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30 Days toMarketMastery
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Founded in 1807, John Wiley & Sons is the oldest independent publish-ing company in the United States. With ofﬁces in North America, Europe,Australia and Asia, Wiley is globally committed to developing and marketingprint and electronic products and services for our customers’ professionaland personal knowledge and understanding.
The Wiley Trading series features books by traders who have survivedthe market’s ever-changing temperament and have prospered—some byreinventing systems, others by getting back to basics. Whether a novicetrader, professional or somewhere in between, these books will provide theadvice and strategies needed to prosper today and well into the future.
For a list of available titles, visit our Web site at www.WileyFinance.com.
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30 Days toMarketMastery
A Step-by-Step Guide toProﬁtable Trading
JACOB BERNSTEIN
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Copyright C(cid:2) 2007 by Jacob Bernstein. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
Wiley Bicentennial Logo: Richard J. Paciﬁco
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in anyform or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise,except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, withouteither the prior written permission of the Publisher, or authorization through payment of theappropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers,MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests tothe Publisher for permission should be addressed to the Permissions Department, John Wiley& Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or onlineat http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used theirbest efforts in preparing this book, they make no representations or warranties with respectto the accuracy or completeness of the contents of this book and speciﬁcally disclaim anyimplied warranties of merchantability or ﬁtness for a particular purpose. No warranty may becreated or extended by sales representatives or written sales materials. The advice and strategiescontained herein may not be suitable for your situation. You should consult with a professionalwhere appropriate. Neither the publisher nor author shall be liable for any loss of proﬁt or anyother commercial damages, including but not limited to special, incidental, consequential, orother damages.
For general information on our other products and services or for technical support, pleasecontact our Customer Care Department within the United States at (800) 762-2974, outside theUnited States at (317) 572-3993 or fax (317) 572-4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appearsin print may not be available in electronic books. For more information about Wiley products,visit our Web site at www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
Bernstein, Jacob, 1946–30 days to market mastery : a step by step guide to proﬁtable trading /
Jake Bernstein.
p.
cm. – (Wiley trading series)
Includes index.ISBN 978-0-470-10987-8 (cloth)1. Futures. 2. Futures market–Examinations, questions, etc.
I. Title.
II. Title: Thirty days to market mastery.HG024.A3B4748 2007332.64(cid:3)52–dc22
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
2006036782
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Contents
Preface
Acknowledgments
Introduction
LESSON 1, DAY 1
The Structure of a Trade
LESSON 2, DAY 2
Setup, Trigger, andFollow-through: The Basics
LESSON 3, DAY 3
Seasonality and High-OddsSeasonal Setups
LESSON 4, DAY 4
The Seasonal Trigger
LESSON 5, DAY 5
Follow-Through
LESSON 6, DAY 6
Trading the Power MomentumFormula (PMF)
LESSON 7, DAY 7
Power Momentum Formula(PMF) Trigger
LESSON 8, DAY 8
PMF: Follow-through: Part I
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CONTENTS
LESSON 9, DAY 9
PMF: Follow-through: Part II
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LESSON 10, DAY 10
Using the Moving AverageChannel: Part I
LESSON 11, DAY 11
Using the Moving AverageChannel: Part II
LESSON 12, DAY 12
Three Powerful PricePatterns: Part I
LESSON 13, DAY 13
Three Powerful PricePatterns: Part II
LESSON 14, DAY 14
Three Powerful PricePatterns: Part III
LESSON 15, DAY 15
The Eight-Bar Open/ClosePattern and How to Use It
LESSON 16, DAYS 16–17
Understanding and Using theCommitment of TradersReport: Part I
LESSON 17, DAYS 18–19 Commitment of TradersReport Part II: Triggers
LESSON 18, DAYS 20–21
The Advanced 30-MinuteBreakout for S&P andE-Mini Trading
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125
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141
151
LESSON 19, DAYS 22–24 How to Structure Your Trading
Portfolio for Maximum andConsistent Gains
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LESSON 20, DAYS 25–27 Diversiﬁcation
LESSON 21, DAY 28
Putting It All Together
LESSON 22, DAYS 29–30
The Psychology andDiscipline of Trading
Index
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Preface
L iving in a capitalist society provides us with numerous opportunities
and methods by which we can multiply our money. As capitalismslowly—but ever so surely—continues its seemingly inevitable ad-vance to all countries in the world, investment opportunities grow as well.We no longer live in a world of disconnected economies; rather we live in aworld of intricately intertwined and interdependent economies. A change inChinese interest rates reverberates throughout the ﬁnancial world, impact-ing stock and commodity markets as well as foreign currency relationships.A potential banking problem in Russia sends shock waves across all mar-ket sectors as stocks in the United States reﬂect the possible impact of thenews. OPEC ministers agree to cut oil production by a larger than expectedamount and prices in the crude oil futures pits surge higher. Stocks on majorworld exchanges drop on fears of inﬂation due to increased oil prices andinterest rate futures drop sharply in response to concerns that inﬂationarypressures may cause central banks to raise interest rates. At the same time,gold and silver futures push higher as investors rush to buy these inﬂationsensitive markets.
Volatility and large daily price swings have become the norm as interna-tional economic growth and market participation have expanded. While theopportunities provided by volatility have opened the door to huge proﬁts,they have also brought with them substantial and heretofore unheard ofrisks. This has caused many individual investors and traders in stocks andcommodities to withdraw from the markets for fear that they may lack ei-ther the expertise and/or the risk tolerance to participate in the developingmarket moves.
Many investors have, therefore, chosen to entrust their hard-earnedmoney to the supposedly capable hands of professional money managers.They have enlisted the assistance of investment bankers, ﬁnancial plan-ners, hedge funds pension fund or retirement fund managers, mutual fundsor more conservative investment managers who use such vehicles as cor-porate bonds or government issued treasury securities as their preferredinvestment areas. Unfortunately, many of us have been disappointed by the
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PREFACE
experts. All too often the cost of having our money professionally managedis too high given the seemingly low returns. In recent years, some profes-sionally managed programs—in particular hedge funds—have actually lostmoney for their clients.
If you have ever looked at the performance of your investments and said,“I could do better,” it is very possible that you are right. With the right tools,sufﬁcient money, motivation, persistence, and consistency, I believe thatmany individuals can do just as well or even better than some professionalmoney managers. I believe that this holds true for the futures markets aswell as the stock markets. I believe that you can do it on your own and thatyou do not need a degree in ﬁnance, banking or economics to achieve yourgoals of ﬁnancial freedom. In fact, too much education and knowledge inﬁnance could prove to be a detriment to making money in the markets.
The lessons presented in this book are designed to take you to a levelthat will facilitate your chances of success in the futures markets. This isnot to say that futures trading is without risk. Futures trading is, in fact, theriskiest game in town. My goal is to reduce the risk and increase the oddsof success using solid tools that I have developed over the last 35 years. Butthe tools presented here are not applicable to futures trading alone. Mostof them are equally applicable to stocks. Hopefully, you will learn tools thatwill assist you for many years to come whether you’re a commodity or stockinvestor.
ORGANIZATION
Although the 22 lessons that follow can be completed in 30 days time, youmay want to take longer with your studies. Lessons 1 through 15 can becompleted in the ﬁrst 15 days. Take longer with lessons 16 through 18. (Isuggest two days for each.) Lessons 19 and 20 should be given three dayseach. Give Lesson 21 one day and spend two days or more on Lesson 22. Inall, the process can be completed in 30 days but, of course, you are advisedto move at your own pace.
ANSWERS TO QUIZZES
I have provided a quiz at the end of all but two of the lessons. You canget the answers at my Internet Web site at the http://www.trade-futures.com/30DaysKey.html. I can be reached by e-mail at jake@trade-futures.com.
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Acknowledgments
T he following people and organizations provided me with the highest
caliber of assistance in the completion of this project. I thank all ofthem for their efforts, encouragement, input, support, and help.
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Emilie Herman at John Wiley & Sons was a pure pleasure to have workedwith on this project. She made me look good.Lynn Doherty, at my ofﬁce, spent many hours organizing, reorganizing,and reformatting my charts and tests. I thank her for her assistance.To my wife, Linda, I give thanks for the hours I borrowed from our timetogether.Thanks to my ofﬁce staff for screening phone calls and helping me maketime for this project.My right-hand associate and organizer, Marilyn Kinney, who has beenwith me for over 30 years and through every one of my books, knowswell by now how to keep me on course for my deadlines, and I thankher deeply.To Kevin Commins at John Wiley & Sons, who gave me the opportunityto write yet another book for Wiley, I extend thanks!Finally, the very good people at Genesis Financial Technologies(http://www.genesisft.com) are owed a very special word of thanks forproviding the outstanding charting and analysis software that helpedmake this book, my research, and my trading possible.
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Introduction
F inancial markets throughout the world have changed their nature and
structure dramatically since the 1970s. High-speed computers, pow-erful analytical software, the declining cost of commissions, instanta-neous communications via the Internet, rapid dissemination of ﬁnanciallyrelated news, business radio and television, the emergence of second- andthird-world powers as signiﬁcant ﬁnancial and monetary forces, and thegrowing world dependence on fossil fuel have all combined in one grand“machine” to change the face of the markets. Events that affect the Chinesecurrency can and will have a ripple effect on currencies and markets theworld over. Stock prices can be inﬂuenced dramatically by trends in un-derlying commodity prices. Daily price volatility has exploded in virtuallyevery sector of the ﬁnancial markets. This has created more opportunityas well as more risk. It has also narrowed the differences between stockand commodity markets. Indeed, in recent years there has been a growingparticipation by hedge funds, pension funds, and investment companies inthe commodity markets.
The search for effective and consistent trading information has takentraders in many directions, some productive, most of them dead ends. Mygoal in this course is to give you some solid tools that you can implement intoyour trading plan whether in stocks, commodities, or both. I have providedexamples of my methods in stocks as well as in commodities. Some methodsare exclusively geared to commodities; however, most are applicable toboth. In the event that you have questions, comments or corrections pleasee-mail me: jake@trade-futures.com.
Jake BernsteinHighland Park, IllinoisSeptember 2006
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L E S S O N 1, D A Y 1
The Structureof a Trade
INTRODUCTION
The stock and futures markets have several functions. In stocks, the mar-ket allows corporations to raise funds for expansion of their businesses.In futures, the most important function is to provide a means by whichproducers—such as farmers, mining companies, banks, and the like—andend users—such as manufacturers, food processors, petroleum processors,and the like—can market what they produce and buy what they need. By farthese two groups of market participants comprise most of the transactionsthat occur in futures. However, the third major group, traders or investors,provide a buffer between the two major groups and also constitute a goodportion of market activity.
Figure 1.1 shows the general structure of futures market participantsand their orientation to the markets. This model does not apply to the stockmarket, where the structure is not as complicated.
THE PURPOSE OF TRADING OR INVESTING
As speculators or traders, we have only one purpose or goal in trading andthat is to make money. There is no other goal!
If you are in the futures markets for any other reason, then you are
doing this for the wrong reason.
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ProducersFarmersMining companiesBanksPetroleum companiesMoney managersMortgage companiesCan be buyers or
sellers, but are primarilysellers for the purpose oflocking in a profit
Traders/InvestorsShort-term tradersDay tradersPit brokersHedge fundsMoney managers
End UsersGrain processorsPetroleum “crackers”Food processorsMeat processorsBanks and mortgage companies
Can be buyers, sellers
Are primarily buyers because
or on both sides usingspreads (to be explained)
they need the product in orderto run their businesses but theycan also be sellers at times
FIGURE 1.1 Futures market participants.
THE PURPOSE OF THIS COURSE
The purpose of this lesson is:
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To teach you the speciﬁc structure you will need in order to trade thefutures markets objectively.To give you a solid education in the most effective way to structure atrade.To teach you trading tools and methods that are 100 percent objectiveand that eliminate vague decisions and unclear trading signals.To show you several methods of proper risk management.To elucidate and emphasize the major importance of proﬁt maximizingstrategies.To provide you with the proper organizational, analytical, and behav-ioral skills that are vital to consistent success in trading.
Without the proper structure for a trade, you have nothing!If you truly want to succeed, then you need to structure every singletrade correctly. If you do not, then you will likely lose money—and if youmake money, then it will be out of sheer dumb luck. Making money bychance is a hit or miss proposition that does not bring lasting success.Furthermore, it does not teach you anything. If that is how you want totrade or invest, then you might as well buy a lottery ticket. Your chances ofmaking money are about the same as they are if you trade without the properstructure.
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WHAT IS “STRUCTURE”?
Every trade must have three aspects to it. These three aspects, or steps,comprise the structure of a trade. Structure in trading is necessary becauseit decreases the odds of random or emotional decisions and it brings vitalorganization to your trading. The three steps are:
1. Setup, which consists of a high probability repetitive pattern.
2. Trigger, which conﬁrms or puts into motion a setup.
3. Follow-through, which is the method used to minimize losses and, most
important of all, to maximize proﬁts.
Now let’s deﬁne each of these more speciﬁcally.
STEP 1: DETERMINE A SETUP
As noted above, a setup (S) is a pattern that has shown a strong tendencyto repeat over time. There are literally thousands of setups, but few arereliable or accurate.
The following are examples of setups:
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Chart patterns such as gaps, pennants, head-and-shoulders, support,resistance, ﬂags, trend lines, reversals, key reversals, island tops, andbottomsFormations such as Gann, Elliott, Fibonacci, regression line analysisCycles, seasonals, ratios, anniversary dates
The ﬁrst setups I will teach you are based on seasonal key dates. Thismethod is highly reliable and constitutes one of the most effective ap-proaches that I know of to futures and stock trading. Table 1.1 is an exampleof a key date seasonal setup.
As you can see, this setup or pattern has a very speciﬁc set of rules. Itis totally objective. It is not a matter of opinion, a theory, or an assumption.It is an exact statement of history. The vast majority of traders use marketentry and exit methods that have never been tested. They have no idea ofhow often their methods have been correct. They believe what they haveread in a book or heard from another trader. This is where and how themethods that I teach you differ dramatically from what you may now beusing or what you may have heard elsewhere.
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TABLE 1.1 Example: A Key Date Seasonal Setup
Long MayCrude Light
Enter:1/27
Exit:2/2
Stop %:4.00
P/L Ratio:6.0
Trade# 92541921
ContractYear
Date In Price In
Date Out Price Out Proﬁt/Loss Total
198419851986198719881989199019911992199319941995199619971998199920002001200220032004
Trades:21Avg Prof:0.3821
27-Jan28-Jan27-Jan27-Jan27-Jan27-Jan29-Jan28-Jan27-Jan27-Jan27-Jan27-Jan29-Jan27-Jan27-Jan27-Jan27-Jan29-Jan28-Jan27-Jan27-Jan
29.6824.8620.7518.1716.5816.8721.5619.5119.4919.815.4617.817.0422.9817.3512.4725.5827.6520.4830.4932.61
2-Feb4-Feb29-Jan2-Feb2-Feb2-Feb2-Feb4-Feb3-Feb2-Feb2-Feb2-Feb2-Feb3-Feb2-Feb2-Feb2-Feb2-Feb4-Feb3-Feb2-Feb
29.8225.9319.7918.316.7517.1421.9419.5219.2420.0715.9918.1317.1923.2517.4212.5325.9629.6120.5631.3432.75
0.141.07−0.960.130.170.270.380.01−0.250.270.530.330.150.270.070.060.381.960.080.850.14
0.141.210.250.380.550.821.21.210.961.231.762.092.242.512.582.643.024.985.065.916.05
Losers:2
Winners:19Avg Loss: % Avg Prof:−0.605
1.66
Daily PF:0.0636
% Winners:90.48% Avg Loss:−2.95
What does the setup above tell us? It tells us that buying May crude oilfutures on the close of trading January 27 and exiting February 2 (or on theclose of business the next trading day if the market is closed on the givendate) would have been correct over 90 percent of the time since 1984 usinga stop-loss close of only 4 percent below the entry price.
Note that this is only a setup. It is not a call to action. It is only the ﬁrststep. Even though this is a potentially excellent trade, we need to go to step2, which is the trigger.
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STEP 2: USE A TRIGGER FOR EVERY SETUP
The trigger is a method used to conﬁrm or validate a setup. The methodsyou will learn in this course require a setup and a trigger for every trade.There are no exceptions to this rule!
Triggers are similar to what most traders call timing indicators. Thetriggers I teach you are very simple and very speciﬁc. Remember, it isthe combination of setup and trigger that places you way ahead of mosttraders.
In future lessons, you will learn speciﬁc combinations of setups and
triggers that work well together.
STEP 3: EVERY SETUP AND TRIGGERCOMBINATION MUST HAVE AFOLLOW-THROUGH METHOD
The follow-through method is designed to:
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Manage and/or limit the riskMaximize proﬁts
Without both elements, you will likely be like most traders—you willhave many small victories that will be more than neutralized by a numberof large losses. Unless you are able to bank large proﬁts, you will neversucceed at this game.
In future lessons, you will learn speciﬁc follow-through methods de-
signed to limit losses and maximize proﬁts.
REVIEW
In this lesson, you learned the basic structure of each trade. The structureof every trade consists of three elements:
1. Setup
2. Trigger3. Follow-through
Some speciﬁc examples were given.Please take a few minutes to answer the questions below.
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LESSON 1 QUIZ
Instructions: Circle the correct answers.
1. The three major groups of participants in the futures markets are:
A. Buyers, sellers, and speculators.
B. Speculators, producers, and end users.
C. Winners, losers, and spread traders.
D. Setups, triggers, and follow-throughs.
2. A setup is:
A. A bad tip given to you by a broker.B. A winning trade.C. A losing trade.D. A pattern that repeats over time.
3. A trigger is:
A. A trade that has over 90 percent probability of being correct.B. A market that makes large moves based on weather.C. The trading system used by all successful speculators.D. A method that validates or conﬁrms a setup.
4. Follow-through:
A. Consists of risk management and proﬁt maximizing strategies.B. Is not necessary in cases of 90 percent odds.C. Is used only by losing traders.D. Consists of three moving averages.
5. For our purposes the goal of futures trading is:
A. To help your children through college.B. To help brokers generate more commissions.C. To learn new systems and methods of trading.D. To make money.
6. End users in the futures markets:
A. Are primarily buyers.
B. Always trade commodity spreads.
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C. Are generally uneducated in futures trading methods.
D. Take advantage of small traders.
7. Proper structure of every trade is:
A. Necessary since it decreases the odds of random or emotional deci-
sions.
B. An effective way of taking delivery on futures contracts.
C. Not possible because of low margin requirements.
D. Use by commercials as a tool for helping farmers.
8. Without the proper structure of a trade:
A. You will take small losses and large proﬁts.B. You will be forced to use a computer when placing your orders.C. Traders will have to rely on tips for good trades.D. You have nothing.
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L E S S O N 2, D A Y 2
Setup, Trigger,andFollow-through:The Basics
INTRODUCTION
The market structure presented in Lesson 1 will be explained in greater de-tail in this lesson. Speciﬁc examples of setup, trigger, and follow-through(S, T, and F, respectively) will be given. In reading the material in this les-son, do not forget that the most important part of any trade is the structure.If you stray from the structure, you decrease your odds of success, increaseyour odds of making a mistake, and increase your odds of an emotionalresponse. None of these are acceptable and they are inconsistent with prof-