Stock Market Trading : : : : : : : : : . . . .

"Stock Patterns for Day Trading" a Book Review

"Stock Patterns for Day Trading - Intraday Trend Trades Scalps & Swing Trades" by Barry Rudd, (no copyright or print date listed - assumed 1998), 221 pages, $95.00. Published by Traders Press, Inc.

The author, Barry Rudd, has a BS in Psychology from Texas A&M. He worked in pharmaceutical sales after college while casually trading in stocks, options and futures over a 10-year period. Recently he became a full-time trader and according to the introduction, "has made a living for well over a year using the methods he describes in his book."

When I read that he's been trading full-time for "well over a year," I said to myself, "Oh shit, I've got socks older than that." For those of you out there that have been trading for some time, and know the ropes, you know what I mean . . . Oh well, let it never will be said that I don't have an open mind, and can't learn something from some young "whipper-snapper."

It is necessary to provide some background before beginning this review. Some of you may be familiar with the SOES (Small Order Entry System) which permits almost "instantaneous execution" of small equity orders (typically 1,000 shares or less) via on-line computer systems. Other similar systems are offered and go by the abbreviated names: SOES, DOT, Instinet, Selectnet, Island, NQDS, etc.

The recent introduction of these Small Order Systems has lead to the development of "Trading Offices" whereby security firms have set up fully equipped, state-of-the-art, "Trading Rooms" for would-be-traders. A trader would typically pay a monthly "rental fee" for a "fully equipped trading desk," and begin daytrading to his hearts content. In some cases, if you're really good, the security firm will literally "hire you" to trade their capital, and to teach other would-be traders how to trade.

To learn more about these trading boutiques, check out the classified ads in the "Investors Business Daily" under the classification heading of: "Trading Services" or "Day Trading." You will see lots of ads for these "SOES Trading Offices." You'll probably notice an ad placed by "Sceptre Trading," they offer a Day Traders Course taught by Barry Rudd, the author of "Stock Patterns for Day Trading" (The object of this book review).

This type of trading is quite unique. You are typically glued to the computer screen watching the various bid/ask price postings along with the actual trades that are taking place, all in real-time. The trader must intuitively digest all of this instantaneous trading information and make buy and sell decisions immediately and without hesitation.

It’s a little bit like that arcade game which has a number of gopher holes, and each time a gopher pops his head up for a split second you take this large hammer and try and hit him in the head before he disappears back down into his hole. Its fast paced, and you're trying to watch all those gopher holes at the same time.

Given the pace of trading and the limited decision-making time available, any trading technique has to be "Easy, Fast and Simple." And, even more importantly, it has to have a high percentage of winning trades. In many cases, you must act almost intuitively to be successful. Barry uses both daily bar charts and intra-day 5-minute bar charts in making his trading decisions. The only mathematical indicators that he uses are the 50-day and 200-day simple moving averages of the daily closes. To quote Barry: "Simplicity is your friend in this game. Get too technical and the probabilities of success begin to fade."

He acknowledges the importance of "learning" how each individual stock moves, learning its personality, and how the overall market indexes affect the stock's movement both on a daily and intraday basis. One of the key elements he mentions in order to successfully trade intraday price movements, is to carefully select "Trader Friendly" stocks, which are those stocks with little downside risk and decent profit potential. Barry provides a selection criteria for selecting good trading candidates.

His methods look for "Price Patterns" which typically "set-up" in advance of a very short intraday price trend for a given stock. The idea is to enter a trade with the goal of achieving a 1-point or better move for the day.

The book is divided into two broad sections, with each section being divided into various sub-sections: The first major section focuses on "Day Trading," while the second major section focuses on "Swing Trading." At the end of the book he provides a brief additional section on "Scalping," however, this type of trading is not the primary focus of the book.

The first section is titled "Intraday Trading Patterns (for daytrading)." All example bar charts and actual trading charts utilize 5-minute bar charts. The examples typically show "buy set-up," however; "sell set-up" are the same, just inverted The example bar charts are hand-drawn illustrations of what "ideal examples" of the trading patterns would look like as the 5-minute bars are charted on your screen. A total of 18 example chart patterns are described. The first 9 are called "High Probability Trades," while the next 4 chart patterns are referred to as "Lower Probability Trades," and the last 5 chart patterns are referred to as the "Lowest Probability Trades."

The "ideal example" bar charts are clearly illustrated and well described. However, the terms High, Lower and Lowest Probability Trades is the author's empirical evaluation of the various chart patterns, and is not supported or substantiated by any historical testing. For those of you who are students of technical analysis, the chart patterns he describes are not only recognizable on the intraday 5-minute bar charts, but can be easily found on daily and weekly bar charts. And, just as in the case of the daily or weekly charts, the "trigger" for making buy or sell decisions occurs when a price "break-out" occurs from a prior price consolidation pattern.

Following these "text book ideal examples" is a series of "Intraday Chart Examples" where he shows "actual 5-minute bar-charts" on over 100 stocks. Each chart shows a complete 5-minute bar chart extending over 2-trading days. Each chart is well marked showing support and resistance levels, breakout points, and a hand-written commentary, which realistically describes the application of his techniques.

The actual trading charts, and his hand-written commentary on each chart, provides the reader with a "look over the author's shoulder," which is both well done and very helpful in bridging the gap between the theoretical "ideal examples" of the various chart patterns, and real life trading.

Personal Note: I am not an intraday trader, but I do use intraday hourly charts to supplement the daily data that I follow. However, I was taken aback by the shocking similarity between the price movements and subsequent chart patterns that are generated on the intraday 5-minute bar-charts, and the daily and weekly bar-chart patterns that are formed over many days or several months.

I believe this surprising similarity in stock price movement, and the resulting identical chart patterns, is due to the "human element." It appears that regardless of the time periods involved, a human being's emotional reaction while trading, must be the same -- Therefore, price movements and the resulting chart patterns appear almost identical regardless of the time periods involved. As a result, this book has merit for all traders, not just intraday traders.

The next section of the book is divided into two sub-sections. The first is titled "1 to 3 Daily Bar Setups (for daytrading)." This section describes high probability trades based on yesterday's daily price bar and in some cases the previous 2 or 3 daily price bars. All illustrations of bar charts and actual trading charts utilize daily bars. The examples show both "buy and sell set-ups."

As before, the example bar charts are hand-drawn illustrations of what "ideal examples" of the trading patterns would look like as the daily bars are charted on your screen. Barry identifies only 2 general price patterns, however, each of these 2 patterns have several subtle variations which expand the possibilities. Based on the action of the prior day, a position is typically taken early in the morning, and then followed closely throughout the day.

Following these "text book ideal examples" is a series of "Daily Chart Examples" where he shows "actual daily bar-charts" on 11 stocks. Each chart shows approximately 3-months of trading activity. Each chart is well marked showing the 50-day and 200-day moving average, and includes hand-written notes, which describes the application of his techniques.

The next sub-section is title "Longer Term Daily Bar Patterns (for daytrading)." This section describes high probability trades based on daily price formations which occur over several days, (4 to 10-days). All example bar charts and actual trading charts utilize daily (open, high, low, close) data.

The examples show both "buy and sell set-ups." for daytrading)." This section describes high probability trades based on yesterday's daily price bar and in some cases the previous 2 or 3 daily price bars. All illustrations of bar charts and actual trading charts utilize daily bars. The examples show both "buy and sell set-ups."

As before, the example bar charts are hand-drawn illustrations of what "ideal examples" of the trading patterns would look like as the daily bars are charted on your screen. Barry identifies only 3 general price patterns; however, sometimes a pattern may have several subtle variations, which expand the possibilities. All of the patterns discussed are consolidation patterns. Thus, based on the price action over a prior number of days, a position is typically taken when the price breaks out of its most recent period of consolidation.

And as before: Following these "text book ideal examples" is a series of "Daily Chart Examples" where he shows "actual daily bar-charts" on 4 stocks. Each chart shows approximately 3-months of trading activity. Each chart is marked showing the 50-day and 200-day moving average, support and resistance areas, and a brief hand-written description of the pattern being formed on the chart.

The next section of the book describes "Support and Resistance" (S/R). In one page, Barry does a pretty fair job describing the concepts of S/R. (However, he does not describe a detailed methodology for drawing proper S/R lines.) Following this brief description of S/R levels, Barry provides us with 8 daily stock charts, which show a full year of trading activity. Each bar chart shows the 50-day and the 200-day moving average along with various support and resistance lines.

The idea is once long-term S/R levels are identified, these levels act as an additional "filter" for the purpose of finding the best day-trades to enter. In other words, if you got a "buy set-up" just as a stock has reached an important "resistance level," you would forego that trade in favor of a "buy set-up" which was reaching an important "support level." Below is a quote from this section of Barry's book.

"Trading congestion is something to stay away from. If a stock is not trending, has narrow range daily bars (from high to low), or is just chopping sideways, then avoid it. Wait until it breaks out of congestion and begins some good daily price swing activity. This is when you look for the trade setups to act upon. Also, look at the recent average range of a daily price bar (from high to low). If that stock doesn't trade over a point or more on a regular basis then you probably won't want to trade it.

Look for the bigger profit opportunities with stocks that are currently in a "trader-friendly" mode . . . Support and resistance levels aid your decision making for day trades. They show how far a stock can be expected to move up or down on both an intraday and daily time frame. This is the final step (or filter) to confirm a potential trade, or to rule it out."

The overall concept is correct, however, Barry's skill in drawing "proper" support and resistance lines needs a lot of work. Some of the S/R lines are drawn correctly, while others are very arbitrary. Additionally, all of his sample charts only show horizontal support and resistance lines, while excluding all (up and down) trend-related support and resistance lines.

The basic concept of using S/R lines as "filters" for shorter term trades is very good, however, Barry's knowledge, and abilities in drawing "proper" S/R lines is cursory at best. I would suggest that any reader look elsewhere for a proper methodology for constructing S/R lines before applying this concept, and ignore Barry's sample charts.

The next section of the book describes the various computer screens a "daytrader" will be looking at, and how to read the various pieces of information. He describes the "Market Maker" and "Time of Sale" screens as well as the "Ticker" screen. He combines these screens with the "daily bar-chart" and the "5-minute bar-chart" to provide a complete picture of the stock's recent history, and current status.

In summary Barry says: "Tying together the daily and intraday price pattern setups with the learned timing of the market maker and time of sale screens are essential to your success. Leave one component out and you reduce your odds for even the best price pattern setups. Only through experience with your universe of stocks will you improve your bottom line. This is the art of trading."

Barry provides 12 sample "Market Maker" and "Time of Sale" screens which are well marked with his hand-written notes. The last screen (#13) in this section shows you an example of how you would configure your computer screen to display all of the current market information along with your daily and 5-minute bar charts. It's a very nice screen layout.

The next section is titled "Swing Trading (trade setups for 2 to 5-day holds)." This section focuses on a few technical patterns, which are right out of Edwards & Magee's book on "Technical Analysis of Stock Trends." Once again, price breakouts of S/R levels are important indicators, as well as anticipating price reversals at significant S/R levels.

Barry uses hand-drawn examples to show the ideal pattern, and then supplies 23 daily charts, which are well marked with personal notes, to highlight the previous examples. Each chart provides daily price bars over a period of approximately 6-months, along with a 50-day and 200-day moving average line. The hand-drawn S/R lines are done far more accurately in this series of charts.)

The rest of the book is filled with helpful hints, additional trading ideas, and sample trade sheets to help you organize your activities, and 10 Commandments of Trading. The last section includes a brief supplement on "Scalping Trades." These are really short-term trades lasting sometimes only minutes, and aimed at capturing small fractions of a point.

Many of the same price pattern "set-up" examples he previously mentioned are repeated in this section. The only difference is you exit the trades as soon as a small profit is generated. My previous analogy of the arcade game with the "hammer and gopher holes" typifies the pace of this type of trading.

This book is well written, and his writing style clearly explains his trading ideas. As always, the BIG MISSING LINK (as with most other trading books) is that no "Historical Testing" or "Test Analysis Results" are presented to the reader in support of the presented trading methods and ideas. So, the reader is left with having to accumulate the necessary data, and test out the ideas presented in this book.

However, it is important to note the SOES arena is a unique animal unto itself. Therefore, the importance of having a very well developed intuitive gut response to a stock's developing technicals is vital to making this thing work. Barry acknowledges that trading in this fashion is much, if not more, "art" than "science." Not a bad job for a young "whipper snapper." by Raymond F. Kohn