THE 1 HOUR TRADE Basic Training
This book was written assuming you have some base knowledge of trading and investing.
I’ll provide a quick overview in this chapter, just in case you need some brushing up on your vocabulary or basic foundational concepts.
If this stuff is brand-new to you, and by the end of the book you “just don’t get it,” again, please email me and we’ll figure out what you need.
Fundamental Analysis vs. Technical Analysis
These are two differing schools of thought when it comes to justifying an investment or trading decision.
Fundamental analysis attempts to unravel what a company is truly worth currently and what it will likely be worth in the future, based on financial reports and underlying factors that affect the business and operations.
Someone performing fundamental analysis of a stock is attempting to arrive at the value of a company in order to compare that value to the share price to determine if the current price is overinflated or undervalued.
Technical analysis assumes that the price of a stock has little to do with its “true value” and more to do with how the buyers and sellers in the market are reacting toward its price.
Someone performing technical analysis is attempting to predict where the price of a stock will be in the future, based on chart patterns and mathematical indicators.
Trading vs. Investing
Generally, “investing” describes a longer term holding period and a focus on fundamental analysis; the idea is to buy value that will appreciate over time.
“Trading” describes a short-term holding period and frequent buying and selling with a focus mainly on technical analysis; the idea is to take advantage of short-term fluctuations in price.
Bulls & Bears
Those market participants who believe a stock’s price will rise are referred to as “bulls” or as being bullish.
Market participants who believe a stock’s price will fall are referred to as “bears” or as being bearish.
Buyers are bullish; sellers are bearish.
Supply & Demand
As in any free market, stock prices are determined by supply and demand.
For any given stock, the current price of that stock represents the equilibrium between demand driving the price higher, and supply sinking the price lower.
Those with demand for the stock are the buyers, and those with supply of the stock are the sellers.
Support & Reesistance
Support is a price level that a stock has historically had difficulty falling below, due to the high demand in that particular price area.
Imagine a group of many buyers, all bidding around a certain price point; the demand
In the chart below, the support line is detailed in green:
At, and immediately below the price level represented by the green line, is where many buyers are all bidding to purchase stock.
Because there are more buyers with demand for the stock than sellers with supply of the stock at that particular level, the price has difficulty sinking below that level.
Resistance, in contrast to support, is a price level that a stock has historically had difficulty rising above, due to the high volume of supply in that particular price area.
In this case, imagine a group of many sellers, all selling their positions to take profits or opening short positions around a particular price level.
The price cannot rise above that level because there is more supply of stock from sellers than there is demand for stock from buyers.
In the chart below, the resistance line is detailed in red:
It is important to understand that, many times, support and resistance levels behave more like nets than walls; meaning they are elastic rather than firm and static at exact price points.
Support and resistance are two of the most important ideas to understand with regard to this trading strategy because knowing these levels allows you to make better decisions about entering and exiting trades.
We will discuss more on this later.
Bid & Ask and Level2
The bid is an order from a buyer to purchase a number of shares at a specific price.
The bid will detail the price offered and what quantity to be purchased.
The bid volume can be thought of as demand for a stock.
The ask is the price a seller is willing to accept for her shares, also known as the offer price.
The ask will detail the selling price and quantity to be sold.
The ask volume can be thought of as supply of a stock.
The difference between the highest current bid, and lowest current ask, is called the “spread.
The Level 2 is a real-time view of every combination of bid price/quantity and ask price/quantity currently available for stock.
Here is an example of a Level 2 screen from E*Trade:
For this book’s purposes, all you really need to know regarding Level 2 is how to identify the volume (size) of the various bids and asks.
The size of these orders gives us insight into areas of significant demand and supply that may act as support and resistance levels.
Liquidity is the measure of how easily a stock can be bought or sold without affecting the stock’s price.
The higher the trading volume, the more liquidity a stock has.
Trading stocks with low liquidity is dangerous because large price changes can happen very quickly on low volume.
You need to be aware of the liquidity in any stock in which you’re considering opening a position.
The way to judge a minimum amount of liquidity is by looking at average daily volume; stocks averaging over a million shares traded daily have enough liquidity for most trading sizes.
If you’re trading small positions, you can move into lower liquidity stocks safely.
Just be sure there’s enough minute-to-minute trading activity to allow you to exit your position size without affecting the price in any significant way.
Volatility is a measure of the degree to which a stock’s price can fluctuate.
High volatility means the price can change significantly over a short period of time.
In contrast, low volatility implies that a stock’s price has a low range of price levels it’s expected to hit for the near term future.
Market Order – This type of order guarantees you’ll be filled (Your full quantity will be purchased or sold.
), but it will be filled at the available price(s) at that moment.
When entering a market order, you cannot be 100% sure at what price you’ll be filled until your order is complete.
This type of order is useful if you need to exit or enter a trade quickly; however, it can be dangerous if the stock has low liquidity, or if the price is moving quickly.
If you enter a market order when you see a stock at $X.
XX, you may be filled at a much higher or lower price, depending on current volume and your position size.
Limit Order – This type of order guarantees what price you will pay but does not guarantee you’ll be filled with the full quantity you’re attempting to buy or sell.
When entering a limit order, you dictate the price at which you’re willing to buy or sell shares.
Stop Order – This is an order to buy or sell a stock when its price touches a predetermined point.
Once the stock’s price meets the “stop” price, a market order is triggered.
These orders are effective and useful for profit protection or loss limitation, as well as breakout entries.
Stop-Limit Order – This is identical to a normal stop order, but instead of the stop triggering a market order, it triggers a limit order.
NOTE: Using stop orders will not protect against overnight price gaps.
Conditional Orders – These orders are conditional on certain events.
They include contingent orders, One-Cancels-All orders, One-Triggers-All orders, and One-Triggers-OCO order.
We’ll go over these types of orders in Chapter 7.
Candlesticks (or Candles)
“Candles” are used in charts to detail the price action of a set period in a pictorial format.
They are more useful than other forms of price action charting because they can reveal underlying sentiment (Is the current sentiment more bullish or bearish?) and potential reversals of sentiment sooner than other forms of charting.
In this book when I refer to “price action,” I’m referring to what the candle(s) is revealing.
A candle example is shown below:
When the candle is white (or green), the price closed higher than the open for the period, so the open is at the bottom of the real body, and the close is at the top of the real body.
When the candle is black (or red), the price closed lower than the open for the period, so the open is at the top of the real body, and the close is at the bottom.
We’ll go over candles in more detail in Chapter 3.
An indicator is a mathematical calculation based on price and volume, usually represented graphically below, above, or overlaid onto a chart.
There are hundreds, if not thousands, of potential indicators you can use.
We use only one indicator for this setup, simple moving averages.
Simple Moving Average – SMA
An SMA is a linear representation of the average closing price over the last [x] amount of days.
(For example, a 12 SMA is the simple moving average of the closing price over the last 12 days.
We use SMAs in our setup to identify if a move is more or less likely to occur depending on where the current price is relative to various SMAs.
We’ll go over this in more detail later.
Gaps form when the opening price creates a blank “gap” on a chart.
A gap up is when the opening price is higher than the previous day’s high.
A gap down is when the opening price is lower than the previous day’s low.
Most gaps occur when there is extended-hour trading moving the price.
They are significant when accompanied by high relative volume.
The opening range is the first fifteen minutes of the trading day.
It is usually a good idea to steer clear of any trade commitments until you get an idea of how the price action and volume are playing out during the opening range.
High of the Day/Low of the Day These refer to the highest and lowest prices the stock has touched so far during the trading day.
Our high volume runner strategy relies on buying a break above the fifteen-minute HOD, meaning the highest price of the first fifteen minutes.
Also referred to as a retracement, a pullback is a decline in price from a recent peak.
A pullback can either be a short-term pause in upward momentum, representing a buying opportunity before the prevailing uptrend continues, or it can be the start of a full reversal in the trend, in which case potential buyers should stay away, and those holding should plan an exit.
A breakout is a price movement through and above an established level of price resistance.
Usually, a breakout is accompanied by an increase in volume and volatility.
Generally, the more volume accompanying the breakout, the higher the chance it will sustain its upward momentum.
A price breakout with lower volume or a lot of selling pressure in the price action is more likely to fail to continue increasing in price.