The Magic of Moving Averages

THE MAGIC
OF
MOVING AVERAGES
Scot Lowry
TRADERS PRESS, INC.®

P.O. Box 6206
Greenville, S.C. 29606
Books and Gifts

for Investors and Traders
Copyright ©1998 by Scot Lowry. All rights reserved.
Printed in the United States of America. No part of
this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means,
electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the
publisher.
ISBN: 0-934380-43-0
Reprinted by agreement with the author, Scot Lowry

Published April 1998
TRADERS PRESS, INC.®

P.O. Box 6206
Greenville, S.C. 29606
Books and Gifts

for Investors and Traders
Please write or call for our current catalog.
1-800-927-8222 FAX 864-298-0221
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This book is dedicated to the following:
To Kim, for all your unselfish help.
To Brian, for your assistance and patience.
To Deena, for your creative input.
To Juanita, for doing all the things behind

the scenes that no one gets credit for.
To Jim, see, I told you.

INTRODUCTION
The reason for writing this book is twofold:

first, after years of studying charts, I have been able
to identify an occurrence in market trading that can
almost ensure high returns with minimal risk. This
approach to trading is very clear and easy to
understand. Which leads me to the second reason
for writing this book. For a long time I have felt
this system was too simple to wan-ant a book, but
over time, I became increasingly convinced that the
system that you are about to learn has been
overlooked by the vast majority of people. I once
asked a friend of mine, who was instrumental in my
decision to write this book, why more people had
not seen this. His response was, "more often than
not, people do not see the forest for the trees". In
other words, the trading plan you are about to see is
so simple that it defies logic. It is not complicated,
it is not time consuming, and it has no difficult
formulas to try and understand. It is an easy,
layman's approach to profitable trading in the
futures markets.
1
As I mentioned earlier, I believe this
approach to trading has been overlooked by many.
On the other hand, it is so basic that it is hard to
believe that it isn't being used by quite a lot of
investors already. Here's why. As many of you
already know, the basis behind any market move in
a particular direction is founded upon one simple
principle - there are either more buyers than sellers
(in which case the market goes up), or there are
more sellers than buyers (in which case the market
goes down). So why do I believe that other
investors are somehow arriving at the same area on
the charts as I am to place buy or sell orders?
Because, as you will learn, this trading strategy
places orders above or below where a particular
market is trading at that time. When the ,market
price finally trades at our price, the market has a
tendency to continue in that direction at a rapid
pace, which tells me there are many other orders
placed to buy or sell at the same price I have
chosen; i.e., more buyers than sellers forcing the
price up, or more sellers than buyers forcing the
price down.
One more note to make before we embark

on a short journey on how both experienced and
novice futures traders can learn a very simple and
successful approach to trading.
Chapter one is a brief overview of how

futures and commodities trade. This chapter is
2
devoted to those who have never dipped their hands
into the excitement of trading futures. It will
explain in simple terms how and why futures trade
as they do, and give you an understanding of terms
and phrases used in the markets. For those of you
who have been trading in the past you may find this
tiresome and may want to move on to chapter two.
It is to be related that all commodity and futures charts, trades, systems,

patterns etc., discussed in this book are for illustrative purposes only and are
not to be construed as advisory recommendations. There is the chance of
substantial loss in futures trading and there exists no trading plan with a
foolproof system. Past performance is no indication of futures results with
this trading system or any other. It should be further noted that the ideas and
trading systems in this book are solely those of the author and do not
necessarily reflect those of Data Transmission Network, the advertiser, or
anyone else affiliated with this book in any way. Futures trading is risky and
traders do lose money. Before investing in the futures market one should be
aware of the potential profits and losses involved. Any trades that an investor
attempts should be discussed with his or her broker before implementing.
The information contained herein has been obtained from sources believed to
be reliable; however, it cannot be guaranteed.
3
CHAPTER ONE
Before learning a trading strategy it is

important to have a general understanding of how
and why markets move. You need to know why we
have commodities markets and what their purpose
is. You need to fully understand how and when
orders are placed and to know about the different
orders that exist. Proper placement of an order with
your broker is of the utmost importance; errors can
become extremely costly.
In the mid-1800's the first commodity

exchanges opened to the public. They were
devised to keep prices stable; i.e., to keep prices
from having exaggerated swings either up or down.
If these trading arenas had not been open to the
public we would never know from one day to the
next what prices would be in the stores. Exchanges
were implemented to keep prices from skyrocketing
one day and plummeting the next.
4
How is this done? Let's first look at a
commodity with which most people are familiar -
wheat for example. Wheat is used for many
purposes throughout the world,- but most people
associate wheat with bread. So let's look at a world
where there was no exchange to keep prices in
check. Suppose that last year there was a drought in
the wheat growing region. This would inhibit the
growth of the wheat crop and would consequently
mean a smaller crop. How would that affect prices
of bread in the stores? The price would go up.
Here are the reasons why: first, the farmers would
have put just as much time and effort into raising a
small crop as they would have into raising a large
crop. Their costs were the same and they need to
make the same amount of money in either event. So
they will charge more for a bushel of wheat, driving
up the price to the bread maker, which will
eventually be passed on to the grocery store and
ultimately to the consumer.
Second, if bread producers know there will

be a shortage of wheat, they will be willing to pay a
higher price to ensure that they receive the quantity
of wheat needed to make as much bread as demand
warrants. Again, higher prices are passed on to the
ultimate bread purchaser. This is the basic law of
supply and demand. If supply is short and demand
is stable, price goes up.
5
Now let's look at the other side of supply
and demand - the scenario where bread prices would
go down. Instead of a drought in the wheat fields,
we have perfect weather and the crop yield is quite
large. In this hypothetical situation the farmer could
have more wheat than he can sell. The bread
producer only needs enough to make the same
amount of bread he made last year (assuming the
demand stays the same). The farmer doesn't want
the costly task of having to store the excess wheat.
He wants to sell it. So he is willing to accept a
smaller amount of money per bushel to sell his crop.
He also knows there are many other farmers trying
to sell their wheat. Now the bread producers can
shop around and offer less money per bushel until
they get the price they want. As farmer after farmer
lowers the price to sell his crop, price may well
have dropped to the point the farmer is no longer
willing to sell. Sometimes the offered price is less
than the cost to harvest.
Now let's speculate on what happens next in

the supply and demand chain. We know the bread
producer paid less per bushel for his wheat, and we
are fairly certain the grocery store knows this as
well. So, at this point, my assumption is that the
grocery store and the bread producer will agree on a
price per loaf of bread so that the grocery store can
stock it's shelves. Now we can rest assured that the
price for a loaf of bread this year will be cheaper
than next. We know the savings will ultimately be
passed on to the consumer...
6
Once again the laws of supply and demand
take over. Assuming again that demand is the same,
we have an overabundance of supply which forces
price down. It is easy to see now why the price of
bread could be very high one year and very low the
next, or could change daily as the people involved
speculate how the weekend rains or the
temperatures overnight affected the crop.
These are hypothetical situations used to

show what could happen to the price of bread (and
every commodity in the world) if this were a world
where no • commodity exchanges existed. There
would be constant and wild price fluctuations and
the public would not know from week to week the
price of a particular product.
The solution to the dilemma was to get the

public involved to help set the price of
commodities. This was done through the
development of the first commodities exchange -
the Chicago Board of Trade. CBOT was set up to
control grain prices, which at the time, were the
staple of American life. By getting the public
involved (the people paying for the loaf of bread), it
was easier to keep the price of wheat from
skyrocketing. The public could sell wheat on the
exchange if the price went too high, thus forcing
the price down. Theoretically, the more people
involved in trading any particular commodity, the
7
more price stability there will be, minimizing to
some degree, wild price swings.
Let us look at how the futures market works.

Futures and commodities trade today at what traders
expect prices to be in the future. Each commodity
trades in individual months. For example, wheat
has contract months of March, May, July,
September and December. These contract 'months
specify at which time a delivery of that particular
commodity is to take place. So let's say that today
is August 23, and the price of December wheat is
$3.83 per bushel. Let's also say that there has been
a rumor that the wheat crop will not be very large
this year. We just learned that if the crop is small,
the price of wheat should go up between now and
December. So today we buy a contract of
December wheat at $3.83 per bushel. We have
between today and sometime in December to sell
that wheat contract. Since we bought today we
hope the price goes up so that we can sell the
contract higher than our purchase price. In this
example we will assume the price goes up to $3.94
per bushel by September and we do not think it is
going much higher. So we sell our wheat 'contract
at that price. The difference between $3.94 and
$3.83 is eleven cents. Since the value of wheat on
the futures market is $50 for every one cent, our
profit is $550. ($0.11 x $50.00 = $550.00) On the
other hand, had we sold wheat at $3.83 in August
and bought it back in September for $3.94 we
8
would have lost $550 - which, of course, is not our
objective.
But wait. How could we have sold wheat in

August when we didn't own any? This is what is
referred to as "shorting" the market - you sell first
and buy back later. This is sometimes confusing, so
I will approach explaining it in as simple a fashion
as possible. Using the above example let's assume
the rumor we heard was the wheat crop was to be
very large instead of very small. In this case we
would surmise that the price would go down from
the current $3.83 per bushel. In order to profit from
that we would want to sell wheat rather than buy
wheat. To do so we must enter into an agreement
with someone who is a buyer of wheat at that price.
We tell the buyer, in our agreement (or contract),
that we will sell him one contract of December
wheat at $3.83 today. Now we have until December
to buy a contract of wheat from someone at some
price. Our hope is that the price of wheat will drop
between now and December so that we can
purchase it at a lower price. If the price drops to
$3.72 and we buy the wheat at that price we will
have fulfilled the terms of our agreement to buy and
deliver the one contract of wheat. We also would
have made the difference of $3.83 per bushel and
$3.72 per bushel, again it is eleven cents at $50 a
cent, or $550.
9
If you are still confused, try this example.
Forget the chronology of time. Regardless of time
we bought wheat at $3.83 a bushel and sold wheat
at $3.94 a bushel in the first example. We bought
wheat at $3.72 a bushel and sold wheat at $3.83 a
bushel in the second example. It doesn't matter
whether you buy first and sell second, or sell first
and buy second. The bottom line is the difference
between the two prices which represents your profit
or loss potential. If you sell first, you want the price
to go down. If you buy first, you want the price to
go up. That is all you really need to know to be an
effective, profitable futures trader.
As this book progresses you will learn a

certain approach to trading. This trading program
requires the use of two types of orders that will be
placed with your broker. For our purposes these
will be the only two types we will cover. Other
fundamentals about trading are not necessary as far
as we are concerned.
To understand the first type of order let's

once again use the first wheat example. In that
example, wheat is trading today at $3.83 per bushel.
Since we think the price of wheat is going up we
will want to place a buy order. As you will learn in
a later chapter, we never buy anything at the current
market price. You will also learn that there is a
certain line on the chart that we will look for and we
will place our buy order above that line. So let's
10
suppose this line we will be looking at is at $3.86.
We will place our buy order above that line, say at
$3.91. That means we will not be buying wheat
until the price of wheat gets to or above $3.91 per
bushel. This is referred to as "buying on a stop".
When the price of wheat does trade at that level, our
order will be executed and we will have bought
wheat.
To place this order with your broker you will

say to him, "Buy one (or more if you are buying
more than one) contracts of December wheat at
$3.91 on a stop." The reason for this order is that if
the price of wheat goes down from the current price
of $3.83 per bushel instead of up, we never got in
the market, because we will not be buyers until the
price goes to or above $3.91 per bushel. We don't
want to buy wheat if the price is going down. We
want to buy our contracts on price strength in the
market, not weakness.
If we take the second example of wheat, we

are looking for the price of wheat to go down. The
current price of wheat in the second example is
$3.83 per bushel. Again there will be a line on the
chart that we will look for to place our sell order
below. Let's say that line is at $3.80. We will then
place our order to sell at $3.78 per bushel. This is
referred to as "selling on a stop". The way you
would place your order with your broker is "Sell
11
one (or more) contracts of December wheat at $3.78
on a stop." This time we will not be selling wheat
until the price of wheat drops to or below $3.78 per
bushel. This time we are looking for weakness in
the market, not strength. To reiterate, if the price
goes up from $3.83 per bushel we never got
involved in the trade. We only sell wheat when the
price drops to our offered price of $3.78 per bushel.
This is the order you will use most often

when trading this system; buying or selling on a
stop. The next order you will learn is to be used
only after you are very proficient at trading, or you
may never use it. I say that because it can be a very
risky trade. It is not used when trading the basic
system you will learn, but it is used on other trades
that will be shown at the end of this book. These
will be trades that go against the grain of the
market, which is why they can be quite dangerous,
but when they work they are extremely profitable.
They are not for the inexperienced trader.
The way this trade works is as follows.

Let's say wheat looks as though it is close to
making a high in price (referred to as a top) and will
stop, turn around, and start going down - based on
what you will learn later. We will at that point
place an order to sell wheat at a specified price or
better. For example, let's say wheat is trading at
$3.95 per bushel. The line on the chart we are
following is at $4.05. In this example we do not
12
think the price of wheat will go above $4.15 per
bushel. This is when we. will place an order with
our broker to sell wheat at $4.05 or better, with a
protective buy stop at $4.21, which is a price above
which we do not think wheat will go. That means
that when wheat gets to $4.05 per bushel we are
selling. This is dangerous because if the price of
wheat continues upward we can incur heavy losses.
Our losses would be the difference between $4.05
and $4.21 - the price of our protective buy stop.
($4.21 - $4.05 =$0.16, $0.16 x $50.00 = $800).
$800 is a round figure because the losses could
exceed that with slippage. Slippage is a term used
when the actual price filled on your stop is worse
than the price you have entered. This can occur in
fast moving or thinly traded markets.
By the same token, if we think the price of

wheat has reached a bottom and wheat is trading at
$3.45 per bushel, we will again find the line on the
chart that we are watching, at a price below $3.45.
Let's say it is at $3.38. At this point we will place
an order with our broker to buy wheat at $3.38 per
bushel or better. That means the price of wheat
must drop from $3.45 to $3.38, and we will be
buying wheat in a falling market. A protective sell
stop would need to be entered below the $3.38
level, around $3.30 per bushel. This is what I mean
by going against the grain of the market - you can
see why there is inherent risk involved.
13
Let me re-emphasize the fact that this
second style of placing orders is not used in the
basic trading system in this book, but is used for
more risky trades that only an experienced trader
should attempt.
I hope this general overview will give you

enough understanding of how markets operate to get
you started. This is by no means all there is to
know about trading futures and commodities, but it
should be enough to get you on your way using a
basic trading plan that does not incorporate a lot of
formulas, fundamentals, seasonals, etc. There are
many topics written about such things and if your
interest goes beyond basics then you will find a
multitude of books from which to choose.
14
CHAPTER TWO
There are so many trading techniques around

now that it. is hard to choose one that seems to work
consistently. When I first started trading in the
futures markets I began using a system that worked
sometimes but more often than not it turned up
losing trades. I continued trading and found that
whatever system I used worked one time, but then
failed the next. I spent years pouring over the charts
and reading market news each night as to why a
particular market moved that day. Then, all of a
sudden, it came together! A clear picture began
forming and I was able to see a concise pattern
occurring over and over. The same formations
continued to happen before major market moves -
on every futures chart! I was astounded, how could
it be this simple and blatant? How could this have
been before my eyes every day and I had missed it?
It seemed there had to be more to it than this, but
after years of watching and back testing I found out
there was not more. It really was this simple. Do
not misunderstand me, I have by no means figured
out the commodity markets in general, 1 don't think
15
anyone ever will. What I have figured out is one
series of events that occurs prior to a market move.
And this one series of events allows you to place
your buy or sell orders above or below where a
market is trading at that particular time. It also tells
you where to place your initial protective stops.
You will know roughly what your potential loss will
be prior to your entry into the market. The
advantage to this trading system is that you will not
need to wait long to find out if you are right or
wrong in the direction the market will be moving.
In most cases you will know within a few days. At
that point you will either be able to move your
protective stop to lock in more profits or you will no
longer be in the market because you were stopped
out with a loss. The latter is what we will try to
avoid. Exercising patience in your entry order is
extremely critical. At all costs, never try prior
anticipation of the direction of the market after
learning this trading system. I have already done
that. Not only does it not work, it is quite costly.
It's like trying to teach a pig to sing, it does not
work. You must wait for the proper signals to act
on before placing your trades.
My system of trading involves something

that has been around since the first hour of the first
day the first market started trading. I have done
nothing spectacular. All I have done is devise a
different approach of using what already exists.
What already exists are moving averages. These
lines are used quite frequently by many traders
16
around the world. Moving averages are already one
of the most popular ways of trading, but by the time
you finish reading this you will have a whole new
outlook on them and how to employ them for
maximum advantage: You will learn a new way to
look at markets, and one thirty-second glance at any
chart will tell you whether a market is worth trading
or not. You won't get in at the bottom, nor will you
get out at the top. But that is not necessary to be in
on extremely profitable trades. This system will
also eliminate guesswork on market direction.
For those of you who are not familiar with

moving averages, following is a brief explanation.
A moving average is the average of a specified
amount of prices divided by the total number
specified. They change on a daily basis as the price
of each market changes. Here is a formula to use
when figuring a moving average:
MA — (P 1 + P2 + ...Pn)/n
MA - represents moving average.
PI - represents the price on the first day.
P2 - represents the price on the second day.
Pn - represents the last day in the series.
n-represents the number of days in the

series.
17
A moving average is just what it says it is, it
moves from day to day. To calculate a moving
average, you must drop the first number of the
sequence (P1) and add a new one to the end. The
new one added to the end would be the closing price
for that particular day. So if you were calculating a
four day moving average you would, at today's
close, add today's price to the series and take away
the closing price from four days ago. Then you
would recalculate. Below is an example of how this
is done.
December Cocoa
Day Close Four day MA
August 12 1515 (P1)

August 13 1527 (P2) -
August 14 1516 (P3) -
August 15 1512 (P4) 1517.5
August 18 1563 1529.5
August 19 1553 1536
August 20 1569 1549.25
August 21 1618 1575.75
August 22 1601 1585.25
August 25 1615 1600.75
August 26 1653 1621.75
For example:
4 day MA =_1515±1522±1516±-
1515+1527+1516+1512=1517.5
4
18
As these averages move on a daily basis you
will see patterns emerge on the charts that will help
you identify trends and show you opportunities to
buy or sell. When looked at properly they seem to
tell us in advance what will happen next. In a lot of
cases they act as arrows pointing to the direction the
market intends to go. You will also find that for
whatever uncanny reason, the markets will quite
often wind up in the "Danger Zone" in the days
prior to a major news event - (The Danger Zone will
be delved into later). In some instances the markets
will emerge from this "Danger Zone" a day or two
before the news is announced, giving us an
indication of possible future market direction. I
think this happens when somebody knows
something he or she is not supposed to know. In
any case, it can be quite helpful - unless they were
wrong. It is always best to stay out of the markets
until after the news breaks. Let's move on to what
these moving averages mean.
19
CHAPTER THREE
Throughout history, man has searched for

the ability to see into the future. Wise men who
seemed to possess certain gifts of clairvoyance were
called seers or prophets. In ancient Greece, at the
temple at Delphi, priests attained almost god-like
status by teaching seekers to look within to see what
lay beyond. Centuries later, the priests at the Oracle
of Delphi are remembered as some of the most
reliable seers and prophets of all time.
The basic trading system described in this

book focuses on a series of events that occur to
create a rare formation. No system that predicts the
future is 100 percent accurate, but this particular
formation not only indicates which direction a
market is headed, it gives the investor a margin of
safety as he or she enters the market. It is a system
of superb reliability. It is for that reason we borrow
from the past and name this occurrence the Delphic
Phenomenon.
20
Before we start into the trading aspects, I
want to explain which moving averages I use and
why. This system employs the use of three moving
averages, the four day, the eighteen day, and the
forty day. These work out the best and have the
most consistency. Certain markets have different
moving averages that are used by the traders of
those markets, but the vast majority use these three
and it is with these that I have found the most
success.
The first example we will use is the 1997

July Soybean chart (page 23). I have chosen this
chart because it contains virtually all aspects of
criteria needed when capturing the beginning
movement of the Delphic Phenomenon. Refer back
to this chart as you continue reading. There will be
other charts shown later which reveal the same
patterns, but some will not be as "textbook" as this
one.
The way I use these averages is quite simple.

The first step is to wait for the eighteen day moving
average to cross over the forty day moving average
(in either direction). For clarity, let's say the
eighteen day moving average crosses from below
the forty day moving average to above the forty day
moving average. At this point, the only thought you
should have is to start looking for a buy signal.
Whenever the eighteen day moving average is
above the forty day moving average we are looking
21
for a buying opportunity. Once the eighteen day
moving average is above the forty day moving
average we will wait for the actual price of the
market to go above the eighteen day moving
average, and then drop below it, for the first time.
This is our buy signal! This is what we are looking
for. This is the stage in the Delphic Phenomenon
that tells you what lies beyond. It is at this point that
we call our broker and place a buy order just above
the eighteen day moving average. If you get filled
on your buy order, you will have your broker place a
protective sell stop just below the forty day moving
average. The difference in price between your entry
point in the trade and the forty day moving average
will be your initial risk in the trade. As the market
moves up you will be able to move your protective
stop up accordingly. You will continue to do this
until such time that the market reverses direction,
trades .at your sell stop price and exits you from the
trade.
The reverse of the above example would be

for a selling opportunity. In which case you will
watch for the,eighteen day moving average to cross
from above the forty day moving average to belQw
the forty day moving average. As soon as this
happens you will be looking for your sell signal.
That sell signal will come when the actual market
price moves from below the eighteen day moving
average to above the eighteen day moving average,
for the first time. At this point you again call your
broker, but this time you will be placing a sell order
22
08/28/97 19:5S CDT CHARTS - Techn - SOYBEANS Jul 97 CBOT Pg ALARM
„
N
ecoudtiine mark dip
• • market price
rises above 18,
• for the first time
place protective sell stop

below 40
market price dips below

18, for the first time
23
just below the eighteen day moving average. If the
market drops and fills your order, you will then call
your broker and place a protective buy stop just
above the forty day moving average. Once again
your initial risk for the trade will be the difference
in price between your entry point and the forty day
moving average. As the market price drops you will
move your protective buy stop down to lock in more
profits until the price changes direction and trades at
your stop price.
These last paragraphs are the essence of the

Delphic Phenomenon trading system. Remember,
you only place your trade the first time the market
price goes inside the eighteen day moving average
after the eighteen day moving average crosses the
forty day moving average. There will be other
times the market price dips inside the eighteen day
moving average, but I will rarely place a buy or sell
order on the other side of the eighteen day moving
average in those cases. The reason is that too many
times the market run from that point is short lived.
A good case in point is the area on the July 1997
Soybean chart ( page 23) at the upper left center.
Around April 1st the market came out of the
eighteen day moving average to the upside. It was
the second time the market price had dipped inside
the eighteen day moving average since the eighteen
day moving average first crossed the forty day back
in December. As you can see, the brief spurt was
short-lived. Had your protective stop been of ample
distance to give the market opportunity to move,
24
your profits may not have been very high, if you
realized any profits at all.
When I say that your protective stop was of

ample distance to give the market room to move,
almost everyone wants to know what "ample
distance" is. Welcome to the hardest and most
difficult question that ever existed in the
commodities markets. I sometimes wonder if there
is an accurate measure of ample distance. Certainly
it is different in every market and it is different from
day to day. I typically will place a protective stop
half-way between the eighteen day and forty day
moving averages. This is what I use as "ample
distance". Had that been done on the July Soybean
chart (page , 23), the second time the market dipped
inside the eighteen day moving average and rose
above it, as described in the previous example, the
trade would have produced small profits. The point
being, I don't think there is a perfectly safe place to
have your protective stops. No market proceeds
along like clockwork.
The best place I've discovered to place my

protective stop is below the forty day moving
average on initial entry into the market in a buying
situation, and just above the forty day moving
average in selling situations. I then like to give the
market about one week to make up it's mind on it's
25
future direction. As the market moves in my favor
after that approximate one week, I move my
protective stop to about half the distance between
the eighteen day and forty day moving averages. I
continue to move it, on a daily basis, until I am
eventually stopped out of the trade. In some cases
that turned out to be a good time to get out of the
market, and in others, staying in longer would have
been better. This method of trailing a stop has had
the greatest amount of success for me so far. You
may want to play with that and see if you can arrive
at a better means of gaining more ground. If you
do, I would love to hear about it.
You may wonder why I have chosen to wait

for the market to go inside the eighteen day moving
average before I place my buy order on the outside
of it. You might say "Why not buy into the market
as soon as the eighteen day moving average crosses
the forty day moving average, or why not just buy as
soon as the market crosses the forty day moving
average?" The answer is that quite often the market
price will jump across the forty day moving
average, run up high enough to cause the eighteen
day moving average to cross the forty day moving
'average, and then just go right down again without
ever coming back up. Sometimes the market price
will jump up above the forty day moving average
and go right back down without ever having enough
strength to stay long enough to pull the eighteen day
moving average across it. Remember, it is not a
buying situation until the eighteen day moving
26
average is on top of the forty day moving average,
•and it is not a selling situation until the eighteen day
moving average is below the forty day moving
average. So the reason for waiting for the market
price to go above the eighteen day moving average
and dropping below it before we place a buy order
is this: if the market continues down - we never got
in the market at all. You will find that, in most
cases, the first time the market cros g es the eighteen
day moving average after the eighteen day moving
average crosses over the forty day moving average,
there will be enough buying pressure to send the
market for a nice run. Your protective stop will be
placed on the side of the forty day moving average
opposite the eighteen day moving average. If the
market fails in its attempt to continue upward after
crossing the eighteen day moving average, you will
know what your losses will be and your stop order
is set below another crucial line of support. It is, in
other words, where it should be - below the line of
support of 'a market. Market support is a term used
to identify where supposed buy orders are already in
place, giving enough buying pressure to keep the
market price from going lower. Market resistance is
a term given to an area where supposed sell orders
already exist, giving the market price a cap (or top)
that price should not breach.
Therefore; it is the very essence of this

trading system that you will be in on a market move
going in your favor or you never got in the market at
all. The only other scenario is that you got in the
27
market and were stopped out with a loss. A loss
you were willing to risk before you started.
Another point I'd like to make is that you

must keep up with reports that will come out on
different markets. For instance, there are crop
reports, cattle on feed reports, unemployment
reports, etc. I make it a point to be out of any
markets the day before a report is issued regarding
that market. The only exception to this rule is if I
already have high profits on the trade and my
protective stop order is well above my original entry
level, I may then consider maintaining my position.
The reason for this is that no matter how good
things may look, a report can totally alter the course
of any market if there is unexpected news.
I will mention options only once in this

book. I do not trade them except on two
occasions. The first is the day before a market news
report. At that time I will place a trade only if the
futures chart shows me I should be placing a buy or
sell order based on the Delphic Phenomenon. If, for
example, the corn chart shows me that I should be
placing a buy order above the eighteen day moving
average tomorrow, and tomorrow is the day of the
crop report, I will buy a corn call option today.
This, too, involves risk but the risk in options is
usually much less than the risk in futures.
28
The second occasion in which I use an
option is if the futures market I plan to trade
requires a large risk, based on how far away the
forty day moving average (where my protective stop
will be) is to my entry into the market. In that case I
will decide at what price , I would have placed my
buy (or sell) order on the futures chart. I will then
call my broker and tell him that when the futures
market trades at that price, to buy a call (or put)
option at the market price. The strike price of the
option will have been predetermined between my
broker and me. I won't waste time explaining how
options work, if you choose to use them your broker
can explain them to you.
I try to avoid the use of options because you

have two enemies in that game - price and time.
The only real enemies in the commodities and
futures trading system you have been reading about
are price and impatience - the greater of the two
enemies is impatience. These opportunities to buy
and sell based on the Delphic Phenomenon do not
happen every day. You must wait for them to
develop. The old adage about patience being a
virtue has tremendous application here.
Overzealousness will destroy an account in a very
rapid fashion.
Now that you have a basic understanding of

when you should place your buy and sell orders and
what to look for in a chart we need to move on to
29
more specifics. Not every single time that the
eighteen day moving average crosses the forty day,
and the market drops inside of it do you place your
buy or sell order. There are certain times to do this
and certain things to look for. The following will be
critical information needed to trade this system
successfully. There will also be more charts to
emphasize these criteria. Before you go to the next
charts I want you to return to the 1997 July
Soybean chart (page 23). Near June 1st, you would
have been filled on a sell order had you followed
this trading system. Your protective stop would
have been placed above the forty day moving
average. Note the proximity of the forty day
moving average to the eighteen day moving
average. They are not very far apart (compared to
other charts you will see). Also, notice how quickly
(eight days) the market price took to come back
above the eighteen day moving average after the
eighteen day moving average crossed below the
forty day moving average. Critical!! These are the
relationships you want to find. These are the ones
with the best opportunities for successful sell trades:
the eighteen day and forty day moving averages are
close to each other, and a quick move of the market
price down and then back up again, above the
eighteen day moving average. The opposite would
apply for a buying situation. On the same chart, go
back to the first week of February. Had you been
trading this system at that time you would have
placed your buy order above the eighteen day
moving average. Your protective stop would have
been placed below the forty day moving average.
30
It seems easy, and it is, when a chart shows
such a clear pattern. Sometimes the charts will not
be as specific.
The next chart shown is the 1997 October

Live Cattle (page 32). In this chart you will see near
the end of December the eighteen day moving
average crosses above the forty day moving
average. On this occasion the market did not make
a quick drop inside the eighteen day moving
average. The market price did not drop inside the
eighteen day moving average until the first week of
February, twenty-five trading days later. That is
usually too much elapsed time for me to place an
order on the other side of the eighteen day moving
average. Granted, you could have made profits on
the trade in this case, but too often the following
breakout from the eighteen day moving average at
this point is short lived. This is a situation that
requires close attention. As stated before, the best
time to get in on a sizable move is when there is
fairly little time between the eighteen day moving
average crossing the forty and the market going
inside it. The opportunity still exists, but this is a
decision I would give serious thought to first.
Following this upward move the market again
drops, this time pulling the eighteen day moving
average below the forty day moving average. When
the market price went above the eighteen day
moving average, we would have placed sell orders
below the eighteen day moving average (around the
middle of March). This trade resulted in a small
31
87/22/97 18:22 CDT CHARTS - Team - CATTLE, LIVE Oct 97 CME Pg ALARM
\,,W%,ttk• f%,.:,'VW'NrS, •.? 4g. ,
\4
On'tMn'AMW-4.YtrAWN''., VA*44NPs*
\‘. \V‘`'. A '')V\ - \*I.A
32
loss. The protective stop just above the forty day
moving average was elected and that took us out of
the trade in late March. The large move upward
after this pulled the eighteen day moving average
above the forty day moving average. Once again
our opportunity arrives to place a buy order above
the eighteen day moving average after the market
price drops below the eighteen day moving average.
About the middle of April we are in the market
again, after our buy order is filled. This resulted in
a very profitable trade.
Going along the same chart we have a sell

off in Live Cattle starting about the first of May, and
the eighteen day moving average is pulled below the
forty. The waiting begins. We are waiting for the
market price to go above the eighteen day moving
average before placing a sell order. This does not
arrive for a long period of time, over twenty days
since the market price first crossed below the forty
day moving average. Too long in this case. This
presents an opportunity to place a buy order at or
below the eighteen day moving average. This will
be explained in a later chapter. This is one of the
dangerous trades for experienced traders. The point
is, if there is too much space between the eighteen
day moving average crossing the forty day moving
average, and the market price dropping and then
going in between the two, it is not the time to be
placing the traditional order that you have learned
thus far. What we are looking for is a rapid drop (or
rise) in the market price right after the eighteen day
33
moving average crosses the forty. When there is a
long gap between the eighteen day moving average
crossing the forty day moving average, and the
market price going inside the eighteen, you could be
flirting with disaster if trying to employ this system
at that time. The number of days required between
the market price dropping (or rising) above (or
below) the eighteen day moving average is not
etched in stone. It is based more on how the charts
look at the time. If you take the time to study the
charts in this book and pay close attention to the
difference between the charts listed under "Delphic
Phenomenon" versus "System Failure" the clarity of
the entire trading system will eventually jump off
the page at you. When you understand the
relationship of time to the occurrence of the Delphic
Phenomenon you will have all you need to pick
these formations out with a quick glance at any
chart.
You will find as you follow current charts or

look into historical charts that the Delphic
Phenomenon occurs quite frequently. It is a very
simple approach to trading futures and commodities
utilizing a system that will bring about substantial
rewards while at the same time limiting risk. There
are times when this system causes us to miss entire
market moves because the market price of a
particular commodity does not go inside the
eighteen day moving average in a rapid fashion after
the eighteen day moving average crosses the forty
day moving average, but these are few and far
34
between. Our goal, however, is not to be in on
every market move, only to be in on the more
certain and conservative trades in order to minimize
risk while employing the Delphic Phenomenon
system. We do not subject ourselves to potential
large losses by simply jumping into a market that
appears to be heading in a certain direction. The
Delphic Phenomenon uses a very easy means of
finding an entry point and a position to place our
protective stop order. By so doing you are well
aware of the potential losses existing in that
particular trade. These locations are based on
tangible spots in the charts and are based on points
of inherent meaning. There will be shown, later,
other ways to enter the market without using the
Delphic Phenomenon. These are means of picking
key turnaround spots, and gaining exceptional entry
points. Before we get to that let's look at a 1997
September corn chart (page 36).
Here lies the same pattern as the Soybean

chart.. First focus on the time around the end of
January. Just prior to that, the eighteen day moving
average crossed above the forty day moving
average. The market drops inside the eighteen day
moving average shortly thereafter. Our buy point is
just above the eighteen day moving average; and
our protective stop is placed below the forty day
moving average initially. As the market moves up,
we trail our protective stop order half-way between
the eighteen day moving average and the forty day
moving average. Around the middle of March, we
35
10/12/97 14:14 CDT CHARTS - Techn - CORN Sep 97 CBOT Pg ALARM
MAs. . • ,,
\
, •, \'•
3 \MU.V1.>4.?:, \k`M\K,N.,„ k•st,'%, ;;;;.„
market price dips below

18, for the first time
36
would have been stopped out of the trade with a
very handsome profit When the market turns
downward in the middle of April the eighteen day
moving average goes below the forty day moving
average. This time we wait for the market price to
go above the eighteen day moving average before
placing a sell order below it. That day does not
come until the middle of June. By using the
Delphic Phenomenon to trade, we would have
missed out on the entire move down. Employing
other tactics at our disposal we would not have
missed out at all. In a later chapter you will find out
how we could have sold short in this market long
before the eighteen day moving average ever
crossed the forty day moving average.
I want to discuss one more chart before

moving on to some of the more exciting things to
look for while trading futures and commodities.
That next chart will be the 1997 September cocoa
(page 38). It will be followed by other charts so that
you will be able to find the formations for yourself.
As you can see, trading by the basic system alone
can be very exciting because it is so simple and
profitable. It is incredibly easy, and one
thirty-second glance at a chart will tell you if the
market is worth trading or not. The more exciting
part of trading futures is yet to come.
I chose the cocoa chart to emphasize once

again the point that when a market makes an
37
09/13/97 14:29 CDT CHARTS - Techn - COCOA Sep 97 CRC Pg ALARM
N\ \:,k
U\\ •"•`. "."` \ 4A
38
extended run (causing a . long gap) after the eighteen
day moving average crosses the forty, it is not time
to place an order above (or below) the eighteen day
moving average. Near the first of March the
eighteen day moving average crosses above the
forty day moving average and the market price does
not drop inside the eighteen day moving average
until the first of April. This is usually too long, and
the point is made clear by the brief burst over the
eighteen day moving average around the end of
April. Do not get sucked into these moves! Have
patience. After that burst up, the market drops and
the eighteen day moving average crosses below the
forty. When the market price goes above the
eighteen day moving average we place a sell order
below. The situation around the middle of May is a
hard call to make. If our sell orders were too close
to the eighteen day moving average, we would have
gotten into the market and taken a loss when the
market crossed the forty day moving average and hit
our protective stop. Had our sell orders been farther
away from the eighteen day moving average, below
the low set on that one particular day, we would
have never been involved in the trade.
That brings up an important question. How

far from the eighteen day moving average should an
order be? As with all stop orders, that's the
toughest question in trading. There is no definitive
answer. Each market is different, and each day is
different. I've tried a number of ways to find a
39
precise distance from the eighteen day moving
average, including previous lows, retracements,
different mathematical formulas, etc. After all the
effort seeking a magical spot, I have found that it is
best to simply place your stop order a few price
ticks below the eighteen day moving average. You
will see, as you study the charts in this book, that
when the market price begins its run from the
eighteen day moving average it has a tendency to
really move. By placing your order close to the
eighteen day moving average you will be in for
better fills as the market moves in your favor and,
likewise, will reduce your losses if the market
should reverse course on you.
The next move on this chart is to the upside

and with it comes the eighteen day moving average,
crossing the forty day moving average near the end
of May. Around the first of June the market drops
below the eighteen day moving average and we
have the perfect scenario; a quick drop of the
market price into the eighteen day moving average,
as soon as the eighteen day rises above the forty day
moving average. We place our buy order just above
the eighteen day moving average and off we go.
When a market moves at breakneck speed as this
I
one did use a different strategy for placing my
protective stop. In almost all cases, any market that
makes an extremely big move in one direction is
followed by the same on the reversal. Don't be
fooled into thinking something will go up forever -
it doesn't! All markets that go up, will eventually
40
come down. The higher and faster they go up, the
harder and faster they will usually fall. Therefore,
in situations like this I will trail my protective stop
order half-way between the eighteen day moving
average and the four day moving average. (See, we
do use the four day moving average sometimes). By
doing so, we would have been able to sell out of the
market near the highs around the end of June, with
tremendous profits. Study the following charts to
test your understanding of this trading system. The
more you study them the clearer the Delphic
Phenomenon will become. You will be given a quiz
at the end of this book. If you fail the quiz, you will
have to read this chapter over. Do your best.
41
CHART KEY FOR THE DELPHIC PHENOMENON
1. Eighteen day moving average crosses above

the forty day moving average. (You are now 6. Eighteen day moving average crosses below
looking for a buying opportunity.) the forty day moving average. (You are now
looking for a selling opportunity.)
2. Allow market price to drop below the eighteen
day moving average, for the first time. 7. Allow market price to rise above the eighteen
day moving average, for the first time.
3. Place a BUY order above the eighteen day
moving average. 8. Place a SELL order below the eighteen day
moving average.
4. After confirmation of a fill from your broker,
place a protective stop just below the forty day 9. Place a protective stop just above the forty day
moving average, moving average.
5. Once the market begins moving in your

direction, trail your stop halfway between the
eighteen day and forty day moving averages.
42
O8/29/97 19:SS CDT CHARTS - Techn - SOYBEANS Jul 97 CBOT Pg MARK
s,
'", NW N.N,
\\z
43

moving average.

44
07/22/97 18:22 CDT CHARTS - Techn - CATTLE, LIVE Oct 97 CHE Pg ALARM
45

moving average.

46
10/12/97 14:14 CDT CHARTS - Techn - CORN Sep 97 CBOT Pg ALARM
Ak:AtAltk &=kk:
W4r
47
—

moving average. 8. Place a SELL order below the eighteen day •
moving average.

48
09/13/97 14:29 CDT CHARTS - Techn - COCOA Sep 97 Pg ALARM
".„ •\‘' \À

, * `*.% • " \‘‘`
49

moving average.

09/14/97 00:20 CDT CHARTS - Techn - US TREASURY BOND Sep 97 CBOT Pg ALARM
51

moving average.

52
10/09/97 13:81 CDT CHARTS - Techn - DEUTCHEMARK Dec 97 IMM Pg ALARM
53

moving average.

54
10/05/97 12:54 CDT CHARTS - Techn - SILVER (SOOO OZ) Dec 97 COMEH Pg ALARM
,N4VW
itiAL'It:MWAtimzsm\4* ft\
IA\
\auth.t: smilek.A4Mt,
" \4 \*I
s' AVA,4VWW,q,AN,
55

day moving average,for the first time. 7. Allow market price to rise above the eighteen
moving average.

10/8S/97 12:47 CDT CHARTS - Techn - COPPER, HIGH GRADE Oct 97 COMEX Pg ALARM
' ■V:Tr;>ir ' ° AvviNKV,
•
\'*3fl ` 134''7IV • t 8Y.
4\VT \
M"VagetWst‘s"&ata,,, •
57

moving average.

58
09/14/97 09:10 CDT CHARTS - Techn - U S DOLLAR INDEX Sep 97 FINEX Pg ALARM
59

moving average.

60
10111/97 14:46 CDT CHARTS eC WEAN OIL Jan 98 CBOT Pg ALARM
61
CHART KEY FOR THE D LPHIC PHENOMENON

moving average.

62
115/12/97 15:11. CDT CHARTS - Techn - LEAH HOGS Dec 97 OlE Pg ALARM
;.11
63

moving average.

64
89114/97 18:47 CDT CHARTS - Tecbn - GOLD (188 OZ) Weekly COMEX Pg ALARM
. \ \\
65

moving average.

66
87/22/97 18412 CDT OIARTS - Tecbn - ORANGE JUICE Weekly NMI Pg ALARM
67
I. Eighteen day moving average crosses above

moving average.

68
09/20/97 14:42 CDT CHARTS - lean - OATS Weekly CBOT Pg ALARM
pw,„.(h\si k$, ts
\' 1,- •
k.,,‘ ;`*ws
69

moving average.

70
\ VN
119/14/97 18:18 CDT CHARTS - Techn - SWISS FRANC Weekly ISM Pg ALARM
. •s s
„,kt
71

moving average.

72
R9/20/97 12:28 CDT CHARTS - Tear' - DEUTCHEHARK Weekly IHH Pg ALARM
73

moving average.

74
09/21/97 10:14 CDT CHARTS - Techn - OIL, CRUDE Weekly HYHEX Pg ALARM
,':&.4ag",2100N1Ov.w *Re
75

moving average.

10/65/97 13:44 CDT CHARTS - Techn - COFFEE, C Weekly CEC Pg ALARM
77

moving average.

78
10/11/97 25:40 CDT CHARTS - Team - AUSTRALIAN DOLLAR Weekly INN Pg ALARM
,„„ \‘\ •\\.‘'r‘
'c;tAk
79
I. Eighteen day moving average crosses above

day moving average, for the first time."
moving average.
S. Once the market begins moving in your

11/82/97
,
11:80 CST
..x CHARTS - Techn - HONG KONG HANG SENG
. • \ \\:W \
>.‘.4‘• \`4,. \
8!

moving average.

82
09/14/97 11:47 CDT CHARTS - Ter.lin - PARIS CAC 40 I if PARIS Pg ALARM
'<
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83

moving average.
place a protective stop just below th,e forty day 9. Place a protective stop just above the forty day

84
89/14197 12:03 CDT CHARTS - Teem - SOYBEANS Weekly CBOT Pg ALARM
• • `,,\\\
85

moving average.

86
18/11/97 15:47 CDT CHARTS - Man - U S DOLLAR INDEX Weekly FINER Pg ALARM
• -• • ; ;v1,. • •t .tt C`.'4 ft( S ‘,\
. '■ •• Zeatt'a\•4&k:
:44
87
, CHART KEY FOR THE DELPHIC PHENOMENON

moving average.

88
18/18/97 11:4S CDT CHARTS - Techn - JAPANESE VEN Dec 97 IHH Pg ALARM
\ 4‘A
,- "
• „
89

moving average.

89/20/97 12:S7 CDT CHARTS - Techn - PORK BELLIES Weekly CME Pg ALARM
V.,P Nt;‘,. t 44A1-446 4WatiNgN4
- "7": ‘114.t37 ' . . .
91

moving average.

92
A9/14/97 12:17 CDT CHARTS - Techn - MEXICO 1PC I V MEHSE Pg ALARM
93

moving average.

94
18111197 13:SS CDT CHARTS Techn - EURODOLLAR, 3 NTH Dec 97 Din Pg ALARM
95
-

moving average.
. Once the market begins moving in your

96
18/11/97 14:83 CDT CHARTS - Techn - COTTON, *2 Weekly NYCE Pg ALARM
97
ART KEY FOR THE DELPHIC PHENOMENON

moving average.

98
09/14/97 09:81 CDT CHARTS - Techn - CATTLE, FEEDES Ueekly CHE Pg ALARM
ywe.su a&av.
• ,k,u , ,
W‘$
ttgialitU ti=aa,
99

moving average.

100
18/11/97 17 :SS CDT CHARTS - Tech - LEAN HOGS Weekly CHE Pg ALARM
•
. .
101

moving average.

102
10/11/97 10:27 CDT CHARTS - Techn - EUROYEH Dec 97 INN Pg ALARM
, £4„ £ s, s 55 " `;`,„
103

moving average. 8. Place a SELL order below the eighteen day.
moving average.

104
18/11/97 18:47 CDT CHARTS - Techn - MEHICAN PESO Dec 97 IHH Pg ALARM
g A
Nignami metONOWaitt& alii,411 AcA.; e4Mk4:,:;ARatak,
105

moving average.

107

moving average.

10/18/97 10:03 CDT CHARTS - Techn - COFFEE, C Dec 97 csc Pg ALARM
,
1.k4k.\. 'As}, •
%i=tv..;
109

moving average.

110
09114197 12:38 CDT CHARTS - Tochn - JAPANESE YEN Monthly HIM Pg ALARM
111
CHAPTER FOUR
We now embark on the fourth chapter, the

one that is the most explosive and exciting.
Chapters four and five will be the ones that show
you the most fascinating things I've been able to
discover in the futures markets. These chapters
should intrigue all people who have traded futures
in the past, and likewise, should awe those of you
who have never traded before. In these chapters we
will delve into the aspects of trading that will show
you how to know when a market is going to make a
major move, not just a small jump, but a long
sustained move, one with speed and velocity. They
will show you how to capture big reversal moves,
even when the trend appears to be going the
opposite way. They will also show you how to
place orders when a market is trending one way -
only your orders will be to the opposite direction.
In the previous chapters you learned how to trade
conservatively to make profits with limited risk.
Now you will learn how to catch major points of
turnaround, and how to know when a very large and
extended market move will occur. Earlier I
explained the types of trades you will use in
112
implementing this program. I explained that there
was an order you would place that would be at a
certain price or better. Here is where you will learn
how to use that. This is what makes futures trading
the fascination that it is.
While studying the basic trading system you

learned that the most important thing to look for is
when the eighteen day moving average crosses the
forty day moving average. That gave us the
direction of the market, we knew at that point to
start looking for a buy signal if the eighteen day
moving . average crossed above the forty day moving
average. Likewise, we also knew to look for a sell
signal whenever the eighteen day moving average
crossed below the forty day moving average. That
part is simple, right? How about this scenario? All
three moving averages converge on the same spot,
(the four day, the eighteen day, and the forty day
moving averages). What happens then? Now you
will learn why the four day moving average has
special implications.
When this phenomenon occurs, I am

ecstatic!! This is the essence of my entire trading
system, because when this happens and is followed
by the formation of the Delphic Phenomenon,
something big is coming next. This is the biggest
event that can happen in futures markets. When the
four, eighteen, and forty day moving averages
converge, we are in for an explosive move in that
113
commodity market. I don't know why the resulting
ferocious move occurs. All I can equate it to is this;
if you took a ten inch diameter water pipe that was
under pressure, and attached a two inch diameter
adapter to the end of it, the water pressure coming
out of the end of the two inch adapter is extremely
powerful. Any time you take something that is
under pressure and condense it you create an
explosive situation. When the three moving
averages converge on a futures chart, the volatile
market has been condensed and is ready to explode.
All commodities are under pressure with extreme
buying and selling going on constantly. The only
time a commodity is not under much pressure is
when that particular commodity is in a "channeling
market condition" (or range-bound). When the
three moving averages converge in a channeling
situation this rule of an explosive move following
the convergence will not apply. In all other
situations, when the four, eighteen, and forty day
moving averages converge, the resulting move is
dynamic. This indicates the market is under
immense pressure and getting ready to blow its lid.
Since this trading system involves using the

eighteen day and forty day moving averages as a
guide to indicate direction, we are left out in the
cold when all three moving averages converge. We
know a big market move is coming, but the trick is
to figure out in which direction it will move.
114
Now is when you need to refer back to the
1997 July Soybean chart (page 23). If you had paid
close attention to what I have stated thus far you
should have been a little bit confused about one
part. That is when I told you that what we want as a
good buy (or sell) signal is when we have a very
small gap between when the eighteen day moving
average crosses the forty day moving average, and
the market goes in between the two. So why did we
place a buy order on the July Soybean chart in early
February? The gap, between the eighteen day
moving average crossing the forty day moving
average, and the market price dropping inside is
large. According to the basic system we would
have had to give this trade a lot of thought before
getting into it. Except for one thing! Look where
the three moving averages were on January 1st.
They had converged! We knew a huge move was
going to follow. That was the reason for placing the
buy order above the eighteen day moving average in
early February. Once the convergence occurred, the
Delphic Phenomenon formation followed right
behind.
Using the same chart, look what happens

around the twenty-fifth of May. The three moving
averages again converge. So once more we are
looking for the Delphic Phenomenon formation to
evolve immediately thereafter. The only difference
is now we know a very large move is in the works.
As stated earlier, when a very fast and strong move
occurs, your protective stop goes between the four
115
day and eighteen day moving averages. In this case
we would have been stopped out of the trade near
the bottom of the chart, in the last week of June.
This particular trade produced about 400% profit in
four weeks.
On the July Soybean chart the three moving

averages converged at key turnaround points, this
makes things easy if we were following the trading
system of the Delphic Phenomenon. What happens
when the three moving averages converge in a
situation that doesn't fit this trading pattern? This is
an interesting point to note! You have already
learned the basic trading system of the Delphic
Phenomenon - always keep this in mind while
trading. To try to simplify what to do when the
convergence occurs I have included charts in this
chapter.
The three moving averages do not always

converge when markets reverse direction. They will
occur in strong upward or downward trends. When
they do converge in these situations it can distort the
chart patterns and give false reversal signals. Do
not fall for these false signals, go back to the basic
trading system and look for the pattern of the
eighteen day moving average crossing the forty and
the market price going inside, and then coming back
out. If that does not occur, and we are already in a
very strong bull (or bear) market condition, then the
convergence of the three moving averages indicates
116
a huge move in the same direction the market was
already going. This is true even if the market
already looks overbought (or oversold). Go to the
1997 September Coffee chart (page 120). From the
first of December this market was in a very strong
upward trend. By the end of February it looked like
it had run its course and was quite overbought. As
you follow the market through the end of March you
see it drop, then go up, and eventually drop again.
This drop finally brought the three moving averages
together. It also pulled the eighteen day moving
average below the forty day moving average,
causing us to start looking for a sell signal. Once
the market dropped below the eighteen day moving
average and then went above it we would have had
our sell orders below the eighteen day moving
average. The market price never went below the
eighteen day moving average again! This is
critical! When the three moving averages converge
in a strong bull market and the basic trading system
has no follow through, (meaning that the market
price never again went below the eighteen day
moving average after the eighteen day moving
average crossed below the forty day moving
average), what is left? What is left is the biggest
upward move of this bull market! In other words, if
the three moving averages converge, and the
• Delphic Phenomenon formation occurs but the
market price never crosses the eighteen day moving
average, then the market will continue on the course
it had been on prior to the convergence of the three
moving averages.
117
CHART KEY FOR THE CONVERGENCE OF THE 3
MOVING AVERAGES
1. 3 Moving Averages converge signaling a very large move

will follow.
2. 3 Moving Averages converge in an onward trending market

signaling the biggest move is yet to come.
118
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133
You will also learn later how to use the
weekly charts to find out if the market is still in a
bull (or bear) phase. This information will be
critical in determining the overall direction of the
market and which direction the market will be going
after the convergence of the three moving averages.
Another example of the convergence

occurring in a strong bull market is on the
December 1997 U.S. Dollar Index chart (page 121).
From the beginning of this chart we are in a bull
market, heading gradually upward. Then the market
drops near the end of April. The eighteen day
moving average crosses below the forty day moving
average. After the market price goes above the
eighteen day moving average we should have sell
orders below the eighteen day moving average
(around the first of June), these orders would have
never been filled. Shortly after these market
conditions abate, the three moving averages
converge (around the middle of June). We now
know a huge move is coming, but in which
direction? First, we have already experienced
"system failure", by that we know the market is
going up - as you will read about further in this
chapter. Second, we are in a strong bull market.
Third, the eighteen day moving average is already
aimed like a directional arrow to cross above the
forty day moving average. (We are looking for a
buying opportunity two days after the convergence
when the eighteen day moving average does cross
above the forty day moving average). So what does
134
all this tell us? It tells us the market is going up -
it's time to buy into this market. Where do we get
in? With all this information at hand it looks
confusing, but it really is not. You simply return to
old faithful - the Delphic Phenomenon. Place your
buy order above the eighteen day moving average
since it has just crossed above the forty day moving
average, and place your protective stop below the
forty day moving average.
The method I use to find overall direction in

a market is the weekly chart of each market. These
give a much clearer indication of the market's trend,
up, down, or stuck in a channel. By pulling up a
weekly chart you can see in a glance which
direction the market is heading, do not trade against
this trend! That can present a problem though,
because it is the daily charts that create the weekly
charts. The daily charts materialize first and thus
create the weekly's, so which comes first, the
chicken or the egg? This is where you will employ
some of the tricks you will soon discover in chapter
five. They will help you determine when weekly
charts could be ready for reversals. If you are in
doubt about the direction of a market on a weekly
chart, but see a formation you'd like to trade on the
daily chart, my advice to you is to leave it alone.
I've found it is much more fun to miss a market
move than it is to be in the market going the wrong
way. Being in a market that is moving against you,
will more likely than not, ruin your day!
135
CHART KEY FOR REVERSAL MOVE FOLLOWING
"SYSTEM FAILURE"
1. The Delphic Phenomenon occurs, but no new lows are set.
2. Place a BUY order ABOVE the 40 day moving average.
3. Your protective stop will be placed BELOW previous lows.
4. The Delphic Phenomenon occurs, but no new highs are set, place a
SELL order BELOW the 40 day moving average.
5. Your protective stop will be placed ABOVE previous highs.
136
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144
After learning about the convergence of the
three moving averages you must once again exercise
patience before getting into the market. Time will
give you the direction the market is going to take.
You also will know a very large move is getting
ready to take place, so don't feel like you are going
to miss the boat by not being in the market soon
enough. There will always be time to get in once
this phenomenon appears. (For traders with
experience, this is a great time to buy puts and calls
simultaneously, because we know one will have
great rewards. Don't forget - this does not work in a
channeling market).
Before we move on to the more exciting and

dangerous trades I think it is appropriate to explain
now what is meant by "system failure". As with
any trading system - nothing works 100 percent of
the time. Nothing ever will! The best anyone can
ever hope for is a trading system that has more
winning trades than losing trades. This should
result in overall net profits. So, as with all other
trading systems, this one has its moments of failure
also. The neat thing about a system failure with the
Delphic Phenomenon is this - the opposite move
occurs with a vengeance. Yes, you read that
correctly. Using this situation, the eighteen day
moving average crosses below the forty day moving
average, and the market price drops, then goes
above the eighteen day moving average. This would
then set the stage for a sell order to be placed below
the eighteen day moving average. The whole
145
scenario is looking like a sell according to the
Delphic Phenomenon. I refer to "system failure"
when the market does one of several things, but all
have the same results:
1) The market never goes below the eighteen

day moving average again, but keeps going up and
again crosses the forty day moving average.
2) The market drops to the eighteen day moving

average, stops, reverses and goes up, crossing the
forty day moving average
3) The market drops below the • eighteen day

moving average, goes a short distance, stops and
again reverses. This time it will keep going up,
crossing back over the eighteen day and forty day
moving averages.
In all of these scenarios one thing will be

certain, the resulting move up will be enormous. (In
a reverse situation, the resulting move down would
be enormous). In each instance your buy order
should be placed just above the forty day moving
average. (A sell order would be placed below the
forty day moving average in a reverse situation). In
example 3 above, the way to determine what a
"short distance" means, is to look at the first drop
the market made after the market price crossed the
forty day moving average and before it rose back
above the eighteen day moving average. The
market set a low price there and that is the critical
146
area. If the market, when it drops out of the
eighteen day moving average, does not go blasting
past this point, it probably isn't going much further
down and you need to be extremely careful. The
likelihood of the market reversing in that zone can
be pretty high if the market did not go zipping right
through this previous low. Quite often the market
price will stall out somewhere around the eighteen
day moving average in cases like this; that alone
should tell you the eighteen day moving average is a
crucial pivotal point. This is the area where the
market (or traders) decide the next course the
market price will be going. This is the time, if you
are in the market, you must be on your toes. This is
when the market price usually takes off like a rocket
- one way or the other. Be alert!
Be sure you fully understand the trading

system and "system failure" before you move on to
the next chapter. This may be a good time to go
back and review the materials already presented
before continuing.
In the next chapter you will be shown the

dangerous and exciting trades. You will also learn
how to use the weekly charts for direction and that
reversals could be in the works - even when it
doesn't seem logical.
147
CHAPTER FIVE
Chapter five will be devoted to the more

dangerous and risky trades. These are formations
that I have found to occur with a high degree of
reliability and they are quite profitable when they
work. When they fail, the losses are much higher
than a conservative approach like the Delphic
Phenomenon. These are trades I do not recommend
employing unless you have the stomach for them.
You must also identify the potential losses and
decide if you are willing to risk the trades.
Parallel Lines
This is something I have found that works in

most all cases. Remember, nothing in life or in
trading commodities works all the time.
Unfortunately the world was not created with that
type of simplicity. On occasion we will find
something that has uncanny reliability. This is one
of those instances. Personally I have not found this
event (parallel lines) to occur at any time on any
chart without having been able to predict the
148
outcome. That does not mean it never happened the
other way, it means that in the hundreds of charts I
have perused, I have never seen the outcome to be
different than the ones prior. Here is how it works;
we will use the Weekly Deutschemark chart (page
170). Look what begins happening around June of
1995, the four day moving average drops and makes
an upward turn just before it touches the eighteen
day moving average. From that point the two lines
(four and eighteen day moving averages) parallel
each other in an upward movement, this is what you
are looking for; the four day and eighteen day
moving averages paralleling each other in either an
upward or downward fashion. Whenever this
pattern emerges on a chart, you will be looking to
place an order going in the opposite direction of the
movement. Using the Weekly Deutschemark chart
as a guide in this example, you will see that the
lines are paralleling upward, which means you will
be looking for a selling point. You will want to
know where to place your sell order and where to
place your protective stop. Placing the protective
stop is the easy part, it will always go above the
previous highs (or lows). In this case that would be
above the highs set in April 1995. As for where
your sell order is to go, you can do one of two
things. First, you could place it somewhere below
the four day moving average, trying to catch the
market when it breaks out of this pattern and drops.
The problem is you never know when the break out
will occur. You could very easily be filled on your
order at a low price and have to, in this case, wait
months for the break out. Second, you could place a
149
sell order at one of the higher levels, above the four
and eighteen day moving averages, and get a better
entry point with your order. I like this method
better for four reasons. First, it gives you a much
better fill; i.e., a higher price when selling the
market short. Second, it forces you to wait until
such time you are convinced the two moving
averages are paralleling. Third, by getting in the
market at a higher price level you are reducing the
risk on the trade substantially since your protective
stop is above the previous highs. Fourth, since you
have given the market time to form parallel lines, it
should not be much longer before the big drop
occurs. Reasons one, three and four would be
reversed for declining parallel lines in a buying
situation.
This pattern of moving averages paralleling

is extremely accurate. It also works whether the
market is in an upward trend or downward trend. It
doesn't matter which moving average is on top, it is
only important that they are either inclining or
declining together in a parallel fashion. You will
note that this always happens after a market has
either set a new high or a new low. Once the lines
begin to parallel, the market should not set new
highs or new lows, that is the reason behind your
protective stop being above or below previous highs
and lows. The market price will then reverse and
make a striking movement in the opposite direction
of the paralleling moving averages. Inclining
parallel moving averages (four and eighteen), will
150
lead the market price to a reversal that will force the
market to go down. Declining parallel moving
averages (four and eighteen), will lead the market to
a reversal and the market price will go up.
In order for two moving averages to parallel

each other it is necessary for the market price to
fluctuate above and below the two moving averages
constantly. There is no other way for this
phenomenon to occur. Since this is the case, it
leaves you with many opportunities to get involved
in the trade. It also makes it very possible, if you
choose to place your order below the moving
averages (in an inclining situation), that you could
very easily be filled on your order and taken for a
long ride in the direction you don't want to go.
Caution must be exercised here. The market should
eventually turn your way, but again, nothing in this
world is certain. My personal recommendation is
that you either find a selling point well above the
moving averages (in an inclining situation), or place
a sell order at least halfway between the paralleling
moving averages and the forty day moving average.
In the latter, you won't make as large a profit.
Unfortunately, this rare occurrence is just

that - rare. For instance, in the Weekly
Deutschemark chart (page 170), this event occurred
only twice in three years. The second time on that
chart was around December 1995. You will note
that on the October 1995 Live Cattle chart (page
151
171) this event occurred only once for a very brief
time. That was near the end of April. On the
weekly Pork Belly chart (page 172) it occurred
twice in three years. Once toward the end of 1995,
and again about July of 1997 - only twice in three
years. On the 1997 October Lean Hogs chart (page
173) - two times, one around the end of April, and
the second around the end of June. You can see that
this doesn't happen often, but when it does, the
resulting move is sizable. You will certainly want
to watch for this event.
The Forty To Eighteen Bounce
The next exciting trade is one that is not

only risky, but is scary as well. You will be placing
a trade against what appears to be the trend of the
market. It usually occurs in a market that is moving
fast and furiously; hence the risk and the danger.
This trade requires that either an extended bull or
bear run precede the event that you will see next. It
does not work if that extended run did not precede
it. Do not lose sight of that, it is what makes this
trade work.
The first example used will be the 1997

September Corn chart (page 184). The first strong
bull run seen on the chart began near the end of
January (right after the eighteen day moving average
went above the forty day moving average, and the
152
market price dropped inside the eighteen day
moving average. We will consider the beginning of
the bull run on the breakout of the eighteen day
moving average - the Delphic Phenomenon
incidentally.) What we are looking for in this
trading plan is, after the strong bull (or bear) nm is
fully under way, for the market price to make a
sudden drop (or rise) to the forty day moving
average, and then bounce up (or down) and touch
the eighteen day moving average. When this
situation occurs in an upward trending market, a
very strong downward move will likely result, and
when this occurs in a downward trending market, a
very strong upward move is likely. The way you
will implement this trading plan is simple. For
clarity a bull market situation will be used as an
example. After the strong bull run occurs, and the
market price makes a sudden drop to the forty day
moving average area, you will place an order to sell
at the eighteen day moving average or better. Your
protective stop will be placed above the previous
highs. The reverse would apply for a strong bear
run. You would be placing a buy order at the
eighteen day moving average.
Using the 1997 September Corn chart (page

184), corn was already in a strong bull run when the
market took a sharp drop and touched the forty day
moving average around the end of March.. As soon
as the market price touches the forty day moving
average it is time to figure out where the eighteen
day moving average is and call your broker. On the
153
1997 September Corn chart the eighteen day
moving average was at $2.93 on the day that the
market price touched the forty day moving average.
Until that time the previous high was $3.01 1/2,
therefore, your order to your broker would read as
follows, "Sell one (or more) contracts of September
Corn at $2.93 or better, if filled, place a protective
stop at $3.04". Then you sit back and panic. You
know what your risk is, you know the danger
involved, so you wait until the market fills your
order and drops like a ton of bricks. Then the panic
goes away. In this case your order would have been
filled on April 10, when the market hit a high of
$2.94 1/2. Your protective stops should remain
intact until the market clearly breaks below the forty
day moving average. Once the market price goes
through the forty day moving average your
protective stop should be moved to that area. On
April 11, the market had a high of $2.99, that was
the highest price seen for the remainder of that
contract month. The rest is up to you, trailing your
protective stop until you would finally be stopped
out. If you followed the basic trading system for
trailing stops, you would not have exited the market
until sometime in July - with enormous profits.
Using the same chart you see that the huge

bear market that followed this trade resulted in the
same formation occurring at the bottom of the chart
in July. The market took a big upturn in July. It
bounced up and crossed the forty day moving
average. It then went back down and bumped its
154
head on the eighteen day moving average only to
reverse with a nice run up. As you can see, the
market will not always cross completely over the
eighteen day moving average before reversing. In
this case it actually reversed at the exact same price
as the eighteen day moving average on July 21, at a
price of $2.40 112. Had you used the exact price of
the eighteen day moving average you may not have
been filled on this order. For that reason I typically
use a price on the inside of the eighteen day moving
average, just a few ticks closer to the forty day
moving average. This is not an exact science, so
you must use your own judgment as to where to
place your order. In this example, had you used a
price of $2.41 1/2 as your buy point, you would
have been filled on your order. The order to your
broker should read as follows (and this would have
been placed right after the market price hit the forty
day moving average on July 15): "Buy one (or
more) contracts of September Corn at $2.41 1/2 or
better, if filled, place a protective stop at $2.25".
Another point to make at this time is the fact that
the eighteen day moving average is changing price
each day. So in actuality, the eighteen day moving
average was at $2.39 3/4 on the day the market price
hit the forty day moving average. Keep this in mind
when placing your order with your broker. Allow a
few ticks to the side of the eighteen day moving
average closer to the forty to be sure you don't miss
out on the move.
155
The next example uses the 1997 December
Coffee chart (page 185). The obvious bull run in
coffee began at the lower left hand side of the chart.
This ploy of selling the eighteen day moving
average after the market price touches the forty day
moving average exhibits itself twice in this chart.
The first time this occurs is around the middle of
March when the market price dropped quickly
below the forty day moving average and then
rebounded to cross the eighteen day moving average
again. Attempting this trade at this time would have
netted small gains as the market price stalled out
once it got below the forty day moving average after
having filled your order at the eighteen day moving
average. In a situation such as this your protective
stop would now be placed at the forty day moving
average. In all cases using this trading technique,
your protective stop should be moved to just on or
above the forty day moving average after the market
price drops below the forty day moving average.
With this particular trade, if you had been paying
close attention to what was happening on the chart
at the time, you would have seen a declining parallel
line formation developing - meaning the market was
preparing for a large move in the opposite direction.
It was time to get out of the market with the profits
at hand. Had you not seen this formation coming,
you would have been stopped out of this trade with
small profits when the market re-crossed the forty
day moving average to the upside.
156
The second time this event occurs on this
chart is near the end of May. The market, after
exhausting itself in a huge bull run, drops rapidly
from its highs, and comes within a few ticks of the
forty day moving average (remember, this is not an
exact science, and this is close enough for me to call
it touching the forty day moving average). The
following day the market starts back up. This is
when to call your broker and place an order to sell
the eighteen day moving average or better. On June
9, the eighteen day moving average was at $197.40.
This is the day after the market hit the forty day
moving average. On this day, call your broker and
place an order to sell one (or more) December
Coffee contracts at $197.20 or better. The
following day, June 10, the market hit a high of
$198.50 and closed out at $175.25. This is a very
large move in the coffee market. Yet it is only the
beginning of a sizable downward run. Employing
the basic trading system for trailing stops you would
have remained in this market, with magnificent
profits (over $19,000 per contract), until the end of
July.
I'll give one more example of this trade

using the S&P futures. The chart used will be the
1997 September S&P (page 186). What is not
shown is the strong bull market that is off to the left
of the chart. At the time of this writing the S&P has
been in a strong bull run for years. It is safe to
assume that the market was in a strong bull mode
prior to the onset of this chart. Near the end of
February, the market made a drop and touched the
157
forty day moving average. So what do we do? We
call the broker and place an order to sell at the
eighteen day moving average or better. In this case
the market touched the forty day moving average on
March 3. The following day, when the market
reversed and went up, the eighteen day moving
average was at $817.30, and the previous high was
at $835.70. The order to our broker would have
been as follows: "Sell one (or more) September
S&P's at $817.00 or better, if filled, place a
protective stop at $838.00". The highest price the
S&P hit before making a large drop was $831.30 on
March 11. After that the market took a big slide, all
the way down to $745.25 on April 11.
Using the same market, but a different

contract month, we look at the December S&P chart
(page 198). When the market started its run after
crossing the forty day moving average on April 29,
it didn't stop again until it made a quick drop to the
forty day moving average on August 8. The
following day brought another upward move in the
S&P. At this point the eighteen day moving
average was at $954.95, and the previous high was
$979.60. On this day the broker receives another
phone call, you should, by now, know how to place
the order. Your order would read as follows, "Sell
one (or more) December S&P's at $954.75 or
better, if filled, place a protective stop at $985.00".
On August 12 the market had a high of $957.50 and
over the next few days dropped to $905.50. Well
158
over $20,000 in profits in less than one week - per
contract!
When this trade works there are very large

profits to be made. By the same token, if it fails
there will be substantial losses. You will, of course,
know from the outset what risks are involved by the
placement of your protective stop above or below
the previous highs or lows. In some cases the
previous highs or lows are quite near the eighteen
day moving average and make the trade worth
risking. In other instances the previous highs and
lows are so far away from the eighteen day moving
average that the risk of loss outweighs the potential
profits of the trade. The December Coffee chart
(page 185) is indicative of that. As usual though,
the more risk, the more reward. This is something
that you must rationalize in your own mind. The
charts exist and the risk is evident before you enter
the trade.
Selling The Second Hump
One more of the signals to watch for is one

that I refer to as "selling the second hump". This
formation occurs in very strong bull market runs. It
requires that the market price break out of either the
eighteen or forty day moving average and make a
very strong and heated run up. The market then
pauses, and usually drops, sometimes it is a
159
substantial drop - but never will the market drop all
the way to the forty day moving average - if it does,
then you have to abandon this plan. Once the
market has dropped it will reverse and make another
upward run, this time it will set new highs. After
the market has set new highs, place a sell order
halfway between the four day moving average and
the eighteen day moving average. Your protective
stop will be above the previous highs. The four day
moving average, along with the market price, will
be your guide for identifying the "humps". They
will point these out clearly to you. These humps are
very reliable indicators on weekly charts. They let
you know when a market that appears to be heading
up with no end in sight, is ready for a reversal. This
is of great help when seeing other formations occur
on daily charts, such as those that look like sells in
very strong bull markets.
This trade has two essential ingredients;

first, the market, after crossing the forty or eighteen
day moving averages, makes _a huge bull run
upward, and second, the market does not touch the
forty day moving average again before the market
sets a second new high. (This works very well for
day trading the S&P using one-minute bar charts).
The 1997 December Cocoa chart (page 200)

will be used for the first example; Near the
beginning of March the market crossed the forty day
moving average and entered a strong bull run.
160
Around the first of April the market dropped and
touched the eighteen day moving average before
again resuming its upward climb. This rise set new
highs and the four day moving average clearly
showed a second hump forming. This is the time to
phone your broker with a sell stop order, halfway
between the eighteen day and four day , moving
averages. In this case, on April 3, the four day
moving average was at $1561, and the eighteen day
moving average was at $1527. Halfway between
the two is $1544, and the previous high was $1592,
thus the order to your broker would have been to
"Sell one (or more) December Cocoa contracts at
$1544 on a stop, if filled, place a protective stop at
$1600".
This phenomenon happened again on this

chart near the end of June. When this bull run
started in the first part of June (after the eighteen
day moving average crossed above the forty day
moving average, the market dropped inside the
eighteen day moving average, and came blasting out
- the Delphic Phenomenon - again), the market set
new highs, consolidated enough to give the four day
moving average its first hump, and then streaked
upward again. Once the market sets new highs and
drops enough to show us the second hump, it
becomes time to place the sell order. First, find the
price of the four and eighteen day moving averages;
in this case they were on June 30, $1736 and $1642,
respectively. That makes our sell price at $1689.
The previous high was $1775. So the protective
161
stop would be above that at $1785. The chart tells
you the rest.
Incidentally, this was also a good way to

place your protective sell stop, had you been a buyer
of this market in the first part of June as the Delphic
Phenomenon indicated.
The 1997 September British Pound chart

(page 201) has another clear picture of this event.
When the market broke out of the mess it was in
around the middle of June it set a new high,
dropped, then touched the eighteen day moving
average, and again shot up to new highs. Once the
four day moving average started to curl, forming a
second hump, it would have been time to figure the
price of the four day and eighteen day moving
averages. In this example, on July 11, they came in
at $1.6852 and $1.6657, respectively. The previous
high was $1.6960. Half the distance between the
four and eighteen day moving averages is $1.6755.
The order to your broker goes in as follows: "Sell
one (or more) September British Pounds at $1.6755
on a stop, if filled, place a protective stop at
$1.7000). On July 15 you would have been filled.
Please note on this chart what came next, shortly
after your order was filled, a pair of inclining
parallel lines, which should have left you with no
doubt as to what was to follow. The chart says it
all, the biggest drop in the British Pound in quite a
162
while. This huge drop was preceded by two clear
sell indicators, back to back.
I will use another example of the "double

hump sell", so you will have an idea how to use it in
relation to a sell signal on a daily chart. The
Weekly Soybean chart (page 202) shows the
beginning stages of the double hump in early May
1997. (It should be noted that during this time
period there were numerous advertisements to the
general public to buy soybeans because they were
going to $10 a bushel). The price actually peaked
out at $903 1/2 in the second week of May. It was
not until the third week of May that the weekly
chart showed signs of the four day moving average
making its second curl - the beginning of the second
hump. Just as this was occurring on the Weekly
chart, the three moving averages converged on the
daily July Soybean chart. As the weekly chart
indicated a possible sell signal with the formation of
the double hump, the daily chart performed the
precise formation for a sell. Not only that, but with
the convergence of the three moving averages, we
knew there was to be a very large move. The
second hump on the weekly chart already told us the
move was to be down, so it left no doubt of
direction when the three moving averages
converged on the daily chart.
Although trading by the weekly charts

should not be done because the prices are
163
aggregates of all daily charts, they are extremely
important in giving us overall market direction. The
weekly charts are used to give us trends, but the
actual entry points for orders must be found on the
daily charts to ensure more precise trading.
The Weekly Pork Belly chart (page 203) is

next. This is to show that the second hump of the
four day moving average does not necessarily have
to occur without going inside the eighteen day
moving average. For clarity, all moving averages in
this book are referred to as "daily moving
averages", and it should be surmised that on weekly
charts the moving averages are actually weekly
moving averages. As the chart indicates, the four
day moving average goes in a virtual straight line
from the time it breaks out of the eighteen day
moving average in February 1.996 until it forms the
first hump in May 1996. The market then drops
rapidly, going inside the eighteen day moving
average before reversing again and setting new
highs. When the four day moving average forms its
next curl in August 1996, we know it's time to start
looking for sell signals on the daily charts.
The Weekly Crude Oil chart (page 204) is

one more clear picture of the second hump. It also
shows that if the market makes a single hump
without setting a new high, it's time to abandon the
watch, or start over. The Weekly Crude Oil chart
has a large upward run beginning in February 1996.
164
(Once again, note the convergence of the three
moving averages in January 1996, followed by the
Delphic Phenomenon, just prior to the enormous
bull run). This would appear to be the first hump.
What comes next, after the market price falls inside
the eighteen day moving average, causes this to be
negated as the first hump. Not only does the market
drop down and touch the forty day moving average,
but it comes out of the eighteen day moving average
and falls back inside the eighteen without ever
setting new highs. When this happens, the large
upward move, or hump, can no longer be
established as the "first" hump in the trading plan.
Eventually though, the market makes another run at
the highs, setting new ones in October 1996. After
the four day moving average curls over and the
market drops, we once again have a starting point
for this particular trade, i.e.., a first hump. This
time the market drops only to the eighteen day
moving average and turns upward again and sets
another new high. As soon as the four day moving
average curls we have the second ,hump - time to
begin searching for sell signals in the daily crude oil
charts.
In seeking out the second hump sell signals

it is important to watch for a continuous line of the
four day moving average. Picture it like this, a very
articulate rendition of the letter "m", one with a
sweeping hump on the second half of the "m".
Sometimes the second hump is much, much higher
than the first. Other times it is only slightly higher;
165
the height makes no difference. The only crucial
point is that the second hump is higher than the
first. The four day moving average is not erratic, it
is formed in a nice flowing motion. When the four
day moving average begins to show too many
erratic signs in between the beginning and end of
this "m", then something is wrong. You should be
very careful and watch for other sell signals.
By utilizing these techniques on weekly

charts as directional guides you will have much
more success in trading with the daily charts. It is
of the utmost importance that I stress the use of the
weekly charts for direction at all times. Trading
against the trend of the weekly chart is an invitation
for disaster. If, for example, a sell signal were to
occur on the daily chart but the weekly chart is still
clearly showing signs of upward momentum, the
drop will most likely be short lived and result in
what I have described earlier as "system failure". I
have found it wise to watch and wait on occasions
such as this. If "system failure" does occur, you
will be in a perfect position to place a buy (or sell)
order on a breakout of the forty day moving
average, which, as you have seen, usually results in
a very fast and strong move. Do not trade against
the trend of the weekly charts! This is imperative!
Never forget it.
Earlier in the book I mentioned the "Danger

Zone". This is the area in the charts between the
166
eighteen day moving average and the forty day
moving average. I consider this the danger zone
because this is the area on the charts where the
market has no direction. It cannot make up its mind
which way to go. If you scan through the charts in
this book you will find that the market never makes
a strong move in either direction until one of these
lines is breached. That is obvious, of course,
because the eighteen day and forty day moving
average lock the market in a range until one of those
lines is breached. A strong bull run requires that the
market price be above the eighteen day moving
average - not below it. If the market price is below
the eighteen day moving average on a bull run, it
stands to reason that one of the following is
happening: either the market price is between the
eighteen day and forty day moving average - in the
danger zone, or the market price is below the forty
day moving average but the eighteen day moving
average is above the forty day moving average. In
any of these cases, we do not want to be in the
market. By the same token, if the market is in a
strong bear run, the market price will be below the
eighteen day moving average. If it is not, then again
the market price has to be between the eighteen day
moving average and the forty day moving average,
or the market price is above the forty day moving
average and the eighteen day moving average is
below the forty day moving average. Neither case
fits the description of the basic trading system.
There do exist trades, as mentioned earlier, that are
placed even when the criteria for the basic trading
167
system does not exist; however, these trades are
clearly labeled (for a reason) as dangerous trades.
The "Danger Zone" has this label because

you should never place a trade in this forbidden area
while trading the basic system. After a quick
glimpse of charts in this book you can easily
confirm why the zone between the eighteen day
moving average and the forty day moving average is
off limits for placing trades. Only one of three
things will happen: the market will break out to the
upside, the market will break out to the downside,
or the market will remain in a channel. We neither
want to be in a channeling market, nor do we know
from which direction the market is going to break.
Thus, no trades should be placed in the "Danger
Zone" while employing the basic trading system.
168
CHART KEY FOR "PARALLEL LINES"
1. Inclining parallel lines signal an approaching SELL

opportunity.
2. Declining parallel lines signal an approaching BUY

opportunity.
169
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•
CHAPTER SIX
No book written on trading futures markets

is complete without a chapter concerning money
management. This is a chapter I suspect most
readers will, at best, skim over or disregard
altogether. I suggest you continue reading because
this chapter is perhaps the most important of all.
You see, I have been in your shoes; whether you are
a seasoned trader or a novice, I have been where
you are now. I say that because you have read this
book to this point, and that alone tells me you are
looking for something new that works.
Furthermore, it tells me either you are frustrated
because you have traded before and can't get where
you want to be or you have never traded before and
are looking for a way to increase your net worth. In
the first case, have you ever asked yourself if you
had used proper money management, would you be
where you are now? Don't lie to yourself, how
many traders have been right on the direction of the
market but been stopped out due to a stop placed
too close to the market? I know I should not make
this assumption, but I would bet that it is close to
100 percent. Now you are asking what this has to
217
do with money management. Everything! You see,
in my opinion, if you cannot place your protective
stop where it belongs on the charts, you have
absolutely no business being in the trade. How does
that fit into money management? Let's go back to
the first chart used in this book, the July 1997
Soybean chart (page 23). The first trade
recommended on that chart was to buy July
soybeans near the beginning of February when the
market price crossed above the eighteen day moving
average. On this occasion we would have a buy
order placed around $7.46. When we were filled on
this order, our initial protective sell stop would have
been placed below the forty day moving average -
somewhere in the $7.15 area. This is a difference of
$0.31, or thirty-one cents per bushel. Each one cent
move in soybean futures is equal to $50. That
equates to $1550 per contract, ($0.31 x $50 —
$1550). If this trade had been a losing trade, you
would have incurred a $1550 loss. If you were
trading with a $3,000 account (which I do not
recommend doing), your losses would have
exceeded 50% of your account. That is poor money
management. By the same token, if your account
was worth $24,000 and you decided to trade eight
contracts of July soybeans, the results are the same -
over 50% loss if the trade turned out to move
against you. Trading in this fashion is a losing
battle. This is where proper money management
comes in. The first rule is to have enough capital in
your account to risk the trade to the protective stop -
and have enough left over to trade again if a losing
trade were to happen.
218
Some traders place protective stops based on
how much money they are willing to risk. I tried
that a couple of times and decided it would be easier
to just send in a check for the rest of my money. In
other words, it did not work for me! Futures
markets do not move in straight lines, they fluctuate.
You must give the markets room to move if you
expect success in this business. It is the only way.
You must place your protective stop where it
belongs on the chart, and you must have enough
money in your account to back up that trade and live
to trade another day if that particular trade goes the
wrong way. Never lose sight of the fact that there is
not a trading system in the world that has a 100
percent success rate. It simply does not exist and
never will. The best you can look for in a trading
system is to end up with more winning trades than
losing ones, and if you practice proper money
management your winners will make up for the
losers in a big way. It has been said that a
successful trader has a 40% success rate, which
means that 60% of his trades lose money. I
personally think we can do much better than that.
Where does that leave us with the money

management question? This will always be a
personal choice, and as with all things in trading
futures, there are no clear answers, and how can
there be - after all, it is the future. With that in
mind, my suggestion is to never open a futures
account with less than $10,000; $20,000 would be a
better starting point. I recommend that you trade
219
one or two contracts of any market per $10,000 in
your account. Of course this would be based on
where the market is at any given time and where
your protective stop should be in relationship to that
market. It would also be based on the margin (the
good faith deposit required to trade any given
commodity) required per contract. If you are
looking for a percentage figure, I would use a risk
factor of between 15% and 20% per trade. As you
slowly increase your account you will be able to
increase your contracts traded. Do not attempt to
make a million dollars your first time around, it is
possible - but highly unlikely. The money is there
to be made, but do not rush it, it will come with
patience. Never look at this as a get rich quick
scheme, avarice will not win in the end. This can be
a get rich slow scheme if you use four tools:
patience, discipline, money management and a good
trading system. These will reward you greatly in the
long run.
As you trade there will be times when you

have a number of winning trades in a row. About
this time you start to feel like superman. You begin
to feel that you have become so good that all of your
trades will be winners. This is when bad things can
happen. You may have a tendency to stray from
trading the system, whether you get in the market
too soon or trade five contracts instead of one.
Something will go wrong and you will be in for an
unfortunate situation. This is where lack of
patience, discipline, and money management will
220
come back to haunt you. You must remember that
you are trading the future, and no one knows the
future with certainty. You must not get impatient
and want to get into a market because you are
"certain" it is going in a specific direction. The
more sure you are of what direction a particular
market is going to take (when trying to anticipate a
market move prior to confirmation through your
trading system), the more likely it is you will be
wrong. The more you listen to news reports on
radio or television, or from recommendations from
other people, the more likely it is you will be wrong.
It has been said that 80% of the general public who
trade futures lose money. It should follow, that if
that were true, you should do just the opposite of
what the general public does! The general public
has a tendency to believe what they read in
newspapers and magazines, or to believe what they
hear on television and radio. That is one of the
reasons they are usually wrong. Block out what you
hear or read, the charts will tell you what is
happening. I suggest you only pay attention to
factual reports, such as crop reports, government
reports, etc. A problem still persists with these
reports as well. Professional traders will always
know more than you do, and they will also be able
to read between the lines of a report to find things
that you cannot. The best thing to do is to stay out
of the market when a report is to be issued. Watch
how the market reacts, if a bearish report comes out
and the market goes up, then obviously there is
more somewhere that tells a bigger tale. You will
find that the charts tell a truer story of what is
221
happening. For some strange reason the answer to
the future direction of a market lies deep within the
confines of the charts alone. It is your job to learn
to read these charts and to decipher which direction
that will be. If you take the time and effort to do
this you will reap the rewards you are seeking.
Many people get caught up in the euphoria

and excitement of trading futures, and when that
happens it is easy to stray from the fundamentals of
money management. There are things that are
critical to conservation of money in the daily trading
regimen of commodities. Although it may appear,
at this time, that trading will be easy and there will
be multiple dollars to make, do not assume it will be
as easy at it seems in the previous pages. Yes, the
charts exist, as do the formations. The hard part is
realizing these formations as they occur. In
hindsight they are simple, but in real life they
sometimes are not as clear. If you maintain a
discipline and trade by the recommendations in this
book you should do fine, but you must understand
that there will be losing trades along the way. Do
not be discouraged by these, and foremost, do not
try to make up the difference in the next trade.
Trading in desperation is the single biggest mistake
you can make in this business. Accept the loss -
because, as stated earlier, your account should be
sufficient enough to handle a loss and live to trade
another day if you use proper money management.
Wait with patience for the proper entry point in the
next trade that fits the basic trading system. Do not
222
try to make up for the loss by jumping back into the
market without a clear plan, that is only asking for
trouble. The basic formations will occur
somewhere in some market again. Wait for them to
happen!
223
Chapter Seven
Now that you have learned the Delphic

Phenomenon, along with some other key formations
to search for, it is time to test your skills as a trader.
The time has arrived for your quiz. In this quiz you
will be tested only on the Delphic Phenomenon. If
you do not have a full grasp of this trading system
you should go back and study the first chapters once
more before taking your quiz.
The first part of your quiz involves the chart

on page 225. It makes no difference what chart you
are using since all futures carry the same
formations. In other words, every market acts the
same. Using this chart and employing the Delphic
Phenomenon, you are to look at the chart and
determine where your order should be placed, what
your order would be, or if no order should be placed
at all. You are to assume that the weekly chart in
this case verifies whatever your order is. If you are
ready and full of confidence, turn the page and
move on. The first one should not be too difficult
for you.
224
tr)
C■1
• wt:
•
See how easy it was? If your order was the
same as mine, it should read as follows:
"Sell one (or more, of whatever this market

is) at $342.00 on a stop."
The actual price you chose for your order

can vary from the $342.00 I chose as long as your
sell stop order was placed below the eighteen day
moving average, which in this case, comes in
around $346.00.
If you did not place your order as stated

above do not move forward in the book just yet.
You should go back and review the Delphic
Phenomenon trading system. For the benefit of
anyone who did not place an order as outlined
above, I want to identify traits of the Delphic
Phenomenon that appear on this chart (after they
have reviewed chapter three).
Please note on this chart at the top right; the

eighteen day moving average crossed below the
forty day moving average. This alerts us to look for
a selling opportunity. The next event that occurs is
that the market price rose above the eighteen day
moving average for the first time. This is our loud
siren that tells us it is time to place a sell order
below the eighteen day moving average. If the
226
market continues up, we never got involved in this
trade. If the market drops, we will be filled on our
order - just below the eighteen day moving average.
For those of you with the correct answer you

may go to the chart on page 228. Therein lies the
final result of this trade. All others should go back
and retake the test until they understand the
appropriate order.
227
DOW JONES INDUSTRIAL AVERAGE, APRIL 1, 1929 THROUGH DECEMBER 1, 1929
4
18
40
. . . . . . . 4
. . BASIC TRADING SYSTEM

October 16, 1929 SELL
BLACK TUESDAY
4/1/29 4/28/29 5/15/29 6/20/29 7/12/29 8/23/29 9/18/29 10/18/29 11/29/29
228
Congratulations! Had you known this
trading system and been alive and trading the
markets in October of 1929, you would have called
your broker on October 14, 1929 with your sell stop
order of $342.00 on the Dow Jones Industrials.
Your order would have been filled on October 16,
1929, and you would have been short the stock
market. Therefore, you would have sold short the
stock market thirteen days prior to Black Tuesday,
October 29, 1929.
Before moving on to the next question of

your quiz I would like to point out a few more
interesting formations appearing on this chart, use
the chart on page 231. Note the parallel moving
averages (four and eighteen) denoting a buy on the
left hand side of the chart. After the market drops,
it pulls the eighteen day moving . average below the
forty day moving average. The market price then
rises above the eighteen day moving average, a
parallel of the four day and eighteen day moving
averages is now forming. This time it is a declining
parallel, signaling a buy. It is also confirmation of a
"system failure" when the market price does not
continue downward, below the eighteen day moving
average. Remember, "system failure" signals a
huge reversal move, upward in this case. So even if
you missed the declining parallel lines, you should
not have missed the fact that a "system failure"
occurred and you would have had a buy order above
the forty day moving average.
229
The next formation would be a bounce from
the forty day to the eighteen day moving average in
the center of the chart. This would have turned out
to be a losing trade. This is a good example to show
that this can be a dangerous trade; when it works, it
is marvelous, when it does not work, you take your
loss and move on. One more formation occurring
on this chart prior to the Delphic Phenomenon, is
another bounce from the forty day to the eighteen
day moving average. This event happens at the top
of the chart. If you were not still sweltering from
the loss when you tried trading this bounce earlier,
you would try it again here for a fantastic fill in this
market, shorting the stock market on or about
September 17, 1929 - over a month before the crash
of October 29! And only about 12 points off the all
time high thus far set in the Dow Jones Industrials.
The last note to make on this chart is the

existence of the second hump just prior to the last
bounce discussed. That clearly shows itself after
the market went on a strong bull run after breaking
out of the eighteen day moving average in the center
of the chart. Remember, when trading the second
hump formation, if the market price touches the
forty day moving average after forming the first
hump, that first hump is negated and you must start
over. Note the first hump negating itself after
touching the forty day moving average in the center
of this chart!
230
40 TO 18 BOUNCE - SELL AT THE 18
. . . . BASIC TRADING SYSTEM

October .16, 1929 SELL
. . . . . . . DECLINING PARALLEL LINES SIGNAL BUY ..... I. . . . . .
BLACK TUESDAY
4/1/29 4128/29 5/15/29 6/20129 7/12/29 8/23/29 9/18/29 10/18129 11/29129
231
Are you prepared for your final test
question? If so, refer to the chart on page 233 and
use the same rules as described on the first test
question. Look at the chart, decide what your order
would be - if any, and determine the price and
direction of the order.
232
illggeSMORMIUMECii:W...10Aaka ttat,V. \KW:
233
Your order on this chart selection should
read as follows, "Sell one (or more, of whatever this
market is) at $2530.00 on a stop)". If you had
placed your order too close to the eighteen day
moving average in this situation you may have been
filled earlier and been stopped out for a loss when
the market bumped over the forty day moving
average for a brief time. Use patience when placing
these orders! Suppose you had placed your order
too close to the eighteen day moving average and
had gotten into this market prematurely, but were
willing to place your protective stop high enough
above the forty day moving average to give the
market room to move, you would still be in a good
position for what the following market move was to
be. I emphasize the fact that, in either case, whether
you are placing an order to be filled below the
eighteen day moving average or placing a protective
stop above the forty day moving average, you must
neither be too close with your entry position nor be
too close with your protective stop, give the market
room to move. If you exercise caution with both of
these orders you will have much better success.
Had you placed the proper order for this

market, your outstanding order to sell at $2530.00
on a stop would have been phoned in to your broker
on September 30, 1987. It would have been filled
on October 6,1987. This would have made you
short the stock market thirteen days prior to Black
Monday, October 19, 1987.
234
.
.
. 4
.
.
.
. 40
.
.
.
.
.
.
.................................... 1
October 6, 1987 SELL \ •
4 40 .
\\ .
18 \ .
\\ .
.
\ .
.
\\ .
.
BLACK MONDAY •
5/03/87 6/15/87 7/14187 8/12187 9/16/87 10/06/87 11110187 11/23/87 12/1/87
235
Remember, in both of these test questions,
your protective stop is not to be given to your
broker until your order is filled. As soon as you are
notified of your fill by your broker it is up to you to
identify where the forty day moving average is, at
that time, and place your protective stop at a safe
distance above the forty day moving average.
I commend all of you who were able to pass

the quiz; you should now be ready to strike out on
your own. I suggest that if you do trade by this or
any other system you do it first on paper without
using real money . This gives you a better idea of
how far away from the moving averages to place
your orders and protective stops. You gain a better
understanding of how markets move, which is
critical to successful trading. When you begin paper
trading, do it for a few months before you invest
real money. The markets will always be there and
they will always trade the same - that should be
evident in that you just passed a test using a chart
that existed 69 years prior to the writing of this
book! There is no rush to get in the market now or
at any other time. Exercise your patience when
paper trading as well as when waiting for the proper
entry time into one of the markets. Patience, I have
learned, is the single greatest asset you can have in
being a successful trader. Good luck to you all, and
happy hunting.
236

The Magic of Moving Averages

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THE MAGIC

TRADERS PRESS, INC.®

Books and Gifts

Reprinted by agreement with the author, Scot Lowry

TRADERS PRESS, INC.®

Books and Gifts

To Kim, for all your unselfish help.

To Brian, for your assistance and patience.

To Deena, for your creative input.

To Juanita, for doing all the things behind

To Jim, see, I told you.

The reason for writing this book is twofold:

One more note to make before we embark

Chapter one is a brief overview of how

It is to be related that all commodity and futures charts, trades, systems,

Before learning a trading strategy it is

In the mid-1800's the first commodity

Second, if bread producers know there will

Now let's speculate on what happens next in

These are hypothetical situations used to

The solution to the dilemma was to get the

Let us look at how the futures market works.

But wait. How could we have sold wheat in

As this book progresses you will learn a

To understand the first type of order let's

To place this order with your broker you will

If we take the second example of wheat, we

This is the order you will use most often

The way this trade works is as follows.

By the same token, if we think the price of

I hope this general overview will give you

There are so many trading techniques around

My system of trading involves something

For those of you who are not familiar with

MA - represents moving average.

PI - represents the price on the first day.

P2 - represents the price on the second day.

Pn - represents the last day in the series.

n-represents the number of days in the

Day Close Four day MA

August 12 1515 (P1)

Throughout history, man has searched for

The basic trading system described in this

The first example we will use is the 1997

The way I use these averages is quite simple.

The reverse of the above example would be

place protective sell stop

market price dips below

These last paragraphs are the essence of the

When I say that your protective stop was of

The best place I've discovered to place my

You may wonder why I have chosen to wait

Therefore; it is the very essence of this

Another point I'd like to make is that you

I will mention options only once in this

I try to avoid the use of options because you

Now that you have a basic understanding of

The next chart shown is the 1997 October

Going along the same chart we have a sell

You will find as you follow current charts or

Here lies the same pattern as the Soybean

market price dips below

I want to discuss one more chart before

I chose the cocoa chart to emphasize once