Market Internals Seminar

Trade The Markets
Market Internals and More

John Carter & Hubert Senters
www.tradethemarkets.com
PDF created with pdfFactory Pro trial version www.pdffactory.com
DISCLAIMER
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. THIS COMPOSITE PERFORMANCE RECORD IS HYPOTHETICAL AND THESE TRADING ADVISORS HAVE NOT TRADED TOGETHER IN THE MANNER SHOWN IN THE COMPOSITE. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY MULTI-ADVISOR MANAGED ACCOUNT OR POOL WILL OR IS LIKELY TO ACHIEVE A COMPOSITE PERFORMANCE RECORD SIMILAR TO THAT SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN A HYPOTHETICAL COMPOSITE PERFORMANCE RECORD AND THE ACTUAL RECORD SUBSEQUENTLY ACHIEVED. ONE OF THE LIMITATIONS OF A HYPOTHETICAL COMPOSITE PERFORMANCE RECORD IS THAT DECISIONS RELATING TO THE SELECTION OF TRADING ADVISORS AND THE ALLOCATION OF ASSETS AMONG THOSE ADVISORS WERE MADE WITH THE BENEFIT OF HINDSIGHT BASED UPON THE HISTORICAL RATES OF RETURN OF THE SELECTED TRADING ADVISORS. THEREFORE, COMPOSITE PERFORMANCE RECORDS INVARIABLY SHOW POSITIVE RATES OF RETURN. ANOTHER INHERENT LIMITATION ON THESE RESULTS IS THAT THE ALLOCATION DECISIONS REFLECTED IN THE PERFORMANCE RECORD WERE NOT MADE UNDER ACTUAL MARKET CONDITIONS AND, THEREFORE, CANNOT COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FURTHERMORE, THE COMPOSITE PERFORMANCE RECORD MAY BE DISTORTED BECAUSE THE ALLOCATION OF ASSETS CHANGES FROM TIME TO TIME AND THESE ADJUSTMENTS ARE NOT REFLECTED IN THE COMPOSITE. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. THIS COMPOSITE PERFORMANCE RECORD IS HYPOTHETICAL AND THESE TRADING ADVISORS HAVE NOT TRADED TOGETHER IN THE MANNER SHOWN IN THE COMPOSITE. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY MULTI-ADVISOR MANAGED ACCOUNT OR POOL WILL OR IS LIKELY TO ACHIEVE A COMPOSITE PERFORMANCE RECORD SIMILAR TO THAT SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN A HYPOTHETICAL COMPOSITE PERFORMANCE RECORD AND THE ACTUAL RECORD SUBSEQUENTLY ACHIEVED. ONE OF THE LIMITATIONS OF A HYPOTHETICAL COMPOSITE PERFORMANCE RECORD IS THAT DECISIONS RELATING TO THE SELECTION OF TRADING ADVISORS AND THE ALLOCATION OF ASSETS AMONG THOSE ADVISORS WERE MADE WITH THE BENEFIT OF HINDSIGHT BASED UPON THE HISTORICAL RATES OF RETURN OF THE SELECTED TRADING ADVISORS. THEREFORE, COMPOSITE PERFORMANCE RECORDS INVARIABLY SHOW POSITIVE RATES OF RETURN. ANOTHER INHERENT LIMITATION ON THESE RESULTS IS THAT THE ALLOCATION DECISIONS REFLECTED IN THE PERFORMANCE RECORD WERE NOT MADE UNDER ACTUAL MARKET CONDITIONS AND, THEREFORE, CANNOT COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FURTHERMORE, THE COMPOSITE PERFORMANCE RECORD MAY BE DISTORTED BECAUSE THE ALLOCATION OF ASSETS CHANGES FROM TIME TO TIME AND THESE ADJUSTMENTS ARE NOT REFLECTED IN THE COMPOSITE.
Released in December, 2005

www.tradethemarkets.com 3
John Carters First Trading Setup
Johns current trading setup in Austin, TX
Professional Traders Workshop
TTM Trend
Trade The Markets (TTM) Trend What is it ?

We use this indicator a lot, so we want to explain it early in the seminar as it comes up on many charts. Modified Version Of the Heikin-Ashi Technique. Its just a easier way to look at candle sticks. The heikin-ashi method (heikin means "average" or "balance" in Japanese, while ashi means "foot" or "bar") is a visual technique that eliminates irregularities from a normal chart, offering a better picture of trends and consolidations.
Trade The Markets Trend how is it calculated?

The heikin-ashi candlestick technique uses modified open-high-low-close (OHLC) values and displays them as candlesticks but I had them converted to paint bar studies . The modified values are computed using these definitions: haClose = (O+H+L+C)/4 haOpen = (haOpen (previous bar) + haClose (previous bar))/2 haHigh = Maximum(H, haOpen, haClose) haLow = Minimum(L, haOpen, haClose)
TTM Trend
The "open," "high," "low," and "close" referred to are of the current bar. The prefix ha- indicates the corresponding heikin-ashi modified values. The value haOpen is always set to the midpoint of the body of the previous bar, while haClose is computed as the average price of the current bar. The modified high, haHigh, is chosen as the highest value of the set {real high (H), modified open (haOpen), and modified close (haClose)}. The same logic applies to the definition of the modified low: It is the lowest value in the set {real low (L), modified open (haOpen), and modified close (haClose)}.
Notice how the candle lie to you but the TTM did not
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Internals
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1. 2. 3. 4. 5. 6. 7. 8.
A large part of what dictates my intraday trades is determined by the action of the key intraday indicators that I watch. They are as follows: TICK (measures net buying/net selling NYSE) TIKI (measures net buying/net selling DOW) Put/Call (measures the ratio of calls vs. puts) TRIN (measures up/down volume on NYSE) TRINQ (measure up/down volume on Nasdaq) Sector Sorter List (measures sector performance and overall market strength or weakness) Volume on ES, YM Pit Noise, Program Trading, Etc.
Learning to read internals correctly is what gives traders an edge over everyone else. Your goal is to determine what type of trading day it is: ___________________ ___________________ ___________________ This is never evident to most people until after the trading day is over and they are looking at a chart. These days require a DIFFERENT TYPE of trading from each other On __________ days ignore short setups On __________ days ignore long setups How early in the day you determine this will determine how successful of a trader you are. So . . . HOW DO YOU DO THIS? Lets take a look . . .
Part 5.1: TICK Internals
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TICK 5 Minute Chart
Audio Alerts at +/- 600, 800, 1000 and 1200 Ticks

TICK TIPS
+ or _____ ticks is noise and can be ignored Pay attention over +/- _________. This is a heads up for potential action. If you are long and you get a +______ tick reading, close out your trade and take your profits (potential reverse trade discussed later) If you are short and you get a -______ tick reading, close out your trade and take your profits (potential reverse trade discussed later) Look for how much time ticks are spending above or below zero line. If ticks spending most of their time above zero, 18 then focus on the long side, etc.
Part 5.2: TICK Fades & Hook Plays
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This is a very easy play and is very mechanical. However it scares most people and they dont take it or follow the parameters As we just discussed, there are times when the TICKS reach extreme levels of over 1000. When this happens, the market is expending all of its energy and is running out of gas. When I see a +1000 or -1000 TICK reading, I exit any day trades in that direction and also look to see if criteria are met for a fading opportunity. For example, with +1000 I am closing out longs and shorting, and with -1000, I am closing out shorts going long.
TICK 5 Minute Chart
At +1000 ticks youd better be selling day trade longs and or looking at shorting opportunities
For TICK plays, here are the parameters: YM: __ point target/__ point stop/__ minute time limit ES: __ point target/__ point stop/__ minute time limit If my stop or target is not hit after time expires, I exit the trade at the market. TIME LIMIT IS IMPORTANT! Only take trades between 10:00 AM 3:30 PM Eastern. If by 10:00 a.m. Eastern the ticks have spent over 95% of their time above zero (or below zero), I will pass on tick fades for the rest of the day. This shows an extreme amount of fund activity. This is the best trade set up for __________ markets Ive also found that a 2:1 risk reward ratio increases the odds on this play. On ES this means a ___ point stop and a ____ point target. On YM this means a ____ point stop and a _____ point target.
Type of day where I do not use this setup Generally these are big breakaway gap days
Extreme Positive Ticks
Extreme Negative Ticks

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TICK 5 Minute Chart
1st half hour
Choppy vs. Trending Days

1. 2. 3.
4. 5. 6. 7. 8. 9.
Short at the market, fill 10192. I place a stop at 10222 and a target at 10172. Time elapses. I exit at the market. I am filled at 10182 for +10 points. The ticks hit +1000 again. I short at the market, filled at 10194. I place a 30 point stop and a 20 point target. Target is hit 20 minutes later at 10174 for +20 points on the trade. Buy at 10118. My target is hit within 8 minutes and I am out for +20 points. The ticks reverse and quickly hit +1000 and I short at the market. I am filled at 10168. The markets roll over quickly and I am out at 10148 for +20 points. The ticks hit +1000, but it is 3:50 p.m. Eastern so I dont take the trade. Remember, no trades after 3:30 p.m. Eastern!
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5. 6. 7.
On September 8, the ticks registered a +1000 reading shortly after 10:00 a.m. Eastern and I shorted the YM at the market, getting filled at 10355. I placed my stops and targets and kicked back. The market rolls over quickly and my target at 10335 is hit in 10 minutes for +20 points. About 40 minutes later the ticks act up again and I short at the market, getting in at 10337. The markets go into chop mode, and 35 minutes later I exit at the market, getting a fill at 10335 for a whopping +2 points. A few hours later the ticks start getting jiggy with it, and I short and get filled at 10346. About 15 minutes later my target is hit at 10226 and Im out for +20 points. The ticks ramp up again, but I pass on this trade as it is now past 3:30 p.m. Eastern.
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On July 26 the market action starts off weak, but we dont get any extreme tick readings until just after 11:00 a.m. Eastern. At this time we get a -1000 tick reading and I buy the YM at the market, getting a fill at 9912. I place my orders for my stop and target, and I set my timer. After about 30 minutes into the trade, the market firms and I get out at my target of 9932 for +20 points. The market is quiet for most of the day, then as we approach 3:00 p.m. Eastern we get another +1000 tick reading. I short at the market and get filled at 9932. About 20 minutes later my target is hit at 9912 and I am out for +20 points. We get another extreme reading in the markets, but, alas, it is past 3:30 p.m. Eastern so I all I do is sit on my hands and do nothing.
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I shorted this action with a market order. I am filled at 1098.50 and I set my parameters. About 20 minutes later my target is hit and Im out at 1096.50 for +2.00 ES points. I take a short at 1096.50. About 25 minutes later my target is hit and Im out for +2.00 ES points. I short and Im filled at 1096.00. I cover at the market and Im out at 1095.50 for a gain of +0.50 ES points.
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TICK HOOKS
Candles vs. Line on Close
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$TICK, NYSE, Bracket it, Hooks, down day 60/40, M&M.
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Hook 1-2
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Part 5.3: TIKI Internals
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TIKI
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TIKI 5 Minute Chart

If there are 2 buy Programs in a row, Then the next sell Program is generally A buying opportunity (point 7). If there are 2 sell Programs in a row, then The next buy program Is generally a selling Opportunity (point 11)
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TIKI TIPS
+ or 24 is noise and can be ignored Pay attention over +26 or -26. This is an indication of a buy or sell program. Highest are + or 30. Key is to trade in the direction where the most programs are hitting. Mostly buy programs? Then sell programs are a buying opportunity. TIKI is faster than the TICK. Early indicator. Heads up for the TICKS.
Part 5.4: Put/Call Ratio Internals
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Put Call Ratio

The market keeps going up until everyone is long. Then there is no one else left to buy. Conversely, the market keeps selling off until everyone is shortthen there is no one else left to sell. These instances market tops and bottoms. How to spot them?
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7/3/06: High intraday readings over 1.00 provide heads up to market bottoms
Put/Call Intraday Chart (over 5 days)
7/3/06: High intraday readings over 1.00 provide heads up to market bottoms
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Put/Call 10 Day Moving Average
First question on combined equity/index put call ratio is: Where is the 10 day moving average? Near .70 points to market tops and near 1.00 points to market bottoms.
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Data available for free at www.cboe.com

http://www.cboe.com/data/IntraDayVol.aspx
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Put/Call TIPS
Look for extreme readings: Over 1.00 potentially puts a floor in the market represents extreme bearishness. Heads up for a potential market turn. Under .70 will potentially put a ceiling on the market. Look to close longs and go short. This represents extreme bullishness. Trend is important: You want the Put/Call to move in the direction of the market in order to confirm trend. Rising put/call in a rising market confirms the trend (traders buying puts into a rally, gives fuel for short covering), while falling put/call in a rising market sets up a reversal (vice versa). TS symbol is $WPCVA Wait until 10:00 a.m. to get an accurate reading as the listed stocks need to all open for trade. 10 Day Moving Average marks major turns
Part 5.5: Put/Call Plays
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PUT/CALL Trade Analysis 6/9/2005 6/1/2006 All following analysis based on continuous contract Put Call Over 1 at end of down day. Buy YM futures close and sell next day open.
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PUT/CALL Trade Analysis 6/9/2005 6/1/2006 Put Call Over 1 at end of down day. Buy YM futures close and sell next day open.
July
August
Sept
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PUT/CALL Trade Analysis 6/9/2005 6/1/2006 Put Call Over 1 at end of down day. Buy YM futures close and sell next day open.
NOTE: 4 out of 8 losing trades were over the weekend. The 4 largest losing trades ($175,$215,$180, and $385) were over weekends (Friday close/Monday buy) versus ($110,$165,$135,$30) for weekdays. 10 trades occurred over weekends (approximately 1/4 of the total) 6 were winners ($115,$15,$185,$205,$95, $60), 4 were losers(see above) From the limited data, it would appear that taking this trade on a Friday is not optimal. Removing the weekend winners from the total winners (28-4) and dividing by the total trades that were Non-weekend (37-10) yields a respectable win ratio of 24/27 = approx 81%. 27 trades yields approximately 2 trades per month. August and September are not great months for this trade (seems to be the case with the trin analysis too) Probably a reflection that these were down months for the market overall. Dont want to overanalyze by backing out August and September. Would need to look at multiple years, and I cant get more than a years data on Put/Call from TradeStation.
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PUT/CALL Trade Analysis 6/9/2005 6/1/2006 Put Call Over 1 at end of any day. Buy YM futures close and sell next day open.
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Notes: Still a decent trade, but you get more bang for you buck trading it only on down days. Ran the analysis on just up days. No better than 50% winners, so eliminate up day trades.
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PUT/CALL Trade Analysis 6/9/2005 6/1/2006 Put Call Over X at end of down day. Buy YM futures close and sell next day open. Strategy Optimization Report
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PUT/CALL Trade Analysis 6/9/2005 6/1/2006 Put Call Over 1.05 at end of down day. Buy YM futures close and sell next day open. Not Too Shabby !
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PUT/CALL Trade Analysis 6/9/2005 6/1/2006 Put Call Over 1.05 at end of down day. Buy YM futures close and sell next day open.
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Part 5.6: TRIN Internals
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TRIN 15 Minute Chart (3 days)
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$TRIN measures up/down volume (buying/selling pressure) of NYSE, $TRINQ measures Nasdaq General: Over 1.0 is bearish, under 1.0 is bullish Not Important! What is important is the _______. Moving higher = increase in selling pressure. Ignore long setups. Moving lower or opening near .50 and staying there all day = increase in buying pressure/steady buying pressure. Ignore short setups. In a range between about 0.80 and 1.20 = CHOP! The trend of the trins is critical. TRINQ just a tool alongside the TRIN: TRIN is 61 more important as it has more breadth.
TRIN & TRINQ TIPS
Part 5.7: TRIN Plays Crescendo (Crash and Go)
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Pay attention to where the TRIN closes . . .

1. Gap up +10, high of +71 before ending down on the day. TRIN 1.99 Gap up +6, high of +59, closing in the upper 1/3 of its range. TRIN 1.65 Gap up of +2, high of +93 on the day, closes near dead highs. TRIN 2.30 Gap up +9, high of +37 before rolling over and closing lower on the day. TRIN 2.82 Gap up +3, high of +74 on the day before rolling over and closing lower. TRIN 2.50 Gap up +12, high of +106 on the day, closing in upper 1/3 of range. (TRIN 1.45 Gap up +6, high of +52, closed at dead highs of the day. TRIN 1.39
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TRIN Over 1.50 Play

A TRIN close over 1.50 results in bounce next day 9 times out of 10. No bounce? Market is in trouble and look for continued selling the next day. Most times YM will rally at least 50 points at some time during the next day. Whether it is able to hold onto those gains is another story. So look for +40 to +50 YM points and close out long into that. Close under 0.50 is way overbought. The reversal play here (go short the next day) is not as consistent, but look for a potential market top.
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$TRIN End Of Day Trade 5/25/04 5/25/06 TradeStation Optimization Results
Optimization of $Trin
1.70 yields 3.50 dollars returned for every dollar invested. It also has the highest % profitable trades and the lowest intraday drawdown. On average, this trade should occur once per month. One interesting thing to note. August is a losing month no matter what the $trin value. I have No idea why.
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Trin 1.5
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Part 5.8: Sector Sorter List Internals
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SECTOR SORTER LIST
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SECTOR SORTER LIST TIPS

Watch number of sectors that are green vs. red (up vs. down) at any given time. Often while indexes consolidate, the number of sectors up or down on the day will change. This is a heads up as to the direction of the next market move. Any move without the Banks, Brokers and Semiconductors most likely will not last. Sort on a net % change basis Very useful during doldrums to determine market direction into the final hour
Intraday Indicator Screen SetupTying it All Together
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The key with the intraday indicators is to watch how they are all working together. On strong downtrending days, everything will be bearish (TRINS trending higher, lots of lower TICK readings, key sectors lower, etc) On strong uptrending days, everything will be bullish and supporting the buying. On days where you get conflicting messages (some point higher some point lower) then look for CHOP. This is where you should spend the most time during the daywatching the internals.
Intraday Indicators
Part 5.9: 5 Minute Volume
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5 MINUTE VOLUME
Watch the volume on a 5 minute chart of the ES and YM. In general, volume under the key level means we have a choppy market. Volume over the key level means we have real buying or selling coming into the market. Persistent volume over the level should NOT be faded. The volume during the first half hour of the regular cash session (9:30 10:00 am EST) is a good indicator of the coming day. If ________ the key levels during the first 30 minutes then we will generally have chop all day.
Part 5.10: Buy & Sell Programs, Premium, Etc.,
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Price will never Lie to you.
But a chart will confuse you at times

Dome
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Time & Sales
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Micro the small look
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Macro the Big look
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$TRIN, NYSE, Trend Of the $TRIN, Inverse, M&M.
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$WPCVA, OPRA, No E-signal at this time, give guide lines, M&M.
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$ESINX, CME, Index Arb and Program Trading works 7 out of 10 most cases
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RSI 7,28,68 or RSI 7,28,70
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Explain which one you use and Why www.indexarb.com
Explain which one you use and why.

http://www.programtrading.com/buysell.htm
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Part 5.11: Pit Noise
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Who We Use
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Pit Noise Guide lines on how to use it.

6 20 by Means 1136.20 X 1136.50 bid ask spread of the big SP contract. Paper is a retail order like GS MER. Local market the locals are just trading among themselves light action. Thin Top means there are not a lot of Bid up here look for top to fail.

If you hear some one being a scale buyer or sell pay attention to what they are doing and where. If noise explodes fade it. If noise get gradually louder go with it till it explodes then exit. If some on is above or below the market with size and local fill him go with it.

If pit moderator tell you what the low is and you are close to it has a good chance of going lower. If pit moderator say look for a stop run at 1136 pay attention to that number if you are below it. Dont get caught up in the excitement. It will take about 2 months of solid listen to get use to a lot of the thing about pit noise but I cant trade with out it.
FREQUENTLY USED SQUAWK BOX TERMS: BOOK: Buyers that have actual resting orders to Buy below the market and Sellers that have resting orders to Sell above the market at any given time. Currently the CME feed shows orders five (5) ticks above and below the current price. These resting orders are known in the industry as the "book". BUY PROGRAMS: Using our proprietary Program Trading Indicator, we alert you to automated programs used by institutions that cause buying in the E-mini S&P Futures. SELL PROGRAMS: Using our proprietary Program Trading Indicator, we alert you to automated programs used by institutions that cause selling in the E-mini S&P Futures. CAR: Phrase for "Contract". 10 "cars" = 10 contracts BID: The current price you would get if you sold at market OFFER: The current price you would pay if you bought at market INSTITUTIONAL: Trade Size Lots of 200 contracts or more OFFERED: This means offered for SALE. 100 Offered at 50 means 100 contracts offered for sale at 1445.50 If you hear a big offer, this means someone wants to sell a big number of contracts above the market CHOPPY: No real trend. Market is erratic and usually controlled by local's THIN: Volume is light. BEST: Highest bid or lowest offer at that given time.
ALL DAY: Used a summation term usually regarding quantity Example25000 traded all day".
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ALL DAY: Used a summation term usually regarding quantity Example25000 traded all day". PULLS (OR PULLED): When an offer or bid quoted gets cancelled/withdrawn FADING or FADES: Going the opposite way of the move or trend PRINT: A price that is actually traded and sent out (printed) to real-time data EVEN: Price is at an even dollar level: 1445.00 OR 1444.00, etc. SMALL: Small car or contract lot. Not a big trade. LIGHT: Same as above TEN TIMES: Ten contracts FIFTY TIMES: Fifty contracts ON THE BID: Orders to buy on the Bid - usually limit orders.
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Part 6: Gap Plays
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Gap Plays: The Right Way

Gap in prices from 4:15 p.m. to 9:30 a.m. Gaps are like open windows: At some point they will be closed Best gaps are in indexes and in opposite direction of previous days move Best gaps are between 15 to 40 YM points or 1.5 to 4 ES points. Over this increases odds of a breakaway gap.
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Why Not Individual Stocks?

Stocks that gap with the index and dont have any stock specific news are good gap candidates. However, stock specific news gaps should be avoided. Enron wont be filling its overhead gaps anytime soon. Gaps in stocks that are not part of a major index should be avoided. Playing gaps on specific stocks that receive upgrades and downgrades is not consistent.
Why Index Gaps Get Filled

When an index gaps higher, there will be many sectors and stocks that move higher with the gap, but there will also be sectors and stocks that are down on the day (vice versa for gaps lower) The initial pullback, combined with the already negative pressure on some sectors, causes the index to fill its gap (vice versa for gaps lower) Many larger funds wont commit until a gap is filled. This lack of commitment often causes the markets to drift to their gaps at some point during the day. They like to get the charts cleaned up before committing more money to the current market. 105
Gap Play Methodology: FILTER

Watch pre-market volume in key stocks to get an idea of the power behind the move. KLAC, MXIM, NVLS, AMAT, are good overall candidates. Less than 15,000 shares each, gap has a 90% chance of filling. 15,000 to 30,000 then its moderate. HALF GAP FILL Over 30,000 shares pre-market, the chances of the gap not filling rise significantly. Look to 50% gap fill. Over 50,000 and I dont fade.
Gap Play Methodology: STOPS

When the gap is at 35 YM points/3.5 ES points or lower, on low pre-market volume, I use a ________ risk reward ratio. These are set it and forget it parameters. This keeps a trader out of the noise and in the play. Ideal for people who have to set parameters then go to work. So if it is a 20 point gap, Im using a ___ point stop. When the gap is at 35 YM points/3.5 ES points or higher, on low pre-market volume, I use a ________ risk reward ratio. These are set it and forget it parameters. So if it is a 40 point gap, Im using a ___ point stop.
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Parameters for the GAP Scenario #1

Target is a full gap fill for low volume gaps. If moderate volume, will use same parameters and a full gap fill IF gap is in the opposite direction of previous days 1% move. If YM is at 11150 previous day was a -112 point down day in the YM (over 1%), then Im using this technique to short a +20 point gap UP the next day whether it is low or moderate volume. This situation represents the highest probability full gap fill. However, all low volume gaps have a high probability for a full gap fill whether or not we had a 1% move the previous day.
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Parameters for the GAP Scenario #2 Target is a 50% gap fill for moderate volume gaps for markets that moved less than 1% the previous day or if the gaps are in the same direction as the previous days move. You can hold on for full gap fill, but safer play is to take half off at 50%, then move stop to your entry point. You can also just take all off at 50% and move on.
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Live Gap Example
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Part 6.1: Using TTM Trend with Gaps for timing and tighter stops
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Gap up look at TTM need 2 to go short and or a tick hook
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Still got you first 10 point before it reversed on you
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Part 1 @9:30 am this is what the gap looks like
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Part 2 TTM turn Blue Step up go long.
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How to manage the Trade

10 point stop from entry Sell @ +10 Move Stop to BE -3 Sell @ +20 Move Stop to BE +3 Sell @ Gap Fill
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What about when GAPS dont fill?
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When Gaps Dont Fill

There will be times when the gap doesnt fill. This is called a pro gap and is designed to keep ordinary investors out of the move, as it happens overnight when they are sleeping. When it doesnt fill, write down the open gap price. The markets will usually take out that gap within the next 5 to 10 trading days. Think of it as a black hole that will attract prices until that gap is filled. Useful for setting up swing and intraday targets.
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Part 6.2: Raw Gap Data
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What size gaps are most likely to close? 13pts 56% 1pts
2pts 3pts 4pts 5pts 6pts 7pts 8pts 9pts 10pts 11pts 12pts 54% 55% 40% 45% 60%
14pts 15pts 16pts 17pts 18pts 19pts 20pts 21pts
33% 0% 0% 100 50% 50% 0% 0%
22pts 100% 23pts 24pts 0% 50%

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Is a Gap Fill more likely on an options expiration Friday?

All Fridays Options Expiration Friday Answer __________
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Is a Gap Fill more likely on a Monday following an options expiration Friday? All Monday Monday After Options Expiration Answer
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Is a Gap Fill more likely on a rollover day?

All Thursday Rollover Thursday Answer
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Is a Gap Fill more likely on a Friday after a rollover Thursday?

All Fridays Friday after Rollover Thursdays Answer
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What is the probability of a gap closing on the first or last trading day of the month?
First Session of Month Last Session of Month Answer.
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Are the large gaps worth fading or are they just too risky?
Gap over 15pts less than 40% fill their gaps If you use a stop of .50 you have a 0% success rate you are stopped out on every trade. But if you used a 5.25 you would have made a 50 point profit 9.00 pts stop would have made 54 point profit
What if I used a % stop of the gap size as the stop loss on the large gaps instead of a fixed stop loss? 25% stop loss would have netted 54.5 points
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What is the probability of the gap filling if the gap is larger than the previous days range?
What is the probability of an Extreme Gap filling? A gap where the opening price is outside the previous sessions high or low.
What is the probability of half the gap filling?

This is my favorite gap play . If you trade a lot of gaps just cut at least loose at a gap fill you will be happier.
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Gaps and the Pivot Point and Support and Resistance Levels
Price Opens price at certain levels Total% Closed Over R3 R2 to R3 R1 to R2 PP to R1 S1 to PP S2 to S1 S3 to S2 Below S3 57% 60% 000 33% 62%
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How significant is the opening price to the gap filling and the closing price for the day?
If the market gaps up what is the % probability that it closes higher than yesterday ?
Which means pay attention after the gap fills the market has a % probability of closing higher than it did yesterday.
Part 8 : Scalper Buys and Scalper Sells
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I use the scalper buys and scalper sells in the trading room chart I post during the day. This is a visual way to use tradestation to help determine whether to buy or sell against a pivot level. The faster the time frame, the faster the confirmation and the more frequent the signals. White Paint bar marks a pivot high or pivot low. This is done TYPICALLY after 3 higher closes or 3 lower closes. However, this is in reality based on pivot prices so this can vary. Pivot highs and lows drive this indicator. In a downtrend, the trigger bar is the first bar that has a higher low than the previous bar. The next bar that closes above the high of this trigger bar paints this previous low bar which now becomes the swing low and the beginning of a new up swing.
Scalper Buys and Scalper Sells Getting Triggered

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Scalper Buys and Scalper Sells on 233 Tick Chart You can use the confirmation dots, but they are in line with the TTM Trend
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When I see the paint bar signal, I go long at the market. I am filled at 1133.25. I am out at 1138.50. The gain on the trade was +5.25 S&P points.
A long signal occurs on August 10, which paints the August 6 bar. I go long at the close of August 10 and Im filled at 9916. The next signal hits on September 7. Im out at 10278 for a gain of +362 YM points.
I took a short at the close and got in at 52.51. About a month later, on May 3, I get a reversal signal. I cover my short at 42.96 for a gain of +9.55.
On September 9 a reversal signal was painted on Crude Oil. Long was entered in at 43.60. On September 28 the reversal paint bar: Im out of the trade at 49.50, for a gain of 5.90. www.tradethemarkets.com 147
For scalping, I dont use these as entry signals. Im typically already in a trade and am using this signal as an EXIT SIGNAL. I program alerts for the white bars. This way if I am doing something else I can hear that a pivot point has been produced. The name is also misleading it can be used on daily and weekly charts as well, so it is not just a scalping tool. It is very good for fading a parabolic move as it signals that the move is potentially over and gives you a clear stop the top of the signal bar.
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Pivot Play Mechanics: YM

Place order 3 points in front of pivot 20 point stop 10 point target on first half Move stop to entry -10 on trending days Move stop to entry itself on choppy days Target on second half is discretionary. I use one of 4 things:
Scalper Buy or Sell Signal Extreme Tick Reading Next Pivot Level If Squeeze is on, loss of momentum in squeeze
Note first half is purely mechanicaleither I will get stopped out or my first target will get hit. I bring discretion into the second half.
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Part 10: Squeeze Plays
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Squeeze play
What is a Squeeze play? Volatility Play or the lack of The squeeze relies on the premise that stocks and indexes fluctuate between periods of high volatility, followed by low volatility.
Squeeze Plays are ways to measure the strength and direction of the next market move. Markets spend the day contracting and expanding in terms of volatility. Squeeze lets you know when the contraction is ending, when the expansion is about to begin, and in general which direction that expansion will take place. When I get a Squeeze Play, I will generally stay in the play until the Squeeze is over meaning I will ignore the pivots for exit levels until the squeeze STARTS TO RUN OUT OF GAS. www.tradethemarkets.com 155
The Squeeze is a measurement of the relationship between the Bollinger Bands and the Keltner Channels with their standard settings. It looks for the times when the Bollinger Bands trade in between the Keltner Channels. They work on all time frames. I like the Two Minute and Five Minute time frames the best for day trades. Five minute signals are more powerful than two minute signals, but happen less often.
How Narrow is Narrow?

As students of Bollinger Bands know, when the bands get "narrow", a breakout is about to occur. But how narrow is narrow? This indicator simply plots a value of 1 in the rare case that Bollinger Bands fit inside the Keltner Channel of the same length, and it plots a value of 0 otherwise. Plots the difference between price and the average of the midline and the Exponential Average of the same length as the BB and KC. When it is above zero (green), price is likely to break out upwards, and vice versa
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BB
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BB, KC
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BB and KC
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GOLD 240 Minute Chart
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BB, KC and MO
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BB, KC, MO and Squeeze
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BB, KC, MO and Squeeze
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How to manage the Trade

10 point stop from entry Sell @ +10 Move Stop to BE -3 Sell @ +20 Move Stop to BE +3 Sell @ Tick Extreme and Pit Noise or at Pivots or at Fib Cluster
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What is This
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Go with the direction of the Market dont follow the rotations
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GOLD 120 Minute Chart www.tradethemarkets.com

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Squeeze Swing Parameters: Gold

STOPS:
240 & 120 minute charts: $6.50 60 & 30 minute charts: $4.50 15 minute charts: $2.20
TARGETS:
Stay all in until momentum runs out Or, scale out every $2.00 until momentum runs out
Squeeze Swing Parameters: YM

YM Daily: If YM is within 50 points of 8 EMA, then bid at 8 EMA and trail bid until filled. If YM is further than 50 points, then bid at 8 EMA +20 points. Stop is 75 points. First target 75 points, then move stop to entry. Second target is loss of momentum on squeeze or trailing 21 EMA.
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Day Trade Parameters: YM

YM 5 Minute Squeeze: If YM is within 8 points of 8 EMA, then bid at 8 EMA and trail bid until filled. If YM is further than 8 points, then bid at 8 EMA +5 points. Stop is 20 points. First target 20 points, then move stop to entry -10 points/ Second target is loss of momentum on squeeze or trailing 21 EMA.
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Squeeze Swing Parameters: FOREX Daily
Daily Chart good for EURUSD, GBPUSD, USDCHF and USDJPY Once squeeze fires, place bid/offer 15 pips in front of 8 EMA. Trail until filled. Once filled, place 50 pip stop. Target on first half is 100 pips. If target hit, move stop to entry. Second half target is loss of momentum or trailing 21 EMA stop. Can also scale out every additional 50 pips if trading additional contracts.
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Squeeze Swing Parameters: Forex Intraday

60, 120 and 240 minute charts Once squeeze fires, buy pullback or sell rally to 8 EMA (5 pips in front) 50 pip stop Target is +50 on first half Move stop to entry point On second half use loss of momentum, trailing 21 EMA scale out every additional 50 pips, and move stop up another 50 pips.
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Squeeze Swing Parameters: FOREX Daily Exotics
Daily Chart good for EURAUD and GBPJPY. These two pairs MOVE. Once squeeze fires, place bid/offer 25 pips in front of 8 EMA. Trail until filled. Once filled, place 50 pip stop. Target on first half is 50 pips. If target hit, move stop to entry. Second half target is loss of momentum or trailing 21 EMA stop. Can also scale out every additional 50 pips if trading additional contracts.
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Attitude of a Trader
Right attitude will make or break a trader Biggest obstacles are Greed and Euphoria Greed Kills Greed takes over and mistakes kick in: overtrading, not sticking to parameters, yelling at screen All you can eat buffet: no reason to overload your plate on 1 trip; you can keep going back www.tradethemarkets.com 185
Attitude of a Trader (cont.)

Euphoria is worse than Greed Things are going great so double up! This is like eating a great dinner. It tastes really great. So, to make your life even better you order a second plate This will only end in one way: Badly: Develop a business plan and stick to it! www.tradethemarkets.com 186
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About Us Our Services

Each evening after we finish our market research, we post it on our site. We each have our own newsletter that discuss our own unique views of the market and discuss our trade setups for the next day There is also a free video series available for sign up on the site We have CDs and DVDs of previously recorded seminars available on The site that discuss our trade setups and philosophy in detail. We also develop indicators and systems available for TradeStation, And to some extent, eSignal, and these are available on the site.
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Live Audio Internet Trading Room Plays and market analysis in real time New members must be voted in
3 Day Online Workshop October 28-30
189
Q & A/Contact Information

John Carter & Hubert Senters Trade the Markets.com Austin, Texas USA [email protected] [email protected] Futures: www.tradethemarkets.com Forex: www.razorforex.com +1 512-266-8659
Trade The Markets
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Trade The Markets

Market Internals and More

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Released in December, 2005

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John Carters First Trading Setup

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Johns current trading setup in Austin, TX

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Professional Traders Workshop

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Trade The Markets (TTM) Trend What is it ?

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Trade The Markets Trend how is it calculated?

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Professional Traders Workshop

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Professional Traders Workshop

Part 5.1: TICK Internals

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TICK 5 Minute Chart

Audio Alerts at +/- 600, 800, 1000 and 1200 Ticks

Professional Traders Workshop

Part 5.2: TICK Fades & Hook Plays

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TICK 5 Minute Chart

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Extreme Positive Ticks

Extreme Negative Ticks

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TICK 5 Minute Chart

1st half hour

Choppy vs. Trending Days

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$TICK, NYSE, Bracket it, Hooks, down day 60/40, M&M.

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Part 5.3: TIKI Internals

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TIKI 5 Minute Chart

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Professional Traders Workshop

Part 5.4: Put/Call Ratio Internals