Trading Basics: Evolution of a Trader

DETERMINING STOCK OR MARKET DIRECTION

Determining market direction is more art than science. It is like telling you how to hit a tennis ball at a can I have placed on the far side of the court. I can tell you to aim a bit more to the right, but I cannot give you the skill to consistently knock the darn thing over. You have to develop that yourself. I can give you some useful tips, though, like aim for the can, not the referee. Tips 11 through 14 are useful for short-term traders.

11. What Are the Futures Doing?

If you have been trading long enough, then you probably know this tip: What are the S&P and Nasdaq futures doing? I use the Yahoo! Finance website because they show the futures versus fair value before the market open. If the value is a double-digit number like 20 or higher (or –20 and lower), then expect the market to open positive (negative).

• If the S&P or Nasdaq futures make a big move, either higher or lower, expect the stock market to open accordingly.

12. Price Jumps. Now What?

Figure 5.9 shows two candles. The one on the left is a pattern you may come across if price does an inverted dead-cat bounce. Recall that price shoots up on news in that event pattern. Often price will close at or near the day's high. The figure shows what typically happens the next day, and that is important if you want to sell.

Figure 5.9 The right candle is the typical profile when price closes the prior day at the high.

I used 565 stocks from October 2005 to September 2010 and found ...