Trading as a Business (2015)

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TRADING AS ABUSINESS

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TheWileyTradingseriesfeaturesbooksbytraderswhohavesurvivedthemarket’s ever changing temperament and have prospered--some by reinventing systems othersbygettingbacktobasics.Whetheranovicetraderprofessionalorsomewhere in-between these books will provide the advice and strategies needed to prosper today and well into the future. For more on this series visit our Web site at www.WileyTrading.com. Founded in 1807 John Wiley Sons is the oldest independent publishing company in the United States. With offices in North America Europe Australia and Asia Wiley is globally committed to developing and marketing print and electronic productsandservicesforourcustomers’professionalandpersonalknowledgeand understanding.

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TRADING AS ABUSINESS The Methods and Rules I’ve Used to Beat the Markets for 40 Years DickDiamond

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Coverimage:©iStock.com/ricardoinfante Coverdesign:Wiley Copyright©2015byDickDiamond.Allrightsreserved. PublishedbyJohnWileySonsInc.HobokenNewJersey. PublishedsimultaneouslyinCanada. ChartsinthebookwerecreatedusingtheMetaStocktradingplatformandhavebeenusedwithpermission. ©MetaStock2014. Nopartofthispublicationmaybereproducedstoredinaretrievalsystemortransmittedinanyformorby anymeanselectronicmechanicalphotocopyingrecordingscanningorotherwiseexceptaspermitted underSection107or108ofthe1976UnitedStatesCopyrightActwithouteitherthepriorwrittenpermission ofthePublisherorauthorizationthroughpaymentoftheappropriateper-copyfeetotheCopyrightClearance CenterInc.222RosewoodDriveDanversMA01923978750-8400fax978646-8600orontheWeb atwww.copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothePermissions DepartmentJohnWileySonsInc.111RiverStreetHobokenNJ07030201748-6011fax201 748-6008oronlineathttp://www.wiley.com/go/permissions. LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbesteffortsin preparingthisbooktheymakenorepresentationsorwarrantieswithrespecttotheaccuracyorcompleteness ofthecontentsofthisbookandspecificallydisclaimanyimpliedwarrantiesofmerchantabilityorfitnessfora particularpurpose.Nowarrantymaybecreatedorextendedbysalesrepresentativesorwrittensalesmaterials. Theadviceandstrategiescontainedhereinmaynotbesuitableforyoursituation.Youshouldconsultwitha professionalwhereappropriate.Neitherthepublishernorauthorshallbeliableforanylossofprofitorany othercommercialdamagesincludingbutnotlimitedtospecialincidentalconsequentialorotherdamages. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupportpleasecontactour CustomerCareDepartmentwithintheUnitedStatesat800762-2974outsidetheUnitedStatesat317 572-3993orfax317572-4002. Wileypublishesinavarietyofprintandelectronicformatsandbyprint-on-demand.Somematerialincluded withstandardprintversionsofthisbookmaynotbeincludedine-booksorinprint-on-demand.Ifthisbook referstomediasuchasaCDorDVDthatisnotincludedintheversionyoupurchasedyoumaydownloadthis materialathttp://booksupport.wiley.com.FormoreinformationaboutWileyproductsvisit www.wiley.com. LibraryofCongressCataloging-in-PublicationData: DiamondDickStockbroker Tradingasabusiness:themethodsandrulesI’veusedtobeatthemarketsfor40years/DickDiamond. pagescm.—Wileytradingseries Includesindex. ISBN:978-1-118-47298-9paperback 1.Investmentanalysis.2.Speculation.3.Investments.4.Portfoliomanagement.5.Stockbrokers.I.Title. HG4529.D4972015 332.64--dc23 2014032268 PrintedintheUnitedStatesofAmerica 10 987654321

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v CONTENTS Foreword ix RobertPrechter Preface xi Acknowledgments xiii CHAPTER1 MyLifeasaTrader 1 TradingasaBusiness 5 CHAPTER2 EmotionalDiscipline 9 WhyTradersFail 11 CorePositionand80/20Trades 12 TheEmotionsofTrading 13 TheImportanceofCommitment 15 CHAPTER3 PrinciplesofSuccessfulTrading 17 TradewithinYourCapital 17 QuietConfidence 18 SellTooSoonNotTooLate 19 TakePersonalResponsibilityforYourTrading 21 Waitfor80/20Trades 21 PlayGreatDefense 22 PulltheTrigger 22 OpinionsAreforPunditsNotTraders 23

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CONTENTS vi StrictlyFollowTechnicalData 23 MarketEntryTactics:UseLimitOrdersBuy/Sell ZonesandPositionScaling 24 UseDefensiveStops 24 TrackYourResults 25 ManagingYourTradingAccount 25 TakeAdvantageofMarketConditions 26 ReviewtheRulesEveryWeek 27 CHAPTER4 TechnicalAnalysisandTradingConcepts 29 MovingAverages 29 Crossovers 34 Divergences 35 WilliamsR 37 StochasticOscillator 38 StochasticMomentum 40 Bressert 41 RMO 42 MovingRibbons 43 CHAPTER5 TradingwiththeMovingAverageTemplate 45 CHAPTER6 TradingwiththeMovingRibbonsTemplate 65 CHAPTER7 TradingwiththeBressertTemplate 79 CHAPTER8 TradingwiththeRMOTemplate 99 CHAPTER9 ADayofTrading 117 Appendix:AboutMetaStockProTemplates 123 CreatingtheDickDiamondTemplates 124 Template1:WalterBressert 126 Template2:MovingRibbons 127 Template3:RMO 127 Template4:MovingAverages 128 ApplyinganExistingTemplate 128

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CONTENTS vii MakingChangestoaTemplate 129 SavingaTemplate 129 TheDefaultTemplate 130 CreatingtheDiamondWorkSpace 131 AbouttheAuthor 135 Index 137

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ix FOREWORD I n1979Iwassittingbetweentwotradersataspecialtybrokeragefirm.Theoneon myleftwasonthephonealldayworkinghiscontactstogetpreopeningsharesin initialpublicofferingswhichhewouldjettisonataprofitshortlyafterthedeals.He solicitedopinionsfromfriendstofigureouthotstockstoride.Hewasalwayslong never short. The guy on my right was a plunger who would identify markets that were extended and then bet huge wads on a reversal. I was there when a reversal didn’tcomeandhewasgone. Sittingacrosstheroomwasalonerwhoquietlyworkedhissystem.Thefriendto my left suggested I meet him so I did. I asked him what he was doing. He said he tradedoptionsandIcouldsitandwatchifIwanted.HisnamewasDickDiamond. MostofthetradersintheroomwerechattybutDickwasquiet.Mostlyhejust watchedthescreenandupdatedhisindicators.Theneverynowandthenhewouldsit up straight and become hyperalert. Then—bam—he would call in a trade. There werenoelectronictradingplatformsbackthen.Hewouldstayonedgeforaperiod oftimemaybeanhourandthencalltoclosethetrade.Thenherelaxedagain. WhenIpressedhimaboutwhathewasdoinghewouldtalkaboutwaitingforthe right‘‘setups’’actingswiftlyandgettingoutwhilemomentumwasstillinhisfavor an absolute must when trading options. He seemed more disciplined than other traders. He wasn’t trying to win a war he was in a bunker taking the occasional shot when his odds of a hit were 80/20. He never changed his tactics never asked other people their opinions and never bet big. Incredibly unlike almost everyone elsehewasalsomakingaverygoodlivingeverysinglemonth. I liked Dick right away because he was a pure technician. He never acted on news he didn’t care about valuation he didn’t try to solicit inside information he didn’t factor in what the economy was doing or the president or the Fed. He just

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FOREWORD x waitedforthemarkettosignalthestartofavolatilemovethenhegrabbedapiece ofittimeandagain.Westruckupafriendshipthat’sstillongoing. Inthemid-1980sDickandItalkedaboutteachinghismethod.Subscriberswere alwaysaskingmeaboutwheretheycouldlearntradingandhewasreadytoshowa few people how he did it. So for several years he taught would-be traders usually aboutfouratatimeinhisLongIslandhome.Theywouldsitwithhimforaweekas he showed them exactly what he did all day. Despite being shown the ropes most students for psychological and other reasons never became as successful as he is. Buteverynowandthenhewouldreportononewho‘‘gotit’’andwasdoingwell. In the 2000s after Dick moved to Florida he set up seminars that would accommodate 20 or more people. Dick was trading futures by then but he never changed his entry and exit methods. He and his partners Roberto Hernandez and Brad Marcus kept to the format of allowing prospective traders to learn what he was doing in real time for a week. Often he would get dumb questions such as ‘‘When you get stopped out why don’t you just reverse your position’’ Dick’s usualanswerwas‘‘That’snotwhatIdo.’’Secretlyhewasthinking‘‘Ifyouwantto losemoneyonsomerandomideagoahead.’’Butoccasionallyanattendeewould adopthismethodandstartwinningmorethanlosing. Inthe1990sIstartedbuggingDickaboutwritingabook.Isaid‘‘Lotsoftrading books are about making killings and getting killed. Yours will be about chopping it out every day not for a thrill but as a business. It will be a first.’’ His wife took up thecause. Many years went by and no book. Dick is not a writer he’s a trader. After a falsestartortwomyfirmputDicktogetherwithseasonededitorKevinCommins with whom we had worked on several projects. Soon the trading book began to takeshape. Andhereitis Ifyou’relookingforcolorful‘‘warstories’’youwon’tgetany.Butifyoureadthis bookyouwillknow—ascloselyasyoucanabsentmathematicalcodification—just whatDickhasbeendoingalltheseyears. Dick’s approach is so conservative that he’s still trading at an age when most peopleareretired.Andhestilldoesn’thaveabossoremployees.Formostpeople tradingproducessleeplessnights.Forhimitproducessteadyincomeatretirement age. What a difference Incredibly this is absolutely not what most traders want. Consciously or unconsciously they want big scores. That’s one reason they end uplosing. AnybodycanadoptDick’smethod.Whetheryoudoisanotherquestion. Butit’s allhereandit’sveryclear. ROBERTPRECHTER September2014

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xi PREFACE I ’ve been around the trading game for over 40 years. I’ve seen a lot of traders comeandgo.Butwhileit’satoughandunforgivinggameitispossibletomakea greatlivingfromtrading.ThekeysasIdiscussthroughoutthisbookareemotional disciplineandriskcontrol. I’ve organized this bookTradingasaBusiness in much the same way that I teach attendees at my seminar. I recount a little bit about my own history as a trader. I discuss the principles that I use to guide my trading and explain the technical indicatorsthatIuse.FinallyIrevealmyfourtradingtemplatesandprovidedozens ofexamplesofhowIusethetemplatestoplacetrades. I would suggest reading the entire book from beginning to end and then returningtoChapter2‘‘EmotionalDiscipline’’Chapter3‘‘PrinciplesofSuccessful Trading’’ and Chapters 5 through 8 which discuss trading with four different templates. After you’ve mastered the material I suggest you set up the trading templates on your computer and begin analyzing the markets every day using the templates. Just as I do in Chapters 5 through 8 you should try to identify 80/20 tradestradesthatwillproduceaprofitfouroutoffivetimes. I have taught many traders and I certainly understand that readers will come to this book with different levels of trading experience and expertise in technical analysis. Many of my most successful students adapted parts of my methods to their preexisting approach and evolved into better traders. Roberto Hernandez a former student who now teaches with me uses his own trading template which incorporates some indicators that I do not use at all. If you’re going to modify the templates or use your own template I would suggest a few things. First and most importantly do not rely on a single indicator or even two indicators. The markets are too complex to be reducible to a single indicator at all times. I advocate using

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PREFACE xii threetofiveindicatorsinatemplateandwaitinguntilalltheindicatorsalignbefore putting on a trade. Second make sure that your template is effective in identifying 80/20 trades. From my experience it’s tough to maintain emotional discipline when your template is wrong almost as much as it is right. Finally read and reread thechaptersontradingprinciplesandmakethempartofyourtradingDNA.Trade smallusetightstopsandcultivateemotionaldiscipline. While it’s fine to modify my templates or create your own templates I believe the majority of traders will be better off using the templates in the book. They are thetemplatesIuseinmyowntradingIknowtheywork. As I discuss in the chapter on emotional discipline it’s essential that you feel confident in your trading strategies and your trading rules. A trader without confidencewillhaveahardtimepullingthetriggerandwillconstantlysecond-guess his/her system and rules. A trader with confidence willconsistently follow his/her tradingsignalswilladheretohis/hertradingrulesandwillacceptwithequanimity the occasional loss. Remember as long as you followed your signals and followed your rules you made a good trade—regardless of whether it produced a profit orloss. My goal in this book is to give you all the tools you need to trade successfully and to trade with confidence. If you study the material here and work hard to implement the strategies and rules in the market there’s no reason you can’t becomeaconsistentlyprofitabletrader.

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xiii ACKNOWLEDGMENTS I would like to thank several people who helped me on my path as a teacher of tradingandassistedmeinthepreparationofthisbook. First and foremost I want to thank my wife Sharie for giving me motivation support and encouragement. Without her I don’t know if I ever would have finishedthebook. Inmanywaysthisbookisanoutgrowthofmytradingseminars.Iwouldliketo thankBradMarcuswhogotmeintoteachinginaclassroomsetting.AfterImoved to Florida many years ago I began to take in one or two students for a week. Brad was one of those students. He loved his week with me and proposed that we start a business in which I would teach a group of students for a week three or four timesayear.Bradwasterrificatorganizationandhewasinstrumentalinmakingthe businesssuccessful. Bob Prechter has been a close friend and business partner for many years. Bob appealedtometobeginteachingpeopletotrade.ForalongtimeIsaidno.Finally we were on vacation together with our families and I told Bob I would try it and see how it worked out. Well when Bob mentioned that I was providing trading sessionsinoneofhiscolumnsthephonerangoffthehook.Rightoffthebatitwas ahugesuccess. SteveSweetapartnerinZanerGrouphasbeenveryhelpfulinassistingstudents withsettinguptradingaccountsandplacingtrades.Ideeplyappreciatehispresence atourtradingseminarsinrecentyears. Kelly Clement of MetaStock has also been very helpful at seminars showing studentshowtocreatetradingtemplatesontheircomputersusingMetaStock.I’ve usedanumberoftradingsoftwarepackagesovertheyearsandIconsiderMetaStock tobethebest.

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ACKNOWLEDGMENTS xiv AfterBradcouldnolongerparticipateintheseminarsduetoothercommitments I began working with Roberto Hernandez. I met Roberto when he attended one of my seminars in 2003. I could tell right away that he was a very bright and very committedtrader.Headaptedmyapproachanddevelopedhisownuniquetemplate. UnlikemeRobertoisalong-termtrader.Attendeesatourseminarsappreciatethe perspective and strategies that Roberto brings and how his approach differs from minewhileatthesametimeconformingtothetradingprinciplesIteach. FinallyIwouldliketothankthemanytradersfromaroundtheworldwhohave attended my seminars over the years. I enjoyed teaching each and every one of you. I hope this book reinforces what you’ve learned and helps you to trade more successfully.

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1 CHAPTER 1 MyLifeasaTrader I became a full-time trader in 1965. Next to marrying my wife it was the best decisionIevermade.ThroughtradingI’veenjoyedfreedomindependenceand prosperity.Ihavenobosstokeephappynoemployeestomanageandnocustomers tosatisfy.Tradinghasgivenmeagreatlife. I work hard but it’s on my own terms. I monitor the U.S. stock market during public trading hours between 9:30 and 4:00 paying particular attention to the morningtimeperiodandthehourorsobeforetheclosewhengoodtradesaremost likelytomaterialize.Myafter-marketanalysistakesonlyabout15minutes.Therest ofmytimeismyown. In recent years I’ve had the pleasure of teaching my trading approach in classes organized by Elliott Wave International a company founded by my good friend Robert Prechter. For four days I talk about trading principles and strategies and conduct live trading. Preparing for the classes and then explaining how I trade to a roomful of people is a great experience. Putting my trading rules and strategies downonslidesandpresentingtoagroupofpeoplereinforcestometheingredients tosuccessfultrading.Teachingabouttradinghasmademeabettertrader. Igetenormoussatisfactionwhenmonthsorevenyearslateranattendeetellsme I helped him/her to become a successful trader. I know for a fact that trading can be taught. But not everyone is willing to put in the time and effort necessary to succeed in this business. People often look for easy answers and of course there aretoomanycharlatansintheindustrypromotingget-rich-quicktradingservicesto thegullible.Thetruthisthereisnosubstituteforhardwork.Whensomeonetakes whatItaughtworksatitandmakesithis/herownandthenconsistentlyappliesit inthemarketI’mthrilled. WiththisbookIhopetosharemyknowledgeandexperiencesabouttradingwith a wider audience and in so doing provide aspiring traders with a path to success.

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MYLIFEASATRADER 2 I hold nothing back here. The techniques and principles in this book are the very same techniques and principles that I use every day in the market. Utilizing this approach I’ve been able to make a nice living for many years. I’m confident that anyone who diligently and faithfully applies the ideas in this book will develop into aconsistentlyprofitabletrader. Firstalittlebitaboutmybackground. I received an undergraduate degree from the Wharton School of Finance and an MBA from the University of Michigan. While the degrees may seem important I didn’t learn anything in college that helped with trading. My father owned seats on both the New York Stock Exchange NYSE and the American Stock Exchange AMEX. He focused on the NYSE seat and rarely used the AMEX seat. Following a stint in the Marines in 1960 I used his AMEX seat and began trading on the AMEXfloor. My job was to fill customer orders on the floor. Once I understood what I was doing I found the work to be mind-numbingly dull. I pestered my father to allow me to trade my own account. I was young and aggressive. I thought I had a feel for howstocksmovedandwassureIcouldmakealotofmoneytradingAMEXstocks. Finallyin1965Igotmyshot. The truth is I didn’t know much about trading although I didn’t realize it at the time. I made progressively more money from 1965 to 1968. My good fortune had less to do with skill and more to do with the competitive advantages I enjoyed and overallmarketconditions.TradingfromtheflooroftheAMEXallowedmetotrade fasterandwithlowercommissionsthanmostotherinvestors.Andmostimportant wewereinthemidstofastrongbullmarketphase. AtthetimetherewerealotofcheapstockssellingontheAMEX.Mystrategy—if you want to call it that—was to watch the order flow and when a big buy order cameinforoneofthesecheapstocksIwouldjumpinandtakeaposition.Iwould usually get out later in the day or sometimes the following day. I would make fractions on many of the trades: one-eighth to maybe three-eighths of a point. The strategygenerallyworkedaslongasthemarketremainedinabullphase.Sometimes astockwouldgoitsownwaythelow-pricedstocksIfavoredhadaweakcorrelation totheoverallmarket.ButevensoIwasdoingwell. Probably as a result of my early success I got into some bad habits. I started holding on to losers for too long thinking they would eventually rally. Most of the timetheydid.Thenonetimetheydidn’t.Itwasadisaster. In late 1968 I had positions in 15 different stocks. I held maybe 15000 or 20000 shares. They were all the kind of low-priced go-go stocks that the AMEX was pushing at the time. Many of the companies no longer exist today. We went on a family vacation and I decided to let the positions ride. I didn’t have stops in placeandIwasn’tevencommittedtocheckingonthepositionswhileIwasaway.It was probably the craziest thing I ever did as a trader. You can probably guess what

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MYLIFEASATRADER 3 happened. The stock market tanked. Two weeks later I had lost 70 percent of my tradingcapital. I was at a crossroads. I sat down with my wife and discussed the situation. We decidedthateitherIwasgoingtodothisrightorIwasgoingtofindanothercareer. Wejokedthatiftradingdidn’tworkoutIwasgoingtodooilchanges.Whatpulled me through was my motivation. I never gave up the goal of becoming a successful trader.Iwasdeterminedtogiveitmybestshot. SlowlyIchangedmyapproach.Italkedtosuccessfultradersanddiscoveredthat manyofthemusedtechnicalanalysis.IreadwhateverbooksIcouldfindontechnical analysisatmylocallibraryandelsewhere.Isubscribedtoaweeklychartingservice and updated the charts by hand every day until the next week’s charts arrived. I began to get a feel for market direction. I started shorting stocks when my analysis indicated stocks were headed lower which is something I had never done before. EventuallyIbecameanacceptableshort-termtrader. I also changed the stocks I traded. Instead of trading low-priced highly volatile ‘‘flier’’ stocks I focused on large-cap stocks that tracked the overall market much moreclosely.FinallyItooksmallpositionsandgotoutquickly.Asaresultmyrisk controlimproveddramatically. Theysayhistorydoesn’trepeatbutitrhymes.Thebullmarketofthe1960swas verysimilarintoneandsubstancetothebullmarketinthe1990s.Inthe1960swe hadtheso-called‘‘niftyfifty’’thatdrovethemarkethigherandhigher.Inthe1990s newly formed Internet companies created massive interest in the market. A lot of traders made money by betting on the long side of the market in both decades. Wheneverythingisgoingupit’snothardtomakemoney. ManyofyouprobablyrememberthattheInternet-fueledbullmarketendedwith aresoundingthudin2001.FromJanuary142000toOctober92002themarket lost 31.5 percent of its value. Suddenly many traders who did well in the 1990s weren’t doing so great anymore. Markets change and when traders don’t change withthemtheylosetheirshirts. The 1960s were similar. From June 1962 to February 1966 the market rose 86 percent. After a sell-off for eight months in 1966 the market took off again rising32percentfromOctober1966toDecember1968.Thenasalwayshappens everythingchanged.FromNovember1968toMay1970themarketfell36percent. That was my Pearl Harbor so to speak. I learned my lesson and was prepared for thenextbearmarket. From 1973 to 1975 the Dow lost 45 percent of its value. By this time I was comfortable shorting stocks and keeping my bets small. I didn’t get attached to losershopingtheywouldcomeback.Ihadbeguntolearnoneofthemostimportant componentstosuccessfultrading:emotionalcontrol. Flexibility is important in trading just as it is in life. It’s good to take advantage of new opportunities that arise. In 1975 the Chicago Board Options Exchange

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MYLIFEASATRADER 4 introduced options on stocks. After studying how options worked I decided to incorporate them in my trading. At that time they gave me leverage that I found useful for my short-term low-risk trading strategies. Nowadays I primarily use optionswhenIsenseabigmoveisafoot. The Chicago Mercantile Exchange CME introduced futures on the Standard Poor’sSPindexin1980.Thenin1997theCMEbegantradingE-minifutures which were a scaled-down version of the SP futures contract. Trading volume on the E-minis soared and they quickly became my preferred day-trading vehicle. I cangetinandoutoftheE-minisquicklyandefficientlyandIcanutilizethemargin available on the E-minis without any complication. They are a great tool for day trading. Theadventofpersonalcomputerselectronictradingandreducedcommissions significantly leveled the playing field for independent traders in the 1990s—myself included. With a mouse click you’re in or out of a trade. Compare that to the old days of calling in an order on the telephone. Despite this amazing advancement in thespeedofexecutionIhearpeoplecomplainthatbiginstitutionaltradersmaybe able to execute trades a microsecond faster than an independent trader. Speaking for myself this is not a problem. I get excellent fills on my trades. And I’m not tradinghugesize. I don’t see a dramatic difference between the price movements in the market today and when I first started in the business. Support and resistance momentum divergence cycles chart patterns—they all function in much the same way now as they did in the 1960s. No one indicator is perfect. But combining indicators intelligentlyallowsyoutoreadthemarketandidentifysituationswheretheoddsare heavilyinyourfavor.Despitewhatyoumightreadelsewhereabouthowcomputers haveruinedthestockmarketthereisanopportunityforindependenttraders. Market conditions always evolve. After the Internet bubble the market veered sideways to slightly down until 2003. We had a weak bull market from 2003 to 2007. Then from 2007 to 2009 we experienced the worst bear market since the 1930s. Starting in early 2009 the market rallied making up all of the gains lost in the previous bear market. As I write this the bull market continues although it sometimesappearsitislosingsteamandacorrection—ornewmarketphase—may beimminent. Although I’m primarily a day trader I try to understand big-picture market conditions. I’m always aware of the major and secondary trends. That said I keep my bias as slight as possible going into any given trading day. A bias is just that: a sensethatthemarketismorelikelytotrendinaparticulardirectiononaparticular daybutitisnotanironcladopinion.Sometimesmybiasiswrong.Andsometimes thingshappenoutsidethemarketthatcompletelychangethecomplexionoftheday. Istayflexibleandadjustmyanalysisinrealtimeinresponsetomarketaction.

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MYLIFEASATRADER 5 Idon’tpaytoomuchattentiontotheopinionsofothertradersormarketanalysts. I do my own homework do my own real-time analysis and do my own trading. I think it’s important to be self-reliant in this business. Yes you can learn from other traders. But you have to integrate what you learn into your own process of analyzing the market identifying good trades and executing those trades. If you want to succeed in this business you have to learn how to trade for yourself—no oneelsecandoitforyou. Aftermybiglossin1969thechangesImadetomytradingenabledmetoadjust to the changing market climates over the next five decades. I go long or short in response to opportunities. I don’t force trades. I wait for high-probability trades. AndIstayflexiblewhichhasallowedmetomakemoneyevenwhenmylong-term andmedium-termanalysiswasoffthemark. The biggest change I’ve made from when I started trading in the 1960s is my attitude toward risk. As I mentioned when I first started trading I went after the marketlikeatigerstalkingitsprey.Nomore.Inowconsidermyselfa‘‘scaredy-cat.’’ I respect the market: It will go where it goes and I believe there’s no one in the worldwhocanconsistentlypredictthemarket’sdirection.Ihavemytemplatesfor identifying high-probability trades. But if the trades don’t work out quickly I’m out.AndwhentheydogoinmydirectionIgrabmyprofits. Imarvelatsomeofthebighedge-fundoperatorsIreadaboutinthefinancialpress whomakehugebetsononeparticularidea.Sometimestheyhitthejackpot.Irecall oneexamplewhereatraderforesawthehousingcrashandshortedmortgage-backed securitiesandotherhousing-relatedinstruments.Igatherhemadehundredsofmil- lionsforhisfund.Iunderstoodhissubsequentbets—longgoldandshorttheChinese stock market—were far less successful. I don’t mean to diminish this individual. Obviouslythisapproachworksforsomepeople.It’sjustnotthewayIoperate. ■ Trading as a Business Ilookattradingasalong-termmoney-makingbusiness.I’mnotlookingforthebig scoreorevenaseriesofbigscores.Iwanttostayaroundforthelonghaul.Myfirst priorityistoavoidlosingmoney.Mysecondpriorityistocapitalizeonthemarket’s short-termswingstoekeoutconsistentprofits.SureIhavelosingdays.ButIrarely havealosingweek.AndIhaven’thadalosingmonthinyears. ThekeytowhatIdoistowaitforhigh-probabilitysituations—whatIcall80/20 trades. I define my 80/20 setups patiently wait for them to develop and then act decisively. I anticipate trades. And once the setup materializes I pull the trigger. I don’t force the issue but I don’t overanalyze either. Some days I make no trades atallotherdaysImakefourorfivetrades.Itakewhatthemarketgivesme.

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MYLIFEASATRADER 6 The mind-set I try to cultivate through all this is quiet confidence. Without confidence it’s very difficult to trade. To me quiet confidence is a function of emotionalcontrolfaithinmymethodsandfollowingmytradingrules.Iunderstand andacceptthatsometradeswillbelosers.Idonotacceptviolatingmytradingrules. I will go into all these matters in more depth in later chapters. For now I want to underscore that with the proper trading principles and technical analysis tools you can learn how to consistently make money in up and down markets. You can maketradingyourbusiness. Trading has many advantages over other businesses you might contemplate startingforexample: ■ You choose what you want to trade when to trade it and in any amount you wish. ■ Youhavenocustomerstokeephappy. ■ Youhavenoemployeestokeephappy. ■ Youhavenoproducttomaketoadvertiseortosell. ■ Youhavenothingtostore. ■ You have no invoices to send out no accounts payable no accounts receivables andnobadchecks. ■ Buyersandsellersareimmediatelyavailablewhenyouwanttotransactatrade. ■ Youaloneareresponsibleforthesuccessofyourbusiness. ■ Youcanscaleuporscaledownthebusinessatyourdiscretion. ■ Youcantradefromanywhere. In the pages that follow I discuss trading principles rules and 80/20 trades. I explain the indicators I use how I set up my computer screen and the precise alignment of indicators I look for to put on a trade. I discuss money management markets to trade and how I use options to complement my core strategies. Most important I emphasize emotional control. If you let emotions intrude on your tradingdecisionsthere’snowayyoucansucceedatthisgame. I understand that it’s not possible for everyone to day trade. You may have a full-timejobandcan’ttradeduringthedayasIdo.Oryoumaynotwanttolookat acomputerscreenthroughouttheday.That’sfine.Youcanadjustmyindicatorsto longertimeframesandsetslightlylargerstop-losslevelsandprofittargets.Youcan doyouranalysisatnightandplaceyourorderspriortothemarketopen. Many traders who come to my classes already have developed a method for analyzingthemarketandidentifyingtrades.Sometimestheyjustneedtolearnmore abouttradingprinciplesortacticstobecomesuccessful.ForexamplewhileIdon’t

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MYLIFEASATRADER 7 useElliottWaveI’veknownmanytraderswhodoandtheyhavetoldmethatmy classeshelpedthemtobecomebettertraders. While I trade the E-mini futures you may want to trade individual stocks exchange-tradedfundscommoditiesorcurrencies.Mysetupsworkinallmarkets. Whatever you trade however make sure there is sufficient liquidity to get in and out of the market efficiently. Later in the book I will discuss how I use options. Options can enhance your trading but there are some popular options strategies thatarebesttoavoid. Myconvictionisthatwithproperknowledgeeffortanddisciplinemostpeople attracted to trading can become successful. I hope this book illuminates the path to successintrading.Therestisuptoyou.

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9 CHAPTER 2 Emotional Discipline T hecenterpieceofmytradingistheidentificationandproperexecutionofwhat I call 80/20 trades. I define 80/20 trades as setups that historically have been profitableabout80percentofthetime.Idon’ttrade60/40situations.AndIdon’t trade situations where I have a feeling that market is going to go in a particular directionifmyfeelingisnotcorroboratedbyoneofmy80/20setups. Ispentyearsexperimentingwithvarioustechnicalindicatorsandcombiningthem in different ways to create the best possible trading setups. Some of the technical indicatorsIusearefairlycommonsuchasmovingaverageconvergence-divergence MACDorstochastics.OthersarealittlemoreesotericsuchastheWalterBressert indicator andtheRahulMohindar oscillatorRMO.Iusethembecause theywork intrading.I’mapragmatistnotatheoretician. I look for all my indicators on any particular template to be pointing in the samedirectionbeforeputtingonatrade.Thatmeanswaitingpatientlyfortheright situation to emerge and passing up many situations that do not completely match my criteria. It’s perfectly acceptable to miss a trade. There will always be new opportunities. What you don’t want to do is force the action and get into 60/40 tradesoutofgreedboredomorsomeotheremotionalmotivation.Youmustavoid 60/40tradesatallcosts If you want to exactly replicate my trading screen you’ll need to subscribe to the MetaStock service. I’ve used a few other software programs in my career but in my opinion MetaStock is the best. Of course you may like another software system and choose to continue with it. You should know however that while most of my indicators are on other services only MetaStock has the Bressert and

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EMOTIONALDISCIPLINE 10 RMOindicators.IntheappendixI’veincludedasectionwrittenbyKellyClement ofMetaStockthatdescribeshowtosetupmytemplatesviaMetaStock. Once you have the templates on your computer I suggest monitoring how they respond in real markets for at least four weeks. It’s one thing for me to assert that these setups work. It’s another thing—and much more important—for you to be convincedthatyoucanmakethesetupsworkforyou. You may want to paper trade for a period of time. You can gain experience and the feel of putting on trades placing stops moving stops and exiting trades. Monitor your results closely and when you feel you’ve reached a good level of proficiencyandyourresultsaresatisfactoryyoucanbegintradingwithrealmoney. You always want to use stops—even in paper trading. Put a stop in with your initial order and move the stop in the direction of the trade as the trade becomes profitable. That’s what I do. Never take for granted risk control and don’t let a profit turn into a loss. Markets can change in an instant and you should always protectyourposition. I trade on two-minute charts. I usually set my initial stop two ticks away from entry price. As the price moves in my favor I’ll push the stop higher or lower to protect my position. If the market doesn’t move fast enough I may liquidate the tradebeforeithitsmyprotectivestop.It’sbettertobreakeventhantakeatwo-tick loss.Myinitialgoalisnottolosemoney. When I enter an 80/20 trade on a two-minute chart I expect the market will move quickly in the direction of the trade. I’m looking for a free ride. If the ride doesn’tcomequicklyI’llgetout. Mytemplatesworkonlongertimeframestoo.Youmaynotbeabletomonitor the market throughout the day or you may simply prefer to trade on a different timeframe.That’sfine.Youcanadjustthebarsto3060120minutes—whatever time frame you prefer. As you move out to a longer time frame remember two things: 1 you’ll need to set wider stops perhaps six to eight ticks and 2 you’ll needtoholdontoyourtradesforalongerperiodoftime. Apart from any time frame adjustment I would advise sticking with the settings I use on the indicators and templates. If you want to tweak an indicator to see how itrespondstoadifferentsettingthat’sOK.Itmaygiveyousomevaluableinsights. However you don’t want to constantly change the settings. The worst thing you candoistochangethesettingsfollowingeverytradethatdoesn’twork. About one in five or six 80/20 trades identified by my templates doesn’t work out. That’s acceptable because if you execute the templates consistently you will makemoney.Thetemplatesenableyoutoidentifysituationswherethepercentages are in our favor and execute trades in a disciplined and consistent manner. If you keep changing your indicators you’ll undermine your confidence and without confidenceit’sdifficulttotrade.

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EMOTIONALDISCIPLINE 11 Everything in trading is connected: trade setups money management and emotional discipline. To be profitable you need both high-percentage trade setups and good money management tactics. And to execute 80/20 trades and adhere to sound money management principles you need to be emotionally disciplined. All threeelementsarerequiredtobeasuccessfultrader. ■ Why Traders Fail Themostimportantcomponenttosuccessfultradingcanbedescribedintwowords: emotional discipline. You must develop the ability to patiently wait for a tradable situationtodevelopandthenwhenit’sinfrontofyouexecutethetrade.Itsounds simple but believe me the lack of emotional discipline is the number one reason thattradersfail. Sometraderstendtoforcetradeswhentheoddsarenotintheirfavor.Othershave difficultypullingthetriggerwhenagoodtradepresentsitself.Onthebackendsome tradersholdontotradestoolong.Asaresultlossesfrequentlybecomebiggerand profitsfrequentlybecomesmaller.Theseareallproblemsofemotionaldiscipline. As I transformed myself from a losing trader to a winning trader it became apparent to me that emotional discipline was my key to success. Sure I had developed a process for analyzing the market and identifying good trades and that was a big challenge. But emotional discipline proved to be a much more difficult skilltomaster. Regardless of whether you’re a short-term trader like me or a long-term trend traderemotionaldisciplineiscentraltosuccess.Oneofthemostfamouslong-term trend traders of all time is Richard Dennis. Like me he believes the emotional and psychological factors are more important than market analysis in determining successorfailure. ‘‘The key is consistency and discipline’’ Dennis said in the bookMarketWizards. ‘‘Almost anybody can make up a list of rules that are 80 as good as we taught. Whattheycan’tdoisgivepeopleconfidencetosticktothoseevenwhenthingsare goingbad.’’ Dennisbelievedtradingcouldbetaught.Asanexperimentherecruited23traders from a large pool of applicants and taught them a trend-following strategy money managementtechniquesandgavethemcapitaltotrade.Whilesomeofthemfailed a significant number were highly profitable. The experience reinforced Dennis’ conviction that discipline is the most important component of trading. The traders whomostcloselyfollowedthesystemandmoneymanagementruleswerethemost successful. The trading system that Richard Dennis taught has been public knowledge for years. Similarly Warren Buffett’s method for buying and selling stocks is well

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EMOTIONALDISCIPLINE 12 known. In addition Buffett’s stock holdings are fully disclosed and easily available. Yet very few investors and very few traders come anywhere near the performance ofDennisandBuffett. Sometimes it strikes me that trading is similar to weight loss. Knowledge is not the problem. Everyone knows that to lose weight you need to burn more calories than you consume. If you eat the right foods in the right amounts and exercise consistently you’ll lose weight. It’s as simple as that. Yet there are hundreds of booksondietingandanentireindustrydevotedtohelpingpeopleloseweight.Just as in trading in weight loss the critical factor is emotional discipline. You have to dotherightthingconsistentlyevenifitfeelsuncomfortable. ForacompleteunderstandingofthetopicIrecommendabookentitledEmotional DisciplinebyCharlesManzBerrett-Koehler2003.Inessencethebooktalksabout a process to identify understand and reframe your emotions. I think the process canbeagreathelptotraderswhohavetroubletradinginanobjectiverationaland disciplinedmanner. ■ Core Position and 80/20 Trades WhileIbelieveemotionaldisciplineisthemostimportantfactorintradingsuccess you also need a method to identify profitable trades and sufficient capital to trade. Later in the book I provide the templates I use to identify high-probability trades. In regard to capital determining and adhering to your core position is an absolute necessitytosucceedoverthelonghaul. A core position is the trading size that you can execute in the market without becoming emotional. Sure you enter into every trade intending it to be a winner. But when a trade doesn’t work out you should be able to exit with a small loss and without any emotional pain. Similarly when a trade works in your favor you shouldbeabletograbyourprofitsattherighttime.Youshouldn’tholdontoolong outofgreedorexittooearlyoutoffear. Mycorepositionisverysmallrelativetomyaccountsize.Mymaximumposition is10E-miniswhichisequivalenttotwoStandardPoor’sSPfuturescontracts. IoftenscaleintopositionswherebyIbuy/sellmaybe5E-minisinitially.Butevenif theinitialpositionisveryprofitableIwillnotexceedmycorepositionof10E-minis inbuildingoutthetrade.Isimplydon’ttradeovermycoreposition. You need to find a position size where you’re not overwhelmed with feelings of hopefearandgreed.Ifyouonlyhaveafewthousanddollarstotradetheposition might be a few hundred dollars of individual stocks. That’s fine. Once you identify and adhere to a core position from which you can trade with emotional discipline you’reonthewaytolong-termsuccess.

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EMOTIONALDISCIPLINE 13 ■ The Emotions of Trading The feeling you want to cultivate in trading is quiet confidence and self-control. When you begin trading you need to base your confidence on knowledge that you can identify high-probability trades and you can follow the trading rules. You need totradesmall.Asyougainexperienceyourconfidencewillgrow.Youmaybeable toincreasethesizeofyourcoreposition.Butbecareful.Manytradersafterastring of good trades get cocky and take on too much risk. Trust me—the market is a mercilessteacher. Greed The object of trading is to make money. However to make money you have to focus on finding good trades and executing according to your trading rules. If you focus too much on the money you very well may lose sight of the trading process thatgenerateslong-termsuccess. Initsmostblatantformgreedleadstraderstotaketoomuchriskoverridetheir systems and hold on to losing trades too long. A trader who is thinking about an expensivecaroranoceanfrontvacationhomeissettinghimselfupforbigproblems. Banishthatkindofthinkingandimageryfromyourmind. Greed can be subtle too. It can creep into your trading at any point in your career. If you’re on a hot streak you may be tempted to trade too large or stay in tradestoolong.Oryoumaystarttakinglessertradeswhenyouhaveafeelingabout themarketdirectioneventhoughthefeelingisnotcorroboratedbyyoursignals. Sometraderssetprofitobjectives.Ithinkthisisamistake.Whatareyougoingto doonthelasttradingdayofthemonthifyouare10percentshortofyourmonthly profittargetThenaturalinclinationistotrademoreaggressivelytohityourtarget. Todosoyoumightoverrideyoursignalsandbreakyourrules. Rememberyoucanonlytradewhatthemarketgivesyou.Therewillbeperiods with many trading opportunities and periods when there are few chances to make money.Focusonthemarketyoursignalsandyourrules.Themoneywilltakecare ofitself. Fear It’s very difficult to trade when you’re anxious and nervous. Not only is anxiety an uncomfortablefeelingitactuallyworsensperformance.Afearfultraderanticipates failure. When you’re wracked by fear it’s difficult to objectively interpret market activity and to follow your trading rules. You have trouble assessing opportunities andpullingthetrigger.You’repronetoparalysisbyanalysis.

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EMOTIONALDISCIPLINE 14 From my personal experiences and knowledge of other traders fear can have manycauses: ■ Lackofconfidenceinyourtradeselectioncriteria. ■ Lackofconfidenceinyourtradingrules. ■ Undercapitalization. ■ Fearoflosingmoney. ■ Fearoffailure. Firstit’simportanttoacknowledgethattradingisnoteasy.Noonecanforecast where markets will go. All you can do is search for tradable situations and execute yourtradesinadisciplinedfashion.Giventhechallengesoftradingahealthyrespect for the markets is certainly warranted. However you can’t let respect grow into fear.Youcan’tletyourselfbecomeimmobilized. Oneofmygoalsinthisbookistoprovideyouwithhigh-probabilitytradesetups andasetoftradingrulesthathaveworkedformeformanyyears.Youneedtostudy the setups get the proper indicators on your computer and monitor the markets untilyoucanconsistentlyidentifythe80/20trades.Atthesametimeyouneedto ingraintherulesoftradingdiscussedthroughoutthisbook.Onceyouhavemastered both the setups and the rules you’re ready to begin trading. Then as you execute correctlyinlivemarketsyouwilldevelopconfidence. Fearoflosingmoneyandhavinginsufficientcapitaltotradegohand-in-hand.You need to have enough trading capital and then trade in a size that won’t lead you to become overly emotional. If you’re counting how much money you’re winning or losing with every tick you need to reduce your trading size. You have to trade the marketandyourindicatorsnotthemoney. Economists who have studied investor behavior have discovered that for most peoplethepainoflosingmoneyisgreaterthanthepleasureinmakingmoney.They call this loss aversion. For traders loss aversion can lead to paralysis. You become unwillingtotakeatradebecausethere’sapossibilityoflosingmoney. Asatraderyouneedtoacceptthatlossesarepartofthegame.Everytradeyou make has the potential to be a loser. If you adhere to a sound method and sound trading rules you will win over time. As long as your trading process is correct youshouldn’tallowyourselftobebotheredbylosingtrades.Youjusthavetokeep yourlossessmall. Fear of failure is similar but slightly different than the fear of losing money. The trader who is afraid of failure typically spends an enormous amount of time and energy on analyzing markets and creating and testing trading systems. This type of trader is afraid that his or her intellectual understanding of the markets will be provenwrongifheactuallytradesonthebasisofhisanalysis.Forthistypeoftrader

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EMOTIONALDISCIPLINE 15 the market is more of a fascinating intellectual puzzle than a playing field where moneycanbemadebyskillfultrading. Therearemanyintelligentandperceptivepeoplewhocloselyfollowthefinancial markets.Someofthemwritenewslettersandprovideanalysisonbehalfofbrokerage firms. Surprisingly a significant number of these people do not trade on the basis of their own analytical work. To trade and fail would undermine the value of their work—atleastintheirownminds.Fearoffailurekeepsthemonthesidelines. Impatience A trader who tries to make money too quickly by overtrading or who desperately wants to be in the market to feel the excitement of the game is destined to lose in thelongrun.Youhavetohavethepatiencetochooseyourspots.TherearedaysIsit infrontofmycomputeranddonotmakeatrade.Nowitisn’tasthoughI’mdoing nothing. I’m monitoring the market and waiting for a tradable situation. If a good situationdoesn’tmaterializeIstayonthesidelines.Patienceisavirtueintrading. Similarlyyourlong-termgoalsintradingshouldberealistic.Banishthethought of getting rich quickly through trading. You should strive to diligently follow your trading rules and trade only high-probability setups. The money will follow. Remembertheturtlewinstherace. ■ The Importance of Commitment Most people do not succeed as traders due to a lack of emotional discipline. While followingyourtradingrulesandtradingwell-definedsetupsmaysoundeasyenough therealityisthatfollowingtheseprinciplesinlivemarketswithrealmoneyatstake is always challenging. You’re going to have successes and you’re going to have failures.Themostimportantthingistoalwayslimityourriskandremainconsistent intheapplicationoftradingrulesandthesituationsyouchoosetotrade. Aswithanyworthwhileendeavorcommitmentisnecessaryforlong-termsuccess intrading.Youcan’tbecomeaprofitabletraderwithahalf-heartedeffort.Youneed to fully commit intellectually financially and emotionally. Above all else commit yourselftoemotionaldiscipline.

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17 CHAPTER 3 Principlesof SuccessfulTrading A s we’ve discussed trading can be a great business. However the majority of people who trade fail to make money consistently. In this chapter we’ll discuss trading principles that are the foundation of my trading. I urge you to read and reread this section. You must understand and apply these principles in your trading to succeed. I can’t stress this enough: The implementation of these principles in your day-to-day trading will allow you to develop emotional discipline. And only with emotional discipline can you becomeasuccessfullong-termindependenttrader. ■ TradewithinYourCapital In trading everyone makes mistakes. Even the best most experienced traders occasionally misread the market. In addition you may do everything right on a trade but something happens out of the blue that causes the market to reverse direction.Eitheroccurrence—amarketmisreadoranout-of-the-blueevent—will result in a losing trade. Losing trades are part of the business. They happen to everyoneandtheywillhappentoyou.Thatbeingthecaseyoualwayswanttolose small. To lose small you must trade small relative to your overall capital. If you have a 20000 account you don’t want to risk 2000 on a single trade. It’s too much of a hit to take given your overall capital. A small series of 2000 losses is going

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PRINCIPLESOFSUCCESSFULTRADING 18 todestroyyourconfidenceandlikelywillcauseyoutostoptradingentirelyortake toomuchriskonanall-or-nothingtradeinhopesofrecoupingyourlosses.Tostay inthemarketforthelonghaulyouneedtotradesmall. I’ve often seen traders increase the size of their trades following a series of winningtrades.Thinkaboutthelogicofthatforamoment.It’saxiomaticthatlosing tradesareinevitable.Afteraseriesofwinningtradesdoyouthinkalosingtradeor series of losing trades is more or less likely In my experience a winning streak is usuallyfollowedbyalosingperiodoratleastafewlosingtrades.Ifyouincreasethe sizeofyourtradesyou’relikelytogiveeverythingbackandthensome. Beginning traders often come into the market with unrealistic ambitions. They think they will consistently make money continually raise the size of their trades as their account grows and within a short period of time they’ll amass a small fortune. A more realistic goal for a beginning trader is to learn the business while makingmodestprofitsandtakingsmalllosses.Firstyoulearntosurvive.Thenyou learn to thrive. Yes you can grow your account and at some point increase your size.ButyouhavetogoafteritlikeaturtlenotlikeaFerrari. There is another element to trading small. Every trader has a position size that he/she cannot exceed without endangering his or her emotional discipline. I call it my core position. Although I can trade much larger my core position is 10 E-mini contractswhichisequivalenttotwoStandardPoor’sSPcontracts.Thisismy maximumposition.IfItradelargerI’llbegintolosemyemotionaldiscipline. Youneedtofindapositionsizethatallowsyoutoexecuteyourtradesobjectively unemotionallyandconsistently.Itmaybemuchsmallerthanwhatyou’recurrently contemplating. It might be 10 shares of a 100 stock. That’s fine. As you get comfortable you can increase your position size—within reason. The point is that you never want to trade at a size where the emotions of hope greed and fear overwhelmyourrationalmindandobjectivedecision-makingprocess. Thebusinessoftradingisallaboutcontrollingemotions.Youshouldnotfightthe marketorothertraders.Youshouldnotfightyourself.Youneedtokeepgreedand fearlowanddisciplinehigh.Hopeisagreatemotioninotheraspectsoflifebutnot intrading.Findyourcorepositionandstickwithit. ■ QuietConfidence Of course weare emotional creatures and we can’t completely stripemotions out oftrading.ThefeelingthatIrecommendyoucultivateisquietconfidence. Quietconfidencecomesfromfollowingyourtradingrulesandfaithfullyexecuting high-probability trades. It comes from trading within your capital and exercising emotional discipline. And it comes from the knowledge that if you do the right thingsintradinggoodresultswillfollow. Whenyouhavequietconfidenceyouareincompletecontrolofyourtrades.

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PRINCIPLESOFSUCCESSFULTRADING 19 At a gambling casino you have less than a 50/50 chance of winning. The odds alwaysfavorthehouse.I’vereadthataplayer’soddsinmostLasVegasestablishments areabout46/54.Whatthatmeansisthatonceyou’verolledyourdiceatthecraps table you’re committed to a bet where the odds are stacked against you and you can’tdoadarnthingaboutit.Youneverwanttodothatintrading. In trading—at least the way I go about it—you never really let go of the dice. You wait for the high-probability trade to materialize. You make the trade. You monitor the position. Depending on market action you get out of the trade with either a profit or at worst a small loss. In a sense you never really let go of the diceinthistypeoftrading.Youremainincontrolthroughouttheprocess. When you lack confidence you can’t win. The quickest way to lose your confidenceistoviolateoneofyourtradingrules.It’sOKtomakeanincorrectcall on the market. But it is not OK to violate a trading rule. Once you start making excusesforviolatingyourrulestheentirefoundationofyourtradingwillcrumble andyou’llbebacktosquareone. Youaremostvulnerabletobreakingyourrulesfollowingastringofgoodtrades. For a period of time in the late 1970s and early 1980s I found myself doing much better than normal. I attributed my improved results to better trading on my part. ThinkingthatIhadnowreachedahigherleveloftradingproficiencyIincreasedmy trading size. I remember getting emotional and little greedy. Then the inevitable happened.ThemarketwentagainstmeandItookabighit.Lessonlearned. If you are making more money than usual it’s probably because the market conditions are creating more trading opportunities not because you’re a better trader. When you’re doing well refocus your energy on following your trading rules and avoid thinking about money. Don’t let quiet confidence develop into overconfidence. Similarlyconfidenceshouldnotcauseyoutobecometoocommittedtoamarket view. Market conditions can change several times during an active day. A trader needs to be pliable and adjust his/her viewpoint in concert with changing market conditions.Youcan’tthinkthatyouknowbetterthaneveryoneelseandyouknow better than the market. That’s not confidence—that’s arrogance. And arrogant tradersneverwin. When you arequietly confident you can trade without beating yourself up over setbacksorgettingtoohighaftersuccesses.Assumingyouhaveagoodtradingprocess inplaceyoushouldtradethesameregardlessofyourrecentresults.Don’tbecome more aggressive and don’t become more cautious following success or failure. Don’tdwellonthepast.Focusonthenowandthenexttradethat’sinfrontofyou. ■ SellTooSoonNotTooLate I’manin-and-outtrader.Ifocusonshort-termsituationswhereIhavean80percent chanceofwinning.OnatypicaldayImakethreeorfourtrades.Givenmystyleit’s

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PRINCIPLESOFSUCCESSFULTRADING 20 importantformetograbaquickprofitorliquidateatradeifitdoesn’tmoveinmy favor.Iexitquickly. Good traders don’t worry about missing a chunk of a big move. They take their profits without regrets. They know they can always get back into the market. In a sensethey’recontentwithtakingapieceofthepieandcomingbackforseconds. In trading everyone agrees that you should cut your losses. However you sometimeshearorreadthatyoushould‘‘letyourprofitsrun.’’Theideaisthatyou wait until the move is exhausted before selling. I don’t agree with this tactic at all. Here’swhy: It’s a rare event for a market to make a move early in the morning and then continue in that direction the entire day. Typically there are pullbacks or small consolidationpointsalongtheway.Sometimesthemarketreversessometimesthe trend continues and sometimes the market transitions into a trading range. The patternsareendless.Thetraderwhohadthemind-setoflettinghis/herprofitsrunis inessencehopingforanunusualmarketstructure:atrenddaythatmovesstrongly inonedirectionandneverlooksback.Thosedayshappenbuttheyareararity. In most circumstances if you ‘‘let your profits run’’ you’ll end up waiting too longandsellingafteraprotractedpullback.You’relikelytogivebackagoodportion ofyourprofitsonthetrade.Moreoverbyoverstayingthetradeyoumaymissout on the next trade. The pullback where you exited may be setting up for another 80/20trade. Thebesttimetoselliswhenthemomentumisinyourfavor.Youseethe80/20 trade. You get in. The market moves in your direction and you have a nice profit onthetrade.Takeit.Getoutandgetreadyforthenexttrade.Dothisthreeorfour timesadayandyou’llendupwinningmostdaysandnearlyeveryweek.That’show alotofprofessionaltradersmakealiving. Youneverwanttofindyourselfwishingorhopingforthemarkettodosomething. Youwanttoremainincontrolofthetradeandincontrolofyouremotions.Winners come into a trade for a quick profit. If it doesn’t work out they get out. Losing tradersholdontohope.Andifthetradedoesn’tworkforthemtheirhopeusually turnstoregretordespairoverlosingmoney.That’snotapathtolong-termtrading success. As you gain experience in the market you’ll get a better sense of market action and the right time to get out. There will be times when you catch a trade just right and the momentum is very strong in your favor. In those cases you can hold on a little longer than usual. In other cases where the market doesn’t move much at all afterputtingonatradeyoumightelecttogetoutearlierwithmaybeascratchora smallprofit. Youalwayswanttocontrolyourtrade.Ifyouhavedoubtaboutatradegetoutof itrightawayandstayoutuntilthesituationbecomesclearertoyou.Youalwayswant

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PRINCIPLESOFSUCCESSFULTRADING 21 to strive for an objective appraisal of the market and unemotional trade execution. Hopedoubtfearandgreedareenemiesofgoodtrading. ■ TakePersonalResponsibilityforYourTrading Youaloneareresponsibleforyourresultsintrading.Yougettopickhowtotrade whattotradeandwhentotrade.Youarethereasonyousucceedorfailintrading. Asuresignofabadtraderisonewhoplacesblameonfactorsotherthanhimselffor hisresults. Badtraderscancomeupwithavarietyofexcusesforalosingtrade: ■ Igotabadtip. ■ Theproswentgunningforstops—andtheygotmine. ■ Mybrokergavemeabadfill. ■ Mycomputercrashed. ■ Thepricequotesweredelayed. ■ Iwasinterruptedordistracted. ■ Anewseventcausedthemarkettoreverse. ■ Andonandon. Againlossesareinevitableintrading.Youneedtolearntohandlethemwithout getting down on yourself or blaming an external factor. While it’s fine to analyze a losing trade to understand what went wrong don’t dwell on it. Don’t dwell on winnerseither.Getbacktothemarketandgetreadyforthenexttrade. I make about 15 trades on the average week. I expect about 12 of them to be profitable.Somewillbemarginallyprofitableandsomewillbeveryprofitable.The lossesonthelosingtradeswillbesmall.AttheendoftheweekI’malmostalways in the black. That said I do have losing days. That’s acceptable. If I have a losing week which is very rare I examine what I’ve done to see if some bad habits have creptintoanyaspectofmytrading.Abadmonthiscompletelyunacceptable. ■ Waitfor80/20Trades As I’ve said the heart of my approach is to trade high-probability setups which I defineastradesthathavean80percentchanceofwinning.Ihavecreatedtemplates which I sharein laterchaptersto recognize these trades.The keyfor me isto wait patientlyforthehigh-probabilitytradetomaterializebeforeputtingonatrade.

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PRINCIPLESOFSUCCESSFULTRADING 22 Therewillbemanytimeswhenyouhaveastrongfeelingthatthemarketisgoing to move in a particular direction. Maybe the market has broken out from a trading rangeandlooksreadytogohigher.Ormaybeanupmovehasrunoutofsteamand the market is turning the other way. These types of situations happen all the time and it’snaturalasan observer of marketaction thatyou get asense of themarket’s next move. However—and I can’t emphasize this enough—do not trade on these feelingsuntiltheyarecorroboratedbythe80/20tradingtemplate. IliketosayI’ma‘‘soreloser.’’Idonottrade60/40situationsandyoushouldn’t either. At the end of the day the profit margins are too small to make these trades worthwhile.Andwhenyoulose40percentofthetimeyou’remorepronetolosing streakslosingdaysandlosingweeks.Alsowhenyourlossrateis40percentyou aremorelikelytosecond-guessyoursignalsandhavedifficultypullingthetrigger. It’s OK to stay on the sidelines when the market is giving you mixed signals. I trade the market by my own set of rules. If the current market action doesn’t give methekindofopportunityIdemandthenIdon’tplay. ■ PlayGreatDefense Agoodtraderismorefocusedoncontrollingriskthanmaximizingprofit.Heorshe doesthisbyaccomplishingthefollowing: ■ Controllingemotionssothatfearandgreeddonotunderminethedecision-making process ■ Gettingoutoflosingtradesquickly ■ Followingthetradingrules ■ Tradingsmallrelativetothesizeofhis/hercapital. It’sveryimportanttogetoutofbadtradesquickly.Alwayskeepinmindthatthe marketcontinuallypresentsnewopportunities.Ifyouoverstayabadtradechances are you’ll miss the next good opportunity. Similarly when a trade is working for youdon’tinflatethepotentialprofits.Don’texpect toomuchfromasingletrade. Take your profits while they are ripe on the vine—when the momentum is still in yourfavor. Everybody has good days in this business. And everybody has bad days too. By thinkingdefensivelyallthetimeyoucanlimitthedamagedoneonbaddays.When youhandlebaddayswellyouareonyourwaytobecomingagoodtrader. ■ PulltheTrigger Tradingisnotfortheweak-minded.Youneedtodothenecessarybackgroundwork before the market opens and you need to have your trading templates in place.

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PRINCIPLESOFSUCCESSFULTRADING 23 Youneedtomonitorthemarketandanticipate80/20situations.Andoncethesitua- tionpresentsitselfyouhavetobedecisive.Tradingwellrequiresasenseofurgency. Don’t fall victim to the ‘‘paralysis of analysis.’’ You have to act when the opportunitypresentsitself.Ifyougetabuyorsellsignalonthetemplatethenmake thetrade.Generallyspeakingthebettertheopportunitytheshorterthetimeitwill beavailable.Therearemanygoodtradersinthemarket.Whenagreatopportunity materializes many of these traders will recognize the situation and act on it. As a resultthemarketwillmovequicklyanddecisivelyinonedirection.Ifyouwaittoo longtoanalyzetheopportunityitwillpassyouby. ■ OpinionsAreforPunditsNotTraders EverywhereIgopeoplehaveanopinionaboutthestockmarket:ontelevisionthe Internet and even on the golf course. It gets to the point where it’s hard for me not to have an opinion. People who know I’m a trader naturally ask me about the market. I’m sure the same thing happens to many of you. Remember whatever youropinioniswetrade80/20opportunitiesnotouropinions. Icomeintoeachdaywithanopenmindreadytogolongorshortasthemarket action dictates. Based on my background work I may think that there’s more potential for the market to go in one particular direction but I don’t let that view preventmefromtradingintheoppositedirectioniftheopportunitypresentsitself. ■ StrictlyFollowTechnicalData The financial press usually attributes every move in the stock market to something in the news most frequently an economic report. And security analysts look at corporatefundamentalstodeterminewhetherastockisfairlyvalued.Ipurposefully ignorebotheconomicandcorporatefundamentals.It’ssimplynotmygame. Technical indicators and charts record all the buying and selling activity in the market organized in a manner that allows me to spot high-probability trading situations. That’s all I need to focus on to make money in the market. As a trader you can’t follow everything. Charts are very important for short-term trading becausetheyshowtheunderlyingmarketpsychology.Andtechnicalindicatorshelp totimeexitandentrypoints.Bothareindispensable. Togetabetterpictureofmarketdynamicsit’svaluabletoassessthemarketone time frame greater than your trading time frame. For example if you are trading witha5-minutechartusea30-minutecharttogainadditionalperspective. You want to be sure to get confirmation from technical indicators and charts before taking a position. For example don’t buy or sell a market only because prices have dropped or risen substantially and the market seems hugely under- or overvalued.Waitfortheindicatorsandchartstosignalabuyorsell.

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PRINCIPLESOFSUCCESSFULTRADING 24 As you gain experience with charts and technical indicators you’ll develop a sense of anticipation about changes in trend. You’ll see momentum flagging spot divergences andsense thatthebalanceof power between buyers/sellersisshifting from one side to the other. When you see the trend changing get focused on your tradingtemplatesandgetreadytotrade. ■ MarketEntryTactics:UseLimitOrdersBuy/Sell ZonesandPositionScaling Regardless of the time frame that you trade it’s very difficult to pick a precise top or bottom. Instead based on your analysis you should target a buy and sell zone whereyouprojectit’ssafetobelongorshort. Whenever possible you should use limit orders to establish a position in your buy/sell zone. A limit order guarantees that you’ll get in at your price or better. Whileit’spossiblethatyourlimitorderwillnotgetfilledandthemarketmaymove quickly in the direction you anticipated I’ve found that rarely happens if I placed mylimitorderatareasonableprice. In many cases I’ll scale into a position. For example I may place a limit buy orderfortwoE-minis.IfI’vecaughtthebeginningofastrongmoveImaypurchase another two E-minis at a higher price and then perhaps another two E-minis at an evenhigherprice. ■ UseDefensiveStops I advocate the use of stops to limit potential losses. You can set them at specific prices or at values created by your technical indicators. You need to be disciplined aboutsettingstopswitheverytradesothatyoudon’tallowasmalllosstoturninto abigloss. I typically place my initial stop two ticks away from my entry price. Once the market moves in my favor I move my stop to lock in a profit. I won’t wait for the markettoslowdownorretreatbeforeexiting.I’llgetoutwiththemomentumstill in my favor. If you’re trading on a longer time frame your stops should be larger moreintheorderof5to10ticks. Therewillbetimeswhenyouarerightaboutmarketdirectionbutyou’rewrong on market timing. In those situations you may very well get stopped out of your trade. There’s nothing wrong with getting back in the market shortly thereafter if another80/20setupmaterializes. If the marketmoves in your favor you should adjust your stops to lock in gains. Markets can move against you quickly you don’t want to transform a nice profit

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PRINCIPLESOFSUCCESSFULTRADING 25 into a loss. Again if you get stopped out on a minor pullback after adjusting your stopyoucanalwaysgetbackin. If a trade is showing a loss toward the end of the day I’ll liquidate the position beforethemarketcloses.Idon’twanttoholdlosingpositionsovernight. I may average up or down in certain situations however I do not average up or down above my core position. To average down means that you buy additional stocksorcontractsatalowerpriceafterthemarkethasdroppedbelowyourinitial purchase price. To average up means you sell additional contracts at a higher price afterthemarkethasrisenaboveyourinitialshortposition.Againmycoreposition is my maximum position based on my psychological comfort level. For me it’s 10 E-minicontracts. ■ TrackYourResults At the end of each trading day I note my profits and losses PL for the day for the week and for the month. I’m very precise in my record keeping. I feel that precision carries over into my trading and helps keep me focused. I’m always aware of how each new trade contributes or detracts from my PLs. By focusing on high-probability trades my PLs typically show continuous growth with a few relativelysmalldownperiods.Howeverthereturnsarenotconsistent. Youcanextractfromthemarketonlywhatthemarketgivesyouandyourreturns willvarydependingonmarketconditions.Youcannotdemandconsistencyinyour returns it’s just not in the nature of the business. New traders particularly those with a background in a structured business environment need to understand and acceptthattheirweeklyandmonthlyPLslikelywillshowawiderangeofreturns. Butwhileyourreturnswillvaryyoumustdemandconsistencyinyourdiscipline and adherence to your trading rules. You should review your trades daily to determineifyouactedinconcertwithyourrules.Youshouldrereadandstudyyour tradingrulesonaregularbasis.MakethempartofyourtradingDNA.Theyarethe blueprintforyoursuccess. ■ ManagingYourTradingAccount If you are showing consistent profits for psychological reasons it’s a good idea to payyourselfsomethingfromyourtradingaccount.Youdeservetoberewardedfor yoursuccess.Itwillhelptokeepyoumotivatedandgiveyoupositivefeelingsabout yourtrading. Youshouldnotintermingleyourtradingaccountwithyourinvestmentaccount. In-and-out trading and long-term investing are two distinctly different disciplines.

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PRINCIPLESOFSUCCESSFULTRADING 26 By having the two activities in the same account you may be tempted to change a trading position into an investment position which is usually not a good idea. In addition with the two accounts intermingled it’s more difficult to segregate the tradingPLandevaluateyourtradingperformance. ■ TakeAdvantageofMarketConditions Trending markets and trading range markets present different opportunities and requiredifferentstrategiesandtactics. Firstandforemostyoushouldbeaggressiveintrendingmarketsinestablishinga positioninthedirectionofthetrend.Giventheprofitpotentialinatrendyoucan affordtogiveupatickortwotogetintothemarket. Be aware that prices usually move faster in downtrends than uptrends. In downtrends protective stops get hit and investors close long positions. To avoid losses there is often a rush to the exits. In uptrends investors are faced with a less pressingsituation:establishanewlongpositionaddtoanexistinglongpositionor closealongpositionforaprofit.Investorshavemoretimetomakeadecision.Asa resultthere’saslowerpaceofbuyordersandslowerpricemovementonuptrends. There are times that the market goes into what I call a ‘‘white heat’’ condition wherepricesmoveveryrapidlysometimesgappingupordown.Ifyou’refortunate enough to have a position in the direction of white heat my advice is to take advantageofthesituationandcloseyourpositionwhilethemomentumisstillwith you. If you wait until the white heat move loses steam it very well may gap in the oppositedirection. Intradingrangemarketsyoushouldbemoreselectiveinestablishingaposition. To the degree possible you want to buy at the bid and sell at the offer. The profit potential in trading range markets is smaller than in trending markets so you want togetthebestpossibletradelocation. If a market has been in a trading range for three or four days it’s likely that the marketwillmakeabigmovewhenitfinallybreaksoutoftherange. In most situations it’s best to trade in the direction of the short-term trend. However you want to avoid chasing the market. Usually there will be a pullback whereyoucangetabetterpricethanjumpingonabreakout. As you gain experience in markets you’ll develop a sense of market sentiment. When the majority opinion is either bullish or bearish—and the market doesn’t moveinthedirectionofthemarketconsensus—themarketwilllikelymovestrongly intheoppositedirection. Myindicatorsaresensitivetochangingmarketconditionsandwillsometimesget meintopositionsalittleearly.Generallythat’sagoodthing.Yougetabetterfeel forthemarketonceyouhaveaposition.

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PRINCIPLESOFSUCCESSFULTRADING 27 Andassumingtheindicatorswererightbeingearlyusuallytranslatesintoamore profitabletrade. ■ ReviewtheRulesEveryWeek Please don’t read these rules nod your head and agree that they make sense and then pretty much forget about them. These rules are the product of my years of experienceinthemarkets.IfIhadhadtheruleswhenIfirststartedtradingmypath to consistent profitability would have been much shorter. Read the rules regularly andmakethemyourown.

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29 CHAPTER 4 TechnicalAnalysis andTrading Concepts M yevolutionfromastrugglingtradertoaconsistentlysuccessfultraderwould not have been possible without technical analysis. Technical analysis allowed me to read the market and identify trading opportunities. I examined many many tradingtoolsovertheyearsandhavecometorelyonadozenorsoindicators. Iamapragmatistintheselectionanduseoftechnicalindicators.Iwanttoknow how they operate and respond in various market conditions. However I’m not particularly concerned about why they operate as they do. For me the proof is in thepudding.IftheyworkI’mhappy.Iftheydon’tworkIgetridofthem. ■ MovingAverages Movingaveragesareusedtoemphasizethedirectionofatrendandsmoothoutprice andvolumefluctuationsor‘‘noise’’thatcanconfuseinterpretation. I use a 21/55/89 period moving average. These are all Fibonacci numbers. They can be used for any time frame from a 2-minute chart to a weekly chart. I’ve experimented with other moving averages over the years but have found the 21/55/89periodworksbestforme. Movingaverageswereoneofthefirsttechnicalanalysistoolseverdevelopedand theyhavebeenanintegralpartofmytradingforyears.Justbecausemovingaverages

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TECHNICALANALYSISANDTRADINGCONCEPTS 30 are relatively simple in their construction do not underestimate their usefulness. Whencombinedwithotherindicatorstheycanproduceexcellenttradingsignals. A moving average is constructed by computing the average price of a security overaspecifiednumberofperiods.Forexamplea10-daymovingaverageaddsthe closing price of the market for 10 consecutive days and divides that number by 10. Eachdaythenewclosingpriceisaddedandtheoldestclosingpriceisdroppedfrom theequation.Withanewvaluegeneratedeachdaythemovingaverageisdisplayed onachartinconjunctionwiththeactualmarketprices. There are two types of moving averages: simple and exponential. A simple moving average weights each closing price the same. As a result there is a lag between the simple moving average and the most recent price action. If there is a price breakout from a consolidation pattern it will take some time for the simple movingaveragetocatchuptothepriceaction. An exponential moving average EMA reduces the lag by placing more weight on recent prices. Charting packages calculate the EMA for you so you really don’t need to know how to calculate the average yourself. In any case the formula for calculatinganEMAis: EMA CP×SF + PreviousEMA×1– SF where CPCurrentprice SFSmoothingfactorwhichiscalculated:2/1+N NNumberoftimeperiodsselected As you might infer from weighting multipliers the shorter the EMA the more weightthatisplacedonrecentpriceaction.Averyshort-termEMAsayfivedays will track prices very closely. And regardless of the chosen period an EMA will tendtotrackpricemorecloselythanasimplemovingaverage. WhatMovingAveragesReveal Movingaveragesessentiallyidentifythelevelofunderlyingbullishnessandbearish- nessinthemarket.Arisingmovingaverageindicatesthemarketisbecomingmore bullish. A falling moving average indicates the market is becoming more bearish. Thesharpertheslopethegreaterthebullishnessorbearishness. You can also infer market sentiment from the relationship between prices and the moving average. When prices drop below the moving average bearishness is increasing.Whenpricesriseabovethemovingaveragebullishnessisincreasing. When you use multiple moving averages the alignment of the moving averages is critical. Using three moving averages a bullish alignment consists of the short-termaverageontopthemedium-termaverageinthemiddleandthelongest- termmovingaverageatthebottom.Abearishalignmentconsistsofthelongest-term

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TECHNICALANALYSISANDTRADINGCONCEPTS 31 FIGURE4.1 MovingAverage:21/55/89Bars moving average on top the medium-term moving average in the middle and the short-termmovingaverageonthebottom. As markets change direction the slope of the moving averages shift and the shortest-term moving average will often cross the medium-term and long-term movingaverage.Asshort-termmomentumincreasesthemovingaverageswilltend to separate. As prices settle down and volatility lessens the moving averages will tendtoconverge. Figure4.1showsalloftheseproperties.Ontheleftsideofthechartthemoving averages 21/55/89 are in a bullish alignment and the prices are above all three movingaveragelines.Pricesthenfallbackintothemovingaveragesandthemoving averagesbegintoflattenanindicationthatthetrendischanging.Eventuallyprices drop below the moving averages and the moving averages realign themselves into a bearish alignment. On the right side of the chart the 21-bar moving average is slopingupandpriceshavereturnedtothemovingaverages.Thelevelofbearishness isdecreasing.

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TECHNICALANALYSISANDTRADINGCONCEPTS 32 -105 15 14 13 12 9 -100 5 Williams’ R -63.3333 EMINI SP JUN4 1868.000 1868.750 1867 .00 1867 .250 -0.75000 1856 1857 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878 1879 1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 0 -5 -10 -15 -20 -25 -30 -35 -40 -45 -50 -55 -60 -65 -70 -75 -80 -85 -90 -95 FIGURE4.2 MovingAverage:BreakoutfromCongestion HowtoUseMovingAverages I use moving averages in my trading and I venture to say most other short-term traders do as well. I move in and out of the market quickly every day. By being moreresponsivetothemostrecentpricemovementsexponentialmovingaverages suitmytradingstyle. But moving averages can also be valuable for a longer time frame. Many traders trackthe50-dayand200-daymovingaveragestotimelong-termtrendsinthestock marketandusecrossoversignalsfromthetwomovingaveragestomoveinandout ofstocks.Inessencewhenthe50-daymovingaverageisabovethe200-daymoving average the long-term trend is bullish. When the 50-day moving average is below the200-daymovingaveragethelong-termtrendisbearish. As I mentioned I use the 21/55/89 period moving averages. In most market conditions the three moving averages tend to bunch together. I am always alert for situations where the 21-day breaks out from the bunch. I will then trade in the

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TECHNICALANALYSISANDTRADINGCONCEPTS 33 FIGURE4.3 MovingAverage:RealignmentfromBearishtoBullishtoBearish direction of the breakout. Typically the longer the moving averages stay bunched together the more explosive the breakout move. Figure 4.2 exemplifies this idea verywell. MorecommonlyIusechangesintheslopelinesandcrossoversignals.Typically I’ll look for the 21-bar moving average to begin to move more sharply up or down and to cross the 55-bar moving average and the 89-bar moving average. In Figure 4.3 a sharp change in the slope of the 21-bar line leads to crossover signals andrealignmentfrombearishtobullishandthenbacktobearish. As stated earlier moving averages lag behind market activity. Thus a moving averagecrossoversignalwillgetyouintothemarketonlyafterthemarkethasalready turned. Crossovers will not identify tops and bottoms. At their best crossovers identify change in trend direction and tradable market swings. Depending on the situationandwhatothersignalsaredoingImaytradebasedontheslopeoftheline orImaywaitforthecrossoversignal.

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TECHNICALANALYSISANDTRADINGCONCEPTS 34 MACD The moving average convergence-divergence commonly called MACD is one of themostpopulartechnicalindicators.DevelopedbyGeraldAppelinthe1970syou can find the MACD on all standard charting packages. I’ve found the MACD to be veryvaluableinmytrading. The MACD provides both trend-following and momentum information. The primary MACD line is formed by taking two moving averages and subtracting the longer moving average from the shorter moving average. The signal line is then formedbycreatinganexponentialmovingaverageoftheprimaryMACDline.Ona charttheprimaryMACDlinefluctuatesaboveandbelowazerolineandconverges crossesanddivergesfromthesignallineovertime. The MACD histogram is formed by subtracting the signal line from the MACD line. Like the MACD line the histogram fluctuates around a zero line on a chart. The histogram registers a positive reading above zero when the MACD line is above the signal line and a negative reading below zero when the MACD line is belowthesignalline. I use the default settings on the MACD which are as follows: a 12-bar moving average a 26-bar moving average and a 9-bar moving average of the MACD line. You can experiment with settings to make them more or less sensitive depending on your trading style. If you lengthen the settings you’ll get fewer trading signals ifyoushortenthesettingsyou’llgetmoretradingsignals. The MACD provides useful information about the momentum of the market. When the MACD line and the signal line are moving apart diverging directional momentum is increasing. When the MACD line and the signal line are moving closerconvergingdirectionalmomentumisdecreasing. ■ Crossovers Many traders use signal line crossovers as a trading signal. A signal line crossover occurs when the MACD line crosses the signal line. When the MACD line crosses the signal line on the way higher it’s bullish. When the MACD line crosses the signal line on the way lower it’s bearish. Generally signal line crossovers work bestatthebeginningormiddleofapriceswing.Inthelaterstagesofapriceswing when prices are at an extreme and directional momentum is slowing there may be a quick series of signal line crossovers reflecting a battle between bullish and bearishtraders. CenterlinecrossoversareanotherpopularMACDsignal.Acenterlinecrossover occurs when the MACD line crosses the zero line. When the MACD line crosses the zero line on the way higher it’s bullish when the MACD line crosses the zero lineonthewaylowerit’sbearish.

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TECHNICALANALYSISANDTRADINGCONCEPTS 35 FIGURE4.4 MACDCrossoverSignals InFigure4.4theuppermostchartistheMACD.Asyoucanseetherearethree occasions where the MACD line crosses the signal line. In each case the market continuedinthedirectionofthecrossover.NoticetoothateachtimetheMACD line crossed the zeroline themarketalsocontinued in thecrossing direction. Late in the session the market touches the zero line—but doesn’t cross it—and then continueshigher. ■ Divergences One of the most popular uses of the MACD—and indeed any momentum indicator—is to spot divergences between price and momentum. The core idea is thatwhenpricesreachanewhighorlowonlessermomentumthemarketisready tomoveintheoppositedirection. Divergences can occur in any time frame: weekly daily or intraday. You can read them using the MACD line and signal line or on the MACD histogram.

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TECHNICALANALYSISANDTRADINGCONCEPTS 36 FIGURE4.5 MACDBearishDivergence Some traders like to draw trend lines on the MACD lines or histogram to get a bettersenseofthetrendinmomentum. Whiledivergencesdonotalwaysleadtoanimmediatepricereversaltheywork frequently enough that they always merit attention. When I spot a divergence I become very interested in a possible trade and look closely at my other indicators forconfirmation. Aboutfour-fifthsofthewayintothesessioninFigure4.5thereisapronounced bearishdivergence.ThemarketmakesanewhighbuttheMACDfallssubstantially shortofitsprevioussessionhigh.Thedivergenceisconfirmedbysimilarformations inthestochasticmomentum. A word of caution about divergences in strong trending markets: When a new trend begins with a very strong initial move it’s quite possible that the next move in the direction of the trend will be more muted—and will generate a divergence signal. In those situations pay attention to the signal line: as long as it’s above the zerolineinanuptrendandbelowthezerolineinadowntrendit’stellingyouthat

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TECHNICALANALYSISANDTRADINGCONCEPTS 37 themomentumisstillinfavoroftheunderlyingtrend.Generallyinastrongtrend it’slessriskyandmorerewardingtotradedivergencesinthedirectionofthetrend. ■ WilliamsR The Williams R indicator was developed by Larry Williams. It is a momentum indicator that identifies bullish and bearish conditions and overbought and oversold areas. The R formula compares the current closing price of the market to the high and low of the market for a designated number of days. In essence the indicator showswherethemarketistradinginrelationtotheupperandlowerboundariesof theselectedtradingrange. Williamsused14daysasthesettingwhichisthedefaultsettingonmostcharting packages. If you reduce the setting you’ll speed up the indicator and generate moresignals.Ifyouincreasethesettingtheindicatorwillslowdownandgenerate fewersignals. The value of the R ranges from a low of –100 to a high of 0. To register a –100valuethemostrecentclosingpricehastobethelowestlowofthedesignated numberofdaysintherange.Toregistera0valuethemostrecentclosingpricehas tobethehighesthighofthedesignatednumberofdays. Traders use the Williams R in a variety of ways. Some use it to identify overbought and oversold conditions. They might look to buy a market when the Williams R falls below –80 and they might look to sell a market when the indi- catorrisesabove –20.Theproblemwiththisapproachisthatinastronglytrending FIGURE4.6 WilliamsRBullishSignal

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TECHNICALANALYSISANDTRADINGCONCEPTS 38 market the Williams R can stay at extreme levels for long periods of time. Personally as a day trader I have no problem going long when the indicator is overbought or going short when it is oversold—provided my other indicators are flashingbuyandsellsignals. I prefer to use the Williams R as an indicator of bullish or bearish conditions and then use other signals for confirmation to make a trade. Figure 4.6 provides a goodexample.AlittleshortofhalfwayintothecharttheWilliamsRrisesabove –20andstaysthereforsometimewhichindicatesthemarketisbullish.Whenthe 21-bar moving average turns up and crosses the 55-bar moving average that’s the signaltogolong. ■ StochasticOscillator The stochastic oscillator is another momentum indicator. It’s a popular indicator usedbymanytradersandtechnicians.DevelopedbyGeorgeLaneover50yearsago the stochastic oscillator tracks the speed or momentum of price movements. The coreideaoftheindicatoristhatmomentumchangesoftenprecedepricechanges. My style of trading is to take a profitable piece from short-term price swings. Idon’ttrytopicktopsorbottoms.Idon’ttrytopredictthemarket.Iwaitforthe markettoconfirmadirectionalpriceswing.Igetinquickly.IfthemarketstallsI’ll usually exit immediately. If the market moves my way I’ll usually take my profit priortothecompletionofthepriceswing. For a trade to make sense to me the stochastic oscillator must be moving in the directionofthepotentialtrade.IdeallyIliketoseethestochasticoscillatorturnup or turn down from an extreme level with the fast line decisively crossing the slow lineandanearlyverticalascentordescent. Thestochasticoscillatorshowsthelocationofthecloseinrelationtothehigh/low range of a select number of periods. In essence if price is closing near the top of its range for several periods the stochastic oscillator will trend up. If the price is closing near the bottom of the range for several periods the stochastic oscillator willtrenddown. Thestochasticoscillatoriscalculatedasfollows: K CurrentClose – LowestLow×100 HighestHigh – LowestLow D Three−PeriodSimpleMovingAverageofK The stochastic oscillator is plotted on a 0–100 scale. The K is the fast line and mostresponsivetothelatestpriceaction.TheDistheslowline.Readingsbelow

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TECHNICALANALYSISANDTRADINGCONCEPTS 39 FIGURE4.7 StochasticOscillatorIdentifyingPriceSwings 20indicatethepriceisnearitslowforthetimeperiod.Readingsabove80indicate themarketisnearitshighforthetimeperiod. The terms overbought and oversold are used a lot in the markets and in particular with the stochastic oscillator. Without question markets become extended. And often when markets reach an extreme level some traders take profits and other traders enter new positions in expectation of a reversal all of which can cause the market to reverse from the original trend. However the fact that the stochastic oscillatorisabove80orbelow20doesnotmeanareversalisimminent.I’vemade alotofmoneyovertheyearsbeinglongwiththestochasticoscillatorabove80and shortwithitbelow20. The far right side of Figure 4.7 exemplifies what I like to see in the stochastic oscillatorwhenconsideringatrade.Notethatitsoldofffromanextremelyhighlevel andmoveddowninnearlyverticaldescentwiththefastlinecrossingtheslowerline.

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TECHNICALANALYSISANDTRADINGCONCEPTS 40 Also note that the bearish signal of the stochastic oscillator was confirmed by the otherindicators. ■ StochasticMomentum Stochasticmomentumderivesfromthestochasticoscillator.Whereasthestochastic oscillator calculates the distance between the current close and the high/low range forachosenperiodthestochasticmomentumcalculatesthedistanceofthecurrent closetothecenterofthehigh/lowrangeforachosenperiod. Stochastic momentum originated or was at least popularized by William Blau in the early 1990s. Blau felt the original stochastic oscillator gave too many false signalsinpartbecauseitwasbasedonthehigh/lowrange.Blaufeltbyconnecting theclosetothemidpointofthehigh/lowrangethestochasticmomentumindicator would reflect market conditions more accurately and produce a higher percentage ofaccuratesignals. Formula The stochastic momentum values range between –100 and +100. While I use the stochastic momentum as a means to identify the strength of the current trend othertradersusethestochasticmomentumtoidentifywhenamarketisoverbought or oversold. Generally when the stochastic momentum crosses +60 or –60 the market is beginning to get overextended. Readings of +80 or –80 are strongly overextended. Thestochasticmomentumtendstobealittlefasterthanthetraditionalstochastic oscillator. When the markets turn it’s often the first indicator in the template to flash a signal. Used alone you would be whipsawed by too many short-term moves. But used in conjunction with other indicators in the template it is a very powerfultool. I use stochastic momentum primarily as a means to detect the beginning of new price swings. When it’s moving sharply high or lower and the fast line crosses the slow line I become very interested and look to other indicators for confirmation. In addition because it is very sensitive to recent price movements the stochastic momentum sometimes alerts me to stay out of a trade where slower moving indicatorsmightbeflashingabuyorsellsignal. Figure4.8showshowthestochasticmomentumworksinconjunctionwithother indicators. Throughout the session a change in slope and the fast line crossing the slower line coincided with tradable price swings and were confirmed by activity in theotherindicators.

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TECHNICALANALYSISANDTRADINGCONCEPTS 41 FIGURE4.8 StochasticMomentum:SlopeChangesandCrossoverSignals ■ Bressert TheBressertisaproprietaryindicatorofferedontheMetaStockplatform.Developed byWalterBressertitisbasedoncycleanalysisandshowstrenddirectionanticipates cycleturningpointsandidentifiesmarketcycletopsandbottomsastheyoccurwith mechanical buy and sell signals. I do not use the mechanical buy and sell signals. Instead I use it in conjunction with other indicators. Often the Bressert gives an earlyindicationofachangeintrenddirectionandpossibletrade.Iwillthenlookfor confirmationfromotherindicators. In Figure 4.9 the Bressert is the first indicator to turn about halfway into the sessionandbeginstoascendonasharpangle.Theotherindicatorsquicklyconfirm themove.

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TECHNICALANALYSISANDTRADINGCONCEPTS 42 FIGURE4.9 Bressert:LeadSignal ■ RMO TheRahulMohindaroscillatoranditsassociatedtoolsandindicatorsweredeveloped by Rahul Mohindar of Viratech viratechindia.com. Like the Bressert the RMO is availableovertheMetaStockplatform. The RMO is designed to identify market direction and the primary trend. It is displayedasahistogram.Abullishsignaliswhenthehistogrammovesupandcrosses theoscillator’szerolinegoingupward.Abearishsignaliswhenthehistogrammoves downandcrossesthezerolinegoingdown. In Figure 4.10 the RMO starts out well above the zero line but prices are relatively flat. About midsession price makes a new high but the RMO does not make a new high indicating a bearish divergence. The divergence is confirmed on thestochasticoscillator.

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TECHNICALANALYSISANDTRADINGCONCEPTS 43 FIGURE4.10 RMO:BearishDivergenceandSellSignal TheRMObeginstoshowbearishsignsandfinallylateinthesessionitcrossesthe zero line on the way down. This is a valid RMO signal and it is confirmed by the otherindicators. ■ MovingRibbons Moving ribbons combine a large number of moving averages onto the same chart. Whenalltheaveragesaremovinginthesamedirectionthetrendinthatdirection is obviously very strong. In trading ranges moving ribbons tend to converge on one another. Asdirectional volatilityincreases theytend towiden. Whenmarkets reverse trend there will be a series of crossovers as the moving ribbons realign to reflectthedirectionofthenewtrend.

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TECHNICALANALYSISANDTRADINGCONCEPTS 44 FIGURE4.11 MovingRibbonsConvergingandDiverging In Figure 4.11 initially the moving ribbons are tilted higher in concert with the pricesmovingup.Aspricesflattenthemovingribbonsconvergeandtherearesome crossoversofthefastermovingaveragesthroughslowermovingaverages.Thenthe uptrend resumes and the moving ribbons diverge and tilt higher. Toward the right side of the chart the prices move down again. In response some of the moving averages tilt down and cross slower moving averages. From a trading perspective theresumptionoftheuptrendmidwaythroughthesessionwasconfirmedbyother indicatorsandrepresentedagoodtradingopportunity.

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45 CHAPTER 5 Tradingwiththe MovingAverage Template I n this chapter we’ll go through a series of examples of trading with the moving averagetemplateeachstartingwithachartandfollowedbyanexplanationofthe trade.Let’sgetstarted.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 46 FIGURE 5.1 MovingAverageTemplateTrade1 I use the Williams R a little bit differently than some of the other indicators. Foralong-sidetradeIwanttoseetheWilliamsRabovethesecondlinefromthe top. For a short-side trade I want to see the Williams R below the second line fromthebottom. Ineachcasethetrademustbecorroboratedbyarisingorfallingmovingaverage trend.Moreoverthemovingaveragesshouldbealignedcorrectly.BythatImean for a bullish trade I want to see the 21-period average on top followed by the 55-period average in the middle and the 89-period average on the bottom. For a bearish trade I want to see the 21-period moving average on the bottom the 55-period average in the middle and the 89-period average on top. Very simply this alignment shows that recent momentum as reflected by the shorter moving averages is moving in the direction of the potential trade. I don’t follow this rule exactly in every situation. At a minimum I want to see the two faster moving averagestrendinginthedirectionofthepotentialtrade. AsthesessionopensinFigure5.1themovingaveragesareinabearishalignment with the fast-line 21-period average on the bottom the 55-period average in the middle and the 89-period average on the top. All of the averages are sloping downward.TheWilliamsRisalsomovingdown.WhentheRcrossesthelower lineyoucanputonashort-sidetrade. As the session continues the market begins to flatten and then rally. The R follows suit. About a third of the way into the session the R crosses the top line and stays there setting the stage of a potential long-side trade. When both the 21-period and 55-period moving averages turn up I feel comfortable going long themarket.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 47 The market flattens toward the later part of the session and the R falls below the top line. Toward the right edge of the chart the R again crosses the top line and the moving averages are in a bullish alignment and are trending upward. This might be an opportunity for a longer term trader but it’s too late in the day forme.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 48 :16 :20 :24 :28 :32 :36 :40 :44 :48 :52 :56 :00 :04 :08 :12 :16 :20 :24 :28 :32 :36 :40 :44 :48 :52 :56 :00 :04 :08 :12 :32 :36 :40 :44 :48 :52 :56 :00 :04 :08 :12 -105 -100 -95 -90 -85 -80 -75 -70 -65 -60 -55 -50 -45 -40 -35 -30 -25 -20 -15 -10 -5 0 5 1836.0 1836.5 1837 .0 1837 .5 1838.0 1838.5 1839.0 1839.5 1840.5 1840.0 1841 .0 1841 .5 1842.0 1842.5 1843.0 1843.5 1844.0 1844.5 1845.0 1845.5 1846.0 1846.5 1847 .0 1847 .5 1848.0 1848.5 1849.0 1849.5 1850.0 1850.5 1851 .0 1851 .5 1852.0 1852.5 1853.0 1853.5 1854.0 1854.5 1855.0 1855.5 : 3PM 4PM Williams R Moving Ribbons 10AM 25 FIGURE 5.2 MovingAverageTemplateTrade2 ThemarketopensflatinFigure5.2.TheRmovesintoabearishconditionearly on but the moving averages do not confirm. Then the R spikes up entering bullishterritorybutagainthere’snoconfirmationfromthemovingaverages. AboutonethirdofthewayintothesessionpricesstarttodeclinetheRmoves sharplylowercrossingagainintoabearishconditionandallthreemovingaverages trendlower.Thisisanexcellent80/20opportunity. If you took your profits quickly on the first opportunity there are other short- trade opportunities through the remainder of the session. The moving averages trend down and are in a bearish alignment until the end of the session. Each time theRfallsbelowthebottomlineyouhavethesignaltotakeashortposition.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 49 20 21 24 25 26 27 Williams R Moving Average -105 -100 -95 -90 -85 -80 -75 -70 -65 -60 -55 -50 -45 -40 -35 -30 -25 -20 -15 -10 -5 0 5 1818 1819 1820 1821 1822 1823 1824 1825 1826 1827 1828 1829 1830 1831 1832 1833 1834 1835 1836 1837 1838 1839 1840 1841 1842 1843 1844 1845 1846 1847 1848 1849 1850 1851 1852 1853 1854 1855 1856 1857 1858 1859 FIGURE 5.3 MovingAverageTemplateTrade3 EarlyinthesessioninFigure5.3pricesstartmovinghigherandtheRenters bullish territory. The moving averages are in a bullish alignment with the fastest lines above the slower lines. When the averages tilt upward you have an 80/20 long-sidetrade. The market continues higher producing a profitable trade. Shortly thereafter the market retreats and the R falls below the bottom line into bearish territory. Themovingaveragesdonotconfirmashort-sidetrade. About one third of the way into the session the market starts moving higher again. The R quickly moves into a bullish condition and the fast-line moving average tilts upward again after a brief downward bend. Once that happens you havepermissiontogolong. The fast-line moving average flattens out through most of the second half of the session. The R briefly turns bearish then bullish and then bearish again. Just as

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 50 quickly the R retreats from tradable conditions. In none of these cases does the movingaverageprovideastrongenoughsignaltomakeatrade. FinallytowardtheendofthesessiontheRagaincrossesintobullishterritory. Andthistimethefastlinetiltsupward.Withthealignmentofthemovingaverages stillbullishthisisanopportunitytomakeaquicklong-sidetrade.Imighttakethis tradeasthere’sstillenoughtimeinthesessionforthetradetowork.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 51 FIGURE 5.4 MovingAverageTemplateTrade4 ThemarketischoppyatthebeginningofthesessioninFigure5.4.TheWilliams R moves into bearish territory and the fast line of the moving average crosses below the medium line. However the moving averages are not in the proper alignment for a bearish trade. What you want to see is the fast line at the bottom the medium line above the fast line and the slow line on the top. Without that sequencethisisnotagoodshorttrade. Just before halfway into the session the Williams R moves higher and crosses into bullish territory. At about the same time the fast line of the moving average crosses the medium line. The moving averages are in a bullish alignment and they arealltiltedupward.Thisisanexcellent80/20trade.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 52 FIGURE 5.5 MovingAverageTemplateTrade5 The session opens with the moving averages in a bullish alignment and the Williams R in bullish territory in Figure 5.5 but sinking fast. I would stay away fromthissituationandwaitformoreclarity. About one fifth of the way into the session the Williams R rallies into bullish territory. The moving averages are still in a bullish alignment and they are all trending upward. You could take this trade. However at best you would take a smallprofitorascratchhere.Youverywellmighttakealoss. This is beginning to look like a market that is trying to go higher but can’t get any traction. Many times when a clear bullish or bearish trade setup has no follow-through momentum it’s a signal that the market may be ready to go the otherdirection. About two thirds of the way into the session the Williams R begins to break sharply lower and lands in bearish territory. Prior to this the fast-line moving

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 53 average descended to the bottom of the moving average alignment and all three moving averages started to accelerate down. Particularly because of the failure of the market bulls to move prices higher earlier in the session this is an excellent short-tradeopportunity.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 54 FIGURE 5.6 MovingAverageTemplateTrade6 This session in Figure 5.6 has a nice bullish tilt with the moving averages in a continuousbullishalignment. Notice the three occasions when the Williams R moves significantly above the .20topline.Eachtimetherewasaprofitabletradetobemade.Inthefirstinstance whenthefast-linemovingaveragebeginstotiltupit’sOKtogolong.Thesecond and third instances provide stronger setups because of the sharper angle of the fast-linemovingaveragemovinghigherreflectsrapidupwardpricemomentum. Thissessionshowsthereareoftenmultiplelow-risk/high-rewardentrypointsin a trending market. If you miss the first trade or you exit quickly you’ll often have anopportunitytogetbackintothemarket.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 55 FIGURE 5.7 MovingAverageTemplateTrade7 ThroughoutmostoftheperiodinFigure5.7themovingaveragesareinabullish alignment. The Williams R moves into bullish territory on three occasions: at the beginning of the period about one third in and about two thirds in. Then lateinthesessiontheWilliamsRmovesintobearishterritorysignalingthebest risk/rewardtradeofthesession. Of course it’s always easier to read charts after the fact than in real time. Arguably you could have gone long early in the session when the fast-line moving averagebegantoseparatefromtheothermovingaverages.Withmystyleoftrading Iwouldhavehadascratchorasmallprofitonthetrade. InthesecondinstanceaboutonethirdintothesessionwhentheWilliamsR movesintobullishterritorythere’slittlefollow-throughinthepriceaction.Given the restrained move in the moving averages I would classify this as a 60/40 trade. Usually my trades quickly go in the intended direction. If I were caught in a trade likethisIwouldgetoutquicklyafternotingthelackofpriceresponse.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 56 In the third instance when the Williams R moves above the top line the moving averages barely tilt up. Given the lack of moving average confirmation I wouldstayonthesidelines.Whathappensnextisinteresting.Thefast-linemoving averagewhichhasbeenrelativelyflatsincemidwaythroughthesessiontiltsslightly down and then accelerates sharply down. The Williams R falls dramatically and movesintobearishterritory.Whenthefaster-linemovingaveragecrossestheslower movingaverageyouhavean80/20short-tradesetup.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 57 FIGURE 5.8 MovingAverageTemplateTrade8 Coming into this session the moving averages are in a bearish alignment and tilting slightly downward. But the winds of change are beginning to blow. Notice the sequence of change in Figure 5.8: The Williams R begins to move up the marketitselfjumpshigherthefast-linemovingaveragetiltssharplyupandthetwo slowermovingaveragesflattenout. After the market sells off for a few periods it again starts moving higher. The WilliamsRmovesintobullishterritory.Thefast-linemovingaveragecrossesboth slowerlinesandtheslowerlinesbegintotiltslightlyupward.Thisisanopportune timetogolong. Aroundthemiddleofthesessionthemarketbeginsafairlysteepdecline.Again the Williams R and the fast-line moving average are the first indicators to reflect the price drop. The Williams R remains in bearish territory. When the fast line crossesboththeslower-linemovingaveragesyoucangoshort.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 58 Twothirdsofthewayintothesessionthemarketbeginstoswingupagain.The Williams R moves into bullish territory. The fast line tilts sharply upward and then the two slower lines tilt ever-so-slightly higher. However after the fast line touches the slower line it quickly retreats. Moreover the Williams R has now started moving down on its way to bearish territory. All the moving averages are nowinabearishalignmentandmovingsharplydown.Thisisagreatshort-sidetrade.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 59 FIGURE 5.9 MovingAverageTemplateTrade9 In Figure 5.9 the moving averages are in a bullish alignment at the outset however prices are moving down and the Williams R is also moving down and on its way to bearish territory. The market then bottoms and begins to move up. TheWilliamsRquicklyturnsbullishandthefast-linemovingaverageflattensand begins to rise. The slower moving averages continue to tilt upward. This is a good tradetotakebutyouneedtogetinandoutquickly. Noticethatthroughthefirsthalfofthesessionthemarketmakestwoswinghighs andnoticethatatthesecondswinghightheWilliamsRshowedsubstantiallyless upside momentum. This is a clear and pronounced bearish divergence. This should alertyoutoapossibleshorttrade. Immediately after the bearish divergence the market does begin to drop and the fast-line moving average begins a swing down. A little later the downturn accelerates and the short trade emerges. The fast-line moving average crosses the two slower lines and the slower lines turn down. The Williams R turns bearish. Thisisagreattradetotake.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 60 9 1213 1415 -105 -100 -95 -90 -85 -80 -75 -70 -65 -60 -55 -50 -45 -40 -35 -30 -25 -20 -15 -10 -5 0 5 1856 1857 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878 1879 1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 EMINI SP JUN4 1868.000 1868.750 1867 .000 1867 .250 -0.75000 Williams’ R -63.3333 FIGURE 5.10 MovingAverageTemplateTrade10 ThesessioninFigure5.10beginswiththemovingaveragesinabullishalignment with the 21-day on top and the 55-day and 89-day underneath. But notice that the slope of the moving averages particularly the 55-day and 89-day is relatively flat. AndwiththeWilliamsRmovingquicklyfrombullishtoneutralterritorythere’s notradetobemadeearlyinthesession. ShortlythereaftertheWilliamsRmovesintobearishterritoryandthe21-day movingaveragebeginstoturndown.Eventuallythe21-daycrossesthe55-dayand 89-day. This is a bearish situation that you might be tempted to trade. However there are two mitigating factors that make this more of a 60/40 trade than an 80/20trade: ■ The55-dayand89-daymovingaveragesarerelativelyflatandeventhe21-dayis movingatamodestangle. ■ The moving averages are bunched together which indicates that the market’s directionalbiasisfairlyweak.Theresimplyisn’talotofenergybehindthisbearish move.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 61 After the bearishness dissipates the Williams R moves into bullish territory aboutonequarterofthewayintothesession.Initiallythemovingaveragesremain bunched together until suddenly the market gaps up. The moving averages then separate and slope sharply higher. This is an 80/20 trade but you quickly move in andout. Toward the end of the session the moving averages begin to slope down and the Williams R moves into bearish territory. Prices move quickly lower. With the market moving this fast you have to pull the trigger quickly. In this case if youwaitedforthefastline21-daytocrossboththe55-dayand89-daylinesyou wouldhavebeentoolate.Ifyougotinasthe21-daycrossedthe55-dayyoucould havemadeafewticks.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 62 :32 :36 :40 :44 :48 :52 :56 :00 :04 :08 :12 :16 :20 :24 :28 :32 :36 :40 :44 :48 :52 :56 :00 :04 :08 :12 :16 :20 :24 :28 :32 :36 :40 :44 :48 :52 :56 :00 :04 :08 :12 :16 :20 2PM 1PM 12PM -105 -100 -95 -90 -85 -80 -75 -70 -65 -60 -55 -50 -45 -40 -35 -30 -25 -20 -15 -10 -5 0 5 1858.0 1858.5 1859.0 1859.5 1860.0 1860.5 1861 .0 1861 .5 1862.0 1862.5 1863.0 1863.5 1864.0 1864.5 1865.0 1865.5 1866.0 1866.5 1867 .0 1867 .5 1868.0 1868.5 1869.0 1869.5 1870.0 1870.5 1871 .0 1871 .5 1872.0 1873.0 1872.5 Williams’ R-60.0000 EMINI SP JUN4 1867.250 1867.500 1867.000 1867.250+0.000 FIGURE 5.11 MovingAverageTemplateTrade11 As the session opens in Figure 5.11 the moving averages are in a bearish alignmentwhiletheWilliamsRandtheactualpricesarerising.Themarketthen makesaswinghighandstartsdroppingquickly. Normally I look for the Williams R to move into bullish/bearish territory before putting on a trade. In this case I would be a little quicker. The downward momentum is very strong here as evidenced by the separation of the moving averagesandthesharpdownwardangleinprices.Asthepricesfallbelowthe21-day movingaverageIwouldgoshort. I don’t see another 80/20 setup through the remainder of this session. With the movingaveragesinabearishalignmentyoushouldfocusonshorttrades.However the fast-moving 21-day moving average flattens out through the last two thirds of thesessionindicatingadeclineinvolatilityandhencetradingopportunities.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 63 FIGURE 5.12 MovingAverageTemplateTrade12 EarlyinthesessioninFigure5.12themarketgapsup.Themovingaveragesare in a strong bullish alignment and the Williams R is in bullish territory. This is a good trade to take even though the ensuing market move is a little tepid. If you managethetradewellyoucanmakeafewticks. Just short of halfway through the session the market breaks down. The 21-day moving average drops at a very steep angle. The Williams R is bearish. I would goshortafterthe21-daymovingaveragecrossesthe55-daymovingaverage.Given the steep downward angle on the 21-day moving average there’s no need to wait forittocrossthe89-daybeforeputtingonatrade. Late in the session the moving averages and the Williams R transition from a bearish alignment to a bullish alignment. When the 21-day moving average crosses thetwoslowermovingaveragesit’ssafetogolong.

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TRADINGWITHTHEMOVINGAVERAGETEMPLATE 64 FIGURE 5.13 MovingAverageTemplateTrade13 At the start of the session in Figure 5.13 the moving averages are in a bullish alignment however the 21-day moving average is starting to turn down. After a small move up at the outset the Williams R begins moving down and eventually crosses into bearish territory. There is no trade to make yet but it’s clear that the marketisshowingabearishbias. Just two fifths into the session the 21-day moving average crosses the 55-day movingaverage.AfteraquickspikeuptheWilliamsRstartsdroppinginanearly straight line. Notice too the 55-day and 89-day moving averages have begun to turndown.Thisisagoodtimetogoshort. Abouthalfwaythroughthesessionthemarketbeginstorally.TheWilliamsR moves into bullish territory. When the 21-day moving average crosses the other moving averages on the way up that’s a good signal to go long. However the market begins to flatten at that point. Given the way I quickly move in and out of tradesIprobablywouldhavescratchedonthistrade. Fortunatelythemarketprovidesanotheropportunitytogolongabouttwothirds into the session. The moving averages have remained in a bullish alignment. When theWilliamsRmovesintobullishterritoryagainyouhaveasignaltogolong.

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65 CHAPTER 6 Tradingwiththe MovingRibbons Template I n this chapter we’ll go through a series of examples of trading with the moving ribbons template each starting with a chart and followed by an explanation of thetrade.

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TRADINGWITHTHEMOVINGRIBBONSTEMPLATE 66 FIGURE 6.1 MovingRibbonsTemplateTrade1 Early in the session in Figure 6.1 the moving average convergence-divergence MACD and the stochastic momentum are trending higher. However the moving ribbons are relatively flat and converging with the upper and lower lines moving closertogether.There’snotradeatthispoint. About one third of the way into the session the ribbons as a whole begin to turnupalthoughtheslowlinemovesslightlylower.Thestochasticmomentumhas flattenedatthispoint.Againthereisnotradetomake. Laterthemovingribbonsexpandandmovehigherwithallthelinesparticipating in the move. The MACD tops out and then moves lower and the stochastic momentumcontinuesflattoslightlydown.Withtheindicatorsinconflictyouneed tosittight. A little past halfway into the session the fast lines on both the MACD and stochastic momentum move higher and cross the slow lines. At the same time the moving ribbons remain in a sold uptrend. This is the clearest trading opportunity of the session. All indicators are bullish. You should move quickly to establish a positionandcapitalizeontheupwardmomentum. As is my style I would move my stop up as the market rises and would get out of the trade with the momentum still in my favor. If you choose to wait for one of theindicatorstoturndownyouwouldgetoutjustpriortothesessionhigh.Either waythisisaverygoodtrade.

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TRADINGWITHTHEMOVINGRIBBONSTEMPLATE 67 FIGURE 6.2 MovingRibbonsTemplateTrade2 About one third of the way into the session in Figure 6.2 the MACD and the stochastic momentum break sharply. The moving ribbons remains flat and then eventuallyconfirmthedownmovewhenthefastlinedeclinesslightly.Atthispoint you can take the trade. Given the weak response with the moving ribbons I would classifythisasa70/30trade. Lateinthedaythemovingribbonsareflashingabullishsignal.ThentheMACD reversescourseandmovessharplyup.Howeverthestochasticmomentumprovides aratherweakandlateconfirmation.Iprobablywouldstayoutofthistrade.

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TRADINGWITHTHEMOVINGRIBBONSTEMPLATE 68 FIGURE 6.3 MovingRibbonsTemplateTrade3 ThroughthefirstthirdofthesessioninFigure6.3themarketmovessidewaysto slightly down. The MACD and stochastic momentum break reflecting the bearish sentiment. However the moving ribbons fail to confirm the bearish break. The bottom line on the ribbons trends up while the top line is relatively flat. There simplyisn’tenoughconvictioninthemarketasreflectedinthethreeindicatorsto makeatrade. A little past midsession the MACD and the stochastic momentum bottom out and start moving higher. The price bars make three consecutive higher highs and higher lows. However the moving ribbons remain flat. Again there’s not enough convictionforatrade. After the price bars flatten for a period the market again attempts to go higher. What’s important here is that the MACD and stochastic momentum do not reach

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TRADINGWITHTHEMOVINGRIBBONSTEMPLATE 69 the highs they made earlier in the session. Thus we have a mild bearish divergence between price and these two indicators. After the divergence all three indicators begintomovedownatveryclosetothesametime.Here’syouropportunitytomake a trade. Get in quickly on the signal. Then get out quickly while the momentum is stillinyourfavor.

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TRADINGWITHTHEMOVINGRIBBONSTEMPLATE 70 FIGURE 6.4 MovingRibbonsTemplateTrade4 Early in the session in Figure 6.4 the stochastic momentum and MACD are moving lower but the moving ribbons are converging and moving slightly higher. Later the stochastic momentum bottoms and begins to move slowly higher. The MACDfollowsslowlyuntilaboutonethirdintothesessionwhenitmovessharply higher. At this stage the bottom line of the moving ribbons is moving higher but the top line remains flat. About halfway into the session when the moving ribbons begin to expand and the top line starts trending up you have an excellent 80/20 setup. LaterinthesessionthefastlinesoftheMACDandstochasticmomentumbreak lower. When the top line of the moving ribbons begins a sharp descent there’s an opportunityforaquickshorttrade.

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TRADINGWITHTHEMOVINGRIBBONSTEMPLATE 71 FIGURE 6.5 MovingRibbonsTemplateTrade5 At the beginning of the session in Figure 6.5 the moving ribbons are moving up and the MACD and stochastic momentum are moving down. The stochastic momentum and MACD bottom and turn up but by this time the top line on the movingribbonshastilteddown.Notradetomakehere. Prices rally fall back and then rally again. On the last rally the top line of the movingaverageribbonsturnsupandthefastlinesofthestochasticmomentumand MACDcrosstheslowline.Themovingribbonsarestillinanuptrendandtheyare nowwidening.Thisisagoodtradetotake. Later in the session there’s another chance to go long when the stochastic momentum and the MACD fast lines cross the slow lines and the top line of the movingribbonsbeginstomovehigher.

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TRADINGWITHTHEMOVINGRIBBONSTEMPLATE 72 FIGURE 6.6 MovingRibbonsTemplateTrade6 There are two similarly structured trades in Figure 6.6. The second works out betterthanthefirst. ForagoodpartofthissessionthemovingribbonsarerisingandtheMACDand stochastic momentum are falling. Just short of the halfway point of the session the fast lines of the MACD and stochastic momentum cross the slow lines. Then the movingribbonsreversecourseandbegintotiltdown.Thisisagoodtradetotake. The market falls quickly enabling you to take a profit on the trade. The market thenrallieswhichcreatesanothergoodshortsidesetup.Abouttwothirdsintothe session the fast lines of the MACD and stochastic momentum cross the slow lines and the moving ribbons begin to expand and tilt downward. This is another good tradetotake.

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TRADINGWITHTHEMOVINGRIBBONSTEMPLATE 73 FIGURE 6.7 MovingRibbonsTemplateTrade7 ThemarketisrelativelyflatthroughtheearlypartofthesessioninFigure6.7but slowly begins to move up. The stochastic momentum reflects the market’s bullish biasfirstandissoonfollowedbytheMACD.Whenthemovingribbonsbegintotilt upyouhavean80/20tradesetup.

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TRADINGWITHTHEMOVINGRIBBONSTEMPLATE 74 FIGURE 6.8 MovingRibbonsTemplateTrade8 At the beginning of the session in Figure 6.8 the moving ribbons are trending higherwhiletheMACDandstochasticmomentumaretrendinglower.Aboutone quarter of the way into the session the moving ribbons begin to turn down with the fast line quickly moving through the other lines and finally crossing the bottom line. The MACD and stochastic momentum are still showing strong downside momentum.Thisisagoodshorttradetotake. Through the remainder of the session the moving ribbons continue in a bearish pattern. The faster lines move slightly higher in concert with the stochastic momentumandMACDhowevertheoverallformationtrendsdown.Towardthe finalthirdofthesessionthemarkettopsandthestochasticmomentumandMACD turn down. When the fast line of the moving ribbons turns lower you can short themarket.

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TRADINGWITHTHEMOVINGRIBBONSTEMPLATE 75 FIGURE 6.9 MovingRibbonsTemplateTrade9 Toward the middle section of the session in Figure 6.9 the market makes two swing highs. The second swing high is made on lower momentum in the MACD and to a lesser extent the stochastic momentum. You should be looking to get shortatthispoint. Following the divergence the MACD and stochastic momentum track lower with the fast lines in both indicators crossing the slower lines. When the fast line of the moving ribbons begins to turn and cross the slower lines and the overall formationbeginstoconvergeyoucangoshort.

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TRADINGWITHTHEMOVINGRIBBONSTEMPLATE 76 FIGURE 6.10 MovingRibbonsTemplateTrade10 Early in the session in Figure 6.10 there’s a brief rise in the market followed by a sharper fall. The MACD the stochastic momentum and moving ribbons turn bearishataboutthesametime.Thisisagoodquicktradetotake. The market bottoms and then starts rising again. The stochastic momentum and theMACDreflectthebullishmove.Whenthemovingribbonsturnpositiveandthe fastlineofthemovingribbonscrossestheslowlinethereisagoodopportunityfor along-sidetrade.

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TRADINGWITHTHEMOVINGRIBBONSTEMPLATE 77 FIGURE 6.11 MovingRibbonsTemplateTrade11 AtthestartofthesessioninFigure6.11themovingribbonsareflatandbunched together.There’snotradetomakeatthispoint. The MACD and the stochastic momentum begin to move higher about one fifth ofthewayintothesession.Howeverthemovingribbonsremainflat.Thisisnotan 80/20 trade at this point. Thereupon the market then gaps higher and the ribbons begintotiltupward.Thisisagoodbullishsetup. About one third of the way into the session the MACD and the stochastic momentum turn down. Shortly thereafter the fast line on the moving ribbons beginstotiltslightlydownward.Thentheslighttilttransitionsintoamuchsharper downwardslope.Thisisagoodbearishsetup. About two thirds of the way into the session the MACD and the stochastic momentumaremovingupatafairlysharpslope.Whenthefastlineonthemoving ribbonsturnsupconfirmingtheothertwoindicatorsthereisanotherbullishsetup.

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TRADINGWITHTHEMOVINGRIBBONSTEMPLATE 78 Finally about four fifths of the way into the session the market makes a swing lowonweakmomentumasdemonstratedbytheMACD.Whilethisisnotaclassic divergence pattern because the swing low did not exceed the previous swing low the fact that the downside momentum was so weak indicates that sellers are losing conviction.Iwouldlookforabullishsituationtoemerge. Sureenoughthemarketgapshigher.TheMACDandstochasticmomentumturn up and the moving ribbons tilt slightly higher. When the fast-line moving average turnshigherit’sagoodsituationtogolong.

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79 CHAPTER 7 Tradingwiththe BressertTemplate I n this chapter we’ll show a series of examples of trading with the Bressert templateeachstartingwithachartandfollowedbyanexplanationofthetrade.

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TRADINGWITHTHEBRESSERTTEMPLATE 80 Bressert E-Mini Stochastic Momentum MACD FIGURE 7.1 BressertTemplateTrade1 The session opens in Figure 7.1 with the MACD and stochastic momentum flat to slightly down and the Bressert moving lower. The Bressert quickly reverses and moveshigherbutthere’snochangeintheotherindicators. AboutonethirdofthewayintothesessiontheBresserthaspeakedforasecond time and begun to fall. At the same time there’s a breakdown in the stochastic momentum and MACD. The only shortcoming to this setup is that there isn’t a decisive bearish crossover of the fast lines through the slow lines in the stochastic momentumandMACD.Stillthisisavalidshort-tradesetup. Aboutmidwaythroughthetradingsessionthesellingmomentumhaseasedand themarketagainturnsandgoeshigher.TheBressertisthefirstindicatortoturnand is quickly followed by the MACD and stochastic momentum. This is a solid 80/20 tradefromthelongside.

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TRADINGWITHTHEBRESSERTTEMPLATE 81 On the right side of the chart at the very end of the session all three indicators move sharply higher at about the same time. I wouldn’t take this trade because I almost never carry positions overnight. It’s a risk I’m unwilling to take. However if you are trading on a longer time frame you may want to take some end-of-day setups. If you are interested in holding positions overnight you should establish off-hourstradingstops.

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TRADINGWITHTHEBRESSERTTEMPLATE 82 FIGURE 7.2 BressertTemplateTrade2 Early in the session in Figure 7.2 there was a good trade to the downside. After peaking initially the Bressert broke early leading the way. The MACD and stochasticmomentumquicklyconfirmthemovegivingyouthejustificationtoplace ashortposition.Themarketmovesdownquickly.Iwouldgetoutofthetradewhile themomentumisstillinmyfavor. AboutonethirdintothesessiontheMACDandthestochasticmomentumstart moving up and continue moving up for the duration of the chart. However the Bressert indicator is moving down during the early part of the session at the same time the MACD and the stochastic momentum are moving up. Eventually the Bressertbottomsoutandbeginstorise.Thisisthetimetotakethetrade. This is a slow-moving trade with the market moving sideways initially. The market does not break down however so you could hold this trade with a close stopandgetagoodportionoftheupmove.

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TRADINGWITHTHEBRESSERTTEMPLATE 83 FIGURE 7.3 BressertTemplateTrade3 Midway through the session in Figure 7.3 the MACD and the Bressert start downataboutthesametime.Thestochasticmomentumindicatorquicklyfollows producingagoodtradesetup.Thekeyistostrikequicklyoncethetradeisconfirmed. Themarkettrendslowerforthreeconsecutivebarsgivingyoutheopportunityfor animmediateprofitonthetrade. Late in the day there’s a short trade as the market begins to drop. The Bressert moves first with both the fast and slow lines breaking simultaneously. The MACD and the stochastic momentum indicators quickly confirm the move. If you strike quickly here there’s a nice potential profit. However even if you’re a bit late it stillisagoodtrade.

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TRADINGWITHTHEBRESSERTTEMPLATE 84 FIGURE 7.4 BressertTemplateTrade4 ThroughthefirsttwofifthsofthesessioninFigure7.4theMACDandstochastic momentum trend lower. The Bressert is somewhat volatile. As long as the MACD andstochasticmomentumareinabearishmodeyouwanttolookforconfirmation fromtheBresserttoputonatrade.SpecificallyyouwanttoseebothBressertlines movinginthesamedirectiontoconfirmthetrade. There are two instances early in the session where all three signals are moving down. In the first instance about one fifth of the way into the session the MACD and stochastic momentum are declining at a weak angle and the Bressert is moving down.Notethatyoudon’thaveadecisivebearishcrossovermovewiththeMACD and stochastic momentum at this point. This is more of a 60/40 or 55/45 trade. I wouldn’t take it. If you do take the trade you need to be in and out quickly. The Bressertthenreversesralliesandstartsfallingagain.AtthistimetheMACDand stochastic momentum break sharply down. This is a solid trade that enables you to profitfromtheswinghighandtheensuingmovedown.

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TRADINGWITHTHEBRESSERTTEMPLATE 85 Shortly thereafter both lines of the Bressert bottom and move sharply higher. Then the fast lines of the stochastic momentum and MACD turn higher and cross theslowlines.Thisisahigh-probabilitylong-sidetrade. Aboutfourfifthsofthewayintothesessionthere’sanotherbullishsetupsimilar to the previous trade. The MACD turns higher and is quickly followed by the Bressertandstochasticmomentum.

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TRADINGWITHTHEBRESSERTTEMPLATE 86 –5 0 4 5 6 7 10 11 12 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885 –50 –40 –30 –20 –10 0 10 20 30 40 50 60 70 80 –4 –3 –2 –1 0 1 2 3 4 5 6 Stochastic Momentum MACD FIGURE 7.5 BressertTemplateTrade5 Thisisnotaneasyperiodtotrade. The market spikes higher as the session opens in Figure 7.5. The move happens sofastthatthereisn’tanytimetoeventhinkabouttradeusingmymethods. The market then flattens and about one third of the way into the session the MACD and stochastic momentum slowly trend down. The fast lines of the MACD and stochastic momentum cross over creating a bearish situation. By this time howevertheBresserthasbottomedandflattenedout.Idon’tseeagoodtradehere. Interestingly each time the market tries to go up through the remainder of the session the momentum as reflected in the MACD and stochastic momentum is progressivelyweaker. About halfway into the session the fast lines on both the MACD and Stochastic Momentum cross the slow lines and both indicators begin to accelerate to the downside. Based on our criteria this is a good trade to take. However the market

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TRADINGWITHTHEBRESSERTTEMPLATE 87 staysflat to slightlydown for quite some time. If you held on to the shortposition you would eventually be rewarded. If you liquidated the initial short position for a small profit or scratch you could get back in about four fifths of the way into the sessionwhenalltheindicatorsbreakatthesametime.

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TRADINGWITHTHEBRESSERTTEMPLATE 88 FIGURE 7.6 BressertTemplateTrade6 ThesessionopenswiththemarketfairlyflatinFigure7.6howevertheMACD and stochastic momentum are trending upward while the Bresert is cycling down. Clearlythereisnotradetotakehere. About one third of the way into the session the Bressert turns up. And the stochasticmomentumaftergoingflatrenewsitsbullishtrend.Thisisagood80/20 setup. About three fifths of the way into the session the Bressert begins to decline and the MACD and stochastic momentum quickly follow. This is a reasonable trade to takealthoughthemarketspikesupslightlybeforeitbeginstodecline.

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TRADINGWITHTHEBRESSERTTEMPLATE 89 FIGURE 7.7 BressertTemplateTrade7 Early in the session in Figure 7.7 the MACD line crosses the signal line the stochasticmomentumfastlinecrossestheslowlineandtheBressertindicatorturns sharplyup.Withallthreeindicatorsshowingdecisivebullishmovementthereisan 80/20tradingsetup. Midway into the session the market peaks and starts to descend. All three indicatorsflashsellsignals:theMACDlinecrossesbelowthesignallinethefastline ofthestochasticmomentumcrossesbelowtheslowlineandtheBressertindicator dropsverysharply.Thisisagreat80/20short-sidetrade.

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TRADINGWITHTHEBRESSERTTEMPLATE 90 FIGURE 7.8 BressertTemplateTrade8 AboutonethirdofthewayintothesessioninFigure7.8there’sanicedownward break in all three indicators. Notice that the Bressert is the first indicator to turn and is quickly followed by crossovers in the MACD and stochastic momentum indicators.Thisisagoodtradetotake. A little past halfway into the session there are bullish crossovers in both the MACD and stochastic momentum. Shortly thereafter the Bressert begins to cycle higher.Thistradegetsyouinatthebeginningofalongpriceswing. LateinthesessiontheMACDandthestochasticmomentumbegintodeclineand experience bearish crossovers. Following a weak upside cycle the Bressert begins tocycledown.Thetradeworksforafewbarsbeforethemarketreverses.Youneed tobenimbleandexitquickly.

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TRADINGWITHTHEBRESSERTTEMPLATE 91 FIGURE 7.9 BressertTemplateTrade9 After an early up move in Figure 7.9 the market moves in a flat to slightly down pattern. The Bressert cycles down and after a few more bars the MACD and the stochastic momentum begin to move lower as well and generate downside crossovers.Asyoucanseethistradeworksoutverywell.

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TRADINGWITHTHEBRESSERTTEMPLATE 92 FIGURE 7.10 BressertTemplateTrade10 About one fifth of the way into the session in Figure 7.10 there are bullish crossovers in the MACD and the stochastic momentum. However the Bressert by nowhasflattenednearthehighpointofitsrange.There’snotradehere. After that the Bressert quickly cycles down and begins rising again. So at this pointallthreeindicatorsaresignalingthatthemarketisgoinghigher.Thisisagood tradetotake. About four fifths of the way into the session both the MACD and stochastic momentum touch their reference lines and accelerate higher. The Bressert is also cyclinghigher.Soagainyouhaveagoodlong-sidetrade.

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TRADINGWITHTHEBRESSERTTEMPLATE 93 FIGURE 7.11 BressertTemplateTrade11 Toward the later stage of the session in Figure 7.11 is a very good trade setup. Notice first the bearish divergence when the market makes a new session high but none of the indicators follow suit. The MACD stochastic momentum and the Bressert all make lower highs. This is a powerful sign that upside momentum is exhaustedandthemarketisreadytodecline. Shortly thereafter all three indicators turn sharply lower. This is a very clear 80/20setup.Youshouldhavenohesitationtakingthistrade.

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TRADINGWITHTHEBRESSERTTEMPLATE 94 FIGURE 7.12 BressertTemplateTrade12 ThesessionopenswiththeMACDandstochasticmomentumdisplayingabearish tone in Figure 7.12. But the Bressert—after cycling down—is flat so there isn’t a high-probabilitytradehere. The market then remains in a fairly tight range. The Bressert cycles up and then flattens.TheMACDandstochasticmomentumarealsorelativelyflat. Finally the market gaps up on the opening of a new trading day a little past halfway on the chart. The Bressert cycles upward and the stochastic momentum andMACDbothturnsharplyhigher.WhileInormallydon’ttradethisclosetothe openingIconsiderthisan80/20tradegiventhestrengthinallthreeindicators.

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TRADINGWITHTHEBRESSERTTEMPLATE 95 FIGURE 7.13 BressertTemplateTrade13 A multiday session covering seven days of trading is seen in Figure 7.13. At the outset the Bressert israllying whilethe MACD and the stochastic momentum are declining.Nothingtotradeatthisjuncture. On the 12th about one fifth of the way into the chart the market gaps up and all three indicators flash bullish signals. I would take this trade. The market slowly grindshighertherestofthedayandyoucouldgetoutatanytimebeforetheclose withasmallprofit. On the 13th about one third of the way into the session the MACD the stochastic momentum and the Bressert all turn down. Again I would take this trade. Note that the market goes flat the rest of the day. You might have scratched onthistradeormadeasmallprofitorloss.Whilethetradedidn’tworkoutIwould takethistypeofsetuptimeandtimeagain. Abouthalfwayintothesessiononthe14ththemarketisinatighttradingrange for the third consecutive day. However the MACD and stochastic momentum

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TRADINGWITHTHEBRESSERTTEMPLATE 96 continuetoshowweakness.TheBressertalsoisweakearlyinthedayandwithall three indicators pointing down a short trade is justified. Unfortunately if you’re looking for a quick profit like I do this trade would also be a scratch. If you have a slightly longer-term perspective you would be rewarded as the market breaks at the end of the day. Indeed if you’re flat going into the last couple of hours of tradingthereisagreatshortopportunityasallthreeindicatorsagainflashsubstantial weakness. Thenextgoodtradeoccursaroundmiddayonthe16thaboutthreefourthsofthe wayintothechart.TheMACDthestochasticmomentumandBressertaccelerate higher.Thebullishconditionandrisingpricespersistintothenextday.

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TRADINGWITHTHEBRESSERTTEMPLATE 97 FIGURE 7.14 BressertTemplateTrade14 Therearetwo80/20tradesdisplayedonthechartinFigure7.14. About one-fourth of the way into the chart both lines on the Bressert begin to moveup.AtthatpointtheMACDandstochasticmomentumareintheprocessof bottomingout.Whenthefastlinesonbothoftheseindicatorscrosstheslowerlines notetheBressertisstillbullishyoucangolong.Thetradeworksoutverywell. A little past halfway into the session the Bressert begins to move sharply down. AlittlewhilelaterthefastlinesontheMACDandthestochasticmomentumcross theslowerlinescreatingaclearshort-tradesetup.

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99 CHAPTER 8 Tradingwiththe RMOTemplate I n this chapter we’ll go through a series of examples of trading with the Rahul Mohindar oscillator RMO template each starting with a chart and followed by anexplanationofthetrade.

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TRADINGWITHTHERMOTEMPLATE 100 FIGURE 8.1 RMOTemplateTrade1 The session in Figure 8.1 opens with the moving average relatively flat and the stochasticoscillatorandRMOmovinghigher.Themarketisinatradingrangeand there’slittlemomentumbehindtheinitialattemptofthemarkettogohigher. About one fourth of the way into the session the moving average stochastic oscillatorandRMOallacceleratehigher.Thisisaclear80/20situationandagood tradetotake. After the swing high in the first one third of the session is reached the market falls back. The stochastic oscillator and RMO reflect the fall back but by the time themovingaverageconfirmsthemovetheotherindicatorsareinanoversoldarea. Iwouldnottakethistrade. TheRMOandstochasticoscillatorbottomabouthalfwaythroughthesessionand beginrisingbutthemovingaverageremainsflatanddoesnotconfirmthemove.

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TRADINGWITHTHERMOTEMPLATE 101 Toward the end of the session the RMO forms a bearish divergence when the late-day session price high is made on weaker RMO momentum than the previous pricehigh.Thestochasticoscillatorbreakssharply.Whenthemovingaverageturns downyouhaveconfirmationfromallthreeindicatorsandasolid80/20short-trade opportunity.

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TRADINGWITHTHERMOTEMPLATE 102 FIGURE 8.2 RMOTemplateTrade2 About one-third of the way into the session in Figure 8.2 all three indicators begintomoveupataboutthesametime.Youneedtocatchthetradequicklyasthe marketmovessharplyhigherandthenflattens.Ifyoudon’tcatchitearlyletitgo. AfterthemarketmakesaswinghighthestochasticoscillatorandtheRMObegin toturn.Thegradualdeclineintheseindicatorsthenacceleratesandisconfirmedby a downturn in the fast moving-average line. This is a nice short-trade opportunity. Againyouhavetomovefast. Late in the session the stochastic oscillator and moving average begin to rise at about the same time and the RMO eventually confirms. The market moves progressivelyhigherforthenextseveralpricebars.Thenjustasquicklythemarket turnsdownagainandthedeclineisreflectedinallthreeindicators.

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TRADINGWITHTHERMOTEMPLATE 103 FIGURE 8.3 RMOTemplateTrade3 At the beginning of the session in Figure 8.3 the moving average is moving up and the RMO is above the 0 line. These are bullish conditions and we only need to wait for the stochastic oscillator to confirm. Early on however the stochastic oscillator turns down. We have to be patient monitor conditions for change and continuity and wait for a good opportunity. Finally when the stochastic oscillator turnsupthat’sagoodopportunitytogolong. As the session progresses the stochastic oscillator flattens and then turns down. AtthesametimehowevertheRMOremainsfarabovethe0lineandthemoving average is still trending higher. Conditions continue to be bullish and you want to lookforanopportunitytobuythemarket. When the stochastic oscillator turns up a little before the halfway point of the session you can put on a trade. At that point everything is in place. The moving average the stochastic oscillator and the RMO are all trending higher. This is an 80/20trade. Themarket’supwardmomentumbeginstodissipatetowardthelaterpartofthe session. The moving average flattens and the stochastic momentum breaks sharply down.There’snotsufficientunanimityamongtheindicatorstoconsidergoingshort. And when the stochastic momentum reverses late and trends higher the flattened movingaverageprohibitstakingalatebullishtrade.

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TRADINGWITHTHERMOTEMPLATE 104 FIGURE 8.4 RMOTemplateTrade4 The session in Figure 8.4 opens with the RMO and stochastic oscillator at high levels but moving in a relatively flat angle paralleling the flat price movement in the actual market. It looks like a market ready to break but we need to wait for confirmationfromourindicators. One third of the way into the session the RMO and the stochastic oscillator break sharply and the fast line of the moving average tilts down. This is a strong 80/20 short setup particularly because the market is dropping from overbought conditionsasreflectedintheRMOandstochasticoscillator. Just past the halfway point of the session the stochastic oscillator and RMO are moving higher again. When the fast line of the moving average tilts up and then crosses the slow line you have a bullish trade setup. However given that the stochasticoscillatorisapproachingoverboughtlevelsthisismoreofa60/40trade. About two thirds of the way into the session the RMO and the stochastic oscillator form bearish divergences as the swing price high is made on weaker

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TRADINGWITHTHERMOTEMPLATE 105 RMO and stochastic momentum than the previous price high. Both the RMO and stochasticoscillatorthenbreaklower.Thefastlineofthemovingaveragedoesbegin totiltdownhoweverit’saweakmoveanditisnotconfirmedbytheslowerline. Iwouldn’ttakethistrade. Attheendofthesessionthere’saquickmoveupinallthreeindicators.AgainI wouldn’ttakethetradebutitmightbeanopportunityforalonger-termtrader.

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TRADINGWITHTHERMOTEMPLATE 106 FIGURE 8.5 RMOTemplateTrade5 Early in the session in Figure 8.5 the stochastic oscillator moves sharply higher followedquicklybytheRMO.Whenthemovingaveragebeginstotiltupwardyou haveconfirmationandagood80/20trade. After moving strongly higher the market flattens. The stochastic oscillator and RMObegintomovedown.Themovingaveragecontinuesrising.There’snotrade inthissituation. When the moving average turns down about two thirds into the session you can take this trade. However by this time the stochastic oscillator is approaching oversoldconditionssoproceedwithcaution.Useatightstop.

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TRADINGWITHTHERMOTEMPLATE 107 FIGURE 8.6 RMOTemplateTrade6 There are no solid trade setups until late in the session in Figure 8.6. Early on the stochastic oscillator and moving average are in conflict. About one third of the way in the stochastic oscillator and RMO begin to decline but the move is not confirmedbythemovingaverages. An important thing to see here is the divergence that develops about three quarters of the way into the session. The price rallies however the RMO and the stochastic oscillator fail to reach to the levels they achieved on the previous session high.Thisisabearishsignal. After the divergence the stochastic oscillator and RMO drop dramatically and thefast-linemovingaveragecrossestheslowline.Thisisasolid80/20trade.

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TRADINGWITHTHERMOTEMPLATE 108 FIGURE 8.7 RMOTemplateTrade7 The session in Figure 8.7 opens with the moving averages going higher the stochasticoscillatorgoinglowerandtheRMOflat.Nothingtodohere. About midway through the period the market tries to go higher but gets little traction and then starts down. The RMO and stochastic oscillator catch the move firstandthemovingaveragesoonfollows. About four fifths of the way into the chart is the best trade of the session. The RMOstochasticoscillatorandmovingaveragebreakdownsimultaneously.Thefast lineofthemoving averageaccelerates creating separationfromtheslowline. This isan80/20trade.

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TRADINGWITHTHERMOTEMPLATE 109 FIGURE 8.8 RMOTemplateTrade8 There are several trades available on the chart in Figure 8.8 which represents twoweeksofmarketactivity.Ineachinstanceallthreeindicatorsmoveinthesame direction. And in each instance the trades are profitable provided you follow my approachofgettinginandoutofthemarketquickly. AboutonefifthofthewayintothesessiontheRMOandthestochasticoscillator breakdownsharply.Themovingaveragetiltsdowngentlyincontrasttothesharper moves of the other two indicators. And the fast line of the moving average doesn’t crosstheslowlineuntilthemoveiswellunderway.Iwouldclassifythisasa70/30 or60/40trade. Themarketthenbottomsandheadsupward.TheRMOandstochasticoscillator turn bullish. However the moving average again is slow to respond. And by the timethefast-linemovingaveragecrossestheslowlinethestochasticoscillatorisin overboughtterritory.Iwouldstayawayfromthistrade.

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TRADINGWITHTHERMOTEMPLATE 110 About two fifths into the session is a much better trade setup. The moving average stochastic oscillator and the RMO all rise at the same time. While the movehappenedatthemarketopeningofthe24thandquitelikelywasaresponseto an economic report or other news the response from all three indicators was very strongindicatingthatfollow-throughwaslikely.Thisisagoodtradetotake. About four fifths into the chart is the best trade of the session. The stochastic oscillator leads the way turning up and is quickly followed by the RMO and the movingaverage.Thisisasolid80/20trade. Finally at the very end of the session is a good short-side trade. The stochastic oscillator and RMO turn very bearish. The moving average tilts down as well. A good time to short the market is when the fast-line moving average crosses the slow-linemovingaverage.

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TRADINGWITHTHERMOTEMPLATE 111 FIGURE 8.9 RMOTemplateTrade9 ThemarketopensinFigure8.9withthestochasticoscillatorandmovingaverages inarelativelyflatmovementandtheRMOslowlymovinghigher.Themarketprice stochastic oscillator and moving average then start moving higher also but with the stochastic oscillator at such an extreme level this is not a good opportunity to golong. A little bit later the RMO and stochastic oscillator begin to turn down and are quickly joined by the moving averages. When the fast-line moving average crosses theslowlineyouhaveagoodshort-sidetradesetup.

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TRADINGWITHTHERMOTEMPLATE 112 FIGURE 8.10 RMOTemplateTrade10 AtthebeginningofthesessioninFigure8.10themovingaveragesareinabullish pattern the stochastic oscillator is descending and the RMO is stagnant above the zero.Notmuchclarityhere. Themarketthensellsoffabitandthenralliestoasessionhigh.Atthatpointthe stochastic oscillator quickly begins to drop from an overbought level and the RMO begins to trend down. When the fast-line moving average crosses the slow-line movingaverageashort-sidetradeemerges. Just short of halfway into the chart there’s another bearish trade setup. The stochastic Oscillator and RMO drop sharply and are soon followed by the fast-line movingaveragecrossingbelowtheslowline. A little past halfway into the chart the market makes a swing low on very weak momentum as reflected in both the RMO and the stochastic oscillator. While this

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TRADINGWITHTHERMOTEMPLATE 113 is not a classic divergence signal because price did not make a new low it does indicatethatthedownsidemomentumisquiteweakatthispoint. Following the weak swing low the three indicators move upward at about the same time. This is a very strong trade and the market responds with an ex- tendedrally.

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TRADINGWITHTHERMOTEMPLATE 114 FIGURE 8.11 RMOTemplateTrade11 ThemarketisinatradingrangethroughthefirsthalfofthesessioninFigure8.11. Notice however that throughout the first half the moving average is in a bullish alignment.OntwooccasionsduringthisperiodtheRMOandstochasticoscillator turnhigherandproducequickin-and-outtradingopportunities.Iwouldn’tclassify thesetradesas80/20opportunitieshoweverbecausethebullishtiltonthemoving averagesisveryslight. About halfway into the chart the best trade on the session appears following a bearishdivergencewherepricereachestheprevioussessionhighbuttheRMOand the stochastic oscillator fall well short of their previous highs. Both the stochastic oscillator and RMO then break sharply. When the fast-line moving average crosses theslowlineyouhaveclearancetoshortthemarket.

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TRADINGWITHTHERMOTEMPLATE 115 FIGURE 8.12 RMOTemplateTrade12 Early in the session in Figure 8.12 the moving average is moving in a flat to slightly weaker manner. The RMO is also looking weak. However after a slight turndownthestochasticoscillatorismovinghigher.There’snotradetotakehere butit’sclearthemarkethasabearishflavor. About one fourth of the way into the session the RMO and stochastic oscillator formtopsandthenbeginmovingquicklylower.Whenthemovingaveragesconfirm themoveit’sagoodsituationtogoshort. The market forms a bottom about halfway through the session and then turns up. The RMO and stochastic oscillator start climbing. When the fast-line moving averagecrossestheslowlinethere’sagoodbullishtradesetup.

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TRADINGWITHTHERMOTEMPLATE 116 FIGURE 8.13 RMOTemplateTrade13 AtthestartofthesessioninFigure8.13themarketisclearlybearish.TheRMO and stochastic oscillator are trending down. When the fast-line moving average crosses the slower line everything is lined up to go short. The trade likely would resultinasmallprofitorscratch. Themarketgapsupaboutonefifthofthewayintothechartandalltheindicators turnbullish.Noticetheseparationbetweenthefast-andslow-linemovingaverages aclearindicationofstrongupsidemomentum.Thisisagoodtradetotake. Abouttwothirdsofthewayintothechartthemarketstartsfallingrapidlyandall threeindicatorsturnverybearish.Iwouldgoshortwhenthemovingaveragesbegin separatingandthefast-linemovingaveragebeginstodescendataverysharpangle. Towardtheendofthechartabullishsituationdevelops.Youfirstseetheupward momentum building on the RMO and stochastic oscillator. When the fast-line movingaveragestartsturningupyoucangolong.

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117 CHAPTER 9 ADayofTrading N oonecanaccuratelypredictthemarket.Therearesimplytoomanyvariables. A seemingly perfect trade can go asunder as a result of a natural disaster an unexpected political development or a host of other factors. You need to acknowledgeandrespecttheriskthatisalwayspresentinthemarket. My templates measure market activity and help identify high-probability trading situations.NoticeIsaidhelpidentifyhigh-probabilitytradingsituations.Myapproach isnotmechanicalthere’salwaysanelementofinterpretationinvolved. It’s much harder to read charts in real time than at the end of the day. In real time you have many 60/40 situations where the market is showing a bullish or bearish bias but you don’t have all the signals lined up to make a trade. At various timesduringthedayyoumayfeelimpatientfearfulorgreedy.It’sachallengeto remainobjectivelyimmersedinthemarketwithoutfeelingsomelevelofemotional discomfort. You have to constantly discipline yourself to act on the basis of your objectiveanalysisandnotonthebasisofyourfeelings. IthelpsmetothinkthatwhileIcan’tpredictthemarketwithabsolutecertaintyI canmanagethemarketinrealtime.BymanagingthemarketImeanthefollowing: ■ Iobjectivelygatherinformationthroughtheprismofmytemplates. ■ Ianticipatewhatneedstohappentocreatean80/20trade. ■ Whenthe80/20situationunfoldsIputonatradewithnohesitationandwitha closestop-loss. ■ I take my profit or loss quickly without emotion and get ready for the next trade. Remember most of the time the market lacks clarity. Bulls and bears are in a constant battle for market control. Long-term medium-term and short-term

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ADAYOFTRADING 118 traders are looking for opportunities in their particular time frames. One trader’s short-term selling opportunity may be a long-term buying opportunity for another trader. Ireadthemarketwithmyindicators.ThroughoutthedayIaskmyself: ■ Aretheindicatorsflattrendingorsomewhereinbetween ■ Arethemovingaveragesseparatingorconverging ■ Areanydivergencesbetweenpriceandmomentumdeveloping ■ Aretheindicatorsconfirmingeachotheroraretheyinconflict ■ Whatisthenextmostlikely80/20tradingopportunity By keeping arunning dialogue inmy head I’mabletostayon topof themarket inrealtimeandanticipatenewopportunities.Thenatureofthemarketisthatgreat opportunities occur time andtime again but they disappear very quickly as nimble traders jump in and drive prices substantially higher or lower. You want to be on the forefront of those trades and the only way that’s possible is by staying actively intouchwiththemarketthroughouttheday. Toprovideabetterideaoftheinternaldialogueandmytradingdecisionprocess I’llfocushereontwoofdaysoftrading:May14and152014. Bywayofbackgroundthestockmarketwasinthematurephaseofalong-term bullmarketthatbeganinMarch2009.Severaltimesduringthatperiodthemarket showed signs of weakness leading many traders and prognosticators to warn that the end of the bull market was imminent. Each time the market rallied to record highs. As we approached May 14 the market was slowly churning higher but with very little conviction and very little volatility—not exactly the ideal situation for short-termtrading. I went into May 14 with an open mind but with a slight bearish bias. Several indicators flashed bearish signals on the 13th: the RMO stochastic oscillator stochastic momentum moving average convergence-divergence MACD and Williams R see Figures 9.1 9.2 9.3 and 9.4. I envisioned three scenarios: 1 the market breaks early and a strong selling day ensues 2 the market breaks earlybutthemovefailsandastrongbuyingdayensuesor3themarketremains locked in a trading range for most of the day but breaks or rallies after lunch. As a traderyouneedtobealerttoallpossiblescenarios. At the opening of the 14th the market was flat extended down a bit and thenreboundedalittle.Theshorter-termmovingaverageswererelativelyflatthe longer-term moving averages were tilted slightly higher reflecting the long-term bearish trend. Many of the other indicators continued to look bearish. But despite thebearishtonethemarketwasnotreadytobreak.

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ADAYOFTRADING 119 FIGURE 9.1 MovingAverages As the morning progressed the market established a progressively narrower trading range. In recent days volatility had been diminishing and there were few trading opportunities. Usually the stock market provides one or two good trading opportunities every day. That wasn’t the case lately and I was getting a little frustrated. Markets can stay in trading ranges for a long period of time and you can lose a lot of money trading false breakouts. At the same time when markets decisively break out of a range they often move substantially in one direction. Despite my frustrationallmyexperiencestoldmetosittightmonitorthemarketcloselyand bereadyforthenexttrade. Toward the end of the day around 2:30 P.M. the market finally broke. Here’s whatIsaw: ■ The 21-period moving average turned down and the 55-period and 89-period quicklyfollowed.

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ADAYOFTRADING 120 FIGURE 9.2 Bressert ■ TheWilliamsRwentnegative. ■ TheRMOwentnegative. ■ Thestochasticoscillatorwentnegative. Accordingly I went short at 1886.30. I took my profit just before the close at 1883.00. Afterthebreakdownonthe14thIexpectedaweakmarketandnewshort-trading opportunitiesonthe15th.Ofcourseanythingcanhappenovernighttochangethe dynamics of the market. A positive earnings announcement from a market leader or a bullish economic report could change the tone of the market and generate a rebound on the 15th. But assuming no significant news developments I was alert foraweakopeningandearlymorningselling. NormallyIdon’ttradetheopening.Iusuallywaitforthemarkettoestablishan opening range and then monitor my indicators for trading setups. In this situation howeverIwaspreparedtogoshortveryearlyonthe15th.

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ADAYOFTRADING 121 FIGURE 9.3 RMO Notice that at the close on the 14th every indicator on all four templates was strongly negative. This alone is reason to go short on the opening if the market opens lower than the close on the 15th. Moreover in concert with the set-up I’m thinking about the mind-set of portfolio managers investors and traders. After witnessingthebreakdownofthemarketonthe14thwhowouldjumpinandstart buying stocks on the morning of the 15th Clearly the downside momentum had notabated.Eveninvestorswhobelievedthelong-termbullmarketwasstillinforce wouldmostlikelywaitfortheshort-termsellingtoeasebeforebuyingmorestocks. And those who feared the bull market was dying most likely would be sellers on the15th. Themarketopenedonthe15thatthelowerendofthepreviousday’srangeand almost immediately the market began selling off. With all my indicators pointing down coupled with the weak opening I shorted the market at 1878.50 at around 9:40 A.M.InkeepingwithmypracticeofgrabbingquickprofitsIclosedtheposition at1868.25.

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ADAYOFTRADING 122 FIGURE 9.4 MovingRibbons The market continued lower that day and actually continued lower for the next three days. Do I regret taking my profit quickly and leaving a lot of money on the table Not at all. I would do exactly the same trade again if given the chance. I use tightdefensivestopsandexpecttradestomovequicklyinmydirection.Thenonce thetradegoesmywayI’llgetoutofthemarket.I’vedonethistimeandtimeagain andI’vebeenabletomakeagoodlivingatthisformanymanyyears.

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123 APPENDIX AboutMetaStock ProTemplates D ickDiamond’spreferredchartingplatformisMetaStockProintradayversion. MetaStock Pro is a robust and powerful charting utility ideal for charting scanning and plotting the custom indicators used in Dick Diamond’s trading strategies. As such it is important that you know how to apply and use these setups within the software. Specifically there are four customized Dick Diamond ‘‘templates’’thatmustbeimportedorcreatedinMetaStockPro: ■ Template1WalterBressert ■ Template2movingribbons ■ Template3RMO ■ Template4movingaverages A‘‘template’’containsalltheinformationinachartorlayoutexcludingthebase security. When a template is applied to a security either to an existing open chart orwhenloadingachartallofthepertinentindicatorsandcustomviewswillapply too based on the template’s information. Each template is saved as a file with a .wmtextension. If the information from a template came from a single chart then a chart is created when the template is applied. If the information came from a layout then

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ABOUTMETASTOCKPROTEMPLATES 124 a multichart layout is created. You can also create a default template that is always usedwhenanewchartiscreated. ■ Creating theDickDiamondTemplates A template is created from the information in a chart or a layout. Once that chart or layout appears as you’d like use the ‘‘Save As’’ command in the File menu to save the template. If you create a template when a multichart layout is selected a multichart template is created. If you create a template when a single chart is selectedasingle-charttemplateiscreated. Herearethestepstofollowwhencreatinganewtemplate: 1. OpenMetaStock. 2. InthePowerConsoletypeinasymbole.g.ESc1thenclickNext. 3. OnthenextpageofthePowerConsoleyoucanchoosearangeofoptions.For thepurpose of settingup a new template you can utilizethedefault settings by simplyselectingOpenChart.

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ABOUTMETASTOCKPROTEMPLATES 125 4. After the basic chart is open you can add the indicators and settings for your template. Make the desired changes to the chart by adding the indicators and specifications included in the template. A full listing of the constituent parts of eachofthefivetemplateswillfollow. 5. WhenthetemplateiscompletechooseSaveAsfromtheFilemenu. 6. ChooseTemplatefromtheSaveAsdrop-downlist. 7. TypethenameofthetemplateintheFileNamebox. 8. ClicktheSavebutton.

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ABOUTMETASTOCKPROTEMPLATES 126 ■ Template1:WalterBressert This template requires indicators from the Walter Bressert Profit Trader add-on to MetaStock. This add-on program should be installed into MetaStock before attemptingtocreatethistemplate. FollowingisanexampleofTemplate1forreference: Firstopenablankchart.Noticefromtheprecedingreferenceexamplethatthere arefourindicatorsplotted: 1. CCI-Equis14periods 2. TRIX12periodsclose 3. ‘‘WB:DBS10Intradefaultsettings 4. ‘‘WB:DBS5Intradefaultsettings To plot these indicators on the chart first locate the indicators from the drop- downmenuonthetoptoolbar:

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ABOUTMETASTOCKPROTEMPLATES 127 ■ Template2:Moving Ribbons Firstopenablankchart.Noticefromtheprecedingreferenceexamplethatthere arethreeindicatorsplotted: 1. Movingribbonstimeperiodssetto20spacing5ribbons12 2. MACDstandard12269 3. StochasticMomentumIndex1499movingaverage3 ■ Template3:RMO

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ABOUTMETASTOCKPROTEMPLATES 128 Firstopenablankchart.Noticefromtheprecedingreferenceexamplethatthere aretwoindicatorsandthenbuyandsellindicators: ■ RahulMohindaroscillatorRMOdisplayedinhistogramformat ■ Stochasticoscillator1433 ■ ChartwiththeRMOExpertAdvisorattached ■ Template4:Moving Averages Firstopenablankchart.Noticefromtheprecedingreferenceexamplethatthere arefourindicatorsplottedonthechart: 1. Movingaverage:21-periodexponentialmovingaverageclose 2. Movingaverage:55-periodexponentialmovingaverageclose 3. MovingAverage:89-periodexponentialmovingaverageclose 4. WilliamsR14 ■ Applying anExisting Template Templatescanbeappliedtoachartonthescreenwhenyouopenasmartchartfrom the Open dialog or when you create a new chart. When a template is applied to a chartthetemplateusesthechart’sbasesecurityforallchartsinthetemplate.

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ABOUTMETASTOCKPROTEMPLATES 129 Ifthetemplatewascreated from asinglechartthenachartis created whenitis applied.Thenameintheaffectedchart’stitlebarwillappearas‘‘Chart1’’withthe securitynamefollowing. Toapplyatemplatetoanopenchart: 1. Right-clickonthechart. 2. ChooseApplyTemplatefromtheshortcutmenu. 3. ChoosethedesiredtemplatefromtheApplyTemplatedialog. Toapplyatemplatewhenloadingasecurity: 1. OpenthePowerConsole. 2. Enterthesecurityyouwanttoopen. 3. On the Chart Options page it will ask if you want an attachment. Select the templateunderApplyTemplate. 4. ChooseOpenChartanditwillopenthechartforyou. ■ Making Changestoa Template Changesaremadetoatemplatebyopeningapplyingthedesiredtemplatemaking thechangesandresavingthetemplatetothesamefilename. Tomakechangestoanexistingtemplate: 1. Applythetemplateyouwanttochangetoasecurityorchart. 2. Makethedesiredchanges. 3. ChooseSaveAsfromtheFilemenu. 4. Double-clickthenameofthetemplatefileyouareediting. 5. ClickYeswhenaskedifyouwanttoreplacetheexistingfile. ■ Saving a Template Templates are saved using the Save As command in the File menu. If you want the changes you have made to a template to be retained you must save the template using the Save As command. You can also save a template as the default template. Thedefaulttemplateisautomaticallyappliedtoallnewlycreatedcharts. Tosaveatemplate: 1. ChooseSaveAsfromtheFilemenu. 2. ChooseTemplatefromtheSaveAsdrop-downlist.

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ABOUTMETASTOCKPROTEMPLATES 130 3. If you are editing a template and want to save the changes to the same template namedouble-clickthenameofthetemplatefile. 4. If you are saving a new template type a name in the File Name box and click Save. ■ The DefaultTemplate You can control how a newly created chart appears using the ‘‘default template.’’ The default template is a special template that is exactly like a regular template except that MetaStock automatically applies it to newly created charts. The default template that is shipped with MetaStock is just a single chart with high-low-close pricebarsandvolume. ThedefaulttemplateisnamedDEFAULT.MWTanditisstoredwithyourother templates at c:\MyDocuments\MetaStock. This means that the default template can be applied at any time just like a regular template. For example you could change the default template so that candlesticks and a moving average are always plottedwhenanewchartiscreated. To quickly make the information in the currently selected chart the default templateright-clickthechartandchooseSaveasDefaultTemplate. Toeditthedefaulttemplate: 1. ChooseNewfromtheFilemenuandselectChart. 2. Double-clickanysecuritytochartlistedinthedialog. 3. Makethedesiredchangestothechart. 4. Right-clickonthechartandchooseSaveasDefaultTemplatefromtheshortcut menu.

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ABOUTMETASTOCKPROTEMPLATES 131 ■ CreatingtheDiamondWorkSpace Dick Diamond will view the charts in a 2 and 30 format. Once you have set up the above templates you can easily create the two-view format and look at the 2- and 30-minutetogether: 1. Openanychartwiththetemplatetobeused.Forthepurposeofthisexample wewillusethemovingaveragetemplate. 2. With the chart open use the Window New Window Function in MetaStock. Thiswillallowtheprogramtoduplicatetheexistingchart. 3. Therewillbetwoofthesamechartopen.Toviewthetwochartssidebyside choosetheColumnbutton.

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ABOUTMETASTOCKPROTEMPLATES 132 4. Nowthatthechartsaredisplayedsidebysidethetimeframescanbechanged to the 2- and 30-minute time frames. Select the Periodicity button on each chart. 5. The chart on the left should be set to a 2-minute time frame and the chart on the right set to a 30-minute. To set the 2-minute chart the Custom interval shouldbechosenandthensettheintervalasminute.Themultipliershouldbe at2.Forthe30-minutesimplyselectthe30-minutefromthedrop-down. 6. Verify that your time frames are correct. MetaStock Pro will show you the timeframeinthetopright-handcornerofyourchart.

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ABOUTMETASTOCKPROTEMPLATES 133 7. Youwillneedtosavethisasalayoutwiththetwochartsopensidebyside.To dothisgotoFile |New |Layout. AddbothchartsintothelayoutandthenchooseOK. 8. FinallyyouneedtosavethelayoutbygoingtoFile |SaveAs |Type:Layout.

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ABOUTMETASTOCKPROTEMPLATES 134 9. SelectafilenameandchooseSave. 10. ToopenalayoutgotoFile |Open.ChangefiletypetoLayout. ChoosethefilenameyougavetheproductandchooseOpen.Yourlayoutisnow open. 11. Repeat these steps for each of the four templates to create your workflow like DickDiamond.

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135 ABOUT THE AUTHOR A trading legend Dick Diamond has been trading for a living for over 40 years. He has expertise in trading OEX options SP/Nasdaq futures and Dow/Amex/Nasdaq equities. He offers in-person trading courses through his web site www.marketmentor.com. Diamond has an MBA from the University of MichiganwithabachelorofsciencedegreeineconomicsfromtheWhartonSchool ofBusiness.HeworkedasafloorbrokerontheAmericanStockExchange.Heleft thefloorin1965andhasbeentradingforalivingeversince.

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137 INDEX NOTE:Pagereferencesinitalicsrefertofigures. A AmericanStockExchangeAMEX2 AppelGerald34 B bearmarket.Seetechnicalanalysis BlauWilliam40 BressertWalter9–1041 Bressertindicator79–97 bullishconditionsexample 95–9696 decisionprocessand 118–122120 defined 9–104142 80/20tradeexamples 88888989 939394949797 80/20tradefromlongsideexample 80 80–81 flat/slightly-downpatternexample 91 91 longtradeexamples 8484–859090 9292 shorttradeexamples 838386–8787 template 126126 upwardmomentumexample 8282 BuffettWarren11–12 bullmarket.Seetechnicalanalysis bullmarketof1960scomparedto1990s3 businessoftrading emotionaldisciplineand9–15 principlesofsuccessfultrading17–27 prioritiesfor5–7 buy/sellzones24 C capitaltradingwithin17–18 chartsimportanceof23–24 ChicagoBoardOptionsExchange3–4 ChicagoMercantileExchangeCME4 commitmentimportanceof15 confidenceasprincipleofsuccessfultrading 18–19 coreposition80/20tradesand12 crossovers defined 34–3535 movingaveragesandcrossoversignals33 Seealsomovingaverage convergence-divergenceMACD D daytrading confidencefor6 Diamond’sexperiencewith4

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INDEX 138 daytrading Continued prioritizing5 defensivestops24–25 DennisRichard11–12 DiamondDick biographicalinformation1–5 Diamondworkspacecreating 131–134 132133 DickDiamondtemplatescreating 124 124–125125 SeealsoMetaStockPro divergencesdefined35–3736.Seealso movingaverage convergence-divergenceMACD E 80/20trades defined5 emotionaldisciplinefor9–1112 waitingfor21–22 ElliotWaveInternational1 emotionaldiscipline9–15 commitmentand15 80/20tradesand9–11 80/20tradesandcoreposition12 emotionsoftradingand13–15 needfor9–11 EmotionalDisciplineManz12 exponentialmovingaverageEMA 30 F failure avoiding11–12 fearof13–15 Fibonaccinumbers29 ”flier”stocks3 futuresinceptionof4 G greedasemotionoftrading13 H homeworkimportanceof5 I impatienceasemotionoftrading15 Internetbubble34 investingaccountsseparatingfromtrading accounts25–26 L LaneGeorge38 large-capstocks3 lifestyleoftraders1–5 limitorders24 lossesfearof13–15 M managementoftradeaccounts25–26 ManzCharles12 marketconditionstakingadvantageof 26–27 marketentrytactics24 MetaStockPro123–134 applyingexistingtemplates128–129 Bresserttemplate 126126 changingtemplates129 creatingDickDiamondtemplateswith 124124–125125 defaulttemplates130 Diamondworkspace 131–134 132133 generally9–104142 movingaveragestemplate 128128 movingribbonstemplate 127127 RMOtemplate 127128 savingtemplates129–130 templatesdefined123–124 MohindarRahul9–10.SeealsoRMO oscillator movingaverage45–64 bearishdivergenceexample 5959 80/20tradeexample 5151 longtradeexamples 4646–4749 49–5063636464 low-risk/high-rewardentrypoints example 5454 risk/reward60/40trade80/20 short-tradeexample 5555–56

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INDEX 139 shorttradeexamples 48485252–53 5757–586262 21-day/55-day/89-dayexample 6060–61 movingaverageconvergence-divergence MACD9 crossoversdefined 34–3535 defined34 divergencesdefined 35–3736 SeealsoBressertindicatormovingribbons movingaverages decisionprocessand 118–122119 defined 29–34313233 templatefor 128128 movingribbons65–79 bearishdivergenceexample 6868–69 bullishsignalexample 6767 decisionprocessand 118–122122 defined 43–4444 80/20tradeexample 7373 longtradeexamples 71717676 7777–78 shorttradeexamples 7070727274 747575 templatefor 127127 upwardmomentumexample 6666 O opinionrecognizingopportunityversus23 optionsinceptionof4 overboughtdefined39 oversolddefined39 P papertradingadvantageof10 patienceasprincipleofsuccessfultrading 21–22 personalresponsibilityfortrading21 positionscaling24 PrechterRobert1 principlesofsuccessfultrading17–27 manageyourtradeaccount25–26 marketentrytactics24 opinionsareforpunditsnottraders23 playgreatdefense22 pullthetrigger22–23 quietconfidence18–19 reviewing27 selltoosoonnottoolate19–21 strictlyfollowtechnicaldata23–24 takeadvantageofmarketconditions 26–27 takepersonalresponsibilityforyourtrading 21 trackyourresults25 tradewithinyourcapital17–18 usedefensivestops24–25 waitfor80/20trades21–22 professionaldevelopmentElliotWave Internationalfor1 profitandlossPLtracking25 ”pullingthetrigger”22–23 Q quietconfidenceasprincipleofsuccessful trading18–19 R responsibilityfortrading21 resultstracking25 RMOoscillator9–1099–116 bullishtradeexamples 103103115 115116116 decisionprocessand 118–122121 defined 9–1042–4343 80/20shorttrade 100100–101 80/20tradeexamples 107107108 108 extendedrallyexample 112112–113 longtradeexample 104104–105 oversoldconditionsexample 106106 shorttradeexamples 102102109 109–110111111114114 templatefor 127128 S sellingtimingof19–21 slopelines movingaveragesand30–3133 stochasticmomentumand40 Seealsotechnicalanalysis

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INDEX 140 StandardPoor’sSPindex4 stochasticmomentum4041.SeealsoBressert indicatormovingribbons stochasticoscillator38–4039.SeealsoRMO oscillator T technicalanalysis29–44 Bressertindicatordefined9–104142 SeealsoBressertindicator crossovers34–3535Seealsomoving averageconvergence-divergence MACD divergences 35–3736 importanceof23–24 movingaveragesdefined29–343132 33Seealsomovingaverages movingribbonsdefined 43–4444 RMOoscillatordefined9–1042–4343 SeealsoRMOoscillator stochasticmomentum 4041 stochasticoscillator 38–4039 WilliamsR 3737–38 templates123–135 applyingexistingtemplates128–129 Bressert 126126 changing129 creatingDickDiamondtemplateswith MetaStockPro 124124–125125 default130 defined123–124 Diamondworkspacewith 131–134132 133 movingaverages 128128 movingribbons 127127 saving129–130 trading businessof5–7 decisionprocessfor 118–122119120 121122 lifestyleof1–5 managingmarketand117–118 predictingmarketand117 readingchartsand117 tradingaccountsmanaging25–26 21-day/55-day/89-day defined32–33 example 6060–61 W WalterBressertindicator.SeeBressertindicator WilliamsLarry37 WilliamsR 3737–38.Seealsomoving average

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MAKE MARKET VETERAN DICK DIAMOND YOUR MENTOR Join Dick Diamond at his Market Mentor Trading Course and soak up as much of hishard-wontradingknowledgeasyoucan. Here’sjustsomeofwhatyouwilllearn: 1. HowtorecognizeandactonDiamond’s‘‘80/20trades.’’ 2. Theimportantnuancesoftradingstocksoptionsandfuturesincludingthe besttimeofdaytobuyindividualstocksandhowto‘‘trendplay’’withoptions. 3. Howtopracticeemotionaldisciplineandgetridofbadthehabitsthatthwart yoursuccess. 4. Whichtradingindicatorsyoushouldusehowtosetthemtomaximizetheir utilityandwhichfourindicatorspresentthebestopportunitieswhenaligned. 5. Perhaps most important of all: When to play close to your vest vs. when to takedecisiveactionwhenthemarketdemandsit. You’llgetauniquelyvaluabletradingcoursewithDiamondandhisstarprot´ eg´ e RobertoHernandez—thatalsoincludesLIVEtrading.DickandRobertowillshow youtheirprepworksystemsetupandhowtheyscanthemarketfor80/20trades. If the market offers opportunities they will make actual trades during the course. That’showconfidentDickDiamondisinhistradingmethod. To learn more about Dick Diamond’s next live or online trading course please visit: http://bit.ly/DickDiamondCourse

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WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA.

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