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THEBALANCELINETRADES

THEFIFTHDIMENSION
Wehavenowarrivedatourfifthandfinaltradingdimension.Atfirst,thisdimensionmayseemabit
morecomplicated,butitreallyisn't.Inourearlierbook, TradingChaos, wedescribedasignalwe
labeledthe"thumbtrade,"whichwasbasicallyacounterfractalsignal.Itspurposewastogetusintoa
tradebeforethefractalbreakoutsignal.Thishasbeenprofitablethroughouttheyearswehaveusedit,
but we have now refined this signal to be even more effective, yielding greater profits and fewer
whiplashes.ThebasicsbehindthissignalarewhatwelabeltheBalanceLine.Thislinewasarrivedat
throughtheuseofsupercomputers(mainframes)andwasdeterminedmathematically.Themainframe
computersthenwentthroughmorethanfivemillioniterationstofindawaytoaccuratelyestimatethe
placementoftheBalanceLineusingapersonalcomputer.Wewilldescribethespecificsshortly,but
firstlet'sgetapictureofwhatisactuallyrepresented.TheBalanceLineiswherethepricewouldbeif
therewasnonewincominginformation(Chaos)affectingthemarketatthepresenttime(Figure81).
Thisiswherethepricewouldbewithoutincominginformation,sowecanjudgetheeffectthatnew
informationishavinginthemarketbyhowfarawaythecurrentpriceisfromtheBalanceLine.Inour
research,weconstructedahistogramtomeasurethisdistancebutfoundthatitwasalmostthesameas
our5/34AwesomeOscillatorandprovedtoberedundantwhenusingtheAO.Onewaytothinkofthe
BalanceLineistoimaginethatitistheContinentalDivide.Whenrainfallsontheeastsideofthe
ContinentalDivide,thewaterwillrundownhilltowardtheGulfofMexicobecausegravityisaStrange
Attractor.Thiswillhappenunlessastrongeastwindblowstheraindropsovertothewestsideofthe
divide.Ifthathappens,thewindblownraindropswillrundowntowardthePacificOceanratherthanthe
GulfofMexico.Thewind,inthiscase,isthenewinformationthatchangesbehavior.Achangein
behaviorisafractal.Inthemarkets,newinformationcreatesfractals(changesinbehavior).Therewill
alwaysbeafractalattheendofanytrend.Whenyoudecidedtoreadthischapterratherthandoing
somethingelse,thatwasabehavioralfractal.TheBalanceLinecouldalsobelabeledtheSaddlePoint,
whichistheplacewhereasmallchangeininitialconditionsproducesresultsthataremuchstronger
thanthecause.OneofthecasualtiesproducedbythenewsciencesofquantumphysicsandChaosisthe
destructionofouroldclassicalNewtonianideathatforeveryactionthereisanequalandopposite
reaction.Theyhavealsodoneawaywiththeglobaltheoryofentropy,whichstatedthateventually
everythingwillgodownthedrain.WenowknowthatthereisNegentropywhichhasthecapabilityto
producesomethingfromnothing.ThinkoftheBalanceLineasthetopofthemountain.Whenevernew
informationcomesintothemarket,thepricewillmoveawayfromtheBalanceLinemoreeasily(ittakes
lessenergy,intheformofnewinformation)thanitwillmovetowardtheBalanceLine.Asimplewayto
saythisis:"Itiseasiertogodownhillthanuphill."InChaostheory,thisisdescribedasthe"pathofleast
resistance"(Figure82).Let'stakeacoupleofverysimpleexamplesofhowtheBalanceLineoperates
in any marketstocks, commodities, indexes, spreads, or options. The Balance Line shows us the
directionofthecurrentpathofieastresistanceinmarkets.Figure83isacaricatureshowingthatgoing
downhill(awayfromtheBalanceLine)iseasierthangoinguphill.Inasimilarway,itiseasier(takes
lessenergy)forthepricetomoveawayfromtheBalanceLinethantomovetowardtheBalanceLine.
ThiscanbedemonstratedbysimplyexaminingachartsuchasFigure84.
Figure81WhatistheBaLanceLine?

NoticethatthethirteenbarsintheboxontheleftsideofFigure84moved56pointsandweregoing
towardtheBalanceLine,whichissimilartowalkinguphill.Alsonoticethatthethirteenbarsinthenext
boxweregoingawayfromtheBalanceLine.Thethirteenbarsontherightsidecovered161points
because the price was moving downhill. In this illustration, downhill means the price was moving
higher.RememberthattheBalanceLineisthetopofthemountain,anditiseasierforthepricetomove
awayfromtheBalanceLinethantomovetowardtheBalanceLine.Figure85basicallyrepeatsthetwo
earlierillustrations,againshowingthatmovementawayfromtheBalanceLineiseasier(requiresless
newinformation)thanmovingtowardtheBalanceLine.Figure86i;lustratesthebasicwayoffinding
newinforl.lationfromtheBalanceLinesignal.Thecurrentpricehighislowerthantheprevioushigh.
Whenweinterpretthat,wemustincludetheconceptthat,inanymarket,thereisalwaysastruggle
betweenthebuyersandthesellers.Thebuyerswereobviouslystrongerinthefirsttimeperiod(barA)
thaninthesecondtimeperiod(barB).Weknowthisbecausetheywerenotabletotakethepriceas
highinthesecondperiodasitwasinthefirstperiod.Thequestioncanalsobeasked:Whoisincharge
andwhataretheydoing?Fortunately,wedonothavetoknowspecifically"whoq;wecanseetheresults
ofthecollective"who's"bythepriceaction.Thenewinformationisdeterminedbyreadingtheprice
chart. Figure 86 is quite important as a demonstration of how we recognize new information for
creating Balance Line signals. Notice that bar B has a lower high than bar A. Looking at this
configurationfromthebuyers'pointofview,theywerenotstrongenoughinthetimeperiodoftheprice
barBtokeepthepriceashighasthehighofbarA.Thiscreatesthedottedsquareabovethehighofbar
Baspotentialnewinformation.AttheendofbarB,thesellershadforcedthebuyersawayfromthe
dottedsquare.IfthebuyersregaintheirstrengthandmovethemarketupabovethetopofbarA,a
significant change in behavior will occur, giving us a signal to watch for a Balance Line buy
opportunity.Studythischartcarefully;thisconceptissometimesdifficulttograspinafirstobservation.
Wewillgothroughseveralexamplestomakethisclear.Oncewecanunderstandwheretolookforthe
newinformation,wecanfilterinotherfractalgeometryconceptstocreateprofitablesignals.Wetake
twodifferentfactorsintoconsiderationtogetourmostreliableBalanceLinesignal.Thefirstfactoris:
WhereisthesignalinrelationtotheBalanceLine?WeknowthatmovingtowardtheBalanceLineis
moredifficultthanmovingawayfromtheBalanceLine.Thesecondfactoristhenumberofnewhighs
orlowsneededtocreateasignal.Likethemarket,wewanttotakethepathofleastresistance(Figure8
~Figure88containstherulesforourbasicBalanceLinestrategy.Ourpurposeistomakeiteasierto
get into a directional move when the movement is away from the Balance Line (similar to going
downhill)versustowardtheBalanceLine(uphill).IfwearegoingtowardtheBalanceLine,weplace
oursignalatbase+twohigherhighs(lowerlows).IfwearegoingawayfromtheBalanceLine,weuse
base+onehigherhigh(lowerlow).Thatisourbasicapproach.Wemodifyitdependingonwhichzone
weareinasituation thatwill becovered later on.Atthis point,let's review andsummarize our
approachtothefifthdimension,theBalanceLine.
BALANCELINEBUYS
BuySi~nalsWhentheMarketIs
abovetheBalanceLine
InFigure89,SectionAshowsthesimplebuysignalcreatedbythebasebarBandahigherhighonbar
1.SectionBillustratesthatahigherhigh,whichfollowsabasebar,doesnotcreateanewsignal.The
basebariseitherthecurrentbarorthemostrecentlowesthigh.SectionCdemonstratesabluelight
special.Theoriginalbuywasattheleftmostbar.Whenalowerhighwasformed,thebuymoveddown

onebar.WhenbarBwasformedwithanotherlowerhigh,thebuymoveddowntobar1.SectionD
illustratesthatifthesignalbarisabovetheBalanceLine,weonlyneedthebaseplusonehigherhigh.
AslongasthesignalbaritselfisabovetheBalanceLine,weactasiftheentireformationwereabove
theBalanceLine.Makesurethatyouunderstandthesethreescenariossothatyoucaneasilyfindabuy
signalabovetheBalanceLineonothercharts.Figures810and811areexamplesofhow,oncethe
basebarisestablishedforabuyandthatpatternisfollowedbybarswithhigherhighsthatdonottrigger
thebuystop,thebuystopisnotaffected.Thebuystopstaysinplaceunless(a)itistriggeredOF(b)
anotherbarwithalowerhighisformed,creatingadifferentbasebar.Thelastthreebarsontheright
sideofFigure810andthelasttwobarsontherightsideofFigure811donotaffecttheplacementof
theBalanceLinebuysignal.Nowlet'stryatrickquestion(Figure812).
Hereisatiptospeedupyouranalysis.Whenthemarketismakingnewhighs,youcannothave
eitheraBalanceLineorafractalbuysignalformation.Themarketmustpullbackandcreatealower
highbeforeanewBalanceLineorFractalsignalcanbeformed.
BuySignalsWhentheMarketIs
belowtheBalanceLine
WeknowthatgoingawayfromtheBalanceLineiseasier(takeslessenergy)thangoingtowardthe
BalanceLine.Becausethemarketalwaysfollowsthepathofleastresistance,goodstrategydictatesthat
wedothesame.(Wedidthatintheprevioussection.)Now,wearebuyingbelowtheBalanceLine.We
willrequiremoreenergybecausewearegoinguphill.Wearegoinguphillbecausewearebuyingbelow
theBalanceLine.Figure813,Bsignifiesthebasebar.Insection(A),wehavethetypicalBalanceLine
buysignal.WerequirebaseplustwohigherhighsbecausewearebelowtheBalanceLineandtherefore
areploddinguphilltochangethemarket'senergypattern.Section(B)illustratesthatacurrentbarwhose
highishigherthanthepreviousbardoesnotaffecttheBalanceLinebuybecauseitdoesnotcreatea
lowerbasebar.Section(C)illustratesabluelightspecial.Notethefirstbuy.Itwasfollowedbyalower
high,whichmovedthesignaldown.Themarketisgivingusachancetobuylower.
Let'slookatthepracticechartsinFigures814and815.
InFigure816,thehighsarecircledbecausehighsareallyouareinterestedinwhenlookingfora
buy,andlowsareallyoucheckwhenlookingforasell.
BALANCELINESELLS
SellSignalsWhentheMarketIs
abovetheBalanceLine
Figure816illustratesthetypicalBalanceLinesellingsignalswhenthemarketisabovetheBalance
Line.Section(A)showsthetypicalbaseminustwolowerlows.Section(B)demonstratesthatoncea
baseisformed,alowerlowdoesnotcreateanewsignal.Anewsellsignalcanonlybecreatedby
havingahigherlow.Section(C)demonstratesabluelightspecialsellsignal.Notethatthefirstsell
signaliscreatedbythefirstthreebarsontheleftside.Thatisfollowedbythreehigherlows,which
raisesthesellstopupeachtimeanewhigherlowappears.Thecurrentselliswellabovethefirstsale,
andthemarkethasgivenusanotherbluelightspecial.Again,makesureyouunderstandthischart
(Figure816)beforereadingfurther.Tohelpyouunderstand,let'sdoafewpracticechartsand
schematics,inFigures817through819.EspeciallyinFigure820,weseefourdifferentpossibilities
forthemarket'screatingBalanceLinesellsignals.Section(A)hasthestraightforwardsellsignal.You

onlyneedabasebarandonelowerlowbecauseyouarebelowtheBalanceLineandgravityisgoing
yourwaydownhill.Section(B)illustratesthatalowerlowthanthebasebardoesnotalterthesignalat
thispoint.Section(C)illustratesabluelightspecialsell;themarketisgivingusachancetosellata
higherpricethantheoneweoriginallytargeted.Section(D)illustratesthatifthesignalbarisbelowthe
BalanceLine,weonlyneedabaseandonebarwithalowerlow,regardlessofwhichsideoftheBalance
Linethebasebarison.
PRACTICEPAGES
Figure821isaquitesimpleillustrationofbuyingbelowtheBalanceLine.Thepriceisbelowthe
BalanceLineandgoingdownhill(movingawayfromthelinewhenreadingfromrighttoleft),soyou
onlyneedabaseandonelowerlow.Figure82:2posesanothertrlckquestlon:lsthereaBalanceLine
sell?Whyorwhynot?Again,justasonthebuysideillustratedearlierinthischapter,thereisnosell
here.RememberthatforeitherafractaloraBalanceLinesignal,themarketmustfirstretraceitsmove
tocreatelowerlowsthat,inturn,willcreateasellsignal.Wheneverthecurrentpricebarismakingnew
lows,youcannothaveeitherafractaloraBalanceLinesell.
TRADINGTHEBALANCELINESIGNALS
INTHEVARIOUSZONES
Nowwearegoingtoaddfactorsthatatfirstmayseemconfoundingbuttheypayoffextremelywellin
increasedprofits.Wecallthemfilters.Theydirectustowardthemostprofitproducingsignals.Thefirst
filteristheAlligator.Weknowfromearlierchaptersthat,nomatterwhatsignaliscreated,weonlywant
totradeasignalthatisoutsidetheAlligator'smouthandisgoinginadirectionthatwillkeepusoutside
ofthemouth.Thesecondlimitingconditionisthezonethecurrentpriceisin.Ifyouareattemptingto
buy in the Red Zone, you know that you are buying even though the Momentum is down and is
acceleratingtothedownside.Thatdoesn'tappeartobetoyourbestadvantage.Therefore,ourstrategyis
tomakeittwiceasdifficulttobuyintheRedZone.Ifthecurrentbarisredandweareabovetheblue
BalanceLineandlookingforbuysignals,itwouldrequireabasebarandTWOhigherhighs(ratherthan
onehigherhigh,asintheGreenortheGrayZone).Likewise,ifweareabovetheBalanceLineandin
theGreenZonelookingforasell,wewouldnormallyrequireabasebarandtwolowerlows.However,
beingintheGreenZonetellsusthattheMomentumisupandacceleratingupward,sowerequiretwice
asmanylowerlows(fourratherthantheusualtwo,asintheGreenorGrayZone).Anotherwayto
expressthisis:YouonlydoubletherequirementsforasellintheGreenZone,andyouonlydoublethe
requirementsforabuyintheRedZone.Inanyothersituation,thenumberrequiredwouldbethenormal
numberofhigherhighsorlowerlows.Donotforgettheother,extremelyimportantfilter:DONOT
FEEDTHEALLIGATOR!
THEBALANCELINETRADES
RealTimeTrading
InFigure823aretheBalanceLinetradesyouwouldhavetakenhadyoubeenfollowingour
tradingmethodbetweenApril17andJuly31orjustoverthreemonths.Aninterestingpointshouldbe
notedhere.WheneveryouhavealongtrendrunsuchastheoneinFigure823,youwillalwayshave
moreBalanceLinesignalstriggeredthananyoftheothertradingdimensions.Theresultsfromtrading

theBalanceLinesignalsinatrendruncanbequiteimpressive,asevidencedbyTable81,whichis
basedonthesametimeframeasFigure823.
RECAPANDSUMMARYOFBALANCELINETRADING
The Balance Line is that place where the current price would be if there was no new incoming
information(Chaos).
TheBalanceLinerulesare:
Alwaysreadfromrighttoleft.Lookatthehighsonlywhenlookingforabuysignal.Lookatthelows
onlywhenlookingforasellsignal.Establishthebasebarfirst.Thebasebaristhestartingpoint.Tofind
thebasewhenlookingforbuysignals,lookatthecurrentbarorthebarwiththelowesthigh.Tofindthe
basewhenlookingforsellsignals,lookatthecurrentbarorthebarwiththehighestlow.
Onceyouhaveestablishedyourbasebar:
1.Forabuy,youneedonenewhighifyouaregoingawayfromtheBalanceLine,andtwonewhighsif
youaregoingtowardtheBalanceLine.
2.Forasell,youneedonenewlowifyouaregoingawayfromtheBalanceLine,andtwonewlowsif
youaregoingtowardtheBalanceLine.
Thefinaltwofiltersare:
1.YoudonotsellabovetheAlligator'smouthandyoudonotbuybelowtheAlligator'smouth.Ifyou
do,youarefeedingtheAlligator,whichcanconsumeallyourfood(money).
2.IfthecurrentbarisintheRedZone,youdoublethenumberofnewhigherhighstocreateabuy
signal.IfthecurrentbarisintheGreenZone,youdoublethenumberoflowerlowstocreateasell
signal.
Wehavenowcoveredthefivedimensionsforenteringastockorcommoditymarket.Mosttraders
finditmoredifficulttogetoutofatradethantoenteratrade.Gettingoutisalwaysanexecutive
decision.However,fourguidelinesthatIuseinmyowntradinghavebeeneffectiveinmaximizingthe
profitstakenfromthemarkets.Wewillexploretheseinthenextchapter.