Street Smarts by Laurence A. Connors and Linda Bradford Raschke

Many traders like to buy or sell when price exceeds a previous high or low. These breakout traders act on the expectation prices will continue in the same direction. But if prices should reverse shortly after the breakout, the extent of the reverse move can be significant. That's the basis for the Turtle Soup strategy. For this pattern and all other trade strategies, only the day session prices are used and the night session is ignored.

This trade takes advantage of false breakouts like Turtle Soup. It uses the same type of setup, only the entry is one day later.

Both Turtle Soup and Turtle Soup Plus One can be traded on shorter and longer time frames using the same basic rules. For intraday trades, the entry stop is 1 tick above the previous 20-bar low and 1 tick below the previous 20-bar high.

This is a day-trading strategy which was derived from George Taylor's trading method and research done by Steve Moore.

Moore tested what happened when a market closed in the upper or lower 10 percent of its daily range. 80 to 90 percent of these cases continued in the same higher or lower direction the next day. Yet 50 percent of the time, prices reversed during the day to close in the opposite direction.

George Taylor's trading method defined each 3 day sequence as a "buy day", "sell day", and a "sell short day". However, depending on the day's price action, he would sometimes sell short on what was supposed to be a buy day. The Momentum Pinball offers a simple way to decide if you should buy or short the following day.

This trade is similar to Momentum Pinball except the rate of change is 2 days instead of 1 day. It also follows the basic Taylor Trading Method of a day for buying followed two days later by a day for selling short.

This trade setup follows a 1 to 3 day sell off for a buy or 1 to 3 day rally for a short. The pattern for a buy day is an open on the day's low and a close on its high. The formation of the low is a test of the support area of the previous day's low. If the buy day's low forms slightly above or below the previous day's low, the lower of the two lows is the stop loss.

Similarly, a sell short day should have the high on the open and be a test of the previous day's high. If the test is successful, the higher of the two highs is the price level for the stop loss.

The 2-period rate of change provides an entry point price. First, subtract today's close from the close two days prior. Then add this number to yesterday's close. If tomorrow's close is above this price, enter, or continue to hold, a long position on the close. If tomorrow's close is below this price, take a short position, or continue to hold an existing short.

This trade is a basic swing reaction pattern with a unique way to define the long-term trend. It uses the slope of the %D line from the stochastic indicator to show the trend's momentum. Since momentum tends to lead price reversals, it's an early indicator of price change. The stochastic is set up with a 7-period %K ("fast" line) and a 10-period %D ("slow" line). Use 4 for the %K smoothing parameter.

"Anti" represents a basic principle of price action and can be traded in all time frames.

Of course the title is not meant to be serious. Instead of a grail, holy or otherwise, the pattern uses Welles Wilder's Average Directional Index (ADX). It identifies an entry point to buy or sell the first retracement of a new strong trend.

This is a gap-reversal pattern. It relies on the Average Directional Index (ADX) and the Plus and Minus Directional Indicators (+DI/-DI) as trade filters. The ADX shows trend strength and the +DI/-DI identify the trend direction. The strategy waits for a gap opposite the trend direction and enters when the trend resumes.

This pattern waits for a morning price gap followed by an afternoon reversal. Usually the reversal carries through the next morning and sometimes the following few days.

This pattern relies on a gap reversal which starts to get filled within 3 days.

This is a group of three climax-reversal patterns. Since recognition of the patterns is subjective, there are no rules. However, the patterns do provide distinct points for stop placement to control risk. As with the other strategies, if a trade is going to be profitable, it happens quickly. Since reversals can also happen quickly, using a trailing stop is always important.

The first pattern is the "Spike and Ledge". This pattern forms at both tops and bottoms. Price has a climatic move to create the spike. Then there's a retracement and sideways action to form the ledge. Enter when price breaks out of the ledge and place a stop on the opposite side of the ledge.

"Fakeout-Shakeout" is the next chart formation and it works for both tops and bottoms. When price breaks out of a ledge (rectangle) or triangle pattern, it normally should not retrace back to the breakout point. The "fakeout" is a false breakout and this is the setup for the "Fakeout-Shakeout". Enter once price retraces back through the breakout point. The initial stop is placed at the most recent swing low when buying or swing high when shorting. Move the initial stop to breakeven shortly after entry and follow up with a trailing stop.

The third pattern is "Three Little Indians". If prices climax with three symmetrical peaks or valleys, this forms the "Three Little Indians" pattern. This formation holds for both top and bottom reversals. No specific entry point is specified, only that price is reversing. The book's charts indicate with a top reversal you short on breaking a minor swing low or about a 50 percent retracement of the swing to the third high. The initial stop goes above the third peak and should be moved to breakeven quickly. As with the other patterns, use a trailing stop to protect your profits.

Wolfe waves are based on the idea, market price action produces an equal reaction. The method projects both entry and profit target points. The pattern is formed from 4 alternating swing reversal points. To identify the pattern, start with a swing high for a buy setup, or a swing low, for a short setup. This first swing high or low, is identified as point number 2. Number 3 marks the swing point after 2, and is a low if 2 was a high, or a high, if 2 was a low. Number 1 is the opposing swing reversal point before point 2. Point 3 must be lower than point 1 for a buy and higher for a short. Number 4 is the swing point following point 3. Point 4 should be higher than point 1 when buying and lower if shorting.

Draw a trend line from point 1 to point 3. Its extension projects the future entry area at labeled number 5. No specific method of entry is given, but look to enter on an indication price is reversing off the trend line projection. When price does reverse at point 5, that's where to put the initial stop. To find the profit target, draw a trend line from point 1 through point 4, and extend it to the right. The target price is this trend line.

If listening to the news told you which way a market would go, trading would be very simple. If the news is bad, you sell. If the news is good, you buy. But markets are not that simple.

Instead of listening to the talking heads chatter, listen to what the markets are saying. If a company issues a poor earnings report, it's common sense the stock should go lower and often it does. But if the dip is only momentary, the market is saying it's ignoring the report and it's likely the stock is headed higher. Chapters 17 and 18 offer specific strategies to profit from news.

Where there's volatility and uncertainty, there's an opportunity for profit. Morning news reports often provide that opportunity.

This strategy can also be applied to currencies using different setup values. Look for a reaction to the report of 10 to 20 ticks beyond the prior trading day's high or low. The entry stop is placed 5 to 10 ticks inside of the prior day's high or low. Move the stop to breakeven when the trade is in profit.

This is a news situation which doesn't happen every day, but when it does, the trade may last for many weeks.

Swing trading relies on prices consistently moving up and down. But sometimes, prices continues to move in one direction with only a few minor reactions. When a market opens at one end of the day's range and closes at the opposite end, this is considered a trend day. Trying to swing trade during a trend day is a losing approach. This makes it important to identify trend days before they occur.

The first way to spot when a trend day will occur, is with a pattern called ID/NR4. A day with the smallest daily price range compared to the previous 3 days is NR4. ID refers to an inside day which has a lower high and a higher low than the previous day's range. The ID/NR4 indicates a trend day, but not the direction.

Historical volatility (formula is in the Appendix) is a measure of how dynamic a market's prices are. Volatility is more cyclical and trending compared to prices. If you can predict when volatility will increase, you can take advantage of strong moves.

This strategy looks for the point when low volatility is likely to increase and start trending higher.

Described here are some indicators which can provide a general evaluation of the market. Specific guidelines are given, but none of these tools should be acted on alone.

Smart Money Index
This indicator is designed to show the actions of the uninformed public and the knowledgeable professionals. The index measures the net change in the first hour of the Dow compared to the Dow's net change during the last hour of the day. The Smart Money Index is constructed with the following three steps:

1. Determine the point change in the Dow from yesterday's close to the end of today's first hour. That number is either positive or negative. Multiply the net change by -1.
2. Add the net Dow point change during the last trading hour to the morning's number in rule 1.
3. Record the daily sum from rule 2. If the total is greater than 20, look for market buying opportunities the next day. When the sum is less than 20, look to be selling short the next day.

Tick Indicator
This indicator is used exclusively for trading the S&P futures. The tick is the difference between all the NYSE stocks on up ticks and all those on down ticks. Look for divergence between price and this indicator.

Watch for extreme tick readings. With a tick greater than 400, look to short the next day's morning rally. When the tick is lower than -400, expect a next day morning pull-back as an opportunity to buy.

Arms Index
This indicator combines two ratios. The first divides the daily number of advancing stocks by the number of declining stocks. This ratio is then divided by the result of the volume of stocks moving higher divided by the volume of stocks going lower. Using a 5-day moving average, a value of 1.20 indicates a possible bottom and if less than 0.80, a possible top. As with all indicators, the Arms Index is best used in confirmation with other indicators or patterns.

Beginning traders should paper trade until they can show a break even or better record. Short-term trading yields small profits, but also small losses. In time, the losses will become even smaller and fewer, with an occasional large profit.

Expect that much of the time you won't have a clear understanding of what is happening in a market. It's best to only concentrate on a few reliable strategies. And pay attention to what a market does in response to news or how minor corrections show a trend's strength.

Beware of having a strong opinion about where a market is headed. A strong opinion about market direction can lead to fighting the market, if proven wrong. Instead, when a trade goes against you, let your stop get you out. Holding a losing trade overnight will only make losses worse. At the same time, not only take losses quickly, but also any well-above-average profits.

Overall, keep your trading process simple and be consistent in your approach.

Swing trading requires planning to act logically instead of reacting emotionally. To plan effectively, have a nightly routine to prepare for the next day. Part of the plan should include keeping a record of all trades. Every so often review the records to see what you did right and what you did wrong. Find the plan which works best and apply it with consistent discipline.

The aim of this book is to provide concise strategies to give a trading edge over the uninformed trader. Part of the trading edge is using stops to control losses. The final chapter, written by Fernando Diz, a Syracuse University finance professor, explains why sound money management is so important to trading success.

The three most important elements required for successful trading are psychological balance, a trading edge, and strict money management. A study was done of 925 Commodity Trading Advisor (CTA) programs from 1974 through 1995.

Success was defined simply as the ability to stay in business. 490 CTAs survived and 435 went out of business. A number of statistical measures were used on the winning and losing CTAs to find the difference in their results. The conclusion was simple. While the losing CTAs had a smaller edge than the winners, it was still large enough to stay in business. What caused them to fail, was poor money management.