NIOCKIN re ORAL Je) aoa LL SCANNED BY LEON1 WWW. EWEF.NET BY JOHN CRANE“Swing trading is one of the hottest - and most effective - tools for today’s active traders, and John Crane brings a fresh new perspective and a true trading edge to this important concept.” Peretti reo Ce ge gery Oech OCMC Traders Network, discusses his work with the Action/Reaction trading theory, and illustrates a whole new way of using time, price, and patterns From Cee MGC NTTONARUCCM Cre CeM UCU CR NTT Celm AL em Oo LET Cm Nm LTC ORLLLE Red chapter, you'll be introduced to the concepts that encompass this proven Pree Maron Tt NET com sone Nae Reaction swings Swing trading reaction swings The Reaction cycle PCO Mme etm Les} POTN Near Mone LeTTem Teele OTS ert Long-term versus short-term trends PUM LIC elke Filled with practical advice from a seasoned veteran, real-world examples, PRCT CMeC Ci OMe Mt LM G/ Cec amc Cm UT comprehensive look at the art of swing trading. This valuable book offers clear, step-by-step guidance that will allow you to apply the swing trading methodology to any portfolio and improve your bottom line. “We’ve long touted the benefits of this powerful investment strategy at MrSwing.com, and John Crane’s new work makes an excellent addition to the body of educational material available on swing trading. His cutting-edge techniques are right on the money -Larry Swing, MrSwing.com ISBN 1-4276 9 *781427 613059 Tradenet Publishing 504 W. Eisenhower Ste 302 Loveland, CO 80537Unlocking Wealth Secret to Market Timing By John CraneCopyright © 2007 John Crane. All rights reserved Published by Tradenet Publishing, Loveland, Colorado ALL RIGHT RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopied, recorded or otherwise, without prior written permission of the publisher and the author. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the author and the publisher are not engaged in rendering legal, accounting, or other professional services. Authorization to photocopy items for internal or personal use, or for the internal or personal use of specific clients, is granted by Tradenet, provided that the U.S. $10.00 per page fee is paid directly to Tradenet, 1-800-831-7654. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profits or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Printed in the United States of America. All charts used in this manual are furnished courtesy of DTN Corporation and were produced by their ProphetX charting software. iiDisclaimer It should not be assumed that the methods, techniques, or indicators presented in this book will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples in this book are for educational purposes only. This is not a solicitation of any order to buy or sell. The NFA requires us to state “HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER OR OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THESE SHOWN.” iiiAcknowledgements This book would never have made it all the way to publication without the helping hands of many individuals. In particular, I am extremely grateful for all the help that I received from Joseph Kellogg, Kathleen Marusak and to my two daughters, Anastasia and Holliston for all of your contributions to this book. A special thanks to my wife Angela for all the patience and support you offered during the several months it took to complete this book. John Crane ivContents Preface Introduction CHAPTER 1 — Order out of Chaos — 5 A discussion of market behavior and how it is effected by human emotions and economic supply and demand. How the Action/Reaction theory of a reoccurring cycle circulates throughout the market. CHAPTER 2 — Time — Trend Reversal Pattern - 21 The Trend Reversal Pattern marks the beginning and end of major trend change. The Reaction swing is the central point of the Action/Reaction trading method. It is where the Action ends and the Reaction begin. Rules to identify Reaction swings and use them to project future turning points in the market. CHAPTER 3 — Time — Trend Continuation Pattern - 87 The Trend Continuation Pattern occurs inside a trending market and identifies the center of the longer-term cycle. Rules to identify the Trend Continuation Pattern and project future turning points in the market. CHAPTER 4 — Price — Trend Reversal Pattern - 105 ‘Where and when is the right time to enter or exit the market? An easy and reliable way to determine future support and resistance price levels for entry or exit.CHAPTER 5 — How are they connected? - 149 How to identify the difference between a major turning point and a short-term swing pattern. CHAPTER 6 — Market Tells - 169 Price patterns exhibit specific characteristics and foretell future market action. CHAPTER 7 — Options with Action/Reaction - 217 Combining options with the Reaction swing projections can enhance gains. CHAPTER 8 — Combining Technical Indicators with Action/Reaction - 237 Using technical indicators in conjunction with the Reversal Date Indicator. Rules to help identify major turning points in the market. CHAPTER 9 — Trading with different time frames - 253 What is a hidden Reaction swing? Sometimes patterns can be hidden in a longer-term time frame, but revealed in the intra-day chart. How to find the hidden Reaction swing and use it for an early entry. CHAPTER 10 — Final word - 269 Some final words or wisdom and common sense trading rules to live by. A list and description of trading tools that will enhance your trading skills and help you shorten your learning curve. Resources for Traders - 270 INDEX - 276 viPreface The continual need to expand one’s knowledge or to improve an existing idea is an inherent one in all of us. After finishing my last book “Advanced Swing Trading”, I had many requests for more specific signals for entry and exit. I continued to work on my theories of Action/Reaction, with the objective of finding new ways to expand and to improve this unique trading approach and share with you my favorite strategies. This book deals with the Action/Reaction theory by combining price levels, timing methods and confirmation patterns that strengthen the predictability of future market moves. I take a step- by-step look at the Action/Reaction theory and illustrate how to identify the key trading opportunities. I explain the step-by step process I use to determine my entry and exit of the positions and how to use the information provided by the market to project the next market movement. One of the unique techniques described in this book is the method of projecting future prices. I have not seen this incredible technique published before. By using my Action lines and Reaction lines, within the Reaction cycle, | illustrate how to project the time and price of major market reversals. This cycle tells the trader if the market is going to make a major turn or if the market is only going to make a small correction against the prevailing trend. Since writing my last book, one of the most frequent questions people asked me was “Does this method also work for Stocks?” The answer is - Yes, it does! | have included several examples showing how the Reversal dates work just as well for Stocks as they do for futures. Since most of my experience has been in the futures market, the majority of the examples in this book are from futures markets. However, this in no way means that this technique can only be used in the futures markets. viiMy hope is that the information in this book will increase your awareness of the market’s true behavior and serve as a confirmation of your own market analysis. I offer help throughout every step of your learning process. My specially trained staff is available to answer questions and guide you through the rough stops. You can also follow my daily updates and compare your results with mine. See the appendix for more information on how to take advantage of this valuable resource. viiiIntroduction 1 Introduction Kennedy about the time he got his shoes shined at Grand Central Station. As he was sitting and reading his newspaper, the young man who was shining his shoes told Joe that he had bought some stock for himself, which meant that he now had himself a piece of the American dream. This conversation convinced Joe that the bull market of the 1920s was over. He reasoned, “If the shoe shine boy is in the market, who is left to buy? If everyone is in the market, there is nowhere for it to go but down.” The story goes on to tell how Joe Kennedy pulled his money out of the stock market and avoided the disastrous crash of 1929. This is typical market behavior after any extended market move. It can happen after a long-term bull market in the stocks or even a short-term swing trade in the futures market. Much of this distress and financial loss can be avoided if investors take the time and a little effort to educate themselves on market behavior. Inexperienced traders tend to hesitate when it comes to entering markets near the beginning of a trend but are more than willing to jump into markets near the end of the trend, just as professional traders are exiting their positions. In February of 2000, just before the stock market climax, I was speaking at a seminar in San Francisco about the Reversal Date and Action/Reaction Theory (the subject of this book). After the presentation, I was approached by one of the attendees whom | knew from one of my previous seminars. He pulled out a chart of the Dow Jones Index, on which he had applied some of my timing indicators and reversal patterns. Based on this analysis, he said that he had just pulled all his money out of the tech stocks and was going to short the Dow Jones futures. This man offers a perfect example of what we should strive to emulate. He took the necessary time and effort to educate himself on market behavior and he was rewarded when he closed his long position near the top of the market and was prepared to enter a short positions. He was aware of the market behavior, but more importantly, he had the [« sure many of you have heard the story told by Joe2 Introduction discipline to act on the information. He did not get caught in all the market hype that was being spewed daily from the business news shows. All too often traders seem to be in a hurry; we’re all seeking instant gratification. We have learned as traders, this type of thinking often leads us away from success. If you study the path of successful traders from the past to the present, you will find each had much in common. The most important of these similarities are patience, discipline and a willingness to work as hard and as long as it takes to succeed. Successful traders realize that the pathway to continued success comes not from “inside information” or even from an overabundance of knowledge, but from the understanding of human behavior and how it translates into the market. This formula has not changed since the early 1800s, when U.S. futures trading began on the Midwestern frontier and can probably be traced back as far as 1640, when trading took place in Bulb futures, and it will continue long into the future. In other words, a little education and practice will benefit you forever. Jesse Livermore, one of the great traders during the early twentieth century, stated that one of the most important keys to his success as a trader was understanding market behavior and knowing when to cut his losses quickly. Jack Schwager, in his book “Market Wizards,” interviews Paul Tudor Jones, who is possibly one of the most successful traders of recent time. Paul Tudor Jones insists that a huge part of his success is cutting his losses quickly. He said one of the most important secrets to his trading success is, “If the market is not behaving the way I think it should, I get out!” Of the millions of people involved in speculative markets, only a small percentage will spend the time and effort needed to learn how to trade. Although there is no Holy Grail to trading success, there are road maps and warning signs available to guide you toward your desired destination. Yes, there are many stories of traders who made a killing off one trade, or maybe even a string of trades. This will always be the case, as it is the nature of the markets to offer these opportunities. However, you need to be ready to take advantage of such opportunities when they are offered, because the market can takeIntroduction 3 them away just as quickly if you do not practice pro-active money management. Unfortunately, for every lucky trader, there are countless others who are not so lucky. The good news is that long- term success is available to everyone who has desire, dedication and a strong worth ethic. A few years ago, a young man from our town was preparing to ski in the Olympics. He and his older brother had been skiing since they were very young. A friend asked the older brother how he felt about his younger brother being an Olympic skier and a top contender for the gold medal. He replied, “I’m a better skier than he is, but I quit skiing a long time ago, I got tired of all the work. To me it was not worth all the effort.” This statement says volumes about the difference between success and failure. You have to believe the rewards will outweigh the effort. Any investment that offers the potential of high return offers the potential for high risk... they go hand-in-hand. The trading patterns and methods described in this book have served me well and I have no doubt that they will continue to do so. It will require study and concentration on your part, but I believe with hard work, you will quickly realize the tremendous value of reversal timing and trading techniques. This book is about Time, Price and Patterns, and their reflection on market behavior. The Reversal Date trading indicator is not meant to be a turnkey system, but it can be used by itself or incorporated into other trading strategies. Flexibility is one of the strongest features of the Action/Reaction trading approach. I describe this method in a clear concise manner that should help you understand market behavior and enable you to use what you have learned with a high degree of reliability. My goal is to provide you with the knowledge, confidence and ability to add what you learn from this book to whatever trading approach you are most comfortable with. Since most of the information in this book is designed to anticipate trend exhaustion or trend reversals, it may strike you as unconventional, but I believe we must think out of the box to be more successful. The Reversal Date indicator and the Action/Reaction techniques described in this book can be applied to stocks or commodities. In4 Introduction addition, they work equally as well on daily or intra-day charts. 1 strongly encourage you to apply them both. I believe learning the methods described in this book will give you a tremendous edge, as well as reduce the stress of blindly trading without a defined plan or the knowledge of market behavior. The ability to look at the market and have confidence in your trading decision is worth its weight in gold. Trading offers one of the last great frontiers of opportunity. It is one of the very few avenues that offers everyone equal opportunity. There are very few venues where an individual can start with a relatively small bankroll and actually become a millionaire. While I hardly expect all readers of this book to suddenly transform into super traders, I do believe this information will open your minds to a new way of looking at the market and improve your personal trading performance.