The Finance Book Club

Chapter 18 - The Pit Bull Guide to Successful Trading
This big chapter is almost a book by itself. I've split it up into multiple sections/posts.

Trading style: Marty is a scalper, if you hadn’t already guessed.

Strengths: dedication to hard work, dogged persistence, ability to concentrate for prolonged periods, and a hatred of losing.
Weaknesses: insecurity, fear of losing, and a need for constant reinforcement and frequent gratification.

Marty can’t let his profits run; he needs to be in and out within minutes if possible. He needs a 70-80% win rate.

Tools of the Trade: all outdated imho.

Market Analysis
“I record the pulse reading on the exact half hour by drawing a box around the indicators. Then I overlay a red or green arrow between each boxed set to reflect whether the New York Composite was up or down from the previous half hour and by how much.

This exercise forces me to focus on how the market is trying to move.”

Services: likely also all defunct. It includes things like daily faxes, etc.

10 day EMA is his favorite indicator to determine major trend.

Follower of Terry Laundry.

“Whenever the New York Composite is above the ten-day exponential moving average, I draw it in as a solid green line. When it dips below, the line turns solid red. When you’re trading above the ten-day, you have the green light; the market is in a positive mode and you should be thinking buy. Conversely, trading below the average is a red light. The market is in a negative mode and you should be thinking sell. That doesn’t mean you should never buy when you have a red light, but if you do, it is critical that you have an extremely good intellectual reason for taking that position.”

When price is right at the EMA that’s when it offers the most profit potential but also the most risk. A crossing could show a trend starting, but the EMA can also act like a barrier and reject price.

1. Write down EMAs for S&P500, NYSE comp, OEX, XMI, bond, Eurodollar, S&P Futures
2. Pick an entry point and a risk amount; looking for turning points, “inflection” points
3. Use channel lines and oscillators to pick levels
4. 120, 60 and 30 minute time frames

Bands are 1% above and below the 10 period moving average. When price is close to the lower bound, buy, upper, sell.

Marty then goes into a discussion of how to calculate the EMA. Like he ever does that.
In fact, reading the book I get the distinct impression he rarely does any of this. He is a seat-of-the-pants cowboy who reacts by instinct.

Marty then describes how he trades stocks but most of the methods are pre-computer era. He gets chartbooks sent to his house by mail. He updates them by hand.
He prefers to do things by hand to get a feel for things.

He manually draws support and resistance lines on these charts, faxes them to his assistant who inputs them into her computer.

He uses OEX and SPX options for longer-term plays. Sometimes bond futures when there’s a ‘strong technical setup’.

He scalps for a point or two on 10k-20k share positions.

He looks for temporary weakness in strong stocks to buy, which is why drawing all his trend lines and writing the support levels out is so important. His assistant sets alarms on the computer with the support list; if the price dips into the support area, she notifies him and he looks to buy on a green light with a good looking chart.

Uses 4 monitors. His assistant prints out the 20 charts he looks through. Again he draws trendlines on these by hand.

Then he takes index cards and records average buy and sell levels. These ‘pregame’ notes gives him courage during the heat of battle.

Program Trading
Marty calls it ‘Nintendo Vegas’ because it produces 15-20% of daily trading volume on the NYSE.

After the 1987 crash it didn’t take long for greed to cause the players to come back to ‘the casino’.

Money and power always prevail on Wall Street.

Know the trend of the market and wait for these technocrats to drive the market averages deep into your channel lines.

“Lie in wait until these people conduct their mindless malevolence (LOL) and you counterattack with a contrary position, always using a well-disciplined stop loss.”

The great challenge is to continually adjust your skills to ever-changing market conditions.

“I am always intensely searching for patterns, setups, recurring themes, no matter how small, to help further swing the odds in my favour on a given trade.”

Chart gaps
If they aren’t filled in 2-3 days it’s a strong signal to take a position in the trend direction.

3 types of gaps

1. Breakaway gap - coming off a base - very bullish
2. Continuation gap - happens after a move has already been made
3. Exhaustion gap - indicative of a reversal But Schwartz doesn’t explain how to recognize it! I assume it’s near his band edges.

The market often is stronger the last day of the old month and the first four of the new, as new money flowing into mutual funds are invested into stocks. This is caused by cash infusions into mutual funds.

3 Day rule
After an Intel or Microsoft has had a large 3 day move you don’t want to get in on the mature trend.

“The first day the smart people are moving, the second day the semismart people are moving, and by the third day, the dunces have finally figured it out. If the stock has bad news and it sells down, by the third day you may want to start looking to buy it because the bad news probably has been fully discounted. ”

 

1. Marty Zweig Put/Call Ratios
2. Contrarian reactions to news
3. New Highs/New Lows
4. Up Mondays
5. Market calendar probabilities
6. Option expiration dates
7. Half hour program trading; noontime rallies; highly volatile last half hour
8. Taking out the stops of highs/lows in ranges

These are tried and true patterns that have not withstood the test of time. Get the book if you’re curious though.

Take the first trade after a hiatus slowly to adjust to the rhythms of the market. Make your first trade ‘an intellectual one, not an emotional one.’

Whenever your worst fears are not realized about a trade and the market is letting you out better than you expected, it is not just good luck. Rather, your position is most likely correct and should not only be held but perhaps added to.

Schwartz quotes Pogo. One of my favorite lines.

Divorce your ego from the trade. Stop trying to will things to happen in order to prove that you’re right. Listen only to what the market is telling you now. Forget what you thought it was telling you five minutes ago.

Schwartz then goes through his typical day, which is of limited interest. Except that he uses a checklist, like all good pilots. It’s laminated and it says this:

1. Check charts and moving averages prior to making a trade—the moving averages work better than any tool that I have. Don’t go against them.
2. Are we above or below my moving averages, i.e., in positive or negative mode?
3. Are we above or below a dominant trend line?
4. Has recent price action taken out previous highs or lows?
5. Is the MTO (Magic T oscillator) in positive or negative mode?
6. Always ask before taking a position: do I really want to have this position?
7. Always know the amount I’m willing to lose before taking a position. Know the uncle point and honor it.
8. After a very profitable run of trading, reduce the position size.
9. After a successful period, take a day off as a reward.

“Today the exchanges are just like casinos. They want you playing around the clock. These extended hours can make you old in a hurry.”

And that's it! Another book, in the archive. I won't do a long-winded review except I'll say it was worth the time, for sure.
Next: The Trading Game by Ryan Jones.