Traders can make a living by trading any of the patterns we present in this book. One of the things you will get from this book is a greater ability to listen to the market."
MONEY MANAGEMENT
Place an initial protective stop on the entire position one or two ticks below the most recent high or low. (The market should not come back to this defined support
Immediately look to scale out of your trade as the market moves in your direction
After all, the way to minimize risk is to be in the market as little time as possible. If you don't take your profits when you have them, the market will usually give them back.
PART ONE TESTS
TURTLE SOUP
- As the position becomes profitable, use a trailing stop to prevent giving back profits. Some of these trades will last two to three hours and some will last a
- The market rallies sharply over the next few trading sessions, taking the index to above the 591 level, 12 points above our entry
- A new 20-day low. The previous low was at least four trading sessions earlier
- The market rallies more than 16 points in five trading sessions!
- Over the next two weeks, HWP rallies more than 15 percent
- The market rallies sharply taking prices to above the 1.570 area within six trading sessions
When the market falls below the previous 20-day low, place an entry buy stop 5-10 ticks above the previous 20-day low. When the market makes a new high, it reverses below the May 8 high and we are short. Our protective buy stop is initially set at 123.26, one tick above today's high.
TURTLE SOUP PLUS ONE
- Take partial profits within two to six bars and trail a stop on the balance of your position
- New 20-bar high and a close above the previous period's high
- A sell stop is placed at 473.75 which is the 20-day high made on 10/13
- Four trading days later the market is 12 points lower
Steve profiled days that closed in the top 10 percent of their range for the day. Yesterday, the market opened in the upper 20 percent of its daily range and closed in the lower 20 percent of its daily range.
MOMENTUM PINBALL
2-PERIOD ROC
Sometimes it will make a slightly higher low or a lower low, but this test (ie the low made first on the day of the buy) is what defines the support level. A short term pivot point can be calculated which will tell us when the 2 period rate of change will change direction.
PART TWO RETRACEMENTS
THE "ANTI”
The basic principle is that a short-term trend tends to resolve itself in the direction of the longer-term trend. Enter when the price action causes the fast line to move up again towards the slow line (forming a hook). Aggressive traders have the opportunity to get in early on the breakout of the trendline at point 1.
Our initial stop is placed below the lowest offset value; you should aim to exit within two to four days. Note that most of the time we are not in this business for 10 to 20 minutes at most (two to four lines). The less time we spend on the market, the lower the risk.
THE HOLY GRAIL
When the price touches the 20-period exponential moving average, place a buy stop above the high of the previous bar. The price is trading at the 20-period moving average and a buy stop is placed above the high of the previous bar. We are full at point 3 and our first stop is placed at D, the retracement low.
The ADX is greater than 30 and the price corrects back to the 20-period exponential moving average. At point B the market reverts to the 20-period exponential moving average and the ADX is greater than 30.
ADX GAPPER
Backtesting this strategy shows an improvement in profits holding these trades until the next morning. Once filled, an initial protective sell stop is placed one tick below this morning's low of 120.50. The same goes for buying lower gaps and riding the market when it rises.).
The market is trying to sell off in the morning, but because the overall trend is so strong, the uptrend is resuming and I want to be a part of that continuation. I will then move it higher as my position becomes profitable or if the market becomes very dull.
PART THREE CLIMAX PATTERNS
WHIPLASH
The close must be higher than the open and also in the top 50 percent of the day's trading range. Soybeans gap higher, closing below the open and in the bottom 50 percent of its daily range-selling MOC of 659 1/4. Soybeans go lower, close in the upper half of its range and close above the opening.
Soybeans are moving higher, dosing during their open and closing in the lower half of their range. I pay attention to it in all markets, but I tend to trade it more often in S&Ps and bonds.
THREE-DAY UNFILLED GAP REVERSALS
A resting sell point for the next three trading sessions is placed at 394 1/4, one tick below today's low. Our sell point is filled and our protective buy stop is placed at 400 1/4, one tick above the unfilled gap day high. We place a sell stop one tick below today's low of 405 3/4 for the next three trading days.
We are stuffed and our protective buy stop is set at 410, a mark above the day's high of the gap. Because the low of 7-19 is 6 1/2 points below our entry, our protective sell stop should be placed higher.
A PICTURE'S WORTH A THOUSAND WORDS
WOLFE WAVES
If we draw a trend line from point 1 to point 4, this should give us a price projection. Our trendline is drawn to project point 5. The market finds support at this level, so we enter a long position in the market and place a stop just below point 5. The market trades to its target. It is very common for the market to slightly break above the 5 point, so you should wait for the price to reverse back above the trend line before entering the trade.
I shook my head and said the market felt so strong - how could it possibly break down. A trend line connecting 1 and 3 projects point 5 where the market meets the price target after the tick.
NEWS
You must discard all your preconceived notions and opinions in order to really listen to the market and understand when it is acting as a contrarian. A well-known market magician said that nearly half of the $100 million he made from trading came from when he was able to identify when the market was defying so-called logic and moving in the opposite direction. It is much smarter to observe the market's reaction to a news event, seasonal trend or technical structure than to try to impose your own beliefs on it.
There is no trading advantage in trying to base decisions on what the market should logically do. The more logical something makes, the more likely you are to lose if the market moves in the opposite direction of the prevailing logic.
MORNING NEWS REVERSALS
If they trade 10-20 ticks beyond the previous day's extreme, place a stop 5-10 ticks on the other side of the previous day's extreme. The government reports that the producer price index fell by 0.1 percent for October, signaling low inflation. We place a sell stop at the 118-06 range and fill immediately A protective buy stop is placed one tick above today's 118-14 high.
I noticed how many times the bond market had sharp initial reactions to major economic events in the morning and then reversed. It's very difficult to put a buy stop on bonds when the so-called experts are telling you that bonds are going down.
BIG PICTURE NEWS REVERSALS
The stock, which was trading at 65 before the news, sold off more than 10 percent over the next eight days. 1994, Orange County California, one of the richest communities in the United States, announces that their investment fund has lost money. As you can see, MBIA is up nearly 20 percent over the next two months and nearly 40 percent over the next half of a year.
As you can see, Motorola's stock lost 15 percent of its value in a few days on this news. Over the next 10 months, MOT became one of the best performers on the NYSE, appreciating more than 60 percent.
PART FOUR BREAKOUT MODE
RANGE CONTRACTION
In the breakout mode, we cannot predict the direction in which we will enter the trade. Therefore, we need to place both a buy stop and a sell stop at the same time in the market. The sell stop placed at 486.10 (one tick below the previous day's low) is doubled in size in the event of a reversal. becomes more profitable during the day, a trailing stop should be used to lock in the profit.
The next day (two days after setup) the market closes 0.45 points above our sell point. As you can see, the market opens at lows and doses at highs.
HISTORICAL VOLATILITY MEETS TOBY CRABEL
First, we will compare the six-day historical volatility reading to the 100-day historical volatility reading. If your buy stop is filled, place an additional sell stop one tick below the day one low. The Historical Volatility meets Toby Crabel setup pattern identifies the biggest weekly rally effects to date in six years.
February 13, 1995, bonds experience an inside day, and the historical volatility ratio of 6/100 days is below 50 percent. An additional sell-stop order is placed at 101-08, a tick below the day-1 low.
PART FIVE MARKET MUSINGS
SMART MONEY INDICATORS
MORE WORDS ON
However, most losses will also be small, and this is how ordinary trading ends up. You must also learn to watch for the signals that the market itself is giving you. Your preconceived notions about where the market might go will be your worst enemy.
If the market is closed and you realize you made a mistake, go out the next day. Be pleasantly surprised when a windfall comes along, but never look for "the big one." The market will decide how much profit you get.
BE PREPARED!
Once in town we spent another hour checking the previous day's trades and writing new stock orders. This person started out as a stock options trader in 1978 and is still a professional trader today. I also write down any specific setups in futures for the next day - I will also write down the daily highs and lows of the market.
I note the date and time I entered the trade, buy/sell, quantity, contract and fill price. They figured that if there was no surplus in the account, they could not lose them.
FINAL THOUGHTS
THE SECRETS OF
The first one is the monthly compounded rate of return over the life of the program. The standard deviation gives you an idea of the probability of big hits or big withdrawals relative to the program's average monthly return. This is probably related to both the edge of the program and its money management.
The final money management variable measures the longest time a program has taken to recover from a draw, expressed as a fraction of the program's lifetime. The results of the study show that both preference and money management strongly influence the likelihood of CTA success.
