Trading Dummies

B

Babak

This is a journal dedicated to a very simple pattern called 'dummies' as propounded by Chairman Maoxian.

Complete lessons can be found here.


What you will NOT find in this journal:

*any discussion of indicators (CCI/MACD/OBV/RSI/etc.)
*volume patterns or their meaning
*Guassian, iterations, 8 step this or that, putting 1-2-3 or any other buzz words devoid of meaning
*complex or difficult to understand concepts
*impenetrable language which tries to pass itself off as complex (and therefore intelligent) and requires you to have a Vogon-English Unabridged Dictionary


What you will find in this journal:

*a simple, easy to understand way to trade one recurring pattern


I'm doing this because I want to show that trading does not have to be complex or difficult. Often people, especially those new to trading, believe that the more esoteric, complex, and difficult to understand, the more that concept or strategy has merit. Or that the more they have to struggle to understand and slough through a strategy, the more successful one will be. This is hogwash.

In fact, the power of a concept resides in its simplicity.

For those new to 'dummies', I suggest you read every single lesson before you read this journal. There are more than 100 separate and unique examples/lessons. I don't want to repeat things that have already been said over and over again by the Chairman. You'll find the lessons to be repetitive (this is about one pattern, remember?) but they will give you a good grounding on the nuances that will come later.

Oh, and I'm putting this journal together without CM's foreknowledge or blessing. Although being the nice guy that he is, I'm sure that he wouldn't mind.

Some basics:

The pattern usually sets up in the morning so many times you will be done by noon or sooner. It is an intraday strategy but you can decide to take all of it or some home with you. The pattern is mainly for entry and although an exit strategy is provided (trailing stop), realistically, you will have to learn and adapt your own trade management and exit strategy to suit your own needs.

Since this is an intraday strategy and since we are alerted to it via market scans (looking for unusual moves in price and heavy volume signalling lots of liquidity) it is not possible to give 'watch lists' or potential signals, before they occur. I'll try to post a short alert if a certain symbol is setting up during the day but I will not be writing posts as long as this, explaining entries, reasons, etc. That will be for after the market closes. So this journal, for the most part, will be looking at the dummies pattern as it happened for that trading day (not during).

If you wish to follow along, set up your IB marketscanner to pick up unusual volume/price movements and also look for unusual gaps up/down with volume in premarket. If you don't know what IB is... you need to crawl out from under that rock. :D

ok? Hope that's all clear.

(I would also like to ask as a favor that we don't clutter up this journal with unnecessary posts as I'd like it to be easy to follow for those new to trading or ET. Thank you.)
 
First one is from yesterday (I'll post one for today a bit later).

Its important for you to understand two things. One, if you really want to learn this, go back and read CM's lessons. All of them. It is a simple concept but there are no shortcuts.

Two, I have tweaked it and do not 100% follow what CM says all the time when it comes to dummies. As you'll see in this example.

ATYT gapped down in premarket and was trading quite briskly. This is one of the things that I watch for. This shows me that there is a surprise as many traders will find it going their way and others will find it causing losses. Volume was heavy in pre market and volume normally is quite good (avg daily) so I monitored it. What I noticed was that in the final half hour of pre market it was firming up nicely.

Note: if there was a gap but no volume in premarket and no volume in daily, I would have discarded ATYT from consideration. You need the stock to be liquid and to have the market's attention.

Look at the attached chart (I emailed CM re a Q and he was kind enough to make it for me). Its a 2 minute chart btw.

CM plays the dummy pattern by going short when it falls and long when it goes up. But I play it a bit different. I don't make that sort of black and white decision because I know that often a stock gapping hard can shoot back the other way to close the gap. This is what ATYT did in fact.

Dummies looks for an inside bar or counter trend bar to form. CM uses 15 min or 30 min as entry/exit. I use shorter time frames, like 2 minute or 5 minute. I'm trying to practice more patience and calmness so I'm trying to stretch it out to longer time period, slowly at first to 10 then 15 minutes. Anyway getting back to ATYT:

Looking at the chart you'll see that after the zoom higher from the open price paused and came down a bit. The fourth bar is the key. That is what I was watching for (black arrow). Basically if you zoom in to a shorter time frame what is happening is a coil is forming. Price is being squeezed and the plan is to ride it as it expands out of that contraction.

That is our guide for an entry. Entry is buy (because of my long bias since this is a gap down) stop at price slightly above this 4th candle (an almost completely inside bar in blue). Stop is a few cents below the 3rd and 4th candle.

ok? Is that clear? Once or if, it goes your way, you can decide to leave your stop loose (as CM does) or tighten to BE (as I tend to do).

They don't all rocket higher like ATYT did but the concept is the same. Look for moving, liquid stocks. Watch for an inside or counter bar and buy/short outside this bar. Put stop below/above signalling bar. Manage trade.

The point is to go with the trend. Not against it. But to enter on a pause so that your 'uncle' point is clearly defined and minimized. The point is we are shooting for high R trades (see Tharp).
 

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And for todays:

I hope it would be obvious why OII would have one's attention. It went totally apeshit, jumping from 46 to 50 in no time this morning.

As per dummies, we wait for inside bar to form. It forms on the 5 minute chart at 10 am. Buy stop would be above this candle and stop loss would be a bit below this candle.

Why would one go long and not short this?

Because long would be going with trend of day (and multiday).

Because of Katrina and all oil stocks/refiners going up mad.

Because it did not gap up but ramped up.

ok? hope that's clear. And yes, these are 'cherry picked' examples. There are others where dummies fails and causes losses. But the whole point is that it allows you to enter at an intelligent point with a plan so that you will know when those losses are telling you that your plan/theory/prediction (whatever you want to call it) was incorrect. As Mark Cook says, learn to love your losses. Your profits take care of themselves.

Remember, 'dummies' is not the golden key to unclasp the treasures of the market. Its just one simple strategy. That's all.

And unlike other strategies where you have to thump your head against a brick wall for 2 years, it only took you around 30 minutes or less to grasp.

Hope I've delivered so far as promised: no indicators, no volume analysis, no jargon, no idiotic buzz words. Just a simple plan that can be played over and over again.
 

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sunny, I'm more into swing/position trading (if you've read some of my other posts I mentioned that I was long energy and short airlines). I'm looking into CM's 'dummies' as an intraday/morning play. The best person to ask your questions would be the Chaiman himself (see above link).

candle, no the picture is not me. That's CM. I'm much better looking :cool:

Today I was beset with a virus (BYTEVER.A) and spent the most part of the morning/noon doing online scans, cleanup and installing new antivirus. I'd really like to meet the dildo who wrote those pieces of code and show 'em my appreciation.
 
Other than the numerous dummy lessons I linked to above, you an also find a lot of references to the pattern in other places on CM's website.

For example, he has a regular chat on different topics and at the end of the chat goes over people's trades offering advice, etc.



The above is from the most recent chat (about the newspaper industry and stocks)
 
I wanted to address a topic which has been brought up about 'dummies'. Several people have pm'ed and repeated what sunnyskies asked. That is, they want to know the winning % of this strategy.

First, its impossible to give such a number since this is not automated trading but discretionary. I might see a stock on my scanner and trade 'dummies' in a totally different way than you would (or the Chairman would, as I've detailed in the ATYT example) - and we could both be profitable, or not.

Second, focusing on the % win is a red herring. The expectancy of your method and the number of times that you get to put it into action are what matters. For those that are not familiar with what I'm talking about, please read Tharp's books.

As I've said, I'm new to 'dummies' as well. It is a neat new strategy that I thought I would bring to the board's attention and perhaps in doing so demonstrate that trading doesn't have to be complicated - involving charts that look like a child's first discovery of a ruler or opaque words and meaningless jargon. My motivation was also selfish in that I thought by sharing it and talking about it, I would gain a better understanding.
 
For yesterday I'll go over BEBE as a dummy play (see chart for numbers):

1] It was on our radar because its price and volume showed a lot of 'unusual' activity

2] It formed a narrow range bar (inside bar)

Long or short?

I would have shorted and here's why. It gapped down but not that hard (only 10%) so I wasn't in snap back mode. Also, I look at the morning price action. Notice the wide range bar that is dark? That's pretty ominous. As opposed to say ATYT (previous example) where the wide range bar was white. Also you might throw into the pot that this has not been the greatest market for retailers, blowing up right, left and center. So by going short we are going with the trend.

But notice that the Chairman would have gone automatically short because for him the trend is down. That's all he relies on for the signal. Much simpler than my tweaks.

So we would short below the 3rd bar with a stop above it.

4] Depending on how loose you put your stop you might have been shaken off. The next bar just peeked outside and then went back down. This is why I recommend putting stops a little (few cents to nickel) outside the 'signal' bar's extreme. If one was kicked off with a stop, it was no big deal really as you would be implementing your plan and go on to look for the next pattern.

As mentioned you would trail stop as/when it goes your direction. Whether you get out at the end of the day and make it a day trade or carry it overnight is up to you. You can also do half/half, etc.

The whole point is to take the essence of the pattern or strategy and then mold it to your own trading requirements.
 

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