Kevin Haggerty

Kevin, you told us earlier of a really good OTC trader at Andover who watches for long consolidations. In that situation would you put in a limit order and let it get hit by the market, or would you just watch and place your order when the market got to where you wanted to enter?

Kevin Haggerty:

If it’s a long, narrow consolidation most traders will put in marketable limit orders. Often, they will buy half of the position on the first breakout and if it trades back into the range, they will buy the second half when it breaks out over the top of the consolidation the second time. When you enter an order in the over-the-counter market in a stock that’s potentially in an explosive breakout pattern, a market order wouldn’t be wise.

Submitted by Moderator:

A pullback is a short-term correction or retracment in a trending move. For example, If a market has been trading up, it may “pull back” for several bars before resuming its move.

Submitted by stokguru:

I’ve heard many professional daytraders recommend never making a trade until after 10:00 a.m. due to unsettled, choppy trading in the first half hour of trading. Your opinion?

Kevin Haggerty:

I can understand why some traders do that, but I feel that some of my best trades come in the first half-hour. The reason I say that is because of my institutional background. I like to identify trading situations right after the opening that combine market dynamics, specialist interplay, and institutional activity. An example of this is when a specialist gaps a stock up at least 75% of the stocks average daily range due to S&P futures buying, or vice-versa. That first contra trade is usually a very good one, but you have to be fast with tight stops.

Submitted by Trial User:

What factors would you use to decide to short an open or buy an open after a gap up? Ive noticed some stocks run from the open and some tank-Thanks

Kevin Haggerty:

I will fade an extreme gap to the upside or the downside assuming the gap is at least 75% of its 5 to 10 day average daily range. Most of the time, due to the specialist or market maker, they will open the trap door, take all the sellers out, or let all the buyers in, and then there’s usually a nice contra move back the other direction that will come close to making up a lot of that gap. The problem that you face on trading gaps is to get the information that the stock will gap, because you want to fade it on the opening. I stick with NYSE stocks when I do this.

Submitted by Moderator:

The book should be available in the next several weeks.

Submitted by Mikemore:

How does the behavior of the S&P futures influence or impact your trading?

Kevin Haggerty:

For the daytrader, it’s the whole game. If you’re trading in stocks that are involved in the S&P 500 programs, and those are most of the major trading stocks, you have to be familiar with the buy levels, sell levels and fair value. It’s very important to base your trading on the cash index and not the futures. The good news is that programs give you the opportunity in an uptrend day, if we get a flash program to the down side (a sell program), you get to buy an uptrending stock on a pullback, and vice-versa. The bad news is that you might get stopped out of a trade once or twice due to programs, and that’s a problem from a capital standpoint.

Submitted by unilev:

Do you have problems with the uptick when shorting stocks?

Kevin Haggerty:

That’s a very good question. Larry Connors often asks me how often I play the short side, and my answer to that on an intraday basis, is probably no more than 10% of the time and the problem is clearly getting an uptick and the price you want to short it at. If you’re sitting upstairs without access to floor information, it is very difficult to short stocks. What I like to do is, if I’m playing below the rim, and the stock is trending down, when it retraces back up to some geometric proportion, that’s when I get the opportunity to short it on a plus tick, and I will at every chance I get. If it’s a continuation pattern, where you’re shorting just below the prior day’s low, well, the bottom line there is, you don’t always get that opportunity because it might just be an obvious short and you have too much competition. I find my best short opportunities come within a 10-day time frame using puts or bear spreads.

Submitted by Moderator:

Submitted by Moderator:

Trading at mid-point or offer side refers to trades occurring at prices half-way between the bid-ask prices or at the ask price (or closer to the ask price than the bid price).

Submitted by Moderator:

This concludes our Live Forum. Thanks for all your great questions, and thanks to Kevin Haggerty. Be sure to check out Kevin’s commentary every morning–the live audio version is at 8:30 a.m. ET, and the delayed audio and print versions are at 9:15 a.m. Come back next Thursday, April 15, for our next forum.

Submitted by tniarhos:

When using 5-minute intraday charts, what period should be used for the simple moving average and the expotential moving average?

Kevin Haggerty:

When I’m using a 5-minute intraday chart, I generally use a 13 period exponential moving average. I have seen others use a 20 or 21, and I don’t know that it makes a major difference, just that I feel I force myself to take more trades using the 13 period moving average. I incorporate that with interpreting bar chart patterns.

Submitted by jed212:

Kevin: As an investor who would like to get involved in trading, I find myself overwhelmed with the number of different trading possibilities, strategies, and sources of information. How do you suggest I proceed in this blizzard of information?

Kevin Haggerty:

This is a wonderful question. Thank you for asking. I, for one, know and understand a lot of different patterns, which in reality are nothing more than getting on board when something moves above a prior price. I suggest you learn no more than three or four patterns. I suggest those patterns be simple consolidation patterns if you plan to get invovled intraday. They are the easiest to read and also usually the most profitable. One example is buying a breakout on a very long, tight consolidation pattern on a 5-minute chart to the first new intraday high. When the book comes out, you will be able to select a few more patterns which you feel comfortable with and which you are able to recognize without any difficulty. THe best over-the-counter trader that I know at my firm, at Andover, trades one pattern, always in the over-the-counter stocks, and that is always a long consolidation at the intraday high, or after a substantial move down when there is at least a couple of points between the low and the high, and he’ll play that pattern from the low. He searches all day and scrolls through his 5-minute charts to identify those patterns. Unlike most people, I firmly believe in paper trading. If you are honest with yourself, and you buy it on the offered side, above your pattern, and you sell it on the bid side, you have to write your stop down on paper and go from there.

Submitted by trtucker:

Lately, the market seems to find direction about 1/2 hour after the open. Do you agree and if so, is this normal?

Kevin Haggerty:

I agree with you. Recently, it looked like search and destroy missions by the futures traders and the asset allocators. It seems to happen more frequently at the end of each quarter and during the reinvestment period. It’s also not very unusual.

Submitted by leoceans:

Kevin, I checked through your picks for today, and they most all made money. I am impressed. How is the best way as an individual to watch those stocks during the day? Do I need a ticker tracking them (real time)? What do you suggest? Thanks.

Kevin Haggerty:

Firstly, our patterns that we tell you to focus on are high probability situations if you get entry. The entry of most of those patterns is based on a continuation above the prior day’s high or close (on occasion). You must decide before the opening which one you want to play and prepare to execute. You should only enter one of these trades if it trades through your entry price, if the market looks very strong, or if it gaps only slightly. If you can’t track them real time, don’t get involved on an intraday basis at all. If, in the case of, for example, the gaming stocks that we talked about last month, where I clearly said that these were better position trades, you’re going to take a position trade in a stock, you must be prepared to enter stops with your broker so that you don’t have to watch the screen all day.

Submitted by Trial User:

All transactions in the market have two parties. Should we as traders base our trading decision on the trades of the market maker or the public customer? When one is buying the other is selling? Can the public control a stock more than a market maker can in some instances?

Kevin Haggerty:

I want to follow whoever is making the bids or the offerings on a continuous basis. The market maker (if you mean the specialist on the NYSE) is obligated to take positions against the trend, up to a point. Unless you have direct access to the floor of the NYSE, you have no way of knowing whether it’s a retail order, a specialist order, or an institutional order. Having said that, when you get the specialist, the buying public, the program traders and the institutions all on the same side, that’s when you want to act. Even though the specialist will still have to provide some limited amount of stock on the opposite side, they will try to position themselves on the side of the large buyers if they can. Oftentimes, they can’t.

Submitted by TomSKay:

Can you explain what you mean by “fair value” and how you calculate it.

Kevin Haggerty:

Good question. This will be better for everyone if we post it on the site.

Submitted by Moderator:

Welcome to the tradingmarkets.COM Live Forum, featuring Kevin Haggerty.

Submitted by uptick:

How do you go about narrowing down & selecting a trading list the night before? Using the various lists in tradingmarkets.com, how would you go about selecting a short lists of stocks to trade next day?

Kevin Haggerty:

The first thing I do on tradingmarkets.COM is go to the relative strength screen. I screen for stocks with a relative strength from 80 – 99, $40 and over, with a volume of at least 500,000 shares. I go through every one of those stocks and look for patterns. The second thing I do is go to the pullback list. I check the names on the pullback list versus the relative strength list, and see what patterns pop up. I then go to the explosion list because I love narrow range patterns, especially in highly volatile stocks, and I look for that kind of a pattern, and any other pullback pattern. Because of the kind of market we’re in right now, I favor stocks that have briefly pulled back from their highs. Then, for my final determination, I go and check the volume of these stocks, and I look for any clues in the volume that tell me that the stock is ready to go. On pullback patterns, I want the stock to have closed above the midpoint of the prior day. The last thing, and I don’t know that many of you have it available to you, is many times based on a stock that has traded more of its volume on the offered side rather than the bid side, assuming we’re looking for buy trades.

Submitted by Everett:

Kevin,

Kevin Haggerty:

I define gap openings as extreme and normal. Extreme is when a stock is gapped open almost equally to its average daily range for the last 5 to 10 days, or at a minimum 75% of that range. Any time I fade a stock on a gap, it is usually an extreme gap. A normal gap is when everyone in the media gets a little excited about something, and stocks all gap up to about one-third of their average daily range.

Submitted by Moderator:

Kevin, what are the different kinds of market dynamics you look for when you’re thinking about taking a trade?

Kevin Haggerty:

The market dynamics I look for early in the morning: The first thing is the futures, and whatever news made them go up or down. That lets me anticipate what kind of opening we’re going to get in the NYSE. I’m looking for premium level on the futures, but only related to the S&P 500 Cash index. I’m looking to see which direction we take from the opening and whether the futures trade at fair value or better than fair value. I take a look at all the sector indexes to make sure they’re all turning green or predominantly green on my screen, which means that they’re up for the day, and I look for what kind of volume is coming into the key stocks, the market leaders for the past few days, the stocks we’re looking to trade. In the first 10 – 15 minutes, let’s assume it’s an up opening, if the stocks are not gapped too much, I want to see bids larger than the offer, and I’d like to see the stock trading at the midpoint, which is in between the bid or offer, and preferrably I’d like to see the stock trading on the asked side.

Submitted by tmvaught:

Kevin, At the end of day when the internal’s are as strong as they were today, and you’ve got a position in a “leader of the day”, What do you look at to decide whether to close it or hold it looking for an “up” Friday?

Kevin Haggerty:

It used to be, if you had a profit, you might sell half at the end of the day and take half home. That was before program trading started to dominate. Now, if I turn a day trade into a position trade, I will either buy puts and keep the stock, or preferably, buy an in-the-money call so that I have a defined risk, and is of course much cheaper than the stock. It’s only overnight, so I’m not concerned about implied volatility. I don’t like the feeling of a gap down opening on the following day.

Submitted by Philr:

Kevin, do you ever use indicators like the MACD, stochastics or momentum? If so, which do you prefer, and why?

Kevin Haggerty:

I use them more as filters and longer-term position trades. On intraday trades, or 2 to 5 day trades, if you’re selecting high relative strength/high momentum stocks with an ADX of 30 or above, and the stock is, of course, trading above its 50-day, 200-day and preferably 20-day, the indicators won’t help me make a whole lot of money. When indicators that you mentioned in bull markets get overbought, they stay overbought for a long time. If I had to choose one for a short-term position trade of 2 to 10 days, I prefer the MACD because it’s simple. For an intraday or 2 to 3 day trade, I prefer a fast 710 stochastic.

Submitted by Moderator:

Submitted by rsmith:

What kind of day would you not trade?

Kevin Haggerty:

Good question, because we just had one on Wednesday. It was a non-directional, divergent day, almost totally controlled by the futures and asset allocators as evidenced by the spyders crossing their opening price 8 times during the day, never once establishing any kind of trend. I did not do well! Maybe it’s just me.

Submitted by darvas:

How do you identify the true market leaders? How does a stock get on your buy list?

Kevin Haggerty:

I identify true market leaders by selecting the stocks that are responsible for moving the averages higher because in this environment, which is so hard for the portfolio managers to beat the S&P 500, and because of the narrow breadth (nifty 50), the institutions all have to overweight themselves in these stocks. As we’ve seen in the last year, there hasn’t been much of a rotation as opposed to the reduction in the amount of stocks that are leading the market. Because I prefer the major S&P 500 stocks, it is a very easy list to compile. Bottom line, you’re buying the top performers.

Submitted by Moderator:

Do you have hard and fast rules–say, a certain number of shares have to be trading, or the tick has to move up by a certain amount–or is it more about how the different pieces of the market dynamics puzzle come together at a given time?

Kevin Haggerty:

I don’t want to see one’s and two’s trading coming in from the DOT machine. I’d like to see some blocks start to trade (5,000 or 10,000) and if I’m buying stock, I’d like top see the bid raised and the offer raised. If I’m deciding on which stock to pick from a list of 10, such as I give you on tradingmarkets.COM in the morning, I will gravitate to the stock where I see the dynamics come right out. The most important piece of the dynamics puzzle is that it’s a leading stock, institutional favorite, and preferably closed the day before above the mid-point of its range. If we get carry-through buying on the next day, and the dynamics are right, I will enter the stock many times before it even trades above the prior day’s high. The only reason I do that is because, I think, “Why should I wait?” if I see the elephants coming for the stock. It’s not the pattern that makes me money; it’s the institutional buyer that’s moving the stock up that makes us money. Why wait? If you see him come for it, just jump in!

Submitted by Moderator:

Kevin is speaking in terms of short-term trading (and not necessarily just day trading), not about his work at Fidelity.

Submitted by wadertrader:

What market dynamics help you decide exit points.

Kevin Haggerty:

My exit points are very fast on intraday trades; therefore, I get stopped out often at small losses, but I feel that just helps set up the trade for me. When I take a position, I assume I’m wrong until the market proves me right. I don’t wait for my seelcted stop, whether it’s one-half or three-eighths, to get hit. If the stock doesn’t move in the next 2 or 3 bars on the 5 minute charts, and the stock doesn’t start to trade at the midpoint or on the offer, the market is telling me I’m wrong. If it can’t go up, there’s only one place left for it to go, and that’s down. Program trading is obviously a major assist to help you exit, but having said that, if I make a fast sale, and I detect that it’s just program trading that’s selling the stock down through my stop (but I can never be sure) I might go right back in and buy that stock as I see the ticks get better, if it was just small, fast sell program.

Submitted by Moderator:

If you have a question, ask away!

Submitted by Moderator:

What are the most obvious signs that institutions are moving in on a stock?

Kevin Haggerty:

THe most obvious signs are volume and the persistence of price. If the market is trending or neutral, and there’s either not enough selling out there or there’s more than one institutional buyer, if they want to own that stock, they will instruct their brokers to stay with it and to get some volume in. Once they get about half of the order finished, and they’ve got decent prices, and they have a decent volume-weighted average up to that point, they can afford to sit on the bid side, possibly try to scale down, if the market is selling off after a morning rally; but, if the market turns in the afternoon and starts to trend up again, and other buyers show up on the floor, they will get very agressive to complete their order. This is one of the reasons why we see so many explosions in price during the last hour and one-half of trading. When this is coupled with buy programs kicking in, you have the opportunity to make a good trade.

Submitted by Trial User:

I’m thinking about becoming a short term trader. What do I start studying to get the basics? CW

Kevin Haggerty:

1. Read our book when it comes out.

Submitted by dbundy:

I like options (for leverage) when doing intraday trading. What is your opinion in using this strategy?

Kevin Haggerty:

By definition, you are correct regarding leverage. By actual execution, depending on which options you are trading – at the money, in the money, or out of the money, (and I assume it would always be at the money or in the money) I don’t like the spread on the options too high on a percentage basis – you give up too much. Unless you can get an in the money option where the premium is not too high, and it has liquidity, it makes some sense. The way I like to play it is to buy stock, buy at the money puts, either Delta Neutral or a directional bias, in only the most volatile stocks that you can find where the options have great liquidity and, of course, big open interest. By using puts and stock together, you get to make many adjustments during the day and sometimes that it’s easier for some when they work against a position as opposed to not having one and having to make the emotional decision to pull the trigger.

Submitted by JBB22:

How do you determine if the stock has more in it after it has already run a bit already? Say a $50 stock is up 3-4, what do you look for in order to feel confident of a real run-up?

Kevin Haggerty:

If a $50 stock is up three to four points during the day, that means you’ve probably had two or three breakouts to new highs during the day, assuming it didn’t just open and trade straight up three or four because of news. What I like to do is to get smaller as the stock increases to the upside (take some money off the table). But I usually like to get smaller if I’m going to play the third or fourth breakout. I’ll play my normal size on the first two breakouts if there is definition of pattern.

Submitted by Steve:

When you see a stock moving 5-10 pts. before the open, is it best to buy it at the market at the open, or buy it with a limit order and hope the stock does’t move past your price before the broker can get it bought?

Kevin Haggerty:

Whenever I see a stock moving 5 to 10 points before the open, it’s usually an OTC Internet stock. First, I don’t buy those stocks; secondly, if you feel comfortable doing that and have that kind of experience, put a buy stop limit order in. Please teach me that strategy; it sounds very difficult.

Submitted by chuckm:

In a nutshell, what’s the basic trading technology an individual needs to be able to trade competitively?

Kevin Haggerty:

Probably the best way for me to answer this question, which is an excellent question, and I think is the major problem that the regulators are addressing in this environment, is to start with how I’m hooked up to execute. I use two 19″ monitors, a T-1 line that goes directly to New York for our stock exchange execution, we have a 128 ISDN backup in case the T-1 goes down. I do not execute on the Internet, but, in order to gather the various news items or research, we are hooked up on an ISDN line with a 4 port router that is very fast. It’s unrealistic for any but the most active traders (400 – 500 tickets per month); then the cost of the T-1 wouldn’t be a problem, because the firm they were trading through would pay for it.

Submitted by Lauren:

What indicators, if any, do you look to determine when to exit a trade? Do you find that on balance volume helps you?

Kevin Haggerty:

On-balance volume over a longer term trade, on a position that you’ve held for a while, is probably beneficial. On a short term basis, it’s strictly how the stock is acting relative to the market, relative to other stocks in its group, and whether it’s violated any of my money stops. If I’m not stopped out due to money, I’m very conscious of whether the stock’s trading below the midpoint and on the bid at greater volume than the offered side. You can’t detect this when you look at on-balance volume because of the way they calculate it. A stock could close up several days in a row above its open, but the true volume is predominantly to the bid and below the midpoint and that’s what you have to know. Two vendors that give that to you are Bloomberg and Bridge Trading that I’m aware of.

Submitted by Moderator:

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