BY JIM PRINCE

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 Risks of Trading You Should Understand

Important Notice
The risk of loss in trading commodity futures contracts can be substantial. There is a
high degree of leverage in futures trading because of the small margin requirements.
This leverage can work against you as well as for you and can lead to large losses as
well as large gains.
Past performance is not necessarily indicative of future results and examples of historic
price moves or extreme market conditions are not meant to imply that such moves or
conditions are common occurrences or are likely to occur.
THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS
THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL
PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO,
BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MY HAVE
UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS,
SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL PROGRAMS IN GENERAL ARE
ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT.
NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE
PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

Strategies using combinations of positions, such as spread and straddle positions may
be as risky as taking a simple long or short positions.
This brief statement cannot disclose all the risks and other significant aspects of the
commodity markets. You should carefully study commodity trading and consider
whether such trading is suitable for you in light of your circumstances and financial
resources before you trade.

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 BY JIM PRINCE

Guidelines
The Cycle Trading Strategy entails applying indicators (sometimes
referred to as studies) to price charts to help us make trading decisions.
The studies I use in this methodology include three different Moving
Averages plus the Keltner Channel, the MACD Oscillator/
Histogram, the Slow Stochastic, and the Choppiness Index.

I don’t necessarily use these studies as they might typically be used.

I use them to help me identify the trend, the momentum in the trend,
and if the trend is nearing a cycle high or cycle low.

In addition, I use two of these studies to help me determine if there

is divergence in the market. This is vitally important because it can
alert me to a possible turning point in price before it happens!

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 StrategY
BY JIM PRINCE

Chapter One

Studies
First, be sure you have the indicators properly set to appear on your US Charts Online
charts. With a chart open, click on the dropdown arrow to the right of “Indicators” located at
the top left side of the chart. Then select the applicable indicators from the drop down menu.

You will enter three different Simple Moving Averages (a.k.a. Moving Average, Simple)
into the new template you are going to build. Refer to the accompanying Natural Gas Chart,
noting the red arrows identifying the dropdown arrow and the name of the indicator.

The first moving average we will set is the 50 period. Look at the first Natural Gas Chart to
see an example:

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Next, follow the same steps and add both the 89 and 200 period Simple Moving Averages
to the chart. Your chart should look like the next Natural Gas Chart:

(Note that I’ve changed the colors of each line and made them a different color from the
default settings. The 50 period simple moving average is now blue. The 89 period simple
moving average is now red. The 200 period simple moving average is now purple.)

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The next indicator you’ll be adding is the Keltner Channel. Make sure you change the
“Period” to 21 to match the screen shot.

Here’s what the Keltner Channel looks like when plotted on the chart. It’s the yellow
envelope that surrounds the 21 period moving average on the chart:

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The next step is to add the MACD Oscillator, Exponential to your chart. Make sure to
change the periods to match those in the screen shot! Period = 5, Period 2 = 21, Period 3 = 34.

Here’s what it looks

like plotted on the
chart. It appears in the
pane below the price
bars:

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Next we’ll add the Slow Stochastic. Make sure to change the periods to match those in the
screen shot! Period = 5, Period 2 = 3, Period 3 = 3.

Here’s what the Slow Stochastic

looks like plotted on the chart. It’s
the line chart that appears in the
pane right below the MACD
Oscillator. We’ll focus on the %K
portion of the slow stochastic
indicator. It’s the red line on my
charts:

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The last indicator we’ll put on our chart is called the Choppiness Index. Make sure to
change the period to match the setting in the screen shot! (Period = 13.)

Here’s the Choppiness Index plotted

on the chart with the other indicators.
It’s located at the very bottom:

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Once you’ve saved the indicators on the chart you’re looking at, be sure to also save them
as a template by selecting that option below the chart. By following this simple step you won’t
have to build the indicators individually on each chart in the future. New charts will
automatically appear with your selected indicators displayed.
As a side note. . . if you choose you can simply select my template from the dropdown
arrow below the chart. Taking this step will plot my template (with my colors and the
appropriate settings) on all of your charts. This saves you the time and effort of having to
build the template yourself.

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 StrategY
BY JIM PRINCE

Chapter TWO

Entries to the Upside

To identify markets offering possible entries to the upside, the following must appear
on the chart!

1) The 50 period moving average (which appears as a blue line on my

charts) will help you determine the short-term trend (when used in
conjunction with Trend Seeker). We only want to consider entering
positions to the upside if this moving average is pointing up.

2) The Keltner Channel (which appears as a yellow envelope on my

charts) will help us gauge the depth of retracements for entry purposes.

3) Price must pull back to a “zone” around either the middle Keltner
Channel line or the lower Keltner Channel line for long entries.
Once we identify this occurrence we determine where the slow
stochastic is in its cycle.

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Slow Stochastic
We use this study to help us determine the rhythm of the market. In other words, as the
market breathes, this study helps us to see if it’s inhaling or exhaling. Depending on where it
is in this cycle, it will help us determine whether or not we will enter the market.

If price is in an uptrend (the angle of the 50 period moving average line is pointed up)
we’ll only consider entries if (a) prices pull back to either the middle or lower Keltner Channel
lines, and (b) the slow stochastic is at (or below) the 25 level and is hooking up. Entries occur
if the slow stochastic has hooked to the upside. Then we’d place our order to go long (or buy
call options) one tick above the candlestick (price bar) that developed when the stochastic
hooked up.

Notice how the two red

arrows on the chart point to
areas where lows in price
correspond to lows in the
stochastic at the lower line of
the Keltner Channel! This is
the rhythm we want the
market to be in when
contemplating long positions!
By the way, the first three
retracements within a trend
provide the greatest
opportunity for success. It
doesn’t mean a market can’t
continue to make new
retracements, but simply that
the first three retracements
provide the best opportunities
based on market structure.

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An entry is triggered when price breaks above the candle on which the slow stochastic
makes its hook. The entry is actually placed one tick above that candle. The initial stop loss is
placed one to two ticks below the low of the entry price bar.

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MACD Oscillator/Histogram
This is the first pane below the price action on our chart page. Use this to help determine
the strength of the momentum of the trend and if there is divergence forming between price
and momentum. If there is, this should alert you to a possible impending turn in the market!
This is a very powerful way to use this study!

Divergence with this configuration tends to anticipate a turn in price to the upside a high
percentage of the time!

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Chapter THREE

Entries to the DOWNSIDE

To identify markets offering possible entries to the downside, the following must appear
on the chart!

1) The 50 period moving average (which appears as a blue line on my

charts) will help you determine the short-term trend (when used in
conjunction with Trend Seeker). We only want to consider entering
positions to the downside if this moving average is pointing DOWN.

2) The Keltner Channel (which appears as a yellow envelope on my

charts) will help us gauge the depth of retracements for entry purposes.

3) Price must pull back (retrace) to a “zone” around either the middle
Keltner Channel line or the upper Keltner Channel line for short entries.
Once we identify this occurrence we determine where the slow stochastic
is in its cycle.

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 StrategY
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Slow Stochastic
If price is in a downtrend (the angle of the 50 period moving average line is pointed down)
we’ll only consider entries if (a) prices retrace to either the middle or upper Keltner Channel
lines, and (b) the slow stochastic is at (or above) the 75 level and hooking down. Entries occur
if the slow stochastic has hooked to the downside. Then we’d place our order to go short (or
we’d buy our put options) one tick below the candlestick (price bar) that developed when the
stochastic hooked down.

Notice how the two

red arrows on the
chart point to areas
where highs in price
correspond to highs
in the slow stochastic
at the middle line of
the Keltner Channel!
This is the rhythm we
want the market to be
in when
contemplating short
positions!

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An entry is triggered when price breaks below the candle on which the slow stochastic
makes its hook. The entry is placed one tick below that candle. The initial stop loss is placed
one to two ticks above the high of the entry price bar.

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MACD Oscillator/Histogram
In this example of MACD divergence you can see how the market was trending lower,
formed divergence, and then rallied! The divergence alerted us to a possible turn in the
market before it happened!

Divergence with this configuration suggests that price may soon turn higher!

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Chapter Four

Additional
Considerations
Trend Seeker
Ultimately, the best opportunities will come if both Trend Seeker™ (TS) and the 50 period
moving average are pointing in the same direction. In my opinion, this is when you’ll find
the best possible setups take place based on this methodology. If these indicators don’t line
up, it’s still possible to take the trade based on the direction of the 50 period moving average
alone; however, it does not offer the highest possibility of success on its own. That said, TS will
move slower than the 50 period simple moving average. TS actually analyzes six months of
price data on a daily price chart. The 50 period simple moving average is calculated based on
just 50 days.

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The Choppiness Index

You may have noticed that I did not include the lower pane indicator, the Choppiness
Index (CHOP), within the discussion of trade entries. This is because we won’t be weighting it
has heavily as we do the other studies. However, we will use it to help us determine if the
entry signal we discover occurs in a choppy market (trading sideways) or a market that is not
choppy (trading in a trend either up or down).

The indicator is not directional at all and does not reflect the market’s direction. Instead, it
tells us whether a trend is strong or not. The closer the index’s value is to zero, the stronger the
trend is. Conversely, the more the market is consolidating, the closer the index will be to 100.
The bottom line is, the higher values equal more choppiness, while the lower values indicate
directional trending.

You’ll note that within our display of the CHOP we highlight the Fibonacci-based upper
and lower band of 61.8 and 38.2 respectively (blue-green box via the default settings). The
61.8 is the top edge of the blue-green box and the 38.2 area is the bottom edge of the box.
This box is important because it can give us a heads up on when either a trend or a trading
range is beginning or becoming excessive.

So keep an eye on the CHOP as it moves from one extreme to another. This is when trends
or channels will begin/end.

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SUMMARY OF STEPS
Follow the guidelines listed below and you’ll have done your utmost to make sure you’re on
the “right” side of the trend!

GBE Cycle Trading Reference

In which direction is the 50 period moving average pointing?

➥ Up = Long futures or call option entries only.

➥ Down = Short futures or put option entries only.

What is the Cycle of the Slow Stochastic?

➥ Is it at or below 25 and hooking up for long entries?

➥ Is it at or above 75 and hooking down for short entries?

When trending higher have prices pulled back to a zone around either
the middle or lower Keltner Channel lines when the slow stochastic has
hooked up?

When trending lower have prices pulled back to a zone around either the
middle or upper Keltner Channel lines when the slow stochastic has
hooked down?

Bonus = Is there divergence on the MACD and/or the slow stochastic?

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 BY JIM PRINCE

877 NE 7th Street · Grants Pass, OR 97526

Phone: 541-955-2885 · www.gbemembers.com