3. Go long above the high of the pivot point (2).
4. The stock fails to trigger and sells off.


GENERAL: The pattern works on both sides of the market.
MARKET ACTION: Ideally, the indices should be in a confirming
trend.
SECTOR ACTION: Ideally, the sector action should be in a confirming
trend.
STOCK ACTION: Works best with persistent trends. Can also work in
accelerating trends where aggressive traders are trying to pick a top by
entering on what appears to be a pullback failure.
60 Chapter 5
Q&A
Q. Don’t you give up some of the rally by requiring the stock to trade
above the pivot point or the false rally point?
A. Yes, but you also avoid getting caught in a potential second false
move.
Q. So when the stock trades above the pivot high/false rally point, it
helps confirm the rally?
A. Yes.
Q. Suppose you are looking to trade the initial pullback. How do you
know it won’t make a false move out?
A. You don’t. Markets are prone to false starts. Often though, the sec-
ond move is the real move. Trend Pivot Pullbacks/Second Entry
Pullbacks are essentially pullbacks that didn’t work initially. If you
were fortunate enough to miss the first false move, then you may be
able to capitalize on the second move or avoid a losing trade alto-
gether (if it doesn’t trigger). If you did take the trade off initial pull-
back and are faced with a loss, you might look to exit and re-enter,
or (within reason) stick with the trade to see if it makes a second
move out.
Q. If the second move is often the real move, should one wait for a
Trend Pivot Pullback/Second Entry Pullback to form vs. trading
pullbacks?
A. You could. It all depends on your trading style. You would miss a
lot of stocks that don’t come back in (i.e., rally and keep on going).
However, by waiting for this pattern, you will avoid a lot of losing
trades (i.e., those that have true false rallies). I know of a trading
shop that only allows new traders to take second entries.
SECTION III
TREND ACCELERATION
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Stocks in established trends can often accelerate higher as news flows into the market. In
essence, what happens is that the momentum of the stock itself catches the eye of more
traders. Although many view stocks in this situation as overbought, they can often make
another leg higher—their trends go much further than most expect. My trend-acceleration
strategies seek to capitalize on this phenomenon by looking to enter an accelerating mar-
ket at the first signs of a correction.
61
CHAPTER 6
ACCELERATING
MOMENTUM STRATEGY
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Entry
Many view stocks that accelerate upward as being overvalued. However,

often these stocks have a second leg higher after only a very brief correction.
This is due to the fact that momentum often begets more momentum. If the
move was caused by some new information flowing into the market, the
continuation occurs because it takes awhile for the market to “digest” the
news. Further, during this period, new catalysts can often enter the market.
Therefore, “overvalued” becomes even more overvalued during these “blow
off” type moves.
This is not to say that the trend will last forever. Eventually it will ex-
haust itself. Therefore, proper money management—trailing stops and
taking profits—is a must.
63
64 Chapter 6
Let’s look at the rules.

1. The stock should be in a longer-term gradual uptrend. Ideally, this
trend should be at least two to three months.
2. The stock should accelerate out of its gradual uptrend.

Accelerating Momentum Strategy 65
3. Look to enter on the next pullback or Trend Knockout as the trend

resumes.
Entry
Let’s look at a few examples.

66 Chapter 6
1. The Chicago Mercantile Exchange (CME) is in a longer-term uptrend.
2. The uptrend accelerates.
5. The stock climbs over 3 points over the next few days and nearly 8
points over the next 19 days.
1. The Nasdaq Biotech Ishares (IBB) are in a longer-term gradual

uptrend.
2. The stock begins to accelerate upwards.
4. Go long as the trend resumes out of a pullback.
5. The stock rises more than 5 points over the next few days and over
35% over the next few weeks (not shown).
68 Chapter 6
1. Diagnostic Products (DP) is in a gradual downtrend.
2. The downtrend accelerates.
3. On 07/01/02, the stock forms a TKO.
5. The stock drops over 7 points over the next few weeks.

GENERAL: The pattern works on both sides of the market. However,
on the short side, stocks often drop too fast. Therefore, in general, you’re
better off using a transitional pattern (described in detail in the next sec-
tion) to capture the accelerated move before it occurs.
MARKET ACTION: Ideally, the indices should be rallying out of a pull-
back (i.e., forming a second leg, too).
SECTOR ACTION: Sector action is also important with this strategy.
However, occasionally a stock can emerge as a new industry leader long
before the sector catches up.
70 Chapter 6
Q&A
Q. Don’t you run the risk of buying (or selling short) right after the
market has exhausted itself?
A. There is always a danger of that. However, in many cases, stocks

that are accelerating in their trends, will resume their trends. Money
management is crucial with this pattern though (and any other pat-
tern for that matter).
Q. Can you elaborate on why you prefer this pattern on the long side?
A. Yes. Stocks tend to fall very fast as everyone tends to panic on bad
news—sell first and then ask questions later. So, you often don’t see
a correction until the move is over. In other words, the selling ex-
hausts itself during the first accelerated leg down. On the long side,
there isn’t as much panic. The stock rallies and then traders/inves-
tors reevaluate it. During this period you can often get a brief correc-
tion and then a second leg.
Q. So how do you capture accelerated moves on the downside?

A. Occasionally, a market will tip its hand before a big sell-off. This is
where my transitional patterns come into play.
CHAPTER 7
EXPLOSION GAP PIVOTS

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Buy
Gap
Stop
There’s a common Wall Street myth that all gaps are quickly filled. This
simply isn’t true. Gaps in the direction of the trend are often a sign of an ac-
celeration of that trend. Stocks can continue in the direction of the gap for
weeks, months, and even years. This is especially true for gaps that occur at
new highs (lows). These gaps can indicate extreme strength (weakness), and
in many cases, are never filled.
However, I found that markets often correct soon after these gaps occur
since players are quick to take profits as the stock becomes “obvious” to
everyone. Therefore, I knew that I could not buy or short a market sim-
ply because it was making a gap at a new high or low. I had to find some
sort of entry. I discovered that if the stock survives the first “test” into
the gap area (i.e., does not fill the gap), there’s a good chance that it will
71
72 Chapter 7
resume its trend in the direction of the gap—often for extended periods
of time. My Explosion Gap Pivots pattern seeks to go long after this test.
I define a successful “test” as the stock pulling back into the area of the
gap and then showing some signs of reversing. For a long setup, this
means the stock must make a low into the area of the gap, and then
make a higher low. For a short setup, this means that the stock must make
a high into the area of the gap and then make a lower high. This forms
what is commonly called a “pivot point” into the area of the gap. These
are illustrated in Figures 1 and 2 below.
or
Figure 1: Pivot Low. A pivot low is simply a low (or in some cases two or more
equal lows) “surrounded” (the day before and the day after) by two higher lows.
or
Figure 2: Pivot High. A pivot high is simply a high (or in some cases two or
more equal highs) surrounded by lower highs.
Explosion Gap Pivots 73
Let’s break it down before looking at some examples. Here are the rules
for buys. Short sales are reversed.
1. The stock should gap to at least a 20-day new high.
New
High
Gap
2. The stock should “test” the gap by making a low into the area of the
gap. Said another way, the low of the test bar should be lower than
that of the breakout bar. However, it should not fill the gap.
New
High
Gap
Test
74 Chapter 7
3. The stock should then make a higher low. This action forms a “pivot
low” (a low surrounded by two higher lows) into the area of the gap.
By waiting for this pivot to form, it will often keep you out of failed
patterns (i.e., a gap that gets filled).
New Pivot
High Low
Higher
Gap Low
Test
4. Go long on the first subsequent day the stock takes out the high of the
right side of the pivot pattern.
Buy
Protective
Stop
5. If filled, place a protective stop .25 to 1.00 below the pivot low of the
test.
Before we look at some examples, let’s look at a summary of the rules:
New (4) Buy

High
(1) Gap (3) Higher

(2) Test Low
(5) Protective
Stop
Now let’s look at some examples.

76 Chapter 7
Here’s one I remember very well. Everyone was saying how overvalued
eBay was. I specifically remember some large traders bragging about the
size of their short positions and that the stock was due to crash. How-
ever, in spite of all this, the uptrend resumed.
1. On 04/23/2003 Ebay (EBAY) gaps to a new high out of a high level

consolidation.
2. The stock “tests” but does not fill the gap by making a low into the
area of the gap.
3. A (slightly) higher low. This action completes the pivot low into the
area of the gap.
4. Go long as the stock trades above the right side of the pivot and place
a protective stop .25 to 1.00 below the pivot low (2).
5. The stock climbs over 10 points over the next few weeks and over 24
points over the next few months (not shown).
1. On 05/20/2003, Home Depot (HD) gaps to a new two-month high (ac-

tually a new 52-week high).
2. The stock “tests” (but does not close) the gap by making a low into the
area of the gap.
3. The stock makes a higher high. This action completes the right side of
the pivot giving an entry of 31.13, 10 cents above the high of the bar
(31.03).
4. The stock trades above the 31.13, triggering an entry.
5. The stock gains over 11% over the next few weeks.
78 Chapter 7
Sometimes the gap is tested two or even three times before the trend re-
sumes.
1. On 02/03/03, Alliant Techsystems (ATK) gaps to a new two-month

low.
2. The stock rallies to test but not fill the gap.
3. The stock makes a lower high. This action completes the pivot point.
Go short on subsequent days when the stock trades below this low.
4. The stock tests (but does not fill) the gap again.
5. The stock makes a lower low. This action completes the pivot point.
Go short on subsequent days when the stock trades below this low.
7. The stock loses over 6 points over the next few weeks.
Here’s an example of an incomplete pattern.
1. On 03/07/02, United Rentals (URI) gaps to a new high.
2. The stock forms a pivot low, but does not test the gap. In other words,
the low of the pivot is above the low of the breakout bar.
3. The stock closes the gap. No trade.

80 Chapter 7

GENERAL: I like this pattern on both sides of the market.
MARKET: Ideally, the market should be in a confirming trend.
SECTOR: Ideally, the sector should also be in a confirming trend. How-
ever, occasionally, new industry leaders can emerge.
Q&A
Q. Most of the research you have done involves short-term patterns.
The EGP seems to be more intermediate-term. Are you switching
styles on us?
A. No matter what time frame you normally trade, it helps to study

longer-term patterns. This helps to stack the odds in your favor.
Q. So, as a short-term trader, you would look for some sort of swing
trade entry after this pattern occurs?
A. Exactly.
Q. Suppose you are an intermediate-term trader. How should you trail
a stop with this pattern?
A. If you are patient, many times the stock will form bases above bases
(for longs). After it breaks out of a base, look to tighten the stop be-
low that base. Then wait for the next base to (hopefully) form and
repeat the process.
Q: I noticed foreign stocks that trade in the U.S. gap around quite a
bit. Would these be good candidates for this strategy?
A. No. These are artificial gaps created by their prior day’s trading out-
side of the U.S.
Q. You mentioned placing your stop .25 to 1.00 below the pivot point.
Can you be more specific?
A. It depends on your trading style. If you are going for a bigger move
and are willing to risk a little more, then I would be more inclined to
use a looser stop. You could possibly compensate for the added risk
by trading fewer shares.
Q. So, you will get stopped out more with a tighter stop?
A. Yes. One thing I’ve noticed is that the stock will often “re-test” just
below the original pivot (for longs), creating one last “shake out” be-
fore taking off.
82 Chapter 7
Q. Does the size of the gap matter? Are bigger gaps better than
smaller, or vice versa?
A. I don’t like the pattern on extreme gaps because the volatility of the
stock becomes too high.
SECTION IV
TREND TRANSITION
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Shorts
Downtrend
Begins
Uptrend
First Correction
Downtrend
Resumes
Longs
Uptrend
Continues
Downtrend First
Correction
Uptrend
Begins
Trends don’t last forever. Eventually they exhaust themselves and quite often, a new
trend in the opposite direction emerges. However, established trends can often last much
longer and go much further than most anticipate. Therefore, trying to buy a market be-
cause it is “low” or sell short a market because it is “high” is a loser’s game.
83
84
The good news is that the market will leave clues that a trend is turning and will usu-
ally have a minor correction before resuming its new trend. Looking to enter after that
minor correction and only if the new trend shows signs of resuming is the goal of my
transitional patterns.
CHAPTER 8
FIRST THRUSTS
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Markets making major transitions in a trend often begin with a “bang”—

they have a sharp thrust in the new direction. And once this occurs, they of-
ten only pull back very briefly before resuming their new trend. By waiting
for this thrust and looking to enter at the first signs of a correction, you
avoid the pitfalls associated with picking tops/bottoms and you position
yourself to catch a new trend early. This is the goal of the First Thrust pat-
tern—to catch a ride on this major transition at the earliest possible point.
Here are the rules for buys. Short sales are reversed.
1. The stock must make a major new low.
2. The stock must then rally sharply.
3. The stock must make a lower high and a lower low. In other words,
the first sign of a correction—a one-bar pullback.
4. Go long above the high of (3).
85
86 Chapter 8
Before we look at some examples, let’s break it down:
(4)
(3)
(2)
(1)
1. The market makes a major low.
2. The market has a sharp thrust higher.
3. A lower low and a lower high (i.e., a one-bar pullback).
4. Go long above (3) as the trend resumes.

First Thrusts 87
1. On 10/11/2002, Avocet (AVCT) hits its lowest level in the history of

the stock.
2. The stock rallies sharply, nearly doubling in value in just over two
weeks.
3. The stock makes a lower low and a lower high—a one-bar pullback.
4. Go long when the stock trades above the high of (3).
5. The stock gains another 25% over the next three days.
88 Chapter 8
1. On 10/10/2002, Expedia (EXPE) makes a new 52-week low.
2. The stock rallies over 35% from its lows over the next few days.
3. A lower low and a lower high (i.e., a one-day pullback).
4. Go long as the trend resumes, above the high of (3).
5. The stock gains over 50% over the next few weeks.
First Thrusts 89
The sharp sell-off in early 2003 in many financial and insurance-related

stocks began with a First Thrust.
1. On 01/14/03 National Financial Services (NFS) makes a six-month

high.
2. The stock has a sharp sell-off.
3. The stock makes a higher low and a higher high (a one-day pullback).
4. The stock pulls back for two more days.
5. Go short below the low of the pullback as the trend resumes (26.90).
6. The stock loses over 19% of its value over the next several weeks.
90 Chapter 8
In the summer of 2003, the downtrend in many utility stocks began with
a First Thrust.
1. On 06/03/03, First Energy (FE) makes a new multi-year high.
2. The stock has a sharp sell-off.
3. The stock makes two consecutive higher highs and higher lows (i.e., a
two-day pullback).
4. Go short below the pullback of (3).
5. The stock loses over 12% of its value over the next few weeks.
First Thrusts 91

GENERAL: I like the pattern equally well on both long and short sides
of the market.
MARKET: Ideally, it should also be making a sharp transition in trend.
SECTOR: Ideally, it too should be making a sharp transition in trend.
However, occasionally, early leaders can emerge with this pattern.
92 Chapter 8
Q&A
Q. How do you quantify Rule #2—a sharp rally (or sell-off)?
A. It should be obvious. I take it on a case-by-case basis. For instance,
what might be a large move in one stock based on the stock’s volatil-
ity might not be a significant move in another stock. You also have
to take into consideration the price of the stock. Obviously, a point
move on a percentage basis will be much less in a higher-priced stock.
Q. For instance?
A. Look at the move in the First Energy example. The sell-off was only
3 ½-points or so. However, this move is significant for a utility stock
(utility stocks in general are lower in volatility) priced in the 30s.
Q. Why just a one-bar pullback? Why not several bars or a pattern

such as a TKO?
A. Stocks making sharp transitions often don’t pause for long before re-
suming their transition. Therefore, you have to look to enter at your
first signs of a correction. If you wait for a deeper correction in price
or in time, you stand a good chance of missing the move.
CHAPTER 9
BOW TIES
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
My style of swing trading is momentum based. Therefore, in order for me

to get excited about a setup, the stock must first trend strongly in the in-
tended direction of the trade. Requiring such strong momentum has helped
to keep me on the right side of the market. However, I found that it often
kept me out of stocks that were in the early phases of developing new
trends. These stocks would make gradual changes (i.e., a distribution phase)
and then would accelerate as the new trend emerged. I knew I had to come
up with a pattern for these more gradual transitions or be willing to let
them go.
Through the use of multiple moving averages, I discovered that they
would often come together and spread out in the opposite direction as
the market was making a major transition. That is, they would go from
proper downtrend order—the faster moving averages (shorter periods)
below the slower moving averages (longer periods)—to proper uptrend
order—the faster moving averages above the slower moving averages.
93
94 Chapter 9
When this happens over a short period of time, it gives the appearance
of a “Bow Tie” (this will be obvious after a few examples).
After the Bow Tie forms, it suggests that the market has made a major
trend shift. However, it’s still prone to correct. Therefore, you seek to en-
ter after a minor correction.
For this pattern I use a 10-day simple moving average, a 20-day expo-
nential moving average, and a 30-day exponential moving average. I like
the 10-day moving average because it gives me a “true” average price of
the stock for the past two weeks (10 trading days). For longer-term mov-
ing averages, I prefer exponential moving averages since they “front
weight” the data. Therefore, although they take into consideration the
longer-term trend, they are faster to catch up with price, since more cre-
dence is given to more current data.
Here are the rules for buys (short sales are reversed):
Using a 10-period simple, 20-period exponential, and a 30-period expo-
nential moving average:
1. The moving averages should converge and spread out again, shifting
from proper downtrend order (10-SMA < 20-EMA < 30-EMA) to proper
uptrend order (10-SMA > 20-EMA > 30-EMA). Ideally, this should hap-
pen over a period of three to four days. This creates the appearance of a
Bow Tie in the averages. This is illustrated in the figures below.
30ema
10sma
20ema 20ema
10sma 30ema
10sma
20ema
30ema
30ema
20ema
10sma
Bow Ties 95
2. The market must make a lower low and a lower high. In other words,
at least a one-bar pullback.
3. Once qualifications for (2) have been met, go long above the high of 2.
Continue to work an order above today’s high, good for the next trad-
ing day until filled. If the market trades below its 20- or 30-period ex-
ponential moving average, then the potential trade should be
reevaluated. If filled, use the guidelines listed under Primer to set your
initial protective stop.
Let’s look at some examples.

96 Chapter 9
When the biotech sector bottomed in March of 2003, Gilead Sciences was
one of the first stocks to emerge as new industry leader.
1. The moving averages on Gilead Sciences (GILD) converge and then

spread out: going from downtrend “proper” order (10SMA < 20EMA
< 30EMA) to “uptrend” proper order (10SMA > 20EMA > 30EMA) in
a few days, giving the appearance of a “Bow Tie.”
2. A lower low and a lower high. Go long tomorrow above today’s high.
3. The stock trades above yesterday’s high and we go long.
4. The stock gains over 7 points over the next few weeks and doubles
over the next few months (not shown).
Bow Ties 97
Retail was another sector that bottomed in the first quarter of 2003.
1. The moving averages on 99 Cents Only Stores (NDN) converge and

then spread out again, going from downtrend proper order to uptrend
proper order in a few days.
2. The stock pulls back for one day. Go long tomorrow above today’s
high.
4. After a slow start, the stock gains over 15% over the next few weeks
and over 30% over the next few months (not shown).
98 Chapter 9
1. The moving averages on Progressive Corp. (PGR) go from uptrend

proper order to downtrend proper order as the stock begins to sell off
out of a consolidation.
2. The stock makes a higher low and a higher high—a one-bar pullback.
Go short tomorrow below today’s low.
4. The stock drops over 3 points over the next several days.
Bow Ties 99
Here’s an example of not getting filled.
1. The moving averages on Ebay (EBAY) converge and then spread out
again, going from uptrend proper order to downtrend proper order
over a few days.
2. The stock makes a higher high and higher low—a one-bar pullback.
3. The stock continues to pull back. Go short tomorrow below today’s

low.
4. The stock rallies sharply above all of its moving averages and the po-
tential trade is now ignored.
100 Chapter 9

GENERAL: I like the pattern on both sides of the market.
MARKET: Ideally, the market should be making a transition in trend.
SECTOR: Ideally, the sector should be also making a transition in trend.
STOCK: I prefer more of a “rollover” (or roll up) type pattern after a
strong trend. This will make the Bow Tie very well defined.
Bow Ties 101
Q&A
Q. Why use multiple moving averages?
A. When several moving averages converge at the middle of the Bow
Tie, it suggests that the longer term and shorter cycles are coming to-
gether. Once they spread out again, it suggests a new trend is being
formed.
Q. So why not just buy the market as soon as it comes out of the con-
vergence?
A. In spite of what many books on technical analysis will tell you, mov-
ing-average crossovers do not work. I suppose in their defense, many
of these books were written before everyone had a computer sitting
on their desk. Before computers, crossovers worked much better.
Q. Do you think they used to work better because it wasn’t so obvi-

ous?
A. Yes. Technology has helped to eradicate this edge.

Q. Back to Bow Ties, does the counter-trend movement (Rule #2, a
lower low and lower high for buys and a higher low and higher
high for short sales) help to eliminate false starts?
A. Exactly. You often avoid false moves by waiting for a countertrend

move and only entering if the trend re-asserts itself. Conceptually,
it’s no different than pullbacks. Essentially, you are looking for
thrust/trend, correction and then resumption of trend.
Q. Why reevaluate your entry order if the market trades back to the
20-day or 30-day EMA?
A. If a market comes all the way back to the 20-day or 30-day EMA, it’s
possible that what appeared to be a new trend is a false move. This
doesn’t mean that the market isn’t worthy of trading. As you know,
in trading there are no “absolutes.” However, in any pattern, you
should have a rule for when you should step back and re-evaluate
your analysis. Maybe some other pattern is forming? Maybe not.
102 Chapter 9
Q. But it’s OK for the market to trade back to the 10-day simple mov-
ing average?
A. I think it’s normal, and likely healthy, for a market to pull back to
the 10-day SMA.
Q. You refer to the Bow Tie from downtrend to uptrend for longs and
uptrend to downtrend for shorts. Does the pattern work on mar-
kets coming out of long consolidations or bases?
A. Yes. I discovered the pattern while studying markets that had major
changes in trend—from up to down or from down to up. The beauty
is that you avoid top and bottom picking by waiting for a confirma-
tion of this rollover. A “Half Bow Tie,” if you will, emerges when the
price is coming out of bases/consolidations. These seem to work, but
I prefer the “rollover” pattern, as the chance exists that there are
players still trapped on the wrong side of the market.
Q. The “trapped” players will add fuel to the rally or sell-off for short
setups?
A. Yes.
CHAPTER 10
REVERSAL GAP
STRATEGY
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Entry
When a stock makes a new high, everyone who owns the stock prior to
this new high is profitable. And, those who bought at the new high are at
breakeven. Therefore, everyone (except for the shorts) is essentially happy.
However, should the stock gap down after just making a new high, the psy-
chology of those holding the stock quickly changes. The “Johnny-come-
latelies”—those who bought at or near the top—are now dealing with a loss.
Further, existing longs from lower prices now have to face the fact that their
stock might not go up forever. And worse, they now have to decide if they
should take profits before they disappear.
The Reversal Gap Strategy is a simple, but quite often powerful pattern
that can be used to take advantage of the above traders’ predicament.
103
104 Chapter 10
Here are the rules for shorts, buys are reversed.

1. The stock must make at least a two-month high. Longer-term highs are
even better.
(1)
2. The stock should then gap lower within the next day or so. This action
suggests that the buyers have exhausted themselves. Ideally, this
should occur the first day after hitting a new high. However, a varia-
tion of the pattern, where the stock gaps lower within 10 days of hit-
ting a new high, can often work well.
(1)
(2)
Reversal Gap Strategy 105
3. The stock must then make a higher high and a higher low, in other
words, a one-day pullback. Ignore the setup if the gap is filled.
(1)
(2)
(3)
4. Go short below the low of (3).
5. Place a protective stop above the high of (3), taking into consideration
the initial stop placement guidelines outlined in Primer.
(1)
(2)
(3)
(4)
106 Chapter 10
1. On 07/24/03, Ebay (EBAY) makes a new multi-year high.
2. The following day, the stock gaps down.
3. The stock makes a higher high and a higher low—a one-day pullback.
Go short tomorrow below today’s low. Note: In a situation like this,
where the stock reverses after challenging the gap, aggressive
daytraders may look to enter early (e.g., as the stock stalls intraday—in
this case, soon after the opening of this bar).
5. The stock loses nearly 10 points over the next nine days.
1. On 01/06/2003, Verizon Communications (VZ) makes a new

two-month high (10-months total).
2. Two days later, the stock gaps lower and sells off.
3. The stock makes a higher high and higher low (i.e. a one-bar pullback).
4. Another higher high and higher low. Go short tomorrow below to-
day’s low.
6. The stock loses over 13% of its value over the next seven days.
108 Chapter 10
1. On 10/01/02, American Healthways (AMHC) hits its lowest level in

over one year.
2. The stock gaps higher.
3. The stock makes a lower low and a lower high. Go long tomorrow
above today’s high.
5. The stock gains over 17% over the next five days.

GENERAL: The pattern works on both sides of the market. However, I
prefer it on the short side since markets often drop much faster than they
rise.
MARKET: Ideally, it should also be making a sharp transition in trend.
SECTOR: Ideally, it too should also be making a sharp transition in
trend. However, occasionally, early leaders will emerge with this pattern.
110 Chapter 10
Q&A
Q. Does the size of the gap matter?
A. It should be large enough to have a psychological impact on those
long in the market. Therefore, I would suggest a minimum of 1 to 2
points—more or less for higher/lower priced stocks, respectively.
Keep in mind that you might want to avoid large gaps that occur on
some sort of catastrophic (for the company) news event. This action
increases the volatility of the stock so much that you can easily get
caught in a “whiplash” over the next few days.
Q. I noticed foreign stocks that trade in the U.S. gap around quite a
bit. Would these be good candidates for this strategy?
A. No. These are artificial gaps created by their prior day’s trading out-
side of the U.S.
CHAPTER 11
THE GATEKEEPER
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Markets forming tops after a strong trend often have a sharp sell-off and
then make one last attempt to resume their longer-term uptrend. This re-
sumption is caused by bargain hunters buying at what they perceive to be
low levels and by shorts taking profits (buying to cover). And, it can be ac-
celerated by shorts being squeezed out. However, this action often exhausts
itself before the market makes it back to its old highs. When this occurs, a
true top is then formed. The Gatekeeper is a reversal pattern that seeks to
identify when a market has completed this one “last gasp.” The great thing
about this pattern is that the risks are fairly well defined (at worst, the old
highs) but the rewards can be great when the occasional big-picture top (or
bottom) is caught.
When you study as many charts as I do daily, every so often you observe
a pattern that shakes your belief system. As a trend trader, I was per-
plexed when I discovered a reversal pattern that often occurred within
bullish patterns that I follow (e.g., pullbacks). The “Gatekeeper” seemed
111
112 Chapter 11
to be such a strong pattern, that it made me question my trend trading

mantra, at least temporarily.
In the spring of 2003, I began exchanging trading ideas with Derrik
Hobbs, hedge fund manager and author of Fibonacci For The Active Trader.
He began showing me some of his patterns and would occasionally help
me analyze markets for the money management side of my business.
This inspired me to learn more about Fibonacci and Derrik’s methods.
Because I found Fibonacci* patterns to be somewhat esoteric, I looked for
ways to quantify them. In flipping through my charts, I noticed that mar-
kets that have sharp sell-offs from new highs, often would resume their
trend only to fail at the .618 retracement measured back to their prior
new high (I will explain this in detail below). I further observed that the
.786 retracement number was even better. In discussing this with Derrik,
he explained to me that .786 is the “gatekeeper” of Fibonacci num-
bers—markets often stop (and reverse) right at that number.
I especially like the pattern for helping me to determine when an ex-
tended market could be topping out. Therefore, let’s look at the rules for
short sales (buys are reversed).
1. The stock (or other market) must make at least new two-month calen-
dar high.
2. The stock should then have a sharp sell-off.
3. The stock should have a sharp retrace to at least 61.8% and ideally 78.6%
of its sell-off. In general, the sell-off from highs and retracement back to
the Fibonacci levels should complete within 10 to 11 days. This gives it
a “V” appearance.
4. Look to short the stock at the low of the bar of Rule #3. Aggressive
daytraders (or those looking to “front run” a potential swing trade)
may look to enter intraday as it reverses at the 78.6% level (and place a
tight stop just above that level).
5. If filled, place a protective stop above the high of Rule #4 (above the
78.6% level). Those willing to take more risk with the goal of catching a
longer-term move might look to place a stop at the old high (Rule #1),
which would also be a 100% retracement.
*See Glossary for a definition of Fibonacci.

The Gatekeeper 113
Let’s break it down:

1. The stock must make at least a new two-month high (a).
(a)
2. The stock should then have a sharp sell-off (b).
(a)
(b)
114 Chapter 11
3. The stock should then retrace 61.8% to 78.6% (c)—(a 78.6% retracement
is ideal) of the move as measured from (a) to (b). This will be more ob-
vious after we do the math on a few examples.* Ideally, the entire pat-
tern should complete [from (a) to (c)] within 10 to 11 trading days,
giving it a “V” appearance.
10-11 Days
(a)
78.6% (c)
61.8%
(b)
4. After the 61.8% retracement level or, ideally, the 78.6% retracement
level (c) is hit, go short (d) below the bar that hit the retracement level.
Daytraders or swing traders looking to “front run” a setup may look to
enter as the stock reverses at the 78.6% level (61.8% reversals are a
more common but riskier trade).
(a)
(c)
(d)
(b)
*Note: Don’t get too caught up in the math since virtually all charting
packages have Fibonacci retracement indicators built in.
The Gatekeeper 115
5. Place a protective stop .25 to 1.00 above the 78.6% retracement level (c).
Longer-term traders looking to catch a major top may look to trade
fewer shares place a stop just above the 100% retracement—the same
as the prior high (a).
(a) 100%
(c)
78.6%
(d)
(b)
116 Chapter 11
Here’s an example using the PHLX Gold & Silver Index (XAU):
1. On 06/19/03, the XAU makes a new multi-month high (82.69).
2. The index has a sharp sell-off to 75.88.
3. The index rallies back to 81.48, slightly above its 78.6% retracement of
81.23 [(82.69-75.88)*.786+75.88]. Notice that the pattern (the “V”) com-
pletes in 10 days.
4. The index trades below the bar of (3), triggering a short sale. Note: Be-
cause the index cannot be traded directly, one could look for opportu-
nities within the sector or trade options on this index.
5. The index loses over 8% of its value over the next nine days.
The Gatekeeper 117
Here’s an example using the Nasdaq Biotech Ishares.
1. Nasdaq Biotech Ishares (IBB) make a new two-month high (77.51).
2. The stock reverses from its highs and has a sharp sell-off to 69.66.
3. It then retraces to 75.20—just below 78.6% of the sell-off from high to

low [.786 *(77.51-69.66)+69.66 = 75.83]. The entire pattern completes in
eight days. Note: Notice that even if you go short two bars prior on the
61.8% retracement, you would still be short if you used a stop above
the 78.6% level. See the example of the “Two-Step Gatekeeper” on
page 147 of Chapter 12, Money Management, Variations, and Real
World Scenarios.
4. The stock trades below the low of (3) and we go short. Place a protec-
tive stop above the 78.6% retracement level (3).
5. The stock drops over 8 points over the next four days.
118 Chapter 11
Biogen (BGEN), a biotech, sets up at the same time as the prior biotech
Ishare example.
1. Biogen makes a new two-month high of 50.52.
2. It has a sharp sell-off to 43.15.
3. It then retraces and stops and reverses at 48.94—within pennies of its

78.6% retracement [.786*(50.52-43.15)+43.15 = 48.99].
4. The stock trades below the low of bar (3) and we go short. Note:
Notice how the stock made an intraday reversal on the prior bar (3).
Daytraders or swing traders looking to “front run” a setup might look
as the stock reverses at the 78.6% retracement and place a tight stop
just above that level.
5. The stock drops nearly 9 points over the next four days.
The Gatekeeper 119
When indices rally sharply off of lows, such as the October, 2002 bottom,
buy side Gatekeepers are a good place to look for opportunities in indi-
vidual stocks.
1. On 09/30/03, Centurytel (CTL) makes a new multi-month low.
2. The stock has a sharp rally off of lows.
3. The stock retraces 61.8% of (2) to just above 76.8% of (2). Notice that
the pattern completes in nine days.
4. Go long above the high of (3) as the trend resumes.
The stock gains over 20% over the next two weeks.
120 Chapter 11

GENERAL: The pattern works on both sides of the market.
MARKET: Ideally, it too should be forming a Gatekeeper or some other
transitional pattern. However, contra-market trades can often emerge.
SECTOR: The best trades occur when the sector itself is forming a Gate-
keeper or some other transitional pattern. However, stocks can emerge as
new leaders/laggards making a contra-sector trade worthwhile.
The Gatekeeper 121
Q&A
For this Q&A, I brought in Derrik Hobbs, the co-creator of the pattern.
Q. How do you quantify a “sharp sell-off” for Rule #1?

A. Landry: First, it should be obvious. I supposed if I had to quantify it,
I would say that the distance from the retracement back to the old
lows should be at least 2 to 3 points. This is where one would expect
the stock to possibly find support and would also be a good place to
take partial profits—in other words, enough to make a swing trade
worthwhile. This would put the sell-off, from (a) to (b), in the 3 to 4
point range. Obviously, these numbers would be larger in higher
priced/more volatile stocks and smaller in lower priced/less volatile
stocks.
(a)
(c)
2-3 Points
(b)
A: Hobbs: I agree. It should be enough to make a swing trade worth-

while, just in case you don’t catch a bigger-picture top.
Q. You used short sales for your rules. Do you prefer the pattern for
shorts vs. longs?
A. Landry: I think the pattern works on both sides of the market. I did
discover it as a short pattern while analyzing markets that I was
long. So, I’m partial to the short side of this pattern, especially when
I see a sector stalling out that I’m already long. Also, it depends on
the market conditions. If the market is rallying off of major lows
then you would look for long side Gatekeepers. If the market is stall-
122 Chapter 11
ing out at new highs, then you would be looking for short side Gate-
keepers.
A. Hobbs: I use it on both sides of the market.

Q. Why do you think it works?
A. Landry: Gatekeepers set up as failed pullbacks and bigger-picture
patterns such as Head and Shoulders tops.
Q. If the .786 is the “gatekeeper,” what happens when a market “gets

through the gate”—breaks through that level?
A. Landry: Great question. I actually noticed that it will often break to

new highs and sometimes stall out at the 1.27 retracement of the ini-
tial thrust down or some sort of other fib extension number. I’m not
a huge fan of reversal trading. However, at the time this manual is
being published, I am researching this phenomenon as potential
profit targets for trend trades.
A. Hobbs: Yes, I’ve had a similar experience. I have actually successfully

tested a longer-term version of “broken” gatekeepers from the .786
to the 1.27 level. You enter above the .786 and look to take profits in
the 1.27 range or some fib extension.
Q. Why 10 to 11days (Rule #3)?

A. Landry: I find some of the Fibonacci patterns to be abstract. I wanted
to define it to take the guesswork out of it. And, in studying thou-
sands of charts, I’ve found that patterns that complete around the 10
to 11 day window work best.
A. Hobbs: Because my whole methodology revolves around Fibonacci

numbers, I’m able to recognize what Dave might view as being more
abstract. So, I’m a little more lenient. However, I do like the way that
he works with shorter-term time frames to better quantify patterns.
Q. Since this is a reversal pattern, how do you factor in what’s hap-

pening in the sector?
A. Landry: Generally, you want to see the sector stalling out too. In an
ideal situation, the sector itself will be setting up as a Gatekeeper.
The Gatekeeper 123
A. Hobbs: I agree. The more pieces that fit together—market, sector,

stock—the better.
Q. What about other time frames (e.g., intraday, weekly, etc.)?

A. Landry: I tend to focus mostly on the daily charts but have observed
that these occur in all time frames.
A. Hobbs: I look for them in various time frames from 60-minute charts
all the way up to weekly and even monthly charts.
A. Landry: Derrik brings up a good point regarding longer-term charts.

I find the pattern can take out some of the “guesswork” when ana-
lyzing weekly and monthly charts.
SECTION V
PATTERN
APPLICATION
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
125
CHAPTER 12
MONEY MANAGEMENT,
VARIATIONS, & REAL-
WORLD SCENARIOS
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
The best way to become successful with patterns is to study success. This
next section is filled with variations of some of my favorite patterns, money
management examples, and real-world scenarios. Study these charts care-
fully. I then strongly urge you to find and study the patterns on your own.
127
128 Chapter 12
Here’s a variation of the Trend Knockout that I call a Double Top Knock-
out.
1. Pulte Homes (PHM) is in a strong uptrend.
2. The stock makes a new high.
3. Five days later the stock makes another new high.
4. The stock sells off and takes out the prior two lows (six total). This ac-
tion forms a short-term double top.
5. Go long when the stock trades above (4) as the trend resumes.
6. The stock gains over 10 points over the next five days.
Money Management, Variations, & Real-World Scenarios 129
Here’s a scenario where the market, sector, and stock are all in persistent
uptrends and are all set up. This is the best time to trade.
1. On 05/19/2003, Beazer Homes (BZH), a homebuilder, is in a lon-

ger-term uptrend and more recently, a very persistent uptrend.
2. The stock trades below the two prior lows, creating a Trend Knockout.
3. The entry becomes 76.48, 10 cents above the high of the TKO bar.
130 Chapter 12
Here is the residential construction sub-sector (homebuilders).
1. The homebuilders are in a persistent uptrend.
2. The sector sells off, taking out the prior two lows. This action sets up a
TKO. It also is “in the spirit of” a Double Top Knockout. See page 128
in this section.
Let’s look at the overall market. Here is the S&P Cash.
1. Notice the S&P 500 cash is in a persistent uptrend.
2. This is also part of a longer-term uptrend.
3. The S&P sells off creating a TKO.

132 Chapter 12
The trend resumes in the homebuilders (1).

The trend resumes in the S&P 500 (1).

134 Chapter 12
And the trend resumes in Beazer.
1. The stock trades above 76.48, triggering an entry.
2. The trend resumes.
As you can see, by combining a market and sector action with a setup, in
this case persistent trends with TKOs, you stack the odds in your favor.
The best times to trade are when you get multiple signals setting up in
addition to the market and sector being set up. Let’s look at M.D. Hold-
ings (MDC), another homebuilder that set up the same time as the prior
Beazer example.
1. M.D. Holdings (MDC) gaps higher, accelerating in its strong uptrend.
2. It makes a minor double top and has a “knockout” bar. This “tests” the
gap (1) and creates a Double Top Knockout setup. Also of note (from
the prior example) is that the sector itself has formed a Double Top
Knockout.
3. The stock trades above (2) creating an Explosion Gap pivot and also a
pullback.
5. The stock gains over 7 points over the next 10 days.

136 Chapter 12
In order to make my scanning process easier, I overlay the sub-sector on

each chart.
1. Lockheed Martin (LMT) is in a persistent downtrend.
2. The stock pulls back. Notice that the sub-sector, Aerospace/Defense (a)
is also in a strong downtrend.
3. The trend of both the stock and the sub-sector resumes.

The best time to look for transitional patterns is when the market itself is
making a major transition.
1. On 10/08/02, the Nasdaq Composite hits its lowest level in over six
years.
2. The index has a sharp rally from lows. Note: Other indices are also ral-
lying off of major lows at this time.
3. The index makes a lower low and a lower high (i.e., a one-bar pull-
back).
138 Chapter 12
Here is a semiconductor stock that set up at the same time that the
Nasdaq (and other indices) was rallying off of major lows.
1. Varian Semiconductor (VSEA) hits a multi-year low.
2. The stock rallies sharply off its lows.
3. On 10/16/02, the stock makes a lower low and a lower high (i.e., a
one-bar pullback), completing a First Thrust setup.
The Nasdaq continues higher out of the First Thrust (as do other indices).
140 Chapter 12
And Varian Semiconductor continues higher out of a First Thrust.
As you can see, it pays to look for transitional patterns when the indices
are making major transitions.
Here is an example of a daytrade entry on a Witch Hat that was in the

process of completing.
1. Nabors Industries (NBR) is in the process of setting up as a Witch

Hat/Pullback. The stock gaps open above the prior pivot point (a), the
brim of the hat (forming).
142 Chapter 12
1. The stock begins to sell off and we go short. This is where discretion
comes into play. You can look to short the stock on a breakdown of the
opening range (say, the first 5 to 10 minutes) or when the prior pivot
point high is taken out.
2. A protective stop is placed just above the prior pivot point.
3. The stock drops 1.44 points from its opening reversal.

1. The stock drops over 4 additional points over the next six days.
144 Chapter 12
The gap as a resistance zone is the basis for the Explosion Gap Pivot. No-
tice that the gap was tested several times before the move in the direction
of the gap finally ensues.
1. On 12/01/01, Protein Design Labs triggers an entry on an Explosion

Gap Pivot.
2. The stock tests the gap two more times (three total).
3. The downtrend eventually resumes.

Sometimes a stock is in such a strong move, it will form back-to-back Ex-

plosion Gap Pivots.
1. On 05/20/03, Protein Design Labs (PDLI) gaps to a new high. It then

“tests” the gap by forming a pivot point into the area of the gap.
2. Go long as the stock trades above the right side of the pivot point.
3. The stock gaps to another new high and then tests the gap, forming
another pivot point.
4. The stock trades above the right side of the pivot point, forming an-
other entry.
5. The stock gains nearly 30% over the next two days. Note: When you
are fortunate enough to catch such a massive move, make sure you
take partial profits (i.e., scale out).
146 Chapter 12
My favorite variation of the Gatekeeper is a “First Gap Gatekeeper”—

those that have a gap in their initial thrust down.
1. After making new highs, Yahoo! (YHOO) has a sharp sell-off. Notice
that this sell-off began with a gap down (a).
2. The stock retraces a little more than 78.6% of the prior sell-off.
3. Go short as the low of (2) is taken out.
4. The stock drops over 10% of its value over the next seven days.
Here is another variation of the Gatekeeper. Notice the stock has a false
move out of its 61.8% retracement but then tops out at the 78.6% level.
Derrik Hobbs calls these “two-step” patterns—what some refer to as an
“a-b-c” correction.
1. On 06/06/2003, Marvel Enterprises (MVL) makes a new two-month

high.
2. The stock then has a sharp sell-off.
3. The stock rallies sharply and has an initial false move off its 61.8%
retracement (a) level but, after an initial false move down (b), eventu-
ally finds its high at the 78.6% level (c).
4. The stock trades below the low of (3) and we go short. Note: Notice
how the stock stalled out intraday and reversed right at its 78.6% level.
Daytraders or swing traders looking to “front run” a setup might look
to enter intraday with a tight stop just above the 78.6% level.
5. The stock loses over 20% of its value over the next three days.
148 Chapter 12
Sometimes Gatekeepers can set up within bigger-picture classical pat-

terns such as Head and Shoulders tops.
1. Devon Energy has a sharp sell-off from new highs.
2. The stock retraces nearly 78.6% of the sell-off. Notice that this com-
pletes a Head and Shoulders top pattern.
3. Go short as the low of (2) is taken out.
4. The stock loses over 10% of its value over the next 13 days.
Here’s an example of a bullish Witch Hat pattern that failed and became
a bearish Gatekeeper. This is not to imply that you should be able to play
“both ends against the middle” (i.e., stop and reverse positions when
conditions change). Rather, I’m showing this as an example of why you
need to be on your toes for changing market conditions.
1. On 06/20/03, Ecana (ECA) sets up as a Witch Hat.
2. The Witch Hat triggers.
3. The stock initially rallies, but stalls out right around the 78.6%
retracement, forming a bearish Gatekeeper.
150 Chapter 12
Sometimes in a strong trend, you get several patterns in a row setting up.
Notice that in spring of 2002 the S&P 500 made three “micro” Witch Hats
during its downtrend.
As mentioned in Chapter 3, the “knockout” move of the TKO should be

meaningful. The more players that are knocked out, the better.
1. Amerigroup (AGP) is in a longer-term uptrend (not shown) and in

more recent times, a persistent uptrend.
2. A TKO. Notice that the stock trades down fairly hard and below eight
prior lows. This action has likely knocked out many players and quite
possibly, has attracted some eager shorts.
3. The high of the TKO bar is taken out and the trend resumes.
152 Chapter 12
By waiting for an entry, you’ll often avoid a losing trade. On 09/08/03,

retail and most stocks within the sector were set up as pullbacks from
highs. When both the sector and many stocks within the sector are set
up, it’s usually a good time to trade. Here we have the Retails Holdrs
(RTH).
However, on the following day, 09/09/03, analysts came in and down-

graded the sector. The sector (RTH), and most stocks within the sector,
sold off hard. Fortunately, the sector, and most stocks within it, did not
trigger an entry (a).
154 Chapter 12
As mentioned in Chapter 1, Primer, in general, entries should be around

10 cents above (below) the prior day’s high (low). This allows some wig-
gle room should the stock barely get past the prior day’s high (low)—a
possible target for market makers—before reversing.
1. After making new highs, Biovail (BVF) makes a very strong thrust
down. Notice that this thrust lower begins with a gap down—a con-
firming sign of weakness.
2. The stock sets up as a First Thrusts/Reversal Gap Strategy. Go short

tomorrow, 10 cents below the low of today (39.27). Note: When you
have a fairly narrow range bar like this, you might consider placing
your entry even further (than 10 cents) below the prior day’s low.
3. The stock barely dips below the prior day’s low but does not hit the
entry.
4. The stock rallies sharply and a potential losing trade is avoided.

As discussed in Primer, too tight of a stop can knock you out of your po-
sition before a stock takes off.
1. Career Education Corp. (CECO) is in a longer-term uptrend and in

more recent times, an accelerating and persistent uptrend.
3. The stock trades 10 cents above the prior day’s high (37.54) and we go
long.
4. A protective stop is placed two points below the entry at 35.64 (see the
table on page 15 in Chapter 1, Primer).
5. The stock initially goes against us, trading a few cents below the low of
the pullback, but does not hit the protective stop.
6. The stock gaps sharply higher on the following day.
7. The stock trades over 5 ½ points higher (from the entry).

156 Chapter 12
Note: This is not to suggest that every time you use a somewhat looser
stop the stock will eventually move in your favor. This example is in-
tended to show that by giving a stock some “wiggle room,” there exists
the potential for a stock to continue in the intended direction. You can
use a tighter stop but have to be willing, from a psychological perspec-
tive, to occasionally let a big winner go.
As discussed in the Primer section, when your profits are greater than or
equal to your initial risk, it’s important to lock in half of them and move
your stop to breakeven. Here’s an example of how, by following this sim-
ple money management technique, a potentially losing trade turned into
a small winner.
1. Ingersoll-Rand (IR) is in a longer-term uptrend and in more recent

times, an accelerating uptrend.
2. The stock pulls back, giving us an entry of 57.38.
3. Based on the price of the stock (see table on page 15 in Chapter 1,

Primer), we will risk 2.50 and place a protective stop at 54.88 if filled.
4. The stock triggers an entry and we go long.
5. The stock gaps open to 59.95, giving us an open profit of over 2.50. We
immediately take half of our profits and move our stop on our remain-
ing shares to breakeven, the same as the entry (4).
158 Chapter 12
6. The stock trades below our trailing stop and we are stopped out on
our remaining shares for essentially a scratch.
7. The stock drops below our original entry price. As you can see, this
slightly profitable trade (overall) would have resulted in a loss without
money management.
Occasionally, a swing trade can turn into a longer-term play through the
use of wider stops after profits are taken.
1. Chicago Mercantile Exchange (CME) sets up as an Accelerating Mo-

mentum Strategy.
2. The stock rallies out of the setup and partial profits are taken.
3. The stop on the remaining shares is moved to breakeven.
4. Since the stock continues to move in our favor, the trailing stop on the
remaining shares is trailed more loosely—below each base/pullback
after the trend resumes from that base/pullback. Note: On the wide
range bars higher, additional profits could be taken to help reduce ex-
posure.
5. We are eventually stopped out but not without capturing the majority
of a longer-term move.
CHAPTER 13
GETTING THE MOST

OUT OF MY FAVORITE
PATTERNS
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
START SMALL AND BUILD

If you are new to momentum-based swing trading, you should start
small and build. Persistent Pullbacks are probably the best pattern to be-
gin with for several reasons: They’re easy to recognize, they tend to fol-
low though (i.e., the persistent trend often resumes), and they are
self-regulating with market conditions—during momentum (i.e., good)
markets you’ll get more setups and during choppy (i.e., poor) markets
you’ll get fewer (or no) setups. This brings us to our next point.
CONSIDER MARKET CONDITIONS

You must take into consideration the overall market conditions. Do not
try to use all of the patterns all of the time. In an orderly trending mar-
ket, you want to focus mostly on trend-resumption type patterns. In a
runaway momentum market, you also want to look for trend acceleration
type patterns. In markets making major transitions, you want to focus
mostly on transitional patterns. Transitional patterns should also be used
161
162 Chapter 13
in choppy markets in anticipation of a breakout. However, you should be

trading less during these less-than-favorable periods.
CONSIDER SECTOR ACTION

Sector action is also important. Ideally, the sector should look like the
pattern itself. If the sector is making a transition (and ideally set up too),
then you want to be focusing on transitional patterns. If the sector is in a
longer-term uptrend, then you want to be focusing on trend-resumption
and trend-acceleration type patterns.
BE SELECTIVE
Focus on finding the best of the best setups. Do not try to make a trend
or a setup appear where there is none. This brings us to my next point.
STACK THE ODDS IN YOUR FAVOR

After years of overtrading, I have discovered that the “Holy Grail” of
trading is figuring out when not to trade. By trading less in poor market
conditions, you keep your powder dry for when conditions improve.
Therefore, only trade when conditions are favorable. This means that the
market, sector, and stock are all headed in a clear direction. When they
are not, trade less or not at all.
PRACTICE PROPER MONEY MANAGEMENT

The patterns in this manual, or any manual for that matter, are worthless
without exercising proper money management. This includes keeping
position sizes within reason, using initial protective stop, taking partial
profits, and trailing stops.
DO YOUR HOMEWORK
Success in trading, like any other professional field, requires hard work.
Make sure you are committed to studying the market, sectors, and stocks
daily to determine where they are likely headed. Remember, luck favors
the prepared.
Getting the Most Out of My Favorite Patterns 163
RESEARCH THE PATTERNS

Finally, carefully research my patterns (or anyone else’s for that matter).
Study setups historically. Find ones that worked, find ones that didn’t.
Study the market and sector conditions during those times. Then, ob-
serve (not trade!) the setups in real time. Only after you have gained con-
fidence in the patterns should you apply them in the real world.
IF YOU NEED HELP, ASK

I answer all emails. I can be reached at dave@davelandry.com.
Best of luck with your trading!
Dave Landry
GLOSSARY
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
The following terms appear in this book. Even if you are a more advanced
trader, you might want to skim this chapter to see how they are defined for
purposes of this manual.
Average Directional Movement Index (ADX)—Developed by Welles
Wilder, this formula is used to measure the strength of a market but not
its direction. The higher the reading, the stronger the trend, regardless of
whether it is up or down. It is calculated based on the Positive Direc-
tional Movement Index (+DMI) and Minus Directional Movement Index
(–DMI).
Bar Chart—Shows the open, high, low, and close of a market.
High
Open Close
Low
165
166 Glossary
Bow Tie—A trend-following strategy based on the use of a 10-period

simple moving average, 20-period exponential moving average, and a
30-period exponential moving average. This strategy relies on the usage
of these three moving averages to inform you that the trend has indeed
changed.
10sma
20ema
30ema
30ema
20ema
10sma
CANSLIM—Method of stock selection made famous by William O’Neil.

Each letter in CANSLIM corresponds to a particular criterion required by
the method.
Glossary 167
Daylight—The space between the low of the bar and the 20-period expo-
nential moving average. Many times, daylight signifies that the trend is
in place.
Moving
Average
Daylight
Downtrend—A series of lower lows and lower highs.
Lower
Highs
Lower
Lows
+DMI—See Plus Directional Movement Index.

–DMI—See Minus Directional Movement Index.
Exponential Moving Average—A moving average that gives higher
weighting to more recent prices.
Fading—Trading contrary to the trend.
Fibonacci Numbers—A sequence of numbers discovered by Leonardo
Fibonacci (circa 1200 A.D.). The next number in the series is derived by
summing the two prior numbers. The process is then repeated. For in-
stance, beginning with 1 and 1, the next number would be 2, (1 + 1 = 2),
and then 3 (1 + 2 = 3), 5 (2 +3 = 5), 8 (5 + 3 = 8) and so forth creating the
series 1,1,2,3,5,8,13,21,34,55,89….
168 Glossary
Fibonacci Ratios—derived from the Fibonacci numbers. After about

seven iterations, the next number in the series becomes 1.618 of the cur-
rent series. Conversely, a prior number becomes 38.2% (1 – .618) of the
current number. This gives the common ratios 38.2% and 61.8%. Another
common ratio is 78.6% (the square root of .618).
Fibonacci Retracements—A retracement of a price trend based on
Fibonacci ratios. The most common retracements are shown below.
38.2%
50%
61.8%
78.6%
100%
Follow-Through Day—After a big market decline and failed initial rally,

a buy setup. A day with unusual market strength (Dow or S&P up 1% or
more) and power (volume greater than the previous day), usually occur-
ring between the fourth and seventh day of the attempted rally.
Gap Down—Today’s open is less than yesterday’s low.
Yesterday’s
Low
Today’s Open
Glossary 169
Gap Up—Today’s open is greater than yesterday’s high.
Today’s Open
Yesterday’s
High
Higher High—Today’s high is greater than yesterday’s high.
Higher Low—Today’s low is greater than yesterday’s low.
Historical Volatility—A statistical measurement of how much prices

have fluctuated in the past. It can be used to measure risk and potential
reward.
Initial Protective Stop—An order placed right after a trade is entered to
help control risk.
Lap Down—Today’s open is less than yesterday’s close, but not less than
yesterday’s low.
170 Glossary
Lap Up—Today’s open is greater than yesterday’s close, but not greater
than yesterday’s high.
Limit Order—An order to buy or sell at a specified price.

Long—A position that seeks to profit if the market rises. To buy.
Lower High—Today’s high is less than yesterday’s high.
Lower Low—Today’s low is less than yesterday’s low.
Market Order—An order to be executed immediately at the asking price

for buys and at the bid price for sales.
Minus Directional Movement Index (–DMI)—A component used in the
calculation of ADX that measures the downward movement of a market.
If it is greater than the Positive Directional Movement, it suggests a
downtrend.
Moving Average—The average price of a stock over a given period. For
instance, a 10–Day moving average would be the sum of those prices di-
vided by 10.
Glossary 171
Outside Day—Today’s high is greater than yesterday’s high and today’s

low is less than yesterday’s low.
Yesterday Today
Pivot High—A high surrounded by two lower highs. Can also be two
equal (or in rare cases three) highs surrounded by two lower highs.
or
Pivot Low—A low surrounded by two higher lows. Can also be two
equal (or in rare cases three equal) lows surrounded by two higher lows.
or
Plus Directional Movement Index (+DMI)—A component used in the

calculation of ADX that measures the upward movement of a market. If
it is greater than the Negative Directional Movement Index (–DMI), it
suggests an uptrend.
172 Glossary
Poor Close—The market closes in the bottom 25% of its range.
High
Bottom 25%
Low
Protective Buy Stop—Used to help control losses when shorting stocks.

The order is placed above the current price of the stock. It becomes a mar-
ket order if the stock trades at or above the specified price.
Protective Sell Stop—Used to help control losses when buying stocks.
The order placed below the current price of a stock. It becomes a market
order if the stock trades at or below the specified price.
Range—The high price of the day minus the low price of the day. See also
True Range.
High
Range
Low
Sell Short—A position that seeks to profit if a market drops in value.

Simple Pullbacks—Three to seven consecutive lower highs after a stock
hits a new high.
Stop Order—For buys, an order placed above the current stock price that
becomes a market order if the stock trades at or above the order price.
For sells, an order placed below the current price of the stock that be-
comes a market order if the market trades at or below the order price.
Stop orders are normally used to help control risk but can also be used to
enter positions.
Glossary 173
Strong Close—The stock closes within the top 25% of its range.
High
Top 25%
Low
Trend Knock Outs (TKOs)—Trend-following strategy in which one waits

for the weak hands to be “knocked out” before entering and trading with
the trend.
TRIN—Also known as the Arms Index, the TRIN indicator compares ad-
vancing issues/declining issues to the up-volume/down-volume ratio. A
reading of less than 1.0 indicates bullish demand, while greater than 1.0
is bearish. The index is often smoothed with a simple moving average.
Triple 9s—100,000 shares bid or offered. A key alert in TradingMarkets’
TradersWire.
Trailing Stop—A stop adjusted higher for long positions or lower for
short positions as the market moves in the favor of the trade. Used to
help lock in profits for when the market reverses.
Buy
Stopped
Out
Trailing
Stop
Protective
Stop
174 Glossary
True Range—Conceived by Welles Wilder and used in the ADX calcula-

tion, the true range is the same as range except that gaps (if they exist)
are used in the calculation.
True Range
Range
Gap
True range is the largest value (in absolute terms) of:

1. Today’s high and today’s low
2. Today’s high and yesterday’s close
3. Today’s low and yesterday’s close
Uptrend—A series of higher highs and higher lows.

VIX—The CBOE Market Volatility Index. It is a measure of the implied
volatilities of OEX options.
Higher
Highs
Higher
Lows
Volatility—How much prices fluctuate over time.

ABOUT THE AUTHOR
Dave Landry has been have been actively trading the markets since the early 90s. In 1995 he
founded Sentive Trading, LLC, (d/b/a www.davelandry.com)--a trading and consulting firm. He
is author of Dave Landry on Swing Trading (2000), Dave Landry’s 10 Best Swing Trading
Patterns & Strategies (2003), and The Layman’s Guide to Trading Stocks (2010). His books have
been translated into many languages including Russian, Italian, French, and Chinese (pending
2010). He has made several television appearances, has written articles for several publications
including Technical Analysis of Stocks & Commodities, Active Trader, and Traders Journal-
Singapore. He has been publishing daily web based commentary on technical trading since 1997.
He has spoken at trading conferences both nationally and internationally. He holds a Bachelor of
Science in Computer Science and has an MBA. He was registered Commodity Trading Advisor
(CTA) from 1995 to 2009. He is a member of the American Association of Professional
Technical Analysts.

DaveLandrys10Best Swing Trading Patterns and Stratigies

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

DaveLandrys10Best Swing Trading Patterns and Stratigies

Загружено:

Авторское право:

Доступные форматы

The following article was written to update the information from my first book, Dave

Dave Landry On Swing Trading, 10 Years Later

From The Greatest Bull To A Very Impressive Bear

How I’ve Changed

When in Doubt, Get Out

5% Max Per Risk

My publisher encouraged me to put a maximum risk amount per trade. I initially

Mechanical Market Timing Systems

If you have questions, I can be reached at dave@davelandry.com or by phone at 1-985-

Sentive Trading, LLC

Ebook created in United States of America

Chapter 1 PRIMER: WHAT EVERY SWING TRADER

SECTION II TREND RESUMPTION PULLBACKS 59

Chapter 2 PERSISTENT PULLBACKS 23

Chapter 3 TREND KNOCKOUTS 33

Chapter 4 WITCH HATS 41

Chapter 5 FALSE RALLY PULLBACKS: TREND PIVOT

SECTION III TREND ACCELERATION 61

Chapter 6 ACCELERATING MOMENTUM STRATEGY 63

Chapter 7 EXPLOSION GAP PIVOTS 71

SECTION IV TREND TRANSITION 83

Chapter 8 FIRST THRUSTS 85

Chapter 9 BOW TIES 93

Chapter 10 REVERSAL GAP STRATEGY 103

Chapter 11 THE GATEKEEPER 111

SECTION V PATTERN APPLICATION 125

Chapter 12 MONEY MANAGEMENT, VARIATIONS, AND

Chapter 13 GETTING THE MOST OUT OF MY PATTERNS 161

In my first book, Dave Landry On Swing Trading, I confessed that I was a

As I said in my first book, Dave Landry On Swing Trading, in markets, many

To the readers of my columns at Davelandry.com, you inpire me to become a better trader.

WHAT YOU WILL LEARN IN THIS BOOK

Section II: Trend Resumption Pullbacks

Section III: Trend Acceleration

Section IV: Trend Transition

Section V: Pattern Application

PRIMER: WHAT EVERY

To those new to swing trading, this chapter contains a brief introduction to

SWING TRADING DEFINED

Let’s break it down.

Let’s look at an example of trend qualifiers.

5. The stock has an orderly pullback.

6. The trend resumes.

7. The stock has an extreme wide-range bar higher. Although this is a

8. The stock gaps to new 1-year-plus highs.

1. The moving averages are sloping downward.

4. Notice that the slope of the moving averages is positive (up).

The Trend Should Be Obvious

Uptrend Downtrend No Trend

THE ART OF THE INITIAL PROTECTIVE STOP

Stock Price Protective Stop (amount risked)

Initial Profit Taking

Figure 6 Once a stock moves strongly in your favor, occasionally a longer-term

Q. You didn’t mention ADX as a determinant of trend. Do you still

Q. Do you use actual or mental stops?

Q. Do you carry stops overnight (i.e., good till canceled orders)?

Q. Where could one find more information on volatility?

A. Yes, if everything is “in gear”—the market is rallying, and the sec-

Q. Doesn’t “2 for 1” money management have a negative expectancy

As I wrote in Dave Landry On Swing Trading:

My favorite way to define persistency is to draw a trend line through as

2. After Rule 1 has been satisfied, look to enter on a pullback or pullback

The above will be quite obvious after a few examples.