Summer Reading Was the Thin Tape

It has been a scalper's market lately for us momentum traders, I'm afraid. During slower summer months, the ranges tend to narrow as volume drops, and we are left with smaller swings. That has meant that a lot of my plays over the last month were smaller scalps back and forth.

A friend said he might have picked a lousy time to learn to trade, given these conditions. But I believe it's the perfect time to learn to trade. If you can learn to survive during a drought, you are sure to flourish when it rains. If you can perfect your skills at reading tops and bottoms during difficult trading periods, you will be well-prepared to take advantage of the wider swings that come in when volume returns; in this case, after Labor Day.

One of the first things people want to know when they are learning to trade is, "How do I read the tops and bottoms?" Reading direction changes in a stock is an important part of momentum trading, but it's only part of the equation. It is like someone learning how to hunt asking "How do I shoot a bow?" without knowing how to choose, track and find game.

Anticipation and Confirmation

Before I even start looking for a top or bottom, a trade needs to first meet many criteria. I divide the work behind a trading decision into two phases: anticipation and confirmation.

Anticipation sets up the trade, and it is equivalent to tracking and finding prey. In this phase, I'm checking four main criteria: predictability, price movement, barriers and volume.

Above all, a trade needs to be predictable. To qualify as predictable, the stock should be following a pattern of some sort. This could be a price action pattern or a time-of-day pattern. For example, a price action pattern could be a stock consistently pulling back 50 cents from its opening price before making a first bottom. A time-of-day pattern might be something like the market climbing in the first half hour and topping consistently around 10 a.m. EDT. These are patterns I can anticipate, and that helps me time the trade.

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Ken Wolff is founder of MTrader.com, the first educational daytrading site on the Net, and co-founder of Investingonmomentum.com, a Web site devoted to short-term potential for retirement accounts. TheStreet.com has no affiliation with InvestingOnMomentum.com, and no endorsement of InvestingOnMomentum.com or momentum trading is intended. At the time of publication, Wolff had no positions in any of the securities mentioned in this column, but positions may change at any time. While Wolff cannot provide investment advice or recommendations here, he appreciates your feedback; click here to send him an email.