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Sunday, September 18, 2005 11:51:25 AM

Re: MACDad post# 15099

Post# of 18564
Scanned and Posted from Alan Farley's Master Swing Trader - It's a longish read - but very good to re-visit it often until it is engrained in trading mind... I have placed this link in the ibox

My Apologies if this scan contains misprints - scanning from books into text sometimes produces errors


THIRTY RULES FOR THE MASTER SWING TRADER

TRADE CRAFT

Each market day spawns excellent trading patterns. But many skilled participants still wash out through bad selection and poor timing. Why doesn't their experience save them from ultimate failure? The answer holds great wisdom for every trading aspirant. Simply put, long-term survival depends much more on personal discipline than on market knowledge. Sloppy execution wastes months at the guru's feet. Low self-esteem inflicts more damage than a sudden selloff. And a great stock cannot overcome a bad attitude.

Marginal players view speculation through greedy eyes. Without rules or tac¬tics, they chase hot stocks and hope for the big score. Fate may reward these gam¬blers with an occasional windfall, but easy profits only reinforce a reckless attitude and open the door to eventual demise. Market professionals quickly find these lost souls and send them off to less challenging hobbies.

Opportunity waits for discovery. But modern markets demand careful plan¬ning and precise execution at all times. The road to success begins with the master pattern. Use Pattern Cycles to build powerful tactics that tap a market's vast po¬tential.

Test their real-time performance in each session and adapt a personal style that matches individual needs. Then exercise strict discipline through every phase of position management.
Read the charting landscape with great skill and select only the best setups. Execute positions based on numbers, time, and the smell of the crowd. Knowledge of the master pattern encourages detached execution and solid risk management. This science of trend allows swing traders to build systematic techniques that avoid reckless action. Take the time to explore this hidden world and become a true master of the trade.

RULES FOR THE TRADING GAME

Trade management demands simple understanding of complex market forces. Use these battle-tested rules to internalize the classic mechanics that move price and create opportunity.

MARKET WISDOM

• Forget the news, remember the numbers.
You're not smart enough to know how news will affect price. The chart already knows and reflects it in the numbers. Use the period before scheduled news to apply a convergence-divergence analysis that compares price action to current ex¬
pectations. The best information comes when the chart diverges sharply from common wisdom.

• If you have to look, it isn't there.
Forget your college degree and trust your instincts. The best setups jump out from the market noise and create a sense of urgency to trade. Take a deep breath and cross-verify your numbers. Then act quickly before the opportunity disappears.

• Price has memory.
What did price do the last time it hit a certain level? Chances are it will do it again. Trend mirrors capture some of this movement, but actual experience does a better job. Watch when a favorite stock returns to a price level that turned a profit or loss in the past. The prior tape action embeds deeply in the trading subconscious and guides fresh tactics.

• Profit and discomfort stand side by side.
Look for the setup that scares you the most. That's the one you probably need to trade. Don't expect to feel comfortable until an active position finally closes out. If it feels too good, everyone else will trade it the same way and become the crowd.

• Stand apart from the crowd at all times
Trade ahead of, behind, or contrary to the crowd. Be the first in and out of the profit door. Take their money before they take yours. Always be ready to pounce on the crowd's ill-advised decisions, poor judgment, and bad timing. Your success depends on the misfortune of others.

THE SWING

• Buy the second low. Sell the second high.
Price extremes attract contrary tactics. The first test of a new high should fail. The first test of a new low should succeed. Watch for a breakout or breakdown the next time around.

• Buy the first pullback from a new high. Sell the first pullback from a new low. Act quickly when the market gods offer a gift. Fullbacks let traders jump on board moving trains. They also provide fuel to carry a market higher or lower.

• Buy at support. Sell at resistance. What do you do when you walk into a wall? Price has only two choices when it reaches a barrier: continue forward or reverse. Pick the right one and start counting your profits.

• Short rallies, not selloffs.
When markets drop, short sellers get ready to cover, making this'a terrible time to execute new short sales. Wait until they ignite a squeeze and get shaken out at higher prices. Then jump in quietly while no one is watching.

TIME

Trends depend on their time frame.
Trend relativity errors end trading careers. Make sure your pattern works in the period that you want to trade. Opportunity aligns to specific time segments. Prof¬itable trades find the right ones, while losing trades chase the wrong ones.

• Manage time as efficiently as price.
Time is money in the markets. Don't waste either. Profit relates directly to the amount of time set aside for market analysis. Know your holding period for every trade. And watch the clock to become a market survivor.

• Avoid the open.
They see you coming. The best opening strategies exit old trades and wait patiently for new ones.

• The trend is your friend.
Strong stocks get stronger and weak stocks get weaker. Always surf the wave in trending markets. Save contrary thinking for pullbacks and range

EXECUTION

• Expect the market to reverse as soon as you get filled.
Locate the safety net before jumping into a trade. Stand aside when the exit door is out of reach. Wait for a pullback or drop down and trade the next-lower time frame. Never toss a coin into the fountain and hope your dreams will come true.

• Match tactics to market conditions.
Shift gears quickly when trades stop working. Market inefficiency dries up as the crowd plays your game. But a new door will open as soon as the old one closes. Find it and profit until the herd heads your way.

• Trade with the TICK, not against it.
Go with the money flow. Draw trendlines and channels around TICK to predict where the next big move will occur. Then trade with the wind to your back.

• Major convergence signals the best trades.
Watch for the bull's eye. Look for the price and time that points repeatedly to a specific trade entry. The market is trying to tell you something.

• Don't confuse execution with opportunity.
Save Donkey Kong for the weekend. Pretty colors and fast fingers don't build suc¬cessful careers. Understanding price behavior and market mechanics does. Learn what a good trade looks like before falling in love with the software.

OPPORTUNITY AND RISK

• The perfect opportunity rarely exists.
Learn to trade in shades of gray. Profits depend on different levels of inefficiency. Get off the sidelines and act when enough ducks sit in a row.

• Know the price that violates the pattern.
Keep both risk and reward in sight at all times. Look for trades where price must move only a short distance to show that it was a mistake. Then look the other way to find a profit target and apply this math to every opportunity. Limit execution to positions with low risk and high profit potential. Then update analysis with every new tick.

• Control risk before seeking reward.
Wear your market chastity belt at all times. Attention to profit is a sign of trading immaturity, while attention to loss is a sign of trading experience. The markets have no intention of giving money to those who do not earn it.

• Swing for percentage and distance. '
Learn to hit both the single and home run. The best profits go to the swing trader with the highest AvgWIN and %WIN. Concentrate on building both sides of the market equation.

• Big losses rarely come without warning.
You have no one to blame but yourself. The chart told you leave and the news told you to leave. Learn to visualize trouble and head for safety with only a few bars of uncomfortable information.

SECRETS OF THE PRICE CHART

• Bulls live above the 200-day, bears live below.
Are you flying with the birds or swimming with the fishes? The 200-day moving average divides the investing world in two. Bulls and greed live above the 200-day, while bears and fear live below. Sellers eat up rallies below this line, while buyers to come to the rescue above it.

• The big move hides just beyond price congestion.
Enter in mild times and exit in wild times. Don't count on the agitated crowd for your trading signals. It's usually too late for an easy profit by the time they act. Execute new trades in narrow bars at support or resistance whenever possible.

• Big volume kills trends.
Blow-offs take buyers and sellers out of the market. When volume peaks too sharply or quickly, it will short circuit movement in the prevailing direction. These climax events wash out the crowd as efficiently as a flat market.

• Current price is the best indicator of future price.
What does the latest number say about the market? The answer predicts the next number, up or down. But go ahead and add a few indicators anyway just to stay out of trouble.

• Perfect patterns carry the greatest risk for failure.
Demand warts and bruises on your trade setups. Market mechanics work to defeat the majority when everyone sees the same thing at the same time. Look closely for failure when perfection appears.

• Trends rarely turn on a dime.
Reversals build slowly. Investors are as stubborn as mules and take a lot of pain before they admit defeat. Short sellers are true disbelievers and won't cover without a fight.

• Some gaps never fill.
The old traders' wisdom is a lie. Exhaustion gaps get filled. Breakaway and contin¬uation gaps may never fill. Trade in the direction of their support when price ap¬proaches for the first time.

THE MASTER SWING TRADER
Commit yourself to a lifetime of opportunity and conflict. Professional traders still face unexpected drawdowns and missed profits, but they understand that longevity depends on shaking off their short-term demons and moving on to the next trade. And they have the confidence to expect a profit on the very next position.

Seek market knowledge but avoid the knowledge game. Books and seminars can undermine successful trade execution after a few years of experience. Realize that secondary reinforcement from sitting at the guru's feet may not build either profits or skills. True market wisdom comes only through personal trading experience.

Size doesn't matter. Avoid the bias that position size and professional respon¬sibility must grow with trading experience. Some may find a home managing other people's assets. Others should just stay at home and watch the kids while the markets pay their lunch money. No single characteristic describes the successful swing trader. This master technician may look like a local businessman, soccer mom, or software geek.

Treat this noble profession with great respect. Combine the discipline of a saint with the tenacity of a bulldog through every trading opportunity. The markets work to fool the majority at every turn. Don't be surprised when you suddenly become part of the crowd that you're trying to avoid. Use the opportunity to peek in the mirror and see what it looks like before extricating yourself from this dangerous herd.

Enjoy the long road to market knowledge. Each twist offers a new gem to carry into the next active position. Over time, many battle scars teach a profound understanding of the modern financial markets. Neophytes become members of an exclusive club as they evolve into seasoned professionals. As their power grows, they often wonder if they can fully tame the beast and have it under their total control. Unfortunately, this popular fantasy will never come true.

Even the master swing trader must take what the market gives with humility, acceptance, and good humor.




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