Today's Quote: “Ever notice that the area of a department store containing completely useless objects is called “gifts?” Anon.

There are several good books out there about trading that should be on every trader’s must read list. If you were forced to choose one and only one, the only possible pick would be “Tools and Tactics for the Master Day Trader”. We are going to run a series of excerpts from the best selling book for the next series of lessons. Now in the words of the master trader himself, Oliver L. Velez…

SECRET #1: THERE ARE NO GIFTS ON WALL STREET

There are not many certainties in the larger game of life. Death and taxes are two that immediately come to mind. It can be said that another certainty is change. But when it comes to the smaller game of trading or the market, the only certainty we can bet on is the simple fact that there are no gifts on Wall Street. If you think you have gotten lucky with a trade, time will usually reveal that what you initially felt was luck is actually misfortune. Take the trader who waits to enter a running NASDAQ stock after most of the market makers have disappeared from the inside offer price. If the trader gets filled when there is only one or two market makers left on the offer, it is almost certain that the trader really doesn't want it, or shall I say shouldn't want it. Whenever you think you've been given something, chances are you have been given something, something you don't want. This is akin to receiving a gift. And the simple truth is that no one on Wall Street is going to give up anything for free. Yes, there will always be mistakes made by even the most astute. And yes, there will always be the ignorant who perpetually buy and sell merchandise at the wrong time. But capitalizing on these events is what artful trading is all about.

This is very different from being given what you think to be a gift. I am referring to being lucky, to getting something you know you did not deserve. This is what the trader must be watchful of. In other words, profits and/or opportunities are taken in the market, not given. When someone gives you something, chances are it's a hot potato that you should immediately dish off to someone else, if you do not wish to get burned. This may not make you feel very good about yourself, but the Darwinian-like law on Wall Street is survival of the wisest and shrewdest, not survival of the luckiest. Take what you will, but accept no gifts. They don't exist, not on Wall Street anyway.

MASTER TRADING TIP

If you get something you know you did not deserve, chances are it's a trap. Always be a skeptic when something seems too good to be true. Here are a few examples of potential negative warnings being passed off as "gifts":

1. Your bid gets hit (you buy) below the current market price. This means someone wanted out of the stock so bad they were willing to sell it to under the current bid price. While most novices would be delighted, the master trader immediately becomes skeptical. The fact is, this person may know something that you don't. Whenever this happens, be on guard and ready to get rid of the stock at the first sign of trouble.

2. Your offer gets hit (you sell) above the current market price. This is the exact reverse of the previous scenario. It means someone was so anxious to get the stock they were willing to pay up for it. This could very well be a novice who does not know what he or she doing or an excited trader who's been bitten by the greed bug. But there are times when those willing to pay above the current offer (ask) price are true professionals. When they want all the stock that's available in the current area, they will be willing to buy above the market. This means the stock is likely on the verge of exploding on the upside. We teach our traders to get ready to aggressively buy back into the stock when this happens as a result of professional positioning.

3. One market maker is on the offer (ask price) displaying small size and you still get filled with blinding speed. This often means that the picture of strength being advertised is not really strength at all. Let's look at an example. Four market makers are bidding for (wanting to buy) a stock at $40 and only one market maker is offering 1000 shares of the stock at $40.25. At first glance, the stock looks strong because four people are willing to buy at $40, while only one market maker is willing to sell. However, numerous transactions go off at $40.25, yet the market maker posted at $40.25 still remains. Note: This means the market maker is "refreshing" his or her offer. In the midst of the flurry of trades going off at $40.25 you place a buy order for 1000 shares at the $40.25 offer price. You instantly get filled. While a novice trader might feel lucky about getting the stock at $40.25, the master trader would instantly become skeptical. Sometime the master trader's skepticism would result in an immediate offer of these shares for sale at $40.25 or even $40.37. There are, of course, many more scenarios, but we are sure you get the point.