Today's Quote: “Obstacles are like wild animals. They are cowards but they will bluff you if they can. If they see you are afraid of them ... they are liable to spring upon you; but when you look them squarely in the eye, they will slink out of sight.” Orison Swett Marden.

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 #13: PAYING UP FOR STOCKS BETTERS THE ODDS

One of the most frequently asked questions regarding our stock market approach is, "Why do most of your trading strategies call for buying a stock above the current price?" "Why not buy the stock exactly where it is, which would result in a cheaper price?" Despite covering this topic in much greater detail in a later chapter, I will attempt to answer these questions in two parts. First, it should be clear that we specialize in two forms of trading. We are professional swing traders who focus the bulk of our efforts on discovering stocks that are on the verge of a near-term multi-day move (1 to 5 days). We are also professional intraday traders, who focus on discovering stocks on the verge of a micro-move over the next few moments. Obviously, with such short-term time horizons, we can't afford to tie up huge chunks of our capital in stocks, which may linger on the launch pad for days, weeks, or even months. As a result, we demand a stock to demonstrate its ability to move in the desired direction before we jump on for the ride. If it fails to show the strength, power, and tenacity required to take out the many sellers above it, it gets eliminated from our consideration. Tip: Remember that all stocks are bad unless they go up. Secondly, and just as important, our approach of buying a stock on strength has saved us more money than any other trading tactic (besides the stop loss) in our arsenal. I cannot even count the times a stock in which we were interested failed to rise above our buy point, only to close down $2, $3, or sometimes even $4 on the day. I can say with great confidence that if we were in the habit of buying stocks at the market, right at the open, as many novices do, we'd be a little bit poorer today. Now, some people may say that we are wrong when a stock fails to meet our buy criteria and subsequently moves to the downside. However, we regard ourselves as being absolutely right when this occurs. Keep in mind that each one of our buy recommendations is really saying, "We like XYZ, but only if it can show strength enough to trade above this price." In short, our specific "buy-above-the-current-price" strategy saves us from a lot of unnecessarily hefty losses. Isn't knowing exactly "how" to buy just as important as knowing “what" to buy? You bet it is.

MASTER TRADING TIP

The master swing trader, one who looks for 1- to 5- or 10-day moves, typically looks to buy a desired stock once it trades above the prior day's high. The master microtrader or day trader looks to buy once the desired stock takes out the high of a 2-, 5- or 15-minute bar on the price chart. The master microtrader knows that picking the exact bottom would be more profitable, but has learned, often the hard way, that the only traders able to consistently pick off the bottom are liars. So, the master trader lets those who think there are supermen or superwomen waste their money away in a futile attempt to catch the bottom. The master microtrader simply waits for the stock to signal that the coast is clear. That signal is the stock's ability to trade above the last period's high as described earlier. Only when it has gained the strength to do that does the master trader consider risking his family's financial future. Note: We thoroughly cover the art of properly entering stocks in a later chapter.