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TECHNIQUE5FORTAKINGPROFITS

Nowthatweknowhowtoreadthemarket,wewanttodevisesomegoodstrategiesforsqueezing
thehighestprofitthatispossiblefromourtrades.Justaswelistenforthemarkettotelluswhenand
howmuchtoinvest,wecanalsoexpectthemarkettoguideusintakingprofits.Mosttradersexperience
muchmoredifficultyingettingoutofthemarketthantheydoingettingintothemarket.Again,we
wanttoemphasizethattheansweriswithinyou,andthereferenceisinthemarket.Wesaidintheearly
chaptersthatwewanttogetintunewiththemarketandletChaosworkforusor,usingabetter
expression,letusworkwithChaos.Figure91remindsusofthenatureofChaos.
TYINGITALLTOGETHER
WehavenowcoveredallfivedimensionsofourProfitunitymethodoftrading.Weknowhowtoget
intothemarketbybuyingorselling:
1.Thefractal.
2.TheMomentum.
3.Acceleration.
4.TheZone(addons).
5.TheBalanceLine.
Figure91Chaosisfreedom.
WealsoknowthatweneverinitiateatradegoingagainsttheAlligator.WewanttheAlligatorto
beonourside,andwewanttostayoutofhismouth.Wealsofilterourentries,dependingonwhich
zonewehappentobeinwiththecurrentbar.Nowwearereadytodevelopourbestprofitproducing
strategiesforgettingoutofourtrades.Thenameofthegameistakingmoneytothebank.Atthispoint,
weareapproachingthefourthandfifthlevelsoftrading,whereeducatedintuitionbeginstopayoffwith
profits.Wehavefourmarketgeneratedindicatorsthataidinourexecutivedecisionsandallowustoget
outoftradesbasedonthemarketratherthanonourwantsandwishes.Thesefourare:
1.Redline(Alligator'sTeeth).
2.Fiveconsecutivebarsofthesamecolor.
3.Greenline(Alligator'sLips).
4.Asignalintheoppositedirection.
THEBESTOVERALLSTOPWHENYOUKNOWYOU
AREWITHTHETRENDANDTHETRENDISNOTOVER
Whenyouhaveevidencethatyouarestillinatrendingmarket,yourbestoverallstopistheRed
line.TheRedlineistheAlligator'sTeeth.Itisalsowherethecurrentpricewouldbeiftherewereno
newincominginformation(Chaos)affectingthemarket.ThisisaStopCloseOnlyorder,whichcanbe
putintomostmarketsaseitheraStopCloseOnlyoraMarketOnCloseorder.Ifyouaretrading
Intraday,youhavetowatchthemarketatthecloseofeachperiodandgetoutwithamarketorderifthe
closeisbelowtheRedline.InFig~re92,youvvillseeseveralpenetraticn,acftheRedlin~butno
closesbelowtheRedline.IfyouweretradingthismarketandusingtheRedlineasastop,youwould

stillbelongthismarket.Let'slookatanotherexample.InFigure93,weseeanotherexampleofthe
markettouchingandgoingbelowtheRedlinebutclosingabovethatline,negatinggettingoutofthe
marketthere.TheveryrightmostbardidclosebelowtheRedlineandweexitedatthatpoint.
Figure93AnotherRedLinestopexampLe.
Figure94isanexampleofhowtheRedlinestopkeepsyouinanextendedtrend.Thisisadaily
chartoftheS&P500fromApril24untilJuly31,justoverthreemonths.Alloftherelevantsignalsare
markedonthischart.HadyoutakenallofthevalidsignalsandusedtheRedlineasyourstop,you
wouldhaveaprofitofover$2,000,000bytradingonecontractforeachsignal.Thiscouldhavebeen
accomplishedstartingwithabouta$50,000account.Again,thistypeoftradingopportunityopensup
duringeverydaythemarketisopen.YouwillalsonotethathadyouusedtheLipsoftheAlligator(the
Greenline,whichistheBalanceLinefortwosignificanttimeframeslower),youwouldhavebeen
stoppedoutfourdifferenttimes.
THEFIVECONSECUTIVEBARSOFTHE
SAMECOLCRSTOP
ProbablyourmostusedstopforsqueezingprofitsistheFIVECONSECUTIVEBARSOFTHESAME
COLOR.Thisisasortof
Figure94AnotherexampLeofaRedLinestop.
"RunandGun" trading approach that allows you to place your assets (trading money) with
marketsthataremoving.Whenamarketstartstoslow,youimmediatelymovetheassetstoanother
marketthatisbeginningtotradeaggressively.Thetechniqueissimple.Supposeyouareinalong
positionandthemarketismovingup.Younoticethattherehavebeenfiveconsecutivegreenbars.You
thenplaceyourstoponetickbelowthefifthgreenbar.Ifthemarkettakesyouout,yousimplylookfor
anothergoodpotentialmove.Ifthemarketcontinuestogoinyourdirection,youraisethestopuptojust
belowthemostrecentlycompletedbar.Youkeepdoingthisuntilyouarestoppedout,nomatterwhat
colorthebarsareafterthatfifthgreenbar.Youwouldusethesametechniqueinadownmarketby
placingyourstoponetickabovethefifthredbar.Figure95illustratesthisstop.Thenumbers1through
5designatethefirstfiveredbars.Thesixthandseventhbarsarealsored.Ourfirststopisplacedone
tickabovethefifthbar.Whenthesixthbarhasalowerhigh,welowerthestoptojustabovethehighof
the
Figure95FiveconsecutivebarsofthesamecoLorstop.
sixthbar.Theseventhandeighthbarshappentobegraybars,meaningtheMomentumisstill
downbuttheAccelerationisup.ThisisanotherwayofsayingthattheMomentumtothedownsideis
slowing.Whenthathappens,wewanttostartlookingforplacestotakeprofits.Wethenhaveatrailing
stop,whichusuallygetsusoutofadownmoveonthelowesthighandgetsusoutofanupmoveonthe
highestlow.Youcan'tgetmuchbetterthanthatforprofittaking.Rememberthatonceyouhavethefive
consecutivebarsofthesamecolor,youkeepyourtrailingstopuntilyouarestoppedout,nomatterwhat
colorthesubsequentbarsare.Youmayhavealreadythoughtofthisquestion:Whatifyougetstopped
outwithaprofitandthemarketcontinuestomoveinyourdirectionafteryouareout?Theansweris:
Reenteronanyofthefivedimensionalsignalsgoingyourway,providedthecurrentpriceisstilloutside
theAlligator'smouth.WhatdoyoudowithaRunawaymarketthatdoesnothavethefiveconsecutive

barsofthesamecolorandhasaRedlinesofarawayfromthepresentpricethatyouareuncomfortable?
Youdonotwanttogiveupalltheprofitthatthemarkethasgivenyouatthispoint.InaRunaway
market,weusetheGreenlineasastopcloseonlystop.TheGreenlineistheBalanceLinefortwo
significantlylowertimeframesthanwearetrading.WedesignateaRunawaymarketwhentheangleof
thepricemovementisgreaterthantheangleoftheGreenline.Itindicatesthatsomeverypowerfulnew
information (Chaos) has entered the market, leaving the Alligator's mouth far behind. Figure 96
illustratesaRunawaymarketversusaTrendingmarket.TheleftsideofthechartisaniceTrending
marketwherethepricesstayforawhileoutsidetheAlligator'smouth.HadyouusedtheGreenlinestop
ontheleftsideofthechart,youwouldhavebeenstoppedouibeforethetrendwasover.Aisonotethat
thepricesontheleftsideofthechartapproximatelyrunparallelwiththeGreen(topmost)BalanceLine.
However,ontherightsideofthechart,thepriceincreasesdramaticallyandtheangleofthatincreaseis
greaterthantheangleoftheGreenline.Atthispoint,wewouldmoveourstopcloseonlyordertothe
Greenlineforthenextperiod(oneday,inthischart).YoucanseethattheGreenlineisgoingtolockin
more profit than the Red line (middle line) in Figure 96. Remember: AT THE END OF THE
CURRENTPERIOD,THEGREENAND/ORREDLINESTOPSAREPLACEDATTHEGREEN
ORREDLINEFORTHENEXTPERIOD.Forexample,inFigure96,thenextday'sstopwillbeon
theGreenlineforthenextday.AlsorememberthatwhenusingeithertheGreenortheRedlinestops,
theyarecloseonlyorders.
BUYORSELLSIGNALSINTHEOPPOSITEDIRECTION
Wenowcometoourfinalexecutivedecisionstop,whichisasignalintheoppositedirection(Figure9
7).Thisisourleastusedandleastdesirablegetoutsignal.Ifyouusethissignalconstantly,youwill
findthatyouareleavingtoomuchprofitonthetable.Althoughitisasignalintheoppositedirection,
youwouldusuallyjustexitratherthanstopandreverse,becauseyoushouldbeonthepropersideofthe
Alligator'smouth.Inotherwords,ifyouarelonganddecidetoexitonasellsignal,thatsignalwould
mostlikelybeabovetheAlligator'smouth.Thethingyoudefinitelydo not wanttodoistofeedthe
Alligator.
Figure98summarizesthefourexecutivedecisionpossibilitiesfortakingprofits.Ourdecision
processusuallyfollowsthispath:
1.Anytimewehavefiveconsecutivebarsofthesamecolor(redorgreen),wewillplaceourstopone
tickbelowthelowofthemostrecentlycompletedbarinanupmove,andonetickabovethehighofthe
mostrecentlycompletedbarinadownmove.
2.Ifwebelieveweareinacontinuingtrendmove,wewilluseastopcloseonlyorderjustunderthe
Redline,whichistheBalanceLineforonesignificanttimeframelowerthanourtradingtimeframe.
3.IfweareinaRunawaymarket,asindicatedwhentheangleofthecurrentpricemoveisgreaterthan
theangleoftheGreenBalanceLine,weplaceastopattheGreenlinetokeepfromgivingbacktoo
muchprofit.Wedotheoppositeinasellsituation.
4.Wewilluseabuy/sellstopintheoppositedirectionfromthecurrentmove.
Anytimethereismorethanonechoice forplacingastop,weusuallyprefertousethefive
consecutivebarsofthesamecolor.Ourleastpreferredandleastusedstopisanoppositebuy/sellsignal.
Atthispoint,wehavecoveredtheAlligatordecisionmakerandthefivedimensionalentrypoints
forgettingintoanymarket.Theseare"groundedassessments,"whichdonotchange.Intradingthe
markets,therearealsotimeswherethetradermustmakeanexecutivedecisionabouthisorhertrading
strategyandespeciallyabouttakingprofits.Othermoregeneralizedfactorscanaddtoourconfidencein

tradingandmakingprofits.Themostvaluableinformationwecangleanfromamarketistoknowwhen
onetrendisendingandanoppositetrendisbeginning.Alltrendswillendinafractal,andoneofthe
threetoporbottombarsofthatfractalwillalwaysbeasquatbar.(Seeourearlierbook,TradingChaos,
pages133151.)Let'sexaminetwocharacteristicsofthemarketsthatwillgiveaccurateearlywarningof
theendofatrendandthebeginningofatrendintheoppositedirection.Thesecharacteristicsare(1)
Divergenceand(2)theProfitunityfivemagicbulletsthatendatrend.
DIVERGENCEBETWEENPRICEANDMOMENTUM
Oneofourverybesttoolstodiscovertheunderlyingstructureofthemarketisour5/34Awesome
Oscillator(AO).Basically,itisasimple34barmovingaverageofthemidpointsofthePrice[(HL)/2]
thatissubtractedfroma5barsimplemovingaverageofthePricebars'midpoints.Iftheshortterm
MomentummovesfasterthanthelongertermMomentum,the~/34oscillatorwillincrease.Thissimple
toolisthemosteffectivetechniquewehavefoundtomeasuretheunderlyingMomentumofthemarket.
Thisisnotan"oversold/overbought"indicatorbecause,aswepointedoutearlyinthisbook,thereisno
suchthingasoversold/overbought.AdivergenceiscreatedinanupmovewhenthePriceishigherthan
itwasatthemostrecentPricepeakandtheMomentum(asmeasuredbythe5/34AOhistogram)is
lowerthantheMomentumpeakthatwasatthelastPricepeak(Figure99).Inotherwords,thePriceis
higher and the Momentum is lower, and this is divergence between the Price and the Momentum
(underlyingstructure).Mostmarketstendtoturnonadoubledivergence.Adoubledivergenceinanup
marketrequiresaPricepeakfollowedbyahigherPricepeak(firstdivergence),andthathigherpeakis
followedbyastillhigherPricepeak.TheMomentumishighestonthefirstPricepeak,loweronthe
secondPricepeak,andstillloweronthethirdPricepeak.Thisisadoubledivergence,andmostmarkets
willturnatthispoint.
rlgureY9NoticingthedivergencebetweenPriceandMomentum.
Ifthemarketdoesn'tturnonadoubledivergence,itwillmostlikelyturnonatripledivergence.
Onlyperhapsonceortwiceayearwillyouseeaquadrupledivergence.InFigure910,wehaveoneof
thoserarequadrupledivergences.ThishappenedinthedailyS&P,andinthenextfewdaysafterthis
fourthdivergence,themarketdroppedover$38,000percontract(Figure911).InFigure910,notice
that:
1.Point1isahigherPricethanpointzero.Thisisthefirstdivergence.
2.Point2isahigherPricethanpoint1buttheMomentumisless.Thisistheseconddivergence.
3.Point3isahigherPricethanpoint2buttheMomentumislessthanatpoint2.Thiscreatesatriple
divergence.
4.Point4isahigherPricethanpoint3buttheMomentumislessthanatpoint3.Thiscreates a
quadrupledivergence.Thisisarareoccurrence.Whenitdoeshappen,thereisaveryhighprobability
thatthemarketwillmovedramaticallyintheoppositedirection.
Reviewingagain,weknowthatMomentumalwayswillturnbeforePrice,andthespeedofthe
MomentumwillturnbeforetheMomentumdoes.Thus,wecansetupaproceduretomonitortheendof
anytrend.Toaidusinbeingevenmorepositivethatatrendisending,wehavenoticedthatalltrends
will end only after they have been hit by what we refer to as the "five magic bullets"five
characteristicsthatanytrendwillexhibitbeforeturningandsettingupatrendintheoppositedirection.
AsshowninFigure912,thesefivemagicbulletsare:
1.ThePriceisinthetargetzone.ThiszoneisarrivedatbyusingtheElliottWavecount,notingthe
distancebetweenthebeginningofWave1throughtheendofWave3,andaddingthatpricedifference
tothebottomofWave4.Wethentake62percentofthatdifference.O~er9Qpercentofthetime,the

trerldwillendbetweenthe62percentand100percentmarks.(Forafulldiscussionofthistechnique,
seeourearlierbook,TradingChaos,page130.)
2.DivergencebetweenPriceandMomentumasmeasuredbythe5/34AO.Thisindicatorbecomes
strongerifthereisadoubleorpossibletripledivergence.
3.Afractaliscreatedatthetop/bottom.4.Thereisasquatbarinoneofthethreetoporbottombars.5.
ThereisachangeintheMomentumindicator.
SUMMARY
Inthischapter,wehavedevotedourattentiontofindingthebestpossibleexitstosecuremore
profitsandmaximizeourreturnoninvestment(ROI).Wehavegonethrougheachoftheseexecutive
decisionsintheorderthatwehavefoundtobemostprofitable.Themostvaluablecommodityyouwill
ever deal with is your own perspective, and whatever interferes with that should be dealt with
immediately.ThatisoneoftheprimaryreasonsIsuggestthatyouDONOTreadthe WallStreet
Journal, listentoCNBCFNN,readnewsletters,orevenreadthenewsonyourcomputer.Ourbest
profitopportunitieshaveconsistentlycomewhentheplayerswerejustusandthemarket.Anythingelse
isoldnewsandnotworththecostofclutteringyourmind.Onceyouknowallthesesignalsandhowto
placethem,everythingelseispsychological.Wewillfocusourattentiononthepsychologicalaspectsof
tradinginthelastchapterofthisbook.Wewillexploresomeofthemoreimportantaspectsofusingour
ownpersonalpsychologytoincreasebothourprofitsandthefunof"playing"inthemarkets.Inthenext
chapter,wewilltietogethereverythingwehavecoveredinthisandthepreviouschapters,tomakesure
youunderstandhowtoimplementtheseprofitmakingtechniques inboththestockandcommodity
markets.