Today's Quote: “You must first have a lot of patience to learn to have patience” Stanislaw J. Lec.

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 #8: IT USUALLY DOESN'T PAY TO TAKE PROFITS BEFORETHE OPEN

As mentioned in Secret #7, in today's age of electronic access, traders have the same ability to sell in pre- and postmarket hours as the professionals do. Through the use of the [your broker’s] trading system, our in-house and remote traders can access the market several hours before the market opens and several hours after it doses. Soon, 24-hour trading will commence on all the exchanges, and conducting trades during any time period will be considered normal; however, until this occurs, we actually teach our traders to refrain from trading heavily in these extraneous time frames. We teach our traders to especially refrain from selling a stock before the open, if it is trading up in premarket activity. Why? Because we have found that stocks trading up in premarket activity generally trade a bit higher right after the open. This is because market makers on the NASDAQ will rarely reveal the true picture of the stock before the opening bell. And why should they? Wouldn't this be akin to them showing the world what their hand is before the game commences? Of course it would. My experience has taught me that if I am able to sell my merchandise (stock) before the rest of the crowd at a price perceived to be attractive, the price is really not that attractive. We must always remember that there are no gifts on Wall Street. Let's look at a quick example to further illustrate this point. Let's assume you own 1000 shares of WXYZ, which closed at a price of $20 the day before. About 30 minutes before the opening bell, you turn on CNBC and your level II execution system. You are pleased to find that WXYZ is being bid up $1.25 by several market makers. On your level II screen you see that you can hit Merrill Lynch's bid of $21.25, locking in a $1.25 gain or $1250. You think to yourself, "not bad for two clicks of a mouse button. Life is grand." Yes, life in this scenario is grand, but in most cases, life would become grander if you simply waited for the market to open. Staying in the trade until a few minutes after the opening bell will statistically result in a higher sell price. Of course this is not always the case, but it certainly is the case more often than not.

MASTER TRADING TIP

The master trader knows that most stocks being bid up in premarket activity trade a bit higher after the opening bell. They recognize that novice traders tend to place market buy orders before the opening bell, and these accumulated buy orders often add more fuel to the stock's upward rise. If the market, as measured by the S&P futures contract, is strong during premarket hours, we might yell out something like the following to our traders: "Hey guys! The market is strong and the WXYZ we bought yesterday is up very nicely in premarket trading! This means there are a lot of greedy novices who want what we have, and they are willing to pay up for it! This is why the market makers are adjusting the price upward. They want to make these novices pay, and so should we! Don't even think about selling your WXYZ until the market opens! That would be giving up your merchandise too cheaply. We will have plenty of novice-driven market orders to get us even better pricing!"

Note: Whenever we have a trader, who is holding a rather large but profitable position that is trading up in premarket activity, we instruct him to sell half before the bell, with the idea of letting the rest ride into the open This is an excellent alternative if the premarket gain you have starts to bum a hole in your pocket. Tip: When in doubt about which one of two possible actions should be taken, try to do both. The truth is usually in the middle.