TABLE OF CONTENTS
FORWARD ABOUT THE AUTHOR NECESSARY LEGAL JARGON INTRODUCTION TIMING VERSUS FORECASTING CHAPTER 1: MOVING AVERAGES DEFINED CHAPTER 2: SYSTEM COMPONENTS CHAPTER 3: ESTABLISHING PARAMETERS – Developing Your System CHAPTER 4: IMPLEMENTATION – Reading Trends CHAPTER 5: BASIC SIGNALS CHAPTER 6: BASIC SETUPS CHAPTER 7: 80% WINNERS CHAPTER 8: CONTINUATION SETUPS – Patterns and Pullbacks CHAPTER 9: CROSSOVER BREAKOUT SETUPS CHAPTER 10: TRADE MANAGEMENT CHAPTER 11: AVOIDING FALSE BREAKOUTS CHAPTER 12: SYSTEM LOGIC CHAPTER 13: TREND ANALYSIS CHAPTER 14: MONEY MANAGEMENT CHAPTER 15: TIMING THE MARKET CHAPTER 16: DAY TRADING CHAPTER 17: TRADING RULES AFTERWORD BONUS SYSTEM: 2-3-6 EMA APPENDIX: HISTORICAL SETUPS AND MARKET MOVES 3 4 5 6 7 8 11 15 20 31 37 43 51 65 77 83 92 97 104 108 118 128 129 130 131
FORWARD Thank you for purchasing DYNAMIC TREND TRADING: The System . You have made a wise investment. This publication discloses a tactical strategy for analyzing and profiting from market trends. Format and presentation of the system and trading strategy are designed to reach the largest possible audience, from the beginner to the initiated trader with advanced technical analysis experience. Chapters 1 through 4 detail a basic technical premise upon which the more advanced setup and trade management strategy is based. Even if one is familiar with the technical tools it is imperative to know how to read trends and counter trends prior to learning the actual trade entry setups. Chapters 5 and 6 document basic buy and sell signals and basic setups. Once understood, the trader may advance to the specific price action trade triggers. We therefore encourage readers of any experience to work through the chapters chronologically in order to receive the greatest benefit. Chapters 7, 8 and 9 will instruct the trader on the precise trade entry components, how to achieve 80% winners, and the two types of setups: Continuations and Crossovers. There are two varieties of Continuations: Patterns and Pullbacks. Mastery of these three key chapters will result in the ability to trade virtually any market in any interval. A time tested trade management component can be found in Chapter 10. Here the trader will learn the trade and risk management system which, in the author's opinion, is best method for trading system signals. Chapter 11, 12, and 13 continue the journey with integral tips on how to avoid false breakouts, understanding the logic behind the technical style as well as an intuitive analysis of different types of trends. These tools will build a solid foundation and mastery of the technical merits of the system and install confidence in system efficacy. It is generally in these chapters where even advanced traders will experience breakthroughs and new understanding of trends. Advanced money management tactics are discussed in Chapter 14. Building on trade management rudiments found in Chapter 9, these techniques will enable the trader to use the statistically probable system to build a thriving trading business. Market Timing in Chapter 15 rounds out the course by covering key concepts necessary to make even the novice investor his own best advisory. Understanding the relationship between individual equity price movement and broad market trends is an integral and necessary component of any short or long term trading strategy. Chapter 16 covers the best techniques for using the system to profit from short term and intraday trends. Included is the author's Day Trade Survival Guide and further trend analysis study which will benefit traders using long term intervals as well. To complete the training, the appendices detail examples of systems and setups as well as historical market moves to increase the trader's understanding of key concepts.
ABOUT THE AUTHOR Since childhood Frank Bunn has been fascinated with financial markets.C. Frank's vision is about second chances. He works with traders all over the world to develop profitable trading systems and improve trading skills. Frank launched an advisory dedicated to profiting from price momentum and timing the market. He is aware that conventional financial planning is inadequate. --S. In 2009 he published DYANMIC TREND TRADING: The System. starting over and inspiring those who are on the path of success to even higher levels of achievement. the compilation of trend trading techniques you are now reading. Frank is an empiricist and continues his analytical research of trends and trading strategies. He knows that economic change and the financial collapse of 2008 had a lasting impact on the lives of many.
. Routine study of momentum stock attributes and thousands of screen hours resulted in a relative mastery of high momentum equities and the technical contingencies which produce the most profitable transactions. In 2010. In the 1990s his interest turned to systems and tactical methods for profiting from price fluctuation.
It also does not make any recommendation or endorsement as to any investment. recording. Bunn. Bunn. USE BY INDIVIDUALS You may print copies of this content for personal use only and store the file on your computer. stored in a retrieval system or transmitted in any form or by any means (electronic. Any other use or redistribution is only available with written permission from Frank R. adviser or other service or product or to any material submitted by third parties or linked to this publication. United States Code: Registration Number: TXu 1-682-947 Registration Date: June 30. photocopy. In addition. the information contained herein does not guarantee you will achieve positive results. The material in this e Book does not constitute advice and you should not rely on any material in this e Book to make (or refrain from making) any decision or take (or refrain from taking) any action. Dynamic Trend Trading: The System does not offer any advice regarding the nature. mechanical. While we believe this e Book will be useful. LICENSING AND REPRINT RIGHTS The content in this e Book may not be licensed or reprinted without permission from Frank R. Bunn . The work required to apply what you learn is your responsibility. The investments and strategies mentioned in this publication may not be suitable for you. potential value or suitability of any particular investment. 2010 COPYRIGHT POLICY FOR CONTENT All information in this e Book is Copyright © Frank R. No part of this publication may be reproduced. security or investment strategy. Dynamic Trend Trading: The System does not provide any financial advice. If you have any concerns you should contact an independent financial adviser.NECESSARY LEGAL JARGON The information contained on this e Book and from any communication related to this publication is for information purposes only.
. Bunn. COPYRIGHT Certificate of Registration issued under the seal of the Copyright Office in accordance with title 17. scanning or otherwise) except as permitted under Section 107 or 108 of the 1976 United States Copyright Act. without prior written permission from Frank R.
fear and hope. The internet is a vast resource of such information at no cost should you require a primer. This e Book will provide the specific framework and exact details of an exemplary short and long term strategy. basic stock charting and trading skills will not be discussed. plain and simple. All the statute books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human animal. Sound too good to be true? Maybe it is. Reminiscences of a Stock Operator ………. Implementation depends on you. This is a how-to e Book. " Edwin Lefevre. greed. This e Book assumes you have a working knowledge of the stock market.INTRODUCTION "The speculator’s deadly enemies are: Ignorance. The 'how' is how to systematically and tactically profit from stock trends and how to time the market to reach your short and long term goals. But year in and year out you can profit from stock market fluctuations.
. Fundamental concepts such as positions (long or short). No system is perfect and considerable effort is required.
specific strategy for entering or exiting the market. More importantly it provides a clear plan should that position be wrong. Market timing for our objective involves a proven. what it will do at any given point in time. Indeed most indicators are worthless. the disciplined investor or trader must simply follow the plan and large profits will dwarf occasional or even more frequent small losses. or worse. Most pundits dismiss both as implausible.
. However. there is a vast difference between market 'timing' and 'forecasting'. The media and conventional wisdom erroneously treat both similarly. this is nothing more than guesswork and hope.TIMING VS FORECASTING Much has been written about market timing and technical analysis. Forecasting by definition is an attempt to determine exactly where the market will be at some point in the future. Frequently. Probabilistically.
This is perhaps the most commonly used variable in technical analysis. Each new day's (or week's or month's) numbers are added to the average and the oldest numbers are dropped. They can be used to track daily. 20 day moving average lines tend to move up and down more than 200 day moving average lines (See Illustration 1).com defines MOVING AVERAGE: A technical analysis term meaning the average price of a security over a specified time period. the shorter the time frame used. so. the more volatile the prices will appear. for example. thus. or monthly patterns. used in order to spot pricing trends by flattening out large fluctuations. In general. the average "moves" over time.CHAPTER 1: MOVING AVERAGES DEFINED InvestorWords.
ILLUSTRATION 1: 20 PERIOD AND 200 PERIOD SIMPLE MOVING AVERAGES OF IBM ON A DAILY INTERVAL CHART
. Moving average data is used to create charts that show whether a stock's price is trending up or down. weekly.
giving much more importance to recent observations while not entirely discarding older observations (See Illustration 2). any number of periods may be employed. Although there are popular moving averages such as the 50 or 100. Moving averages are best viewed on stock (bar) charts where the parameters may be manipulated. For our purposes all moving averages will be calculated
ILLUSTRATION 2: 20 and 200 EXPONENTIAL MOVING AVERAGES on an IBM daily interval chart
The number of periods used to compute the average is a parameter selected by the investor. The weighting for each older data point decreases exponentially.An EXPONENTIAL MOVING AVERAGE is calculated by weighting recent price values more heavily than older values.
.using the CLOSE price of the interval. Now that you are familiar with it. The Exponential Moving Average is the primary tool of the system. a 20 PERIOD EXPONENTIAL MOVING AVERAGE will be calculated using the last twenty (20) CLOSING PRICES. let's introduce you to the SYSTEM COMPONENTS.
Notice how the EMA of closing prices smooths the volatility. Each will be used in conjunction with the other two to establish and validate cycles and trends.
ILLUSTRATION 3: 3 PERIOD EMA of IBM on a daily interval chart
. Prices are volatile. Let's examine each one. SHORT TERM TREND and LONG TERM TREND. By smoothing the price over a short average (typically no more than 10 periods) an investor can manage that volatility and more easily spot market entries and trend changes (See Illustration 3). PRICE The shortest (lowest parameter) Exponential Moving Average (EMA) will be used as a surrogate for the price of the security or market we are analyzing.CHAPTER 2: SYSTEM COMPONENTS Understanding the principals of the system is requisite to implementation. There are three components: PRICE. Each component has its own Exponential Moving Average (EMA).
the short term trend is the workhorse of the system.
ILLUSTRATION 4: 13 PERIOD (blue line) EMA of IBM on a daily interval chart
.SHORT TERM TREND The next longest (parameter) EMA represents the short term trend. Its relation to PRICE and the LONG TERM TREND will determine the overall cycle and current trend of the stock or market in question (See Illustration 4). Typically between 10 and 30 periods.
Again. LONG TERM TREND The longest (parameter) EMA is the LONG TERM TREND.In ILLUSTRATION 4 we can clearly observe the relationship between the PRICE (3 PERIOD EMA) and the SHORT TERM TREND (13 PERIOD EMA).
ILLUSTRATION 5: 39 PERIOD EMA of IBM on a daily interval chart
In ILLUSTRATION 5 we can clearly see the relationship between the PRICE (3 PERIOD EMA).
. the SHORT TERM TREND (13 PERIOD EMA) and the LONG TERM TREND (39 PERIOD EMA). This moving average is generally more the 30 periods and is used to establish longer cycles. its relation to PRICE and the SHORT TERM TREND defines the system (See Illustration 5).
The number of EMA periods which will be discussed in the next chapter and the chart INTERVAL are both at the discretion of the investor.
.The system is beginning to take shape. Let's take a quick look at time intervals before proceeding to parameters and implementation. However. the number of EMA periods can remain fixed while the INTERVAL changes. some suggestions will be made. TIME INTERVALS It is important to note the difference between EMA periods and the TIME INTERVAL of the stock or market the trader is charting. Very short intervals may require intraday charting and real time quotes. Once determined. Now let's establish the EMA parameters. This interval can range from a 1 minute bar chart to a WEEKLY or MONTHLY bar chart. Longer intervals such as DAILY and WEEKLY require less work and capture longer term moves.
The PRICE EMA appears to function best when 3-5 periods are employed. we will use the 3 EMA. For the exact system supplied by this e Book. B is the SHORT TERM TREND and C is the LONG TERM TREND. SHORT and LONG TERM TRENDS is: AXB=C A is the PRICE. This approach was developed after years of research. The SHORT TERM TREND will use the 6 EMA. Employing the formula above the LONG TERM TREND EMA is 18 (3 x 6 = 18) – (See Illustration 6). trial and error. this simple approach and consistent application should keep you on track.CHAPTER 3: ESTABLISHING PARAMETERS – Developing Your System The easiest formula for calculating your PRICE.
ILLUSTRATION 6: 3-6-18 SYSTEM on an IBM daily interval chart
. Although no parameter suite will function perfectly all the time. The first two periods determine the third.
you can experiment with your own parameters as you develop your own style.Although this system employs the 3-6-18 EMAs. Some ideas include: 5 – 10 – 50 SYSTEM
3 – 13 – 39 SYSTEM
5 – 20 – 100 SYSTEM
2 – 3 – 6 SYSTEM
the ability to establish parameters and work with time intervals. we may proceed to basic system logic. SYSTEM KEY #1: PRICE CROSSING SHORT TERM TREND When the PRICE EMA crosses over (up or down) the SHORT TERM EMA a short term trend signal is established (See Illustration 7). and reading trends.CHAPTER 4: IMPLEMENTATION – Reading Trends Now that you have a working knowledge of the system components.
ILLUSTRATION 7: 3 EMA crossing above 6 EMA on IBM daily interval chart
a long term trend signal is established (See Illustration 8).
ILLUSTRATION 8: 6 EMA crossing above 18 EMA on an IBM daily interval chart
.SYSTEM KEY #2: SHORT TERM TREND CROSSING LONG TERM TREND When the SHORT TERM TREND EMA crosses over (up or down) the LONG TERM EMA.
ILLUSTRATION 9: LONG TERM UPTREND on IBM daily interval chart
.UP TRENDS If the SHORT TERM EMA is trading ABOVE the LONG TERM EMA the trend is UP (See Illustration 9).
DOWN TRENDS If the SHORT TERM EMA is trading BELOW the LONG TERM EMA the trend is DOWN (See Illustration 10).
ILLUSTRATION 10: LONG TERM DOWN TREND on IBM daily interval chart
a CROSSOVER has occurred. These can be either the beginning of a long term trend change or indecision.
ILLUSTRATION 11: A CROSSOVER UP on an IBM daily interval chart
. (See Illustration 11). The system outlined in this e Book will assume indecision.CROSSOVERS If the PRICE EMA crosses the SHORT TERM EMA (up or down) BEFORE the SHORT TERM EMA crosses the LONG TERM EMA (up or down). It is important to note this.
ILLUSTRATION 12: A CROSSOVER DOWN on an IBM daily interval chart
.Since recognizing CROSSOVERS is extremely important. let’s review with a CROSSOVER DOWN (See Illustration 12).
a CONTINUATION has occurred.
ILLUSTRATION 13: CONTINUATION UP on an IBM daily interval chart
. It is the cornerstone of the system. DO NOT PROCEED UNTIL YOU UNDERSTAND THE DIFFERENCE BETWEEN CROSSOVERS AND CONTINUATIONS . This is extremely important. SHORT TERM TREND signals are most effective when the LONG TERM TREND is established. In effect you do not want to trade indecision. An example would be the 3 EMA crossing ABOVE the 6 EMA when the 6 EMA is already ABOVE the 18 EMA) – (See Illustration 13). In simpler terms. The patient investor will wait for confirmation of the trend (PRICE EMA crossing a SHORT TERM EMA which is ALREADY ON THE PROPER SIDE OF THE LONG TERM EMA).SYSTEM KEY #3: CONTINUATIONS If the PRICE EMA crosses the SHORT TERM EMA and the latter is ALREADY ABOVE OR BELOW THE LONG TERM EMA.
Since recognizing CONTINUATIONS is the cornerstone of the system.
ILLUSTRATION 14: A CONTINUATION DOWN in an IBM daily interval chart
. let’s review with an example of a CONTINUATION DOWN in an existing down trend (See Illustration 14).
a COUNTER TREND has occurred. This indicates the beginning of a long term trend change or indecision (See Illustration 15).
ILLUSTRATION 15: A COUNTER TREND in an IBM daily interval chart
.COUNTER TRENDS If the PRICE EMA crosses over the SHORT TERM EMA (short term trend change) and the latter remains fixed above or below the LONG TERM TREND.
COUNTER TRENDS are used to spot opportunities for trend CONTINUATIONS . One never knows if the LONG TERM TREND is changing or if it will resume. These opportunities will enable the trader to enter the market when the trend is most likely to continue.
ILLUSTRATION 16: A COUNTER TREND evolving into a DOWN TREND in an IBM daily interval chart
. The following illustration provides an example of a COUNTER TREND evolving into a confirmed DOWN TREND. For this reason the system will always side step long term bear markets. The trader will also know when to stand aside. A COUNTER TREND is a sign of weakness in any LONG TERM TREND. The disciplined trader can exit the market and wait for a CONTINUATION. The trader would have exited the market long before a devastating sell-off (See Illustration 16).
you can learn to instantly spot trends.Read this chapter as often as necessary until the rudiments are mastered. Once the logic is clear. trend changes.
. and counter trends in any market.
CHAPTER 5: BASIC SIGNALS Basic signals are simple price and moving average crossovers which occur pursuant to the logic and trend sequences covered in the previous chapter. This chapter will familiarize you with Basic Signals. We want to be certain to differentiate Basic Signals from Entry Setups. Basic signals are generic and generally used for market timing purposes... whether for individual equities or broad market indexes. Setups therefore are precise trade opportunities which appear in conjunction with proper Basic Signal context. Setups are specific price action entry patterns. BASIC BUY SIGNAL – CONTINUATION
BUY when the PRICE EMA CROSSES ABOVE the SHORT TERM TREND EMA after a COUNTER TREND where the SHORT TERM TREND EMA IS ABOVE THE LONG TERM TREND EMA BASIC BUY SIGNAL : 3EMA CROSSES ABOVE the 6EMA in an UP TREND (6EMA > 18EMA) EXIT when the PRICE EMA CROSSES BELOW the SHORT TERM TREND EMA BASIC EXIT SIGNAL : 3EMA CROSSES BELOW 6EMA
Please refer to following example. Note that the 3-6-18 System will be used to demonstrate Basic Signal patterns. Subsequent chapters will detail Entry Setups.
3EMA CROSSES ABOVE the 6EMA in an UP TREND (6EMA > 18EMA) BASIC SELL SIGNAL – CONTINUATION
SELL when the PRICE EMA CROSSES BELOW the SHORT TERM TREND EMA after a COUNTER TREND where the SHORT TERM TREND EMA IS BELOW THE LONG TERM TREND EMA BASIC SELL SIGNAL: 3EMA CROSSES BELOW the 6 EMA in a DOWN TREND (6EMA < 18EMA) EXIT when the PRICE EMA CROSSES ABOVE the SHORT TERM TREND EMA BASIC COVER SIGNAL : 3EMA CROSSES ABOVE 6EMA
• • 32
Please refer to the following example..
3EMA CROSSES BELOW the 6 EMA in a DOWN TREND (6EMA < 18EMA)
BASIC BUY SIGNAL – CROSSOVER
BUY when the PRICE EMA CROSSES ABOVE the SHORT TERM TREND EMA
EXIT: 3EMA CROSSES BELOW 6EMA
Please refer to the following example:
PRICE EMA CROSSES ABOVE the SHORT TERM TREND EMA AND the LONG TERM TREND EMASIMULTANEOUSLY
The Stock or Market Price CROSSES ABOVE the LONG TERM TREND EMA ..
The Stock or Market Price CROSSES BELOW the LONG TERM TREND EMA ....SIMULTANEOUSLY
EXIT: 3EMA CROSSES ABOVE 6EMA
Please refer to the following example:
PRICE EMA CROSSES BELOW the SHORT TERM TREND EMA AND the LONG TERM TREND EMA SIMULTANEOUSLY
.BASIC SELL SIGNAL – CROSSOVER
SELL when the PRICE EMA CROSSES BELOW the SHORT TERM TREND EMA
Basic Signals are not necessarily entry SETUPS. there is much more detail and tactical strategy ahead.
.In summary. and focus on price action setups to enter and manage trades. time the market. Remember. Understanding Basic Signals allows us to build on fundamental trend reading rudiments.
Be patient. Using a 'setup' procedure on any given security performs much better than attempting to move long and short your favorite stock or commodity.com to find HIGH RELATIVE STRENGTH stocks. I typically only watch stocks with a RS of 90 or greater. This is a sign of poor momentum. Here is the key to assesing trend strength: Strongest Trend Technical Trait: PRICE EMA and SHORT TERM TREND EMA are very DIVERGED (pulled away) from the LONG TERM TREND EMA. I always wait for a strong trend (up or down) to emerge in any market before I set up a trade. Focus ONLY on the strongest trends and set up your trades accordingly. 2) Wait for a pullback from a high after a strong uptrend. Remember. It should bounce on it.CHAPTER 6: BASIC SETUPS This chapter will introduce you to the best way to set up your entries and control your risk. Enter long when the 3 crosses the 6 if they are both much higher than the 18. The latter will predispose you to more false signals and error because you won't want to miss a move. the idea here is to trade a very STRONG TREND. Follow these 5 steps to most effectively SET UP your LONG ENTRIES: 1) Use the Investor's Business Daily or www. This is the real 'secret' to gauging trend strength. The strongest trends exist when the short and intermediate term Exponential Moving Averages are very diverged (pulled away) from the long term Exponential Moving Average.stocktables. 3) Ensure the trend is strong meaning both 3 and 6 Exponential Moving Averages are trading above the 18 Exponential Moving Average. A SETUP procedure will allow us to: Analyze price action Control Risk Reduce error and false signals Trade only the strongest trends Ignore 3x6 EMA signals if the crossover occurs BELOW the 18 EMA (long positions)
Although I trade both stocks and the Forex. Reverse this process for shorting. The price should not have closed below the 18 Exponential Moving Average during the Counter Trend. This is your counter trend. You'll want to ignore any 3x6 Exponential Moving Average crossovers (long) if the crossover occurs below the 18 Exponential Moving Average . Look for a 'TEST' of the 18 Exponential Moving Average. The 3 Exponential Moving Average should cross over the 6 Exponential Moving Average DOWN.
The TRIGGER BAR is the interval bar at which the 3 and 6 EMAs cross. A new high breakout will confirm the entry.
.4) Enter LONG when the 3 Exponential Moving Average crosses UP over the 6 Exponential Moving Average.
This is the basic setup. THIS IS VERY IMPORTANT .. Remember to use a limit contingency with your buy stop 5) Perform steps 1 through 5 when the 3 Exponential Moving Average is trading over the 6 Exponential Moving Average on a WEEKLY CHART of the the DOW JONES INDUSTRIAL AVERAGE. More on this later. Have a look at this chart.. Enter a BUY STOP 1 cent above the high of the trigger bar. NOTICE HOW THE COUNTER TREND PULLBACK TESTS THE 18 Exponential Moving Average.
Have a look at this next example. The 3 and the 6 Exponential Moving Averages are not touching the 18 Exponential Moving Average..
..And here's another example... NOTICE HOW THE COUNTER TREND PULLBACK TESTS THE 18 Exponential Moving Average .
.Here is another example..
Now you should have a better idea about 1) gauging momentum with EMA divergence. and 2) how the Basic setup requires a bounce on the Long Term Trend EMA prior to the Price/Short Term Trend EMA cross. Notice that this 'bounce' (or test) occurs within the COUNTER TREND. Have a look at just one more to be certain..
. Be certain you understand Trend Reading.Now that you understand the basic setup procedure we may proceed to more tactical price action patterns. From here we will quickly build on all established rudiments. You should also have a sound familiarity with how to gauge momentum strength. Basic Signals and Basic Setups prior to proceeding.
You can achieve absurdly low-risk entries with overwhelming odds of ending the trade with a profitable transaction.. By doing so I allowed my intuition to hand me the ticket to continuation trend trading. It is truly an amazing thing to watch this work over and over again on almost any time interval... moving averages lag the market. This is probably THE most important concept in continuation trend trading. Used as indicators. That is.
. Take a look at this chart. There are two types of setups which lead to continuation moves: 1) PULLBACKS and 2) PATTERNS. If you master the PULLBACK which RESPECTS your Long Term EMA. IT IS POSSIBLE TO CONSISTENTLY ACHIEVE 80% WINNERS USING THIS STRATEGY . you'll realize this is not simply a moving average crossover system. I will show you how to trade each one. the price action MUST TEST (bounce squarely on) YOUR LONG TERM TREND EMA. Used as moving SUPPORT AND RESISTANCE lines they are LEADING INDICATORS. I watch PRICE ACTION.or better. This is a mathematical certainty. commodity or whatever security you are watching has a HISTORY OF RESPECTING YOUR LONG TERM EMA. you will control your destiny. Even very experienced traders tend to look only at 'indicators'..CHAPTER 7: 80% WINNERS This chapter will detail exactly how to achieve a success rate of 80%. It will also help if the market... stock. Forex pair. Once you understand price support. It's not so much the moving average context but a method for trading continuations after pullbacks to support in established trends. you must understand RESPECT of the Long Term Trend however you define it. whatever system you are trading (3X6X18 or 3X13X39). I'll repeat this: CONFINE YOUR ENTRIES TO ONLY THOSE WHICH INCLUDE A 1 or 2BAR BOUNCE ON YOUR LONGEST EMA PRIOR TO THE 3 RE-CROSSING THE 6. To do this.
..Have a look at the next chart..
.The following chart provides a further example...
.....Take a look at the next chart example of a falling market.
.This chart demonstrates another example....
Take a look at this chart....
And here's one more example.....
. Now we can review the second most important aspect of the system: PRICE ACTION. Inside bars are not a factor. uninterrupted highs and lows in the direction of the trend.. Price behavior in the counter trend falls into one of two categories: PATTERNS. Take a look at the following chart. let's study a few examples to be certain about the concepts. There are no swing high or low reaction points in a pullback.CHAPTER 8: CONTINUATION SETUPS: Patterns and Pullbacks This chapter will provide instruction for trading the two types of continuations setups: PULLBACKS AND PATTERNS. Let's define them: PULLBACK: PULLBACKS and
A brief series of sequential. The subsequent 3X6 EMA crossover results in our entry signal. Let's review our progress. and how to manage the trade once your order is filled. We understand the basic continuation entry as one which must TEST (find support at) the LONG-TERM EMA somewhere in the COUNTER TREND. how to let the market hand you low-risk entries. By learning to read PRICE ACTION you will know exactly which trades to take. There is no resistance in a pullback other than the high or low price at which the CT began. By price action I mean the behavior of the price chart (in terms of highs and lows) during the COUNTERTREND. Furthermore we know how to gauge strong momentum by ensuring the 3 and 6 EMAs are quite diverged (some distance away from) the 18 EMA.
With the concepts defined.. The swing high/low reaction points can be connected by trend lines which better enable the trader to identify the pattern.. what to expect from the setup. This behavior is immensely important. A consolidation area of mixed highs and lows (or higher highs/lower lows) which may or may not form some type of geometric shape.
..Let's continue with another example..
Here is another great example...
...Take a look at another pullback setup..
.And this last pullback example..
...The following chart will demonstrate the pattern entry.
And this next one as well.
.Have a look at this next chart....
.Here is another good pattern entry example.
...Following is an intraday pattern setup.
...Here is an example of how to eliminate error in the pattern setup.
We'll conclude the training with this last chart which details both types of setups.
It's like a lay up shot in basketball if you're familiar with that. I use an advanced charting tool which enables me to program color changes. It has no resistance other than the high or low from which it began. Also. The bars automatically turn green with the 3 over the 6 (up trends/short counter trends) or red with the 3 below the 6 (down trends/long counter trends). The PULLBACK is the easiest and most probable entry.A note about my charts.
. my drawing tools can be magnetically attached to price highs and lows for precise accuracy. Follow through is easy to gauge with a new high or low.
We saw this in the previous example of how to eliminate error in the pattern setup You'll immediately notice PATTERNS can be challenging. PATTERN KEY: ONLY TRADE THESE WHEN YOUR CROSSOVER SIGNAL COINCIDES WITH A PATTERN (Trend line) BREAKOUT. No need to waste time watching these things form. This is because the price action is counter trending in earnest. THE BETTER. Study the charts in this chapter until this concept is clear. Don't make it more complicated than it is. I'm more careful with entry and follow through on these. So don't trade them if you don't want to do the work. but learning to read the tape and assess price action will make your trades tactical and efficient. Let's review the key concepts with a few TRICKS OF THE TRADE: The Pullback Entry Setup is the easiest. DO NOT TRADE THESE. WORK BACKWARDS. Use the following plan to organize your work: Wait for a 3X6 CONTINUATION ENTRY SIGNAL Look for a TEST OF THE LONG-TERM EMA (18 EMA for me) somewhere before or during the counter trend Verify the HIGH or LOW (which precedes the COUNTER TREND) as significant DETERMINE COUNTER TREND PRICE ACTION to be a PULLBACK or a PATTERN COMPLETE ANALYSIS (if pattern. most probable entry Pullback Key – Ideal Price Action – few bars. Let the crossover mechanism do most of the work. it has resistance built in at the swing high/low reaction points which define it. That's what I do most of the time.
NOTE: MANY CROSSOVERS OCCUR WITHIN LARGER CONSOLIDATIONS. your Price Action assessment will do the rest. does 3X6 coincide with Pattern BREAKOUT?) ENTER THE TRADE when the price breaks OVER (long) or UNDER (short) the TRIGGER BAR All you really ever have to do is wait for your 3X6 signal and then call the ball. shallow 'pullback' The Pattern Entry Setup can be challenging – it has RESISTANCE AREAS Pattern Key – 3x6 EMA cross and Trigger Bar MUST COINCIDE with a trend line break
. There is a tendency to over analyze both types of setups. Still probable. The essence of the system is mechanical.PULLBACK KEY: THE FEWER BARS IN IT AND THE MORE SHALLOW IT IS. Wait for pullbacks. The PATTERN is trickier.
Breakouts over the 18 EMA and 21 EMA have considerable technical merit. patterns and low-risk entries. In the course of learning about moving average respect. You should have some theoretical mastery of the continuation setup pattern. an entry signal occurs when a price breakout over the 18 coincides with the 3 crossing over the 6. A stock or market will be in a confirmed trend when price action coincides with the 3 EMAs trading sequentially in one direction. Have a look at the following chart:
. This is the companion breakout strategy to the CONTINUATION SETUP we learned in the previous chapter. This chapter will detail how to profit from Crossover breakouts and achieve the same objective of low-risk. pullbacks.CHAPTER 9: CROSSOVER BREAKOUT SETUPS This segment will cover CROSSOVER SETUPS. you may have noticed that breakouts over the long term moving average can be sharp and profitable. This is our focus: the Crossover. CROSSOVER SETUP/ENTRY RULES (3x6x18 System assumed) As we know from our understanding of Basic Signals. Prices will begin to move against the trend until the Price EMA (3) and Short Term EMA (6) trade above the Long Term EMA (18). consistently profitable entries. This generally includes a counter trend and subsequent continuation. TREND CYCLE Let's review the trend cycle as prescribed by the basic 3 EMA system.
To reiterate. the price bar which crosses over the 18 is also the one at which the 3 crosses over the 6 in the same direction.. This next chart will further clarify. the price closed BELOW the 18 EMA.Notice that prior to the green trigger bar. Ideally. preferably in a confirmed directional trend. The green trigger bar breaks over the 18EMA and the 3 EMA crosses the 6 EMA simultaneously.
. prices should have been trading on the opposite side of the 18 for some time..
This tutorial will only detail the setup strategy..Notice the confirmed downtrend prior to the green crossover breakout trigger bar. Let's define the rules exactly.. Trade management and risk control will be thoroughly discussed in subsequent chapters. the same trade management system is employed for both CROSSOVER BREAKOUTS AND CONTINUATION SETUPS.
. For the sake of simplicity and consistency.
A trigger bar occurs when: Price X 18 / 3x6 Crossover (up) simultaneously = Trigger bar (enter 0. exit market on SHORT SIGNALS Use Weekly Crossover Breakouts for long term equity positions Check out the following chart.the beginning of the counter trend **I almost exclusively time Crossover Breakout entries with an MACD breakout.
.LONG ENTRY** .01 below) INITIAL STOP: TRIGGER BAR HIGH (1-2 cents above) SHORT EXIT: 3x6 Crossover (up) . (See Basic Entry Signal Improvement below for filter information) TRICKS OF THE TRADE Long Crossover Breakouts are typically more profitable than Short Breakouts Trade Crossover Breakouts which follow a confirmed trend in the other direction Use Crossover Breakouts to time the market and/or trade indices (refer to the market timing portion of the course for full instruction on using CROSSOVERS to time the market) Weekly Crossover Breakouts have historically preceded large market moves An excellent strategy: TRADE LONG SIGNALS...01 above) INITIAL STOP: TRIGGER BAR LOW (1-2 cents below) LONG EXIT: 3x6 Crossover (down) .the beginning of the counter trend SHORT ENTRY** .A trigger bar occurs when: Price X 18 / 3x6 Crossover (down) simultaneously = Trigger bar (enter 0.
And here's another example:
most frequently in sideways. it gives the trader optimal flexibility and choice. choppy markets or larger continuations in which the counter trend does not respect the 18 EMA.
.The combination of the 18 breakout and the 3x6 crossover is a very powerful impulse. Forex pair or commodity price chart . With the latter it is possible to get to break even 8 out of 10 trades. Empirical evidence suggests that the win rate is about 70% with proper money management. Signal quality can be dramatically improved with SETUP FILTER (which will be discussed in more detail in a moment. and TRADE MANAGEMENT TECHNIQUES. index. You will see this pattern repeat over and over in any time interval on any stock. Although not as probable as the CONTINUATION setup.
It makes a great companion entry to the Continuation setup. Additionally it can provide more consistent entries in shorter time intervals and day trading strategies.BENEFITS The advantages of this strategy are numerous. It can facilitate single market trading or permit you to follow fewer issues since you can take advantage of more market movement between CROSSOVER and CONTINUATION SETUPS Let's examine the following chart:
. It will enable you to profit from early trend changes in momentum stocks and sustained sideways markets which can appear in Forex pairs and broad market consolidations.
you will never know if it is the beginning of a long term rally or just another run in a broad consolidation. Just like Continuation entries. The only disadvantage to the setup is the very concept. Covered Calls and spreads are much more profitable when some directional bias is established. That said. Since it lacks the counter trend and logic characteristics that precedes a trend continuation. It is not a continuation move.It also compliments a variety of option strategies (some of which will discussed in a tutorial concerning options). any disadvantage is outweighed by the flexibility and probability offered by the pattern. it is all about risk control and trade management. Take a look at this chart:
Let's look at a few ways to do this. high probability filter. short MACD < 0 line) .BASIC ENTRY SIGNAL IMPROVEMENT The astute trader can improve upon basic entries in a variety of ways.trade only breakouts in which the MACD line is on the proper side of the zero (0) line (long .
. This can be used two (2) ways: 1) CONFIRMATION .MACD > 0 line.trade only crossover breakouts that coincide with the MACD line crossing the signal line in the direction of your trade (long MACD X signal line UP. short .MACD X signal line DOWN). MACD BREAKOUT / CONFIRMATION The 12/26/9 parameter MACD (used also in Tutorial #14) provides an excellent. examine the following chart:
This is an example of a MACD CONFIRMATION. To clarify. 2) MACD Signal Line BREAKOUT .
however. It also makes your entry candidates easier to sort if you to choose between several possibilities. The filter provides great impulse and allows me to control my risk more effectively. I would suggest that if you don't use the MACD BREAKOUT filter you should employ MACD CONFIRMATION. It's really cool. I encourage you to test it.
. It allows me to shed risk and get to break even virtually every time. Try it on ten (10) random Crossover Breakouts. The MACD is such a widely followed indicator that it's position above or below the zero line appears to be a self-fulfilling prophecy.Let's take a look at the other MACD criteria:
This is an example of an MACD BREAKOUT (MACD X SIGNAL LINE). Minimally. I generally use the MACD Signal Line Breakout filter for all my Crossover entries. See if they don't all pop.
V-PATTERNS As you study the these charts and do your own analysis, you'll notice that in the best setups there evolves a sharp V-pattern prior to the breakout. By definition, this consists of 3 or more higher (long) or lower (short) closes. This helps determine a meaningful trend change and the greater likelihood of a sustained move. Let's take a look at an example:
Keep in mind that 3 or more higher or lower closes is not necessary, however, to produce a winning signal.
EMA RESPECT Respect (testing) of the 3, 6 or 18 EMAs in the V-pattern is also an indicator of strength and sustainability. RISK An excellent method of improving basic signal entries is risk. Select only those trigger bars where the range (high-low) is less than or equal to the average interval range (most easily calculated on the daily interval). It may seem obvious but a massive breakout bar 3 or 4 times the height of an average interval will almost certainly consolidate. Stick with low-risk entries that market gives you. A low-risk trigger bar provides better control and a greater risk/reward ratio. It pays to be patient. TRADE / MONEY MANAGEMENT As stated previously, trade and money management will be the same method used for Continuation setups. These concepts will be thoroughly discuss later in the course. You can dramatically improve your win rate and profit factor by managing the trades properly. There is almost always some type of follow through after a signal. If this strength (for longs) or weakness (for shorts) is used to shed and/or eliminate risk you will be much more consistent, less frustrated by false signals and a lot less stressed. This completes our introduction of the CROSSOVER BREAKOUT ENTRY. This is a great strategy to compliment the Continuation setup. Once mastered you'll have a powerful tool in your arsenal. You'll be able to trade any market, any time interval. A quick review: MACD INDICATOR FILTERS... MACD Signal Line Breakout Filter – will get you to break even virtually every time MACD Confirmation – MACD > Zero (0) Line...UP TREND MACD Confirmation – MACD < Zero (0) Line...DOWN TREND MACD Confirmation makes longs and shorts MORE PROBABLE MACD DIVERGENCE – Lower low in PRICE, Higher low in MACD (long example)
CHAPTER 10: TRADE MANAGEMENT This chapter will provide precise instruction on how to manage the trade. Trade management really the most important testament to the efficacy of a trading system. Even a mediocre, common trade strategy can be consistently profitable with proper trade management. Let's review our progress. We are familiar with the basic strategy. We've learned how to dramatically increase performance with respect of the long term EMA. Finally, we understand PRICE ACTION and the two types of counter trends. We also have a working knowledge of the CROSSOVER BREAKOUT entry. Best of all we know how to set up trade properly. So, you're in the trade....now what do you do? The focus must immediately shift to PROCESS. You are finished analyzing. You have committed to the trade. You either own it or you're short it. All you have to do now is PROCESS the trade WITH DISCIPLINE and take it home -- and try not to do anything stupid. Our primary focus from beginning to end is SHEDDING RISK. We want to always be thinking about how we can reduce and eventually eliminate real and theoretical risk. Control risk and you control the game. A trader can shed risk in one of only three (3) ways: PRICE REJECTION: STOP ADJUSTMENT: LIQUIDATION: The bid/ask moves sufficiently in the direction of APPRECIATION. An exit stop order is moved in the direction of appreciation so as to reduce or eliminate margin or profit risk. Some or all of the position may be exited, resulting in either 1) reduction of margin exposure; or 2) profit.
The trade management strategy will employ all three. Let's briefly discuss each one. PRICE REJECTION is nothing more than the market moving favorably in your direction. Plot a theoretical risk curve and you'll see that your position has the most risk when it is at or below profitability. When delta has pushed the price sufficiently toward profitability such that a move of X standard deviations will not result in loss, you have no theoretical risk. Buy a stock for $1.00. When the price hits $99 you have no risk. STOP ADJUSTMENT is self-explanatory - you simply move your sell order higher than your original stop loss. LIQUIDATION is simple as well and involves systematically exiting or SCALING OUT of your position (as you achieve price rejection) to eliminate risk. you would either reduce margin or take profit.
being caught in a breakout failure (should price return to previous consolidation).50 cents and your entry is 10.3 easy steps (Long position assumed .25.reverse for shorting) Place your maximum risk STOP LOSS order (SELLSTOP) 0. you would shed risk when price trades through 10. TRIGGER BAR HIGH .TRADE MANAGEMENT PROCEDURE .01 below the lowest price of your TRIGGER BAR (3X6 bar) • THE DISTANCE BETWEEN THE HIGH AND THE LOW OF THE TRIGGER BAR IS THE RISK (This is very important and will be used for MONEY MANAGEMENT). or a least tries to prevent. • SELL 1/3 of your position and move your SELLSTOP to the low of the ENTRY BAR When Price = ENTRY PRICE + 1xRISK than CLOSE (Sell) 1/3 POSITION and move SELL STOP 0.01 below any swing low bars (pullbacks) where price resumes trend and makes higher high.75 (entry price + 3R) TRAILING STOPS Place trailing stops 0. INTEGRATION TRAIL STOPS AT ANY TIME THEY EVOLVE DURING THE TRADE MANAGEMENT 3 STEP PROCEDURE
.TRIGGER BAR LOW = MAXIMUM RISK When the stock appreciates by an amount greater than or equal to your MAXIMUM RISK (1x Risk). Place stops under ANY BAR WHICH BREAKS OUT OVER AN EXISTING HORIZONTAL PRICE LEVEL (such as previous high).25. This is a breakout stop and prevents.75 (entry price + risk) Set a target for liquidating your remaining position when price appreciates to 3 TIMES THE MAXIMUM RISK When Price = entry price + (3 X MAXIMUM RISK) CLOSE remaining 2/3 POSITION Example: entry=10.50 then TARGET = 11.01 below ENTRY BAR LOW Example: if your is . risk = 0.
5 X RISK If you SHED RISK at the appropriate 1 X MAX RISK level and achieve the target on remaining shares. quarter or even 5th of your position. Simple math will tell you if you're in the ballpark. IN ANY CASE -. sell fewer shares. this figure is important for MONEY MANAGEMENT . How much of your position to shed will be determined by your initial risk and how far your entry bar low is from your entry. Let's be clear: exiting 1/3 or your position and moving the stop to your EB low (on the remaining 2/3) should result in a breakeven trade should that new stop be hit. REMEMBER: the goal here is to eliminate risk .01 below ANY BAR WHICH BOUNCES ON THE 6 EMA and rallies. Again. This move should bring you to BREAKEVEN if stopped on the remaining 2/3 position (provided your entry bar is reasonably close to your trigger price). can last weeks and result in the stock price doubling or tripling..ALWAYS FOLLOW TRADE MANAGEMENT PROCEDURE AND COMPLETE STEP 2. You know how paper-trading lacks the emotional pull of actual order entry? This is how it feels after you've shed risk.01 below LOW)
SHED 1/3 AT 3 X MAX RISK and hold remaining 1/3 (choose a stop listed below) TRAIL swing low stops (as we'll see with examples) until stopped out HOLD remaining position until 3X6 EMA crossover (counter trend signal evolves) PLACE trailing stops 0. If you're still under water. TARGET = 2. If you're taking too many cookies off the plate. use one of the following stops (0.33 actually but close enough). you should realize a profit of 2.which will come later. THE CLOSER YOUR ENTRY TO THE ENTRY BAR LOW. You may only need to liquidate a 3rd. I REPEAT: ALWAYS SHED RISK.
.5 RISK. YOU'LL NEVER BE SORRY AND YOU'LL THANK ME FOR SOUND SLEEP! After Step Two (2) of the procedure. YOU WANT TO OWN AS MANY SHARES AS POSSIBLE FOR THE REST OF THE RIDE. Many strong trends (specifically in high RS stocks early in the broad market move). THE FEWER SHARES YOU WILL HAVE TO SHED..5 TIMES YOUR RISK or GREATER depending on the size of your risk shed (2..SHEDDING = BREAKEVEN Step 2 of the management procedure is your RISK SHED. SHED more shares.unless greed overtakes you.and allow you to objectively manage the trade without emotional attachment to random adverse price movement. ALTERNATE STRATEGIES: You may wish to stay at the party longer than 2.
. Take a look at the following chart. Trail stops 0. Refer to this chart...
Let's take another example.01 below the LOWEST OF THE LAST 2 BARS (2-BAR LOW) This permits a 1-bar pullback (to be discussed later) but no greater correction Let's review a few examples of the plan in action..
Follow the 3-step management strategy as a basis until you develop your own style. Doing so will make you consistent. Most importantly you'll be controlling risk and securing in profit.
. I'm offering a variety of stop strategies so that you may develop your own style. Remember that you can't expect the market to move in your direction forever. In any case you'll be letting your winners run and managing your risk on every bar of the trade. Random price behavior dictates that you must pay yourself when the market makes profit available to you. tactical and efficient.The perspective of trade management as a procedure is integral to controlling emotion and developing consistency. Don't feel as if you have to do it all.
TRICKS OF THE TRADE Develop your own style WITH DISCIPLINE and CONSISTENCY Follow the 3-Step plan Don't expect the trend to last forever – control greed PAY YOURSELF (according to the plan) when the market PAYS YOU Use expected price rejection (early trade strength) to ELIMINATE RISK
KEEP IT SIMPLE Use the indicator for nothing more than CONFIRMING NEW HIGHS or CONFIRMING NEW LOWS (for this purpose). You can frequently avoid entries at the beginning of a downtrend or market correction. Be especially aware of these situations when the DOW has turned RED (3x6 down) after an uptrend.CHAPTER 11: AVOIDING FALSE BREAKOUTS As the chapter title suggests. but this method will prevent you from taking entries in late cycle trends with unconfirmed new highs (or new lows if shorting). let's discuss AVOIDING FALSE BREAKOUTS. MACD (12-26) Once again we'll be employing the MACD . If the high which precedes the counter trend is NOT CONFIRMED BY THE MACD high or IS NOT THE FIRST HIGH AFTER THE MACD CROSSES ITS SIGNAL LINE. IF THE HIGH THAT OCCURS BEFORE THE COUNTERTREND CORRESPONDS TO A LOWER HIGH IN THE INDICATOR. The MACD INDICATOR is a great way to visually see these unconfirmed moves.
. AVOIDING FALSE BREAKOUTS Stocks will often make UNCONFIRMED higher highs (false new high breakouts) before sharply correcting. and 2) a zero (0) line. There is no crystal ball of course. THESE HIGH POINTS SHOULD CORRESPOND TO HIGHER HIGHS IN THE MACD INDICATOR . Gerald Appel's Moving Average Convergence/Divergence (MACD) Indicator plots the DIFFERENCE between two moving averages (popularly the 12 and 26). This chapter in your journey will cover how to use a popular indicator found in any price chart software to avoid false CONTINUATION breakouts.the trigger line (generally a 9 period EMA). This 'line' oscillates around 1) a moving average of itself . Remember. a new high in price should be confirmed with a new high in the indicator. When the stock or market makes a new high and the indicator does not. consider passing on the setup and finding one what is not diverged. the price action is said to be DIVERGED. Let's put is this way: IF THE STOCK HAS BEEN MAKING HIGHS.the same one we used to filter CROSSOVER BREAKOUTS. do not take the trade.
All you have to do after that is control your risk and manage the trade effectively. Taking advantage of these reversals is the cornerstone of the system logic. For that matter I would not recommend using any other indicator for confirmation. Trust me. later in the course when we study the system logic. we'll see that continuation trend trades involve counter trends which produce conflicting (counter intuitive) signals in popular indicators. Let's study some examples to eliminate any confusion. Doing so will result in confusion.WARNING .WARNING DO NOT USE THE MACD FOR ANY OTHER PURPOSE THAN CONFIRMING HIGHS AND LOWS..
.. The best you can do is pass on continuation setups that are diverging.WARNING . Doing so. Have a look at the following chart. high probability continuations (bounces off the 18). You will be wasting your time. in addition to finding low-risk. I've tried them all. is the gateway to consistency.
Here is another example.
..We'll move on to another example..
..Let's review an example of CONFIRMED higher highs in this chart...
.Here is another example.....
Let's complete the training with one of the entries covered in the trade management segment....
A FEW WORDS FROM THE AUTHOR ABOUT THE WHOLE IDEA Diverged (unconfirmed) highs will typically occur at the end of broad market trends. You will not see them too often at the beginning of a bull run, unless the stock has been bucking the trend for some time. Downside divergences seem to be more volatile than their uptrend counterparts. The stock (or market) will often make the lowest low of the trend on a diverged spike and quickly
reverse to the upside. This is how 'bottoms' form. The public has capitulated, sold in panic and handed their shares to the smart money. Let's do a quick review: The MACD indicator is a tool for measuring High and Low CONFIRMATION DIVERGENCE Stock = Higher High, MACD = Lower High Stock = Lower Low, MACD = Higher Low Unconfirmed Higher Highs = False new high breakouts Unconfirmed Lower Lows = False new low breakouts Trade Secret: Higher Highs in the stock should correspond to Higher Highs in the MACD indicator (since crossing the zero line)
Assuming a LONG position. found in any free charting tool on the web.
. At the new high. are flashing SELL SIGNALS. The answers to these questions and other mysteries of the universe are contained in this segment. than 90% of all other market participants.CHAPTER 12: SYSTEM LOGIC By now possess the necessary tools to consistently set up and manage low-risk entries . the weak hands exit long positions. establishes a counter intuitive premise. why it consistently picks winners year in and year out. the shorts are forced to cover. Additionally. COUNTERINTUITIVE PREMISE 2. VERIFICATION AND VALIDATION OF LONG TERM TREND COUNTERINTUITIVE PREMISE The setup pattern. SYSTEM LOGIC consists of two (2) main principles: 1. Take a look at the following chart. You might be asking why this system really works. whether the PRICE ACTION be a PULLBACK or a PATTERN entry. You should feel like you are in control.. probably. more buying ensues as this strategy is a common momentum entry popularized by the IBD. Sufficient selling has emerged to facilitate this.. the counter trend is a short-term downtrend which begins OVER the Long Term EMA. The short sellers will place stops at or near the top of the pattern. When the price bounces firmly on the Long Term EMA and quickly reverses. Let's review an example. Most popularly followed canned indicators. The uninitiated trader concludes that the market has topped. The bears have taken control and sellers establish short positions. You are more capable now. But you will have already established your long and may even have shed risk.
. Here is another example.. they buy. When the shorts cover.You will notice how the counter trend attracted sellers.
. This propels prices past the breakout point.
since price strength is necessary to terminate the counter trend and continue the uptrend. you can verify if the 'TEST' of the Long-Term EMA will hold and result in a CONTINUATION pursuant to the rules of 3-moving average systems. YOU CAN THEN ANALYZE PRICE ACTION. you will have an obvious place to enter (the 3x6 crossover). VALIDATION OF LONG TERM TREND The second system logic principle is Long Term Trend validation.In this example notice how the sellers misunderstood price support at the 18 EMA. Since you are familiar with reading trends and gauging momentum. Also. ASSESS RISK AND DECIDE IF YOU WISH TO TAKE THE ENTRY.
My empirical evidence suggests that pullbacks to support without counter trends are much less probable and DO NOT ALWAYS POSSESS THE COUNTER INTUITIVE PREMISE. Also. Therefore. I only trade continuations after counter trends. if you attempt an early entry on a pullback to Long Term support (before the 3x6 confirmation..A WORD ABOUT PULLBACKS TO MOVING AVERAGE SUPPORT Pullbacks to moving average support that result in continuations of the trend ARE MORE PROBABLE if there exists a COUNTERTREND prior to entry. Take look at the following chart. YOUR ENTRY IS RANDOM AND YOU ARE MERELY GUESSING THAT SUPPORT WILL HOLD. Let's review with an example..
SYSTEM LOGIC. why it worked last week. market participants.. technical cycles. Let's review the Counter Intuitive Premise: A COUNTER TREND = Short Term DOWN TREND BUT. Forex pairs. economic cycles. What never changes. The variation is endless of course.and why it should work 20 years from now.. stocks.. volatility. Why this system worked for me in the 1990s. There you have it.the COUNTER TREND occurs OVER the LONG TERM TREND EMA Widely followed indicators flash SELL SIGNALS Short Sellers place stops near the top of the COUNTER TREND New Highs attract BUYERS!
. and good old human greed and fear are constantly changing.THE BOTTOM LINE Markets... however is the fact that price action continuously crosses over and continues.. volume.. news. but the patterns are obvious and discernible.
or more in quiet trends. we can discuss TREND ANALYSIS. QUIET TRENDS • Steady. often several times larger than those in the counter trend • 3 diverges from the 6 EMA • 3/6 diverge from the 18 EMA • Price may diverge/pull away from 3 or 6 EMA . prices bolting up/down at unsustainable angles • Large range bars. Let's begin by defining each type of trend. NOT PARABOLIC • Average range price bars. upward/downward price movement (about 45 degrees).CHAPTER 13: TREND ANALYSIS At this point in the course. Once understood you will know when to sit in a strong trend and trail stops. Understanding these individual trend characteristics will enable you to choose the best trade management technique. typically within normal range • 3 equidistant from 6 EMA . 2) The above method will allow you to land a WHALE on the daily or weekly interval and
. After you enter the position and control risk. You can also learn to establish a target and take profit in those 'flash in the pan' trends. For quiet trends you're looking to trail stops according to one of the several methods detailed in the TRADE MANAGEMENT TRAINING.there is no TESTING • No pullbacks initially • Price diverges from a trend line (drawn by connecting pullbacks or reaction points) With this knowledge you want to determine the trend type and react accordingly. and NO DIVERGENCE (3 pulling away from 6) • 3/6 remain equidistant from 18 EMA. WHAT'S THE LOGIC? 1) PULLBACKS greater than 2 bars are potential REVERSALS (frequently). you'll want to establish the price target (3 times Risk) and exit the trade when the target is reached. 6 EMAs) • Price closely follows a trend line (drawn by connecting pullbacks or reaction points) VOLATILE TRENDS • Parabolic moves. In many cases it is possible to profit 5-10 times risk (R). For volatile trends. NO DIVERGENCE (3/6 pulling away from 18) • Frequent 3 or 3/6 EMA testing (3+ times) • Small one bar pullbacks to moving averages (3. one of two types of market action will ensue. Understand the nature of trends types can dramatically improve your performance over time.
. parabolic (volatile) price action.. This is a rule-based strategy. Profits from volatile target exits can be funneled into QUIET TREND trades. DON'T BE LIKE ROBOTIC SYSTEM TRADERS WHO THINK HISTORY REPEATS ITSELF. Take a look at this price chart. THAT THEIR 'SYSTEM' SHOULD PERFORM EXACTLY LIKE THE 'BACKTEST'. awareness and choice are key intuitive compenents which should be developed. Let's analyze some examples. 5) YOU WON'T WASTE TIME.. AND THAT EVERY ENTRY SHOULD BE HANDLED THE SAME WAY. use your head and allow the the market to guide your management decisions. 6) THE BEST TRENDS DEMONSTRATE SMALL RETRACEMENTS.actually STAY IN IT (so you can stop telling fish stories at cocktail parties) 3) You're competition doesn't understand this and blindly treats all entries the same with some static mechanism while you trust your intuition. But flexibility. 4) By learning to EXIT VOLATILE TRENDS you won't spend lots of time in multi-week / month consolidations which tend to evolve after very quick. You can maximize your effort. USUALLY 1-BAR PULLBACKS.
. Here is another example..This stock was definitely under heavy accumulation.
..Notice how parabolic price action resulted in divergence and inevitable consolidation. Examine this next chart..
. Let's compare this volatile trend to a quiet trend counterpart.
.And let's look at another interesting example.
Think of it this way. analyze the trend.. Shed risk.
. the trend is probably volatile. and manage the trade accordingly.if you wouldn't want to give back that much profit if your stop is hit. ALWAYS SHED RISK You never know what is going to happen..A QUICK TRICK If the price is really far above or below (if short) your stop. you're probably in a volatile trend. follow the trade management plan. Once you shed risk and get to breakeven. you can unemotionally and OBJECTIVELY allow the market to determine your course.
REMEMBER THIS IS RELATIVE You don't need to be 'right' about the trend and you don't have to know what is going to happen next in order to make money. Understanding trend characteristics is a definitive edge. Use your best judgment. QUIET and VOLATILE assessments are RELATIVE. it will have to be developed. move forward. Notice what happens next. follow through and accept the results.ANYTHING CAN HAPPEN Just in case you weren't aware of this by now. A quiet trend can go volatile. I think you'll be surprised at how simple and effective this method can be. The biggest challenge will be objectivity in the face of random outcomes. Occasionally. trend analysis can be tricky. TRADE SECRET: Historically LARGE PRICE MOVES are QUIET TRENDS Some TREND ANALYSIS POINTS TO PONDER: Pullbacks greater than 2 bars (in extended trends) = potential reversals Call a QUIET TREND and you can LAND that WHALE! Trend analysis is INTUITIVE CONSOLIDATIONS DON'T MAKE MONEY! Correct Trend analysis = Efficient use of time Strong Trends demonstrate SMALL RETRACEMENTS
. After your setup follows through (2-5 bars) analyze the trend and proceed. Once you have a firm grasp of the concept. DON'T OVER ANALYZE. However. A volatile trend can retrace and become quiet. Practice spotting historically QUIET and VOLATILE trends. If you don't possess the discipline requisite to following your determined trade plan. anything can happen.
Why? Because if my expected outcome is 12 R and each R is equal to $500... preferences and tolerance.5 times my risk (2. the trade reached SHED target but resulted in no total trade profit 2 LOSSES …. This 12 X RISK (R).. manage and effectively exit a trade) I generally net 12 times RISK. This segment is an addendum to the trade management training. then I can expect to generate 6K in profit.. each one equal to my maximum risk (1 X R) Let's think in terms of RISK: 6 WINNERS 2 Break evens 2 LOSSES TOTAL = 15 times RISK = 0 (no risk) = -2 times RISK = 13 times RISK (net gain)
"OK.but what does this mean? Let's assume that each time I complete a 10 trade sample (enter. Your management style will evolve as you develop a better understanding of your own discipline. or 12 R becomes my expected outcome. Ed. Here is what we want to do: Master the entry setup and trade management techniques EMPLOY POSITION SIZING TO ACHIEVE OUR GOALS Every trade has PREDETERMINED RISK and a PROFIT TARGET..00 to achieve my goal. each one equal to 2. Let's further assume I can complete one sample (10 trades) each month and that my monthly trading goal is $6.00)
...000.00 (R = $500. Everything will eventually culminate in a unique process that will be your own.00. 12 X R = $6.00. This will enable us to enjoy an expected value.5 X R) 2 BREAK EVENS. give or take a few. Join me in the following thought experiment: I have a sample of 10 trades with the following DISTRIBUTION: 6 WINNERS. Here I'll introduce you to a key ingredient necessary to make any strategy truly effective: POSITION SIZING.000.CHAPTER 14: MONEY MANAGEMENT At this point you should be familiar with setting up low-risk entries and managing the trade.. Simple math dictates that I must risk $500.
I will need the trade to go over 40% in order to achieve my target.you will be placing a BUYSTOP order 0... Use the following formula (given risk) to determine your POSITION SIZE: POSITION SIZE = AMOUNT OF RISK / (divided by) TRADE RISK (trigger bar H-L) Let's say I want to risk $500 per trade and my trade risk is $1. You will be surprised at the number of times an entry will appear with only 5% in risk.5 times risk is the target but my trigger bar is very long and equal to 15% of the stock value. IT WILL NOT REQUIRE UNREALISTIC APPRECIATION. REMEMBER HOW TO DETERMINE YOUR RISK: SUBTRACT THE TRIGGER BAR LOW FROM THE TRIGGER BAR HIGH (H-L=RISK) The trigger bar is the one at which point the 3 crosses the 6..SIZING POSITIONS FOR RISK (R) The concept of taking the same amount of risk for each trade is not new but most investors don't do it.
. If 2..00 POSITION SIZE = $500 / $1... Let's take a look at the following chart:.01 over the high of this bar. you can control THE EXACT AMOUNT OF PORTFOLIO RISK (open position risk) YOU WISH TO TOLERATE. by choosing the number of open positions to maintain. THIS WILL GIVE YOU TOTAL CONTROL AT ALL TIMES. As discussed in the trade management chapter you will be placing your SELLSTOP 0. By knowing exactly how much you are willing to risk. Furthermore.01 below the low of the trigger bar.00 = 500 SHARES USING RISK PERCENTAGES TO DETERMINE IF PROFIT TARGET IS REALISTIC The next thing I always do is CALCULATE THE ENTRY RISK AS A PERCENTAGE OF THE STOCK. This will enable you to TAKE PROFIT SOONER. Let's first look at sizing for risk. I know from experience that for momentum stocks 20% is an attainable target. Hence the purpose of my ramblings: FOCUS ON THE LOWEST RISK ENTRIES THAT THE MARKET GIVES YOU. This may not be realistic. you can decide which trades suit your tolerance and which trades do not.
00 risk amounts. for sake of argument. my trading account value is $100. let's say I never want to risk more than 2. GLOBAL PORTFOLIO RISK MANAGEMENT Let's continue my example of $500. I would therefore maintain no more than five (5) open positions. Knowing my own risk tolerance.Notice how the setup provides all the information i need to assess risk and determine if the entry meets my money management objectives.5% of the account's total value.
TOTAL CONTROL.5% of my portfolio (100K)
If I can SHED RISK on several entries and/or achieve sufficient price rejection to theoretically reduce or eliminate risk.00 = 2.500.. Let me tell you.5% draw down I'll surely survive to play another day.RISK 5XR $2..if the worst I can do is a 2. if I hit the target in the thought experiment I profit $6.. SIZING POSITIONS FOR RISK gives YOU:
CONTROL: YOU decide your Risk tolerance CHOICE: YOU decide which trades suit that tolerance MORE CONTROL: YOU decide global PORTFOLIO RISK
TRADE SECRET: LOW PERCENTAGE RISK entry setups DO NOT REQUIRE UNREALISTIC APPRECIATION to hit trade TARGET (and you can take profit sooner!)
... That's 6%.. then I can open an additional position or two. Of course no one will believe that I don't have to assume more risk. I am in control of my money. Let's Review.. But what is the upside? Well..00
= $500. Never again will you have to ask your broker if a 30% loss is really OK.000.144% if I leverage the account 2:1 with standard margin..00 = $2.. Imagine that.500. The choices are mine.72% a year.00.
stone currency of the Easter Island aborigines. THIS DOES NOT MEAN YOU KNOW WHERE THE MARKET IS HEADED. This means that statistically if you're seeing lots of longs the market is probably going up. To be more specific: POSITIONING YOUR TRADE IN THE DIRECTION THAT THE BROAD MARKET IS MOST LIKELY TO GO.... I will begin with the easiest: 1) IGNORE MARKET DIRECTION AND CONSISTENTLY TRADE LONGS I know this ostensibly contradicts the effort of this chapter. Large winners in confirmed trends should dwarf any stop outs in late cycle entries. SINCE YOU NEED A FIRM BOUNCE ON THE LONG-TERM EMA TO GENERATE A SIGNAL. of course.. Here's why you can consistently profit: IF YOUR LONG-TERM EMA IS SHORT ENOUGH (15. COUNTERTRENDS WILL TRADE THROUGH THE LONG TERM LINE (becoming CROSSOVERS) AND SETUPS WILL NOT APPEAR . Typically 3 out of 4 stocks will move in the general market direction.By now you should be familiar with: Basic strategy logic Specific price action setups and technical criteria necessary to achieve consistency Trade and money management Tools to avoid false breakouts and perform trend analysis
What you have learned so far is all you really need to know in order to consistently profit whether you're trading stocks. 21 etc) AND THE MARKET FALLS. you'll recall we briefly discussed the difference between timing and forecasting. If it trades through it. There are five (5) ways to accomplish this feat. As stated in previous segments. What we will be doing here is TIMING THE MARKET. REMEMBER THAT THE COUNTER TREND permits me to assess how well the price is supported at the Long Term EMA.. BUT. Let the market tell you.. I don't even bother. Timing the market is a knack that will greatly enhance your performance over time.. YOU NEVER KNOW IF THE COUNTERTREND IS JUST THAT OR THE BEGINNING OF A DOWNTREND VIA CROSSOVER. lumber or the more rare 500lb. At the beginning. EVEN MILD MARKET CORRECTIONS WILL CAUSE YOUR STOCKS TO SLICE THROUGH IT AND CROSSOVER. so you are familiar with both.CHAPTER 15: TIMING THE MARKET Let's quickly review our progress. NOR DOES IT ASSUME YOU WILL BE CORRECT.
.given that it can be charted.. 18.
. let's proceed to the next chart.2) TRADE STOCKS AS SURROGATES FOR THE BROAD MARKET This is rather self-explanatory. Pictures are worth a 1000 words.. This occurs more often than you think.
With this broad market action in mind... find a stock that is doing the exact same thing.. When the DOW makes a continuation move in any given interval. Take a look at the following chart of the DIAMONDS ETF (DIA).
Then simply watch the DAILY DOW interval for earlier turns.There will frequently be individual equities which correspond to similar broad market or index movement. These will or will not be
. Turn 'cautiously bearish' when the 3X6 EMA crosses down while over the 18 until it goes through it. 3) USE THE 3X6 EMA ON THE WEEKLY DOW INTERVAL AS A 'RED/GREEN BULLBEAR' INDICATOR USE THE 3x6 EMA ON THE DAILY DOW INTERVAL to time entries in the direction of the weekly trend and sidestep counter trends and/or corrections. Turn 'cautiously bullish' when the 3X6 crosses up while under the 18 until it passes through it. This strategy will always keep you on the proper side of the long term trend.
.confirmed by the weekly chart..
And this next chart... WAIT PATIENTLY FOR YOUR SETUPS AND FOLLOW THE PLAN.. This may sound more confusing than it is.
. You can catch an early turn this way. Take a look at the following chart. DON'T WORRY ABOUT MISSING A BOTTOM OR TOP. while we're at it. We'll analyze the March 2009 low as an example.
I was able to use this simple RED/GREEN tool to completely avoid the 2008 meltdown...
. Examine this weekly chart of the DIAMONDS (DIA) ETF. 2007 and again at the end of December. Some of them listened. I told all my friends to go to cash after the first week of November.Strategy #3 works extremely well for long term investments to which you add funds on a regular basis (such as a 401k) because re-entry is not a factor.
The result can be life changing. 4) USE THE CROSSOVER BREAKOUT STRATEGY ON AN INDEX TO PROVIDE MARKET TIMING SIGNALS This strategy is really nothing more than using CROSSOVER BREAKOUTS to gauge market direction. If you heed the warning.NOTE: IGNORE A WEEKLY 3X6 CROSSOVER DOWN AT YOUR OWN PERIL. you will NEVER SIT THROUGH A LONG TERM BEAR MARKET.
. It works exceptionally well.
and the next one.Let's check out the following chart..
.and one last example...
we'll see an example of the system in action.
.To conclude. Take a look at this chart ... here are the simple rule for implementing the Crossover Breakout Strategy as a market timing system.
5) USE BOTH THE 3X6 DAILY/WEEKLY RED/GREEN MODE SYSTEM AND THE CROSSOVER BREAKOUT MARKET TIMING SYSTEM simultaneously You can even track a number of indices and/or market sectors quite easily. Using both methods you should be able to track market direction and avoid pitfalls in just a few minutes a week.
The less you do. So why is everyone touting single-market systems? Because managing a watch list adds a whole new dimension to the crime. ONE MARKET CONSPIRACY Watch only one market or stock and you risk wasting an incredible amount of time. The best trades come from individual stock moves. Most people associate day trading with first-hour breakouts. change ALL the rules. precision and skills not necessary or even desirable for daily or weekly intervals. Choose any other way and you won't be competitive. RULES AND LEVERAGE Thank the tech bubble bust at the turn of the century for the SEC day trading rules and minimum account requirements. These axioms are inverted in day trading Trade the first and last two hours and you can make a fortune.. it is really a miniaturization of the daily or weekly model. COUNTERINTUITIVE TIME DEMON Everything about our culture encourages diligence and hard work.blah. however.. You want to be able to post bids and offers directly into the ECN or DOT (NYSE) system. focused desktop with appropriate technology is necessary to locate and effectively manage even a moderately sized watch list. KEY DIFFERENCES TIME Ultra-short intervals require decisiveness. physical trade error.or not. real-time chart/data errors. the more you'll make. ECN arbitrage or a host of other high volume strategies. blah. What does that tell you? Indexes and ETFs can stagnate for hours or an entire day." The 40 hour work-week. Your friends will probably stop calling as well.. order flow and real-time charting. To play the game you need huge leverage (much more than the 4:1 offered by most brokers) and DIRECT ACCESS execution capability. Trade all day like a desk job and you'll soon have one. You may want to consider a reputable 'prop' (proprietary)
. It can resemble a day job. For me. I knew a guy who bragged about trading only the S&P mini contract. misplaced orders and a host of other pitfalls can trigger emotional responses and imbalance even a seasoned trader. Watch too many and the best moves will slip past like a burglar though an unlocked door in a dark alley. A very organized.. The short-term interval. pairs trading.. I locate low-risk. ERROR Technical difficulties. SCANNING Easily spotted in retrospect. high-probability entries in the same manner I would on any other interval. I seldom make more than 3 or 4 trades per day. Now he teaches other people to trade the S&P mini contract.CHAPTER 16: DAY TRADING This chapter will attempt to tackle the monumental task of conveying the necessary concepts requisite to applying the setup patterns on an intraday basis. real-time entries can slip through your fingers like sand at the beach. "Hard work is rewarded. BROKERS.
FIND A DIRECT ACCESS BROKER WHO WILL GIVE YOU AT LEAST 10:1 INTRADAY LEVERAGE (Preferably 20:1 or 30:1). Put up 5K to 10K in collateral and use good old OPM (other people's money). trade is more orderly and the largest volume securities trade there IF YOU'RE CONVINCED THAT ETFs ARE THE WAY TO GO. be more focused. Let's face it . It can take a year or two to master the game. GIVE IT TIME. ENSURE THIS BROKER IS USING A COMPETITIVE DIRECT ACCESS PLATFORM (Try Instaquote or RealTick). Think they won't come get them? Think again. Some 'prop' firms have their own proprietary and/or experimental platforms. You'll do better. DAY TRADING SURVIVAL GUIDE: TAKE HIGH-QUALITY. if and when it's hunted you can at least breakeven) LEARN TO READ A LEVEL II AND AVOID 'FAST' STOCKS OR MARKETS (Those with sparse volume at various prices which cause excessive price movement and slippage when triggered) TRADE ONLY HIGH BETA STOCKS WITH LARGE VOLUME. build and outfit your trading desk and acclimate to real-time price ticking. The stop order system is much more fair. Frequently this requires the series 7 exam and professional licensing. Consider the DIREXION broad market products.firm. VOLATILITY STOCKS WITH EXCESSIVELY LARGE VOLUME AVOID LOW-
TRADE NYSE STOCKS. Don't put your precious capital or IRA at risk.there are only so many ways to get executions. THE BIG BOYS ARE OUT FOR BLOOD From hedge funds whose primary strategy is running public stops to greedy specialists and front-running clearing firms. and free to deploy your larger accounts for daily and weekly entries.be careful. The setup you have learned will
.. LOW-RISK SETUPS DURING THE MARKET HOURS WHICH TYPICALLY PRODUCE THE BEST MOVES (first 2 hours and the last 2 hours) BUILD A SAMPLE OF TRADES OVER A LONG PERIOD OF TIME USING RULE #1 BE PATIENT ENOUGH TO WAIT FOR A VERY PRECISE SETUP TO EVOLVE (I'll show you which one) USE ONLY 'MENTAL STOPS' UNTIL YOUR HARD STOP IS BREAKEVEN OR BETTER (This way. Think they don't know how you cleverly placed that stop at the same place there are 400 other orders? Think again. TRADE ONLY HIGHLY LEVERAGED ETFs (2 or 3 Xs). everyone is out for your lot..
but that isn't leveraged day trading TRADE ONLY PULLBACKS.
.6 below 18 . 3/6 crossover 18) • COUNTERTREND + PULLBACK PATTERN • ENTRY SETUP What you're looking for is the FIRST COUNTERTREND after a primary trend change from DOWN to UP (or reverse if shorting). however. although desirable. Look for the following sequence AFTER YOU LOCATE AN ENTRY (if long): • DOWNTREND (3. 60 minute charts. That's fine. I would suggest nothing longer than a 10 or 15 minute interval. This keeps it simple and much more probable.severely reduce your learning curve. There are more false breakouts during the day than demonstrators at a World Trade Organization (WTO) conference. will frequently require holding overnight.RED MODE) • CROSSOVER (3 crosses over 6. The only resistance level you must manage is the swing high which preceded the counter trend. DAYTRADING STRATEGY: Choose an interval that will allow your trade to reach its trend potential BEFORE the market closes (if you must liquidate all positions at day's end). Take a look at the following chart... Let's take a look at some examples of how this wave 'Pattern' is demonstrated and exploited.
And this next example.....
Here is an example of a downtrend pattern.....
Here is another example of a downtrend continuation.....
.Check out this next example as well..
.And to complete the training let look at one more example..
but statistically you fare much better long. ONLY TRADE LONGS. Yes. FOCUS ON GAPS.
. These are most likely to resume an uptrend after a morning counter trend. Be certain your high and lows are confirmed. Stocks with 'unfilled gaps' are excellent candidates for continuation moves later in the day. USE THE MACD INDICATOR TO AVOID FALSE Breakouts. Long entries meander farther and are more likely to evolve into lasting trends than their short counterparts. Statistically. And you won't have to struggle with 'hard to borrow' stocks. there are great short entries. FOCUS ON STOCKS WHICH ARE 'UP THE MOST' (highest percent change) FOR THE DAY.
DAYTRADING SUMMARY: THE DAY TRADE CHALLENGE: Entry SETUPS must be seen. FOLLOW THE TRADE MANAGEMENT PLAN. you're likely to struggle with even shorter term intervals.if you can't successfully master the setup and yourself on a weekly. EXPENSIVE (greater than $30) LISTED STOCKS. Just remember. REPEAT: FOCUS ON THE SETUP. IF ALL ELSE FAILS. Locate the best spot for YOU on the interval scale FOCUS ON THE SETUP ESTABLISH specific CONTEXT (early cycle entries) CONTROL YOUR RISK
.. as for computing power use a resource-rich gaming PC with ample screen space (monitors) to reduce the workload and stress. I
The above checklists will give you a fighting chance if you're interested in ultra short term trading. I would suggest you work down from a long-term interval until you locate the best spot for YOU on the interval scale. daily or hourly interval. FOCUS ON THE SETUP. ACQUIRE THE NECESSARY TECHNOLOGY. BUILD A MANAGEABLE WATCHLIST OF HIGH BETA (LARGE RANGE).. If your watch list is larger than your amount of screen space you'll probably also require some type of real time scanning instrument. CONTROL RISK.FOCUS ON THE SETUP. scalable charting tool.. ONE last note. No more than 100 is necessary. You'll want a very dependable. IT WON'T LET YOU DOWN.. analyzed and executed while PRICE IS MOVING WORK DOWN from longer term intervals.. HIGH VOLUME.
etc. non-correlated setups CONTROL RISK Take LOW RISK SETUPS (less than 5%) Follow your trade and money management rules Let the trend do the work Maintain 20 TRADE SAMPLES. 52 wk highs.CHAPTER 17: TRADING RULES
FOCUS ON THE SETUP Establis your precise SETUP CONTEXT SETUP: Price Action specifications CONTEXT: Early cycle entries. MARKET: Correlated. Reduce Error Achieve your goals with POSITION SIZING
stocks. The process must begin with analysis and end with disciplined trade management. Forex and just about any security that exhibits the continuation or crossover pattern. Contrary to most market systems available on the Internet this method actually works. We continue to experiment with price action and challenge ourselves daily to further develop and maintain the discipline and consistency requisite to long term profitable equity trading. Reminiscences of a Stock Operator You now possess the tools requisite to consistently managing trend trades in any market and any time interval. to play the market only when I was satisfied that precedents favored my play. During the course of your training you should have seen numerous profitable examples of the setup patterns on your own charts. This will involve the development of a process. Good fortune. It is used daily by a group of traders in my own office on a variety of time intervals from intraday setups to daily and weekly positions. The biggest hurdle you face will be bridging the gap between theory and practice. Frank
.AFTERWORD “What beat me was not having brains enough to stick to my own game – that is. It is traded with options.” Edwin Lefevre.
BONUS SYSTEM: 2 – 3 – 6 EMA CONTINUATION SETUPS Use the 2x3x6 system to enter strong MOMENTUM STOCK after they have made a NEW 52-WEEK HIGH Setup and manage the entries EXACTLY as you would any other system
Target ONLY stocks which enter Counter Trends (2x3 down) AFTER a 52-WEEK
APPENDIX A: HISTORICAL SETUPS and MARKET MOVES