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CONTENTS Acknowledgments ix Introduction xi Chapter 1 The Basics 1 The Start of It All 1 The Essentials 6 Chapter 2 Getting Started 9 Education 9 Trading Mentality 21 Chapter 3 Tools of the Trade 31 Traditional and Web-Based Brokerages 31 Electronic Direct Access Trading Firms (EDATs) 33 Order Routing Methods 35 Advanced Tools of an Active Trader 44 Charting Software 49 News Services 50 Chapter 4 The New Market Momentum 53 The New Players 53 Institutional Momentum 55 Technical Analysis Momentum 58 Online Trader Momentum58 Smart Money, Informed Money, and Dumb Money 63 Theme Momentum 70 v Copyright © 2002 by Mtrader.com. Click here for Terms of Use. Chapter 5 Predictable Momentum 73 Predicting Momentum 73 Chapter 6 Predictable Patterns 91 Niche Patterns 91 Gainer Pattern 93 Dumper Pattern 106 End-of-Day Gap Plays 111 News Patterns 113 Chat Room News Hypes 117 Patterns to Avoid 118 Identifying Short-Term Tops and Bottoms 120 Upside and Downside Potential 121 Core Methods 124 Chapter 7 Indicators 125 Indicator Stocks 125 Picking an Indicator Stock 130 Trends 131 Chapter 8 Market Dynamics 133 Market Dynamics 133 Two Phases 134 The Players 136 The Moving Parts 138 Trading the Market 146 Mid-Range Rule 148 Mid-Morning and Afternoon 150 The End 150 The Specifics 151 Example Scenarios 157 vi Trading on Momentum Chapter 9 Tracking 163 Building a Tracking Diary 163 Analyzing the Data 167 Forming Expectations 170 Relating Market Dynamics with Tracking 173 Tracking Summary 175 Wrap-Up 175 Chapter 10 Time of Day 179 Delayed Quotes 181 Numbers 184 After-Hours and Pre-Market Trading 186 Chapter 11 Identifying Trading Opportunities 189 Tape Reading 190 The Market Maker Effect 198 Chapter 12 Rules of a Trader 203 Stop Loss Discipline 204 Trailing Stops 207 Money Management 210 Golden Rules of Trading 211 Chapter 13 Personal Accountability and Trading Attitude 221 Trading Attitude 224 Contents vii Chapter 14 Momentum Investing 231 How and Why I Began This Longer-Term Approach 231 The Principles of Momentum in Investing 233 The Law of Participation 238 The Market’s Influence on Momentum Investments 241 Defining the Market 242 Interpreting the Market 247 Momentum Investment Exits 247 Pre-Market Gaps 249 Closing Combinations 251 Epilogue 255 Glossary 257 Resource List 261 Index 263 viii Trading on Momentum ACKNOWLEDGMENTS We would like to thank Ela Aktay of McGraw-Hill Professional Publishing for giving us the opportunity to write this book and Beth Brown from MacAllister Publishing Services for her efforts during the production process. Without your untiring efforts, this book would not have been pos- sible. We also want to thank Victor Jung, a fantastic partner and good friend for his remarkable efforts in the production of this book and tech- nically on a day-to-day basis in the chat room pits. And Steve Demarest from MB Trading for his friendship and constant encouragement. Finally, a warm and grateful thanks to the thousands of traders, both past and present that have graced the cyber halls of Mtrader.com and RealityTrader.com over the years. You have helped us create an explo- sive online revolution that has literally changed the way traders are edu- cated and enter the trading arena. With your help, we have literally changed the face of online trading, helping us shift the power of trading decisions from brokers to individual traders. Your enthusiasm, thirst for knowledge, and quest for education were the reasons we wrote this book. ix Copyright © 2002 by Mtrader.com. Click here for Terms of Use. This page intentionally left blank [...]... the power of information dissemination at the trader’s fingertips This not only empowers the individual to make his or her own trading decisions, it allows us access to applying our decisions to market participation in real time The explosion of online trading is a by-product of the increased efficiency in data distribution and the personal desire for self-directed decision implementation Many brokers... to trading at a consistency rate that allows for gradual profits over time Those that expect huge one-time gains in trading methods are also setting themselves up for big one-time losses Normally, over time, one cannot continuously make huge gains without a few huge losses to complement them These get-rich-quick schemes almost always end up in failure The market doesn’t allow for consistent get-rich-quick... creating highpercentage gains EDUCATION Many of the traders that came from the explosion of online trading see the market as a game that is to be played, rather than a business to be learned It is precisely this reason that we see such a high turnover rate among aspiring traders who want to make trading a career A lack of education and preparation is clearly the number one reason why traders lose money... the best method, but unfortunately the hardest to do as successful traders who are willing to spend the time teaching on a day- to -day basis are hard to find Secondly, you can embark on a self-education process by reading many of the good trading books currently on the market This gives the new trader a basic background on methodology and technique but lacks the real-time, live trading experience Lastly,... the majority of momentum traders lost in what was actually a better market condition to profit in Why? For one simple reason: they failed to change tactics and methods as the market changed They continued to do what worked yesterday, but not today This is the purpose of this book: to teach you the Copyright © 2002 by Mtrader.com Click here for Terms of Use xi xii Trading on Momentum techniques and methods... is happening Real-time education is the key to successful trading for both on- site and online education services Once the action slows down, traders on the staff examine every aspect of the market, what happened, what did well, and what didn’t do quite so well At some point during the trading day, structured daily class sessions teaching the core methods or topics that warrant attention should be discussed... when thinking about this avenue for their learning process The alternative to on- site teaching has therefore become the online teaching forums ONLINE TEACHING FORUMS Online teaching forums have reduced fixed overhead costs Many of them pay for the servers for the site, a few licenses for data transfer, possibly a news service, and then salary to the employees and professional traders When compared with... fall for the most common pitfalls that take most traders out of the game The section titled “The Golden Rules of Trading spells out clearcut rules that I have spent years developing If you read nothing else, read these rules The book concludes with a discussion on what I call momentum investing, a unique form of trading that takes the best of two distinctly different forms of trading: momentum trading. .. successful momentum trader to enter a trade just as the momentum is starting, and exit sometimes just minutes or seconds later as the momentum slows and turns By riding waves of continuous momentum, it creates opportunity for tremendous gains not available to investors or longer-term traders The vast majority of those who enter into the momentum trading arena end up losing in the end for the simple reason... eventually ON- SIGHT TRAINING Over the past five years, with the explosion of online and daytrading, many educational services have evolved to help traders with their progress in this business Although some of these services are nothing more than just stock picking sites, some very good educational sites are available that correct a lot of misinformation about the marketplace and provide a reasonable forum for . blank TRADING ON MOMENTUM Advanced Techniques for High- Percentage Day Trading KEN WOLFF WITH CHRIS SCHUMACHER AND JEFF TAPPAN McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico. good friend for his remarkable efforts in the production of this book and tech- nically on a day- to -day basis in the chat room pits. And Steve Demarest from MB Trading for his friendship and constant. 4 The New Market Momentum 53 The New Players 53 Institutional Momentum 55 Technical Analysis Momentum 58 Online Trader Momentum5 8 Smart Money, Informed Money, and Dumb Money 63 Theme Momentum 70 v Copyright