The full title of this book is “Sniper Trading: Essential Short-Term Money-Making Secrets for Trading Stocks, Options, and Futures” by George Angell.
George Angell was a floor trader at the CME day trading S&P futures. Despite the book being published in 2002, it seems like the book is written at a time when traders still call up their brokers to place their orders, with time lag of a couple of minutes for orders to be executed. At least that was the context I gathered from the book.
Nonetheless, the book contained quite a number of good points on trading that stands the test of time. I liked his stories showing the traits of successful traders. The trading psychology section also contained a number of useful tips. I especially liked the visual image conjured when he wrote about the frightening emotional experience when he is trying to get out of a position while a hundred other people are trying to do the same. I agree with Angell’s point that it is not possible to be a successful trader without experiencing all the emotional stress and pain that trading brings, because you need to have experienced them in order to recognize it the next time you sense them coming, so as to not commit the same mistakes again. This keen sense of danger necessary for long-term survival in trading, needs to be cultivated through experience.
In terms of methodology, there were 3 main sections covering price and time rules to determine the second leg of a trend (essentially assuming that it will mirror the first leg), determining support and resistance levels for trendless days based on recent range changes, and day of week biases (which I presume would have changed somewhat over the years).
All in all, it is a pretty interesting book to read, especially if you are interested to learn more about trading in the pits and how trading was like in the past. I don’t think using purely the methodologies written in the book is sufficient for a total beginner to start trading successfully in the markets. Rather, the book shares ideas that would supplement what a beginning trader would learn as he or she takes the journey.
TRAITS OF SUCCESSFUL TRADERS
Size Based on Confidence, Add in Zones, Exit Quickly if Things Are Amiss
- Those who tent to succeed at trading seem to have an uncanny ability to identify big money-makers and capitalize on this knowledge by taking larger positions.
- The most successful locals would often test the waters with small positions and load the boat if they felt they were right. That is, they would vary their commitment depending upon their confidence in the trade.
- Moreover, they tended to place their positions within buy or sell zones where they could add with the knowledge that the trade still looked good.
- But once sensing that a trade was a mistake, the same trader would exit the market by going “retail,” or giving up the edge to another local, to keep the losses small.
TIPS ON ENTRIES
Fine Tune Your Entries to be Close to the Turning Points
- If you bought near the high of the day, and now profit-taking is setting in, you may have to sustain a greater paper loss than if you fine-tuned the entry and purchased right where the pullback should have stopped.
- Now that requires a certain degree of sophistication, but is not outside the realm of possibility once you can get a handle on how the market behaves.
The Best Time To Enter the Market is When the Most Uncertainty Exists
- The best time to enter the market is when the most uncertainty exists — just before a move begins.
The Premium is a Leading Indicator of Market Turns
- If the market is breaking like a rock, you’ll see all the corresponding indices — cash price, TICK, TICKI, Dow Jones — all knocking on the lows along with the futures price. Given this scenario, if you see the premium starting to rise, you know that someone is buying the market; this is the advanced signal that a reversal is imminent. The reverse, of course, is true at a market top.
TIPS ON FADING
Probabilities Favor Gap Fills If Prior Day’s High or Lows Are Not Exceeded
- Probabilities favor better than a 75% chance that an opening gap will be closed, assuming that the original opening price didn’t exceed the prior day’s high or low.
Never Fade the Afternoon Trend
- Trends in the afternoon have fewer crosscurrents. When the market makes up its mind, after 4 or 5 hours of churning, it runs without interruption into the close. Traders who are caught on the wrong side of the trend would likely panic as the day draws to a close and exit their positions, propelling the trend further.
- The trend also tends to go at twice the speed of the morning move.
- Buying new highs and selling new lows late in the day works.
- Hence, never fade the afternoon trend.
TIPS ON TRADING AROUND LEVELS
Pay Attention to the Third Attempt in Violating a Level
- A significant penetration of a support or resistance will often occur on the third attempt.
- Should the pattern fail to penetrate on the third attempt, you can load the boat to anticipate a market reversal.
- If, however, the third attempt is successful, the market isn’t coming back.
Reverse on Failed Breakouts
- Price rejection is the surest sign that the market is heading in the opposite direction.
- If you buy or sell a breakout and it doesn’t work, you must reverse sides immediately! Don’t think about the lost money. You don’t have time. Just do it!
Recognize the Difference Between Short Covering and a Genuine Rally
- Short-covering rally
- Market will rush up, go quiet, and after a moment or two at the top, then there will be a race to sell down.
- Genuine rally
- At the top of the rally, any selling from profit-taking will be met with renewed strong buying. The market will soon find new buyers coming in and the upward trend will continue its way.
FINDING GOOD MARKETS
Liquidity and Volatility are Necessary Requirements for Short-Term Trading
- When it comes to short-term trading, there are two key requirements — liquidity and volatility. Unless you have both, you aren’t going to enjoy the results. Their absence limits the available markets considerably.
- You need a lot of players both to give you a profit when you want one and to ensure that the fills are not out of line.
- You need the volatility — especially as a short-term trader — to earn a reasonable profit in the first place.
DETERMINING PRICE AND TIME FOR SECOND LEG OF A TREND
- Identify the first leg
- Measure only significant, pure, one-way moves.
- Measure low to high, or vice versa
- Measure elapsed time of move in minutes
- Establish the equilibrium point
- The equilibrium point is defined as two consecutive closes at the same price following the first leg of a trend.
- Where there is no precise equilibrium level, choose a midpoint across an area within the consolidation where a great deal of trading is taking place.
- Get the profit objective of the second leg
- Extend the equilibrium point by the length of the first leg
- Calculate the 0.618 retracement level, or point of maximum adversity
- Don’t place a stop, but watch the action at the level. If price is rejected, it is a sign of stop running. If the level is violated and stays violated, run immediately.
- Buy or sell at or near the equilibrium price
- You can average down in the consolidation zone between the equilibrium level and the retracement level.
- Always buy or sell inside the consolidation zone. If the market starts to run before you have an opportunity to take your position, let it go.
- Don’t buy on breakouts, you would sustain substantial risk and when you get filled the profit point may be reached.
- Calculate when the second leg should end — to the minute
- The second leg should take the same time as the first leg. Time starts not from your entry, but from a significant intraday swing point inside the consolidation zone.
- Exit if profit objective reached within expected time.
- Else use your judgment based on the market action.
- Exit quickly if the pattern fails
- If price broke out and went back into the consolidation zone (the zone between the equilibrium level and the 0.618 retracement), exit the market.
- Trade the continuation of the overnight trend
- The second leg of the first trend might be a continuation from the previous day, i.e. the first leg occurred in the previous day going into the close.
- Or the market may have sold off into yesterday’s close, open with a gap up, then sell back down to fill the gap.
- Use Market On Close (MOC) orders if target time is scheduled to occur in the final
- Late in the day, the market tends to spike irrationally in the same market direction. This is because those on the losing side of the market find themselves with little time left, so they will panic and rush to exit.
- Track all trades on one- and five-minute bars
- Use the higher time frame to focus on finding the two major trends a day. If you only look at one-minute charts, you will find yourself trying to capture minor moves.
- Use confirming indicators
- Look for divergences with indicators (e.g. slow stochastics, S&P cash price, DJIA, TICK, TICKI premium) to add confirmation.
- When TICKI gets above 24 or below -24, look to sell and buy respectively. Same applies when the TICK gets above 600 or 800 or below -600 or -800. Fade high and low readings in these indicators.
BUY AND SELL ZONES WHEN MARKET IS TRENDLESS
Buy and Sell Numbers
- Key numbers
- Rally number = today’s high – yesterday’s low (+ve unless market dropped such that today’s high stayed below yesterday’s range)
- Decline number = yesterday’s high – today’s low (+ve unless market rose such that today’s low stayed above yesterday’s range)
- Buying high number = today’s high – yesterday’s high (+ve if there is a higher high)
- Buying under number = yesterday’s low – today’s low (+ve if there is a lower low)
- LSS pivot breakout buy number = 2*X – today’s low (where X = average of today’s high, today’s low, and today’s close)
- LSS pivot breakout sell number = 2*X – today’s high
- Sell Envelope consists of 4 numbers
- 3-day average of the rally number, added to today’s low
- 3-day average of the buying high number, added to today’s high
- Today’s high
- LSS pivot breakout buy number (a.k.a. trend reaction sell number)
- Buy Envelope consists of 4 numbers
- 3-day average of the decline number, subtracted from today’s high
- 3-day average of the buying under number, subtracted from today’s low
- Today’s low
- LSS pivot breakout sell number (a.k.a. trend reaction buy number)
- Sell Number = Average of the 4 numbers in the Sell Envelope
- Buy Number = Average of the 4 numbers in the Buy Envelope
- Anticipated Range = Sell Number – Buy Number
- If the market is trendless, you want to buy within the buy envelope, and sell within the sell envelope.
- However a breakout above the sell envelope would be a buying opportunity and a breakout below the buy envelope would be a selling opportunity.
- You can add the Anticipated Range to the opening range low, or subtract it from the opening range high, to estimate the day’s boundaries.
Other Support and Resistance Levels
- Intraday highs and lows (same for prior day’s high and low)
- Floor traders like to run stops that are above the intraday highs and below the intraday lows. This will catch both breakout traders as well as trend followers.
- When prices reach intraday highs and lows, watch how the market trades, judge the strength of the side trying to break through. Does it look like the panic covering due to stops, or a real push?
- If you get it wrong, flip your position immediately!
- Fibonacci levels
- Take the opening range (e.g. 1 hour), multiply with 1.382, 1.618, 2.236 to obtain 3 numbers.
- To get resistance levels, add the 3 numbers to the opening range high (yes this is a bit odd because usual Fib application is to add to the low to make it an extension)
- To get support levels, subtract the 3 numbers from the opening range low.
- Entry rule
- Buy when prices breaks above the LSS pivot breakout buy number.
- Short when prices breaks below the LSS pivot breakout sell number.
- Exit rule
- Exit on close.
- On a trend day, there is a high probability that one end of the range will be registered early in the day (the 1st hour) and that the other end of teh range will be registered late in the day (the last hour).
- Initial stop: 50% of 5-day average range (not ATR)
- Trailing stop: 65% of 5-day average range.
- Risk management
- Only take 1 such entry per day, because if price hits both the breakout buy and breakout sell numbers, by the time price gets to the second number, it would have been exhausted, so the second breakout will likely fail.
MEASURING MARKET STRENGTH
- LSS 1-day strength index
- (close – low) / (high – low) * 100
- LSS 5-day strength index
- (close – 5-day low) / (5-day high – 5-day low) * 100
- LSS 5-day oscillator
- X = 5-day high – open 5 days ago
- Y = close – 5-day low
- Oscillator = (X + Y) / [(5-day high – 5-day low) * 2]
- The value will be 100 if in the 5-day period, it opened at the low and closed at the high.
- The value will be 0 if in the 5-day period, it opened at the high and closed at the low.
- Above 70, market is bullish.
- Below 30, market is bearish.
- Plot the 3-day average of the LSS 5-day oscillator to get a smoothed average that is more indicative of a market’s bullish or bearish sentiment.
LSS (Long, Sell, Sell Short) 3-DAY CYCLE
- Created by George Angell based on George Douglass Taylor’s Book Method.
- “L” Day (Buy): The market will be taken lower to allow buying at low prices.
- “S” Day (Sell): The market will trade near the previous day’s high, allowing selling at higher prices.
- “SS” Day (Sell Short): The market will open at an extreme high, allowing shorting opportunities that can be covered at a lower price at the end of the day.
DAY OF WEEK BIASES
- Best day to go long in a bull market when (i) the last Friday closed in the upper 2/3 of its range, and (ii) Monday opens above last Friday’s close.
- Rally in the morning, profit taking around noon, finally rally in the afternoon.
- Get in on open, out on the close.
- If Monday rallied, there will be a choppy morning to digest Monday’s move, then rally continues in the afternoon.
- However don’t buy on Tuesday if Monday was exceptionally strong.
- Choppy day of ups and downs.
- Countertrend day compared to the trend across Monday to Wednesday (e.g. 3 strong days followed by a weak Thurs, or 3 weak days followed by a strong Thurs)
- In bull market, high will be made earlier in the day, and market sells off late in the afternoon.
- Continues Thursday’s weakness. Once a final low is made in the afternoon, bargain hunters come in and the market rallies into the close.
- Weak Friday close >> Continued weakness on Monday
- Strong Friday close >> Continued strength on Monday
- The LSS 1-day strength and LSS 5-day oscillator readings at the end of Friday is a good indication of what would happen on Monday.
Don’t Trade a Size That You Are Not Prepared to Keep Trading
- Don’t risk losses on a number of contracts that you are not prepared to equal in pursuit of getting back losses.
- If you try to double your size each time you lost, you will soon reach a point where you simply couldn’t handle the trade anymore, which is your point of ultimate risk.
Don’t Take Overnight Risks If You Are a Day Trader
- The occasional added profit, when the overnight market cooperated, didn’t compensate for the time and money spent worrying about the losers.
- There are many reasons why you might want to go overnight. But don’t do it if you are a day trader.
Stop Hunting Occurs Around Intraday Highs and Lows
- Locals like to hunt stops around intraday highs and lows. However stop hunting is risky because you may end up buying at the high of the day or selling at the low of the day. That’s why knowledgeable insides only risk doing this with one contract, even if they are much bigger players. The small loss generated by a one-lot position is more than offset by the knowledge gained.
- If the floor tries to take the market lower to get the stops, but the sales are met with buying, sooner or later the sellers give up, you have a wholesale switch to the buy side, and the market soars higher.
The Well-Rested and Relaxed Win The Game
- Identify your own energy cycle and try to implement your trades when you are feeling your best.
- I make it a point to take time off during the lunch hour. You can use this time to recharge your energies.
- It has been my experience that “tick hounds”, who are glued to the screen all day, rarely do as well as traders who take time away from the market.
Don’t Let Yourself Be Distracted
- Don’t let other people or other things distract you while you are trading. Once you are focused on the market, you’ll find that there are subtle clues when a market is getting ready to move. If you are not paying attention, you will surely miss them.
Don’t Beat Yourself Up
- Don’t beat yourself up when you find yourself doing something stupid in the market. Everyone makes these mistakes. Capitalize on the experience by making a mental note of how you sabotaged yourself and vow not to make the same mistake next time.
Trade No More Than Two or Three Markets
- Learn to be a specialist and trade no more than two or three markets at the same time.
- It is okay to switch markets if the volatility and liquidity pick up in one and lessen in another. You want to be where the action is, and there are only a handful of good trading markets.
Focus on the Market, Not on the Money
- When you are focused on the money, you cannot think about the market and what it is likely to do.
- When you don’t think about the money, paradoxically, you’ll begin to make money. The people who win in the market are those who are relaxed and enjoy what they are doing.
Overcoming Your Fear of Pulling The Trigger
- You force yourself to trade, despite your fears of taking a trade and losing; then you do the same thing the next day. After awhile, this is no longer an issue; you just train yourself to do it.
- One trick to help you accomplish this is to refuse to think about the money, meaning you don’t count your wins or losses when you are in a trade. You wait until after you have closed out the trade to see exactly how much you have won or lost. This is not easy to do, but it is necessary if you are fearful of losing money and cannot pick up the phone.
Recognize When You Are Being Left Behind On The Wrong Side of the Market
- When I tell you to do your buying or selling inside the consolidation, this information didn’t come from a theoretical understanding of the market.
- I learned this from being on the wrong side of the market and trying to sell into a crowd of sellers. It is a frightening experience to be standing in the middle of the trading pit trying to sell along with a hundred other people. Where do you think the buyers are in such a situation? They are waiting for the market to bottom out so they can buy at bargain prices. There are no buyers on the way down.
- This is the type of experience that hits home. It is deeply felt. It is a lesson that you don’t forget.
Have an Inner Rock of Gibraltar
- Despite the chaos and confusion that often reigns in the market, the best trades have an inner Rock of Gibraltar in their personality. I’ve seen this quality countless times in the best of them. It is manifested in the ability not to panic, to try and size things up amid the often ongoing confusion, and to make sensible decisions.
- For example, when Challenger exploded, the market dropped like a rock. A friend had paper losses in excess of $50,000, but he didn’t panic. He waited and watched as the market slowly gained ground, and was even by the end of the day. The friend knew that the news was purely emotional and decided to wait.
Market Success is Not Due to Luck
- Luck is what comes to those who persist in their chosen activity.
- The lucky people are those who do what they love and have a capacity to do it well. Take any champion athlete, such as Michael Jordan or Tiger Woods, and look at their commitment to their profession. They may have been well-rewarded for what they do, but they have been concentrating on the job — not the money — since their youth. In virtually any field of endeavor, this is always the case. The genuine superstars never get there by accident.
The Shorter the Trend the Purer
- From the sniper perspective, the shorter the trend the better. In the shorter term, you have the so-called pure trends in which the market does indeed move in one direction. That means you endure little or no adversity while you hold the trade.
- The longer you hold a trade, the greater the likelihood that you will encounter crosscurrents — consolidation phases, profit-taking, and the like. That means the more likely you are to get out in error on a temporary pullback.
Buying at Bid and Selling at Ask is Not a Sufficient Edge
- Pit traders (the locals) were often edge traders who buy at the bid and sell at the offer (that is their edge), trying to nickel-and-dime the public orders. Such edge traders would make money 19 out of 20 trading days a month and lose an entire month’s trading profits when the market suddenly breaks and runs strongly in one direction.
- It is better to have never made the money at all than to lose it on one panic break.
- You need to understand the market so that you will see the trends developing.
The Search-and-Destroy Day Pattern: Rising Tops and Falling Bottoms
- My note: Angell aptly labelled a rising tops and falling bottoms day pattern as a search-and-destroy pattern, which I found is very true, because it would destroy both trend following traders as well as range traders.
- Handle: One S&P point. If S&P moved from 1599 to 1600, it went up one handle. S&P futures trades in increments of 0.10.
- Even: A whole number figure, e.g. 1600.00.
- Half: A half figure, e.g. 1600.50.
- At: Used to preface offers, to distinguish them from bids. E.g. “At eighty!” = offer to sell at xxxx.80
- Bid: Used to identify bids. E.g. “Even bid!” = offer to buy at xxxx.00