1 or$12,300. Total profit stands at $47,100. He did not sell short astrend was up (Figure 6.42).
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Point 6: Bought the spring at 136 for a possible move back to170-180. Stop at 116 (Figure 6.42).Point 7: Sold all at 169 in the sell zone. Market could retrace backto 140. Profit of 36 or $10,800. Total profit stands at $57,900 (Figure 6.42).Point 8: Bought 300 shares at 180 on trend op, trend up confirmed.non-overlapping bars and sharp recovery from the dip that impliedaggressive demand and possible new highs (Figure 6.42).Point 9: Upthrust. Sold at 210 on the close. Sharp reversal afterreaching a new high implies heavy supply. Profit of 30 points or$9,000. Total profit stands at $66.900 (Figure 6.42).Point 10: Bought 300 shares at 160 with a stop at 139. This was thehigh of the low bar of a previous dip that showed aggressive demand. Target of 200-210.Point 11: Dumped all at 182 on the sharp reversal day and wentshort 200 shares as A-leg failed to reach the 50% point which implieda new low or a possible move back to the 120-140 area. The Targetprice is 110. Covered the 200 shares at 130 on penetration of thepivot point low at 146 at a half range below the YY day. Market wasin the potential buy zone and he did not want to press his luck, Profitof 52 points or $10.400. Total profit stands at $77,300 (Figure 6.42).Point 12: Went short at 172 on the sharp reversal day in the sellzone. Stop at 201. Downside target is back to test the lows at 120.Covered 100 shares at 144 on the ABC down for 28 points profit.Point 13: Covered the other 200 shares at 130 (the high of the lowday). Went long here with a stop at 110. This trade was stopped outfor a loss of 20 points. Net results was a profit of $5,600. Totalstands at $82,900. Bought 300 shares again at 130 on the trend up,trend up confirmed and minute double bottom for a possible tripback to the Kelt zone.Point 14: Dumped 100 shares at 158 on the ABC up. Liquidated theremaining 200 shares at 170 (low of high bar in sell zone). Netprofit of $10.800. Total profit stands at $93,700.This gives trader Bob a return of over 60% on his initial investment of $13.600 (Figure 6.43). Can anyone duplicate this hypotheticalstudy? It is possible. However, one must have complete control of hisemotions and be ready to pull the trigger on short notice. You musttrade a stock that is moving. The principles are clearly there for you. toact on. The results would have been much higher if reinvestment planswere used. This study merely shows that the possibilities exist withclearly defined principles to act on.
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USE OF TOOLS IN TRADING THE S&PSThis section will show how some of the various technical tools previouslypresented are used in a coherent fashion to produce profits by trading theS&Ps (Figure 6.44). These are hypothetical studies. The study has thebenefit of hindsight. Read the hypothetical disclaimer.The primary consideration is to look for buy signals when market isin the support zone and sell signals when market is in the resistancezone. Entry into a position may be done on the close or on an openingrange breakout. Exit the trade when market is stretched. The tools andabbreviations used are:Opening range breakout (BO)Narrow-range day followed by wide-range bar (NRWR)Upthrust (UT)Spring (SP)Three-day or bar equilibrium reverse I3DE)Pullback after a thrust (PB)
Non-overlapping bar (NOL)High of a low bar at a prior pivot point low (HLB)Low of a high bar at a prior pivot point high (LHB)Target (T)
FIGURE 6.44 S&Ps futures trading. Created with TradeStation 2000i by OmegaResearch1999.
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Trade 11. Sold short on reversal day at 1370 for a target of 1320. Stopabove 1405 above PG. Moved to 1385 upon penetration of low ofsell day. Other factors were:• Zone of distribution—two rallies into a bed of accumulation.
• Three-bar upthrust—market cleared cut all stops abovethree bars.• Pattern gap four bars earlier.2. Covered short at 1320 at prior major pivot point low. This wasalso three bars down. 50 points profit.
Trade 23. Bought or close at 1330 for a possible trip back to 1360. Stopbelow five bar low. Moved below buy bur upon penetration ofhigh on buy day.4. Liquidated at 1380 on close of NR bar which was below opening.50 points profit.
Trade 35. Sold at 1350 on close for a swing back to HLB at 1325. Stopabove NR bar. 25 points profit.
Trade 46. Buy at 1332 on close in the buy zone and above the NR day high.Stop below the four-day low. Target of 1360-1380.7. Liquidated at 1372 for 40 points profit. This was the fourth dayup in the sell zone.Trade 58. Sold the upthrust in the sell zone at 1365. Look for a possiblequick move back to the high of low bar or 1340. Covered at 1340for quick profit of 25.Trade 69. Bought on close at 1359 for a possible move back to high around1400. Note that pattern gap in buy zone, third dip into possiblebed of accumulation, 3DE and non-overlapping bars.
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10. Liquidated position at 1420 on reversal day. Stop had beenmoved in tight in anticipation of an upthrust. Note reversal barafter fourth bar up. Profit of 61 points.
Trade 711. Sold the upthrust at 1435 for a possible move back to supportarea of 1380. Note the island reversal on day following entryvery bearish.12. Covered short at 1380 on fourth day down fur 55 points profit.Looks like more downside is possible but when quick large profits come this quickly, take them. One never knows what thenext rally may bring.
Trade 813. Sold at 1385 on close. Note the two tails and inability to rally infour days. Target is the low of 1310 made back in June. Note thegap on day following trade—bearish.14. Covered short on reversal day at 1330 for 55 points profit.
Trade 915. Bought at 1318 for possible move back to resistance area of1360-1380. Note the spring, opening range breakout, and closeabove prior days high in buy zone.16. Liquidates at 1350 on close below opening after a five-day runfor a profit of 32 points.Trade 1017. Bought at 1355 for a 50t swing above the pivot point high. Thiswas a 3DE and spring type action as no supply was below thelows of days two and three back.16. Liquidated at either 1378 at low of high bar or at 1396 whichwas the three-bar thrust target. Profit was 23-41 points.Trade 1119, Sold at 1383 on the reversal down day that reversed two priorcloses. Market was in the sell zone. Target is 1350 which is high
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of low bar. Stop above the three-day high. Target, reached twodays later for a profit of 33 points.
Trade 1220. Sold at 1378 which was the low of high bar for a target zone of1320-1340, There was a 3DE up four days after entry but tradewas not taken as market was in sell zone. Stop maintainedabove the high of the day short was entered.21. Covered short at 1320-1340. 1320 was the three-bar thrust target and a prior support point. Profit was 38-58 points.
Trade 1322. Sold short at 1356 at the LHB. Target at three day low. Targetreached three days later at point 23 for a profit of about 20points.Trade 1423. Bought at 1305 on the pull back to the HLB for a target on1340-1350 which is LHB. Liquidated at 1336. On 3BU for aprofit of 35 points.Trade 1526. Sold short at 1325 on 3DE in sell zone for a target of1306-1270.26. Covered short at 1280 at prior support on and below low of widerange day.Trade 1627. Bought at 1306 on close of wide range reversal bar. Target is1340. Market went screaming through that point with a widerange day. Liquidated above the wide range day at 1373 for aprofit of 67 points at point 28.Is the above hypothetical trading possible in real time with realmoney? We seriously doubt it. However, if even half is achieved then results are spectacular. The key to successful trading in this manner is tolook for multiple signals to buy when you are in the buy zone and vice
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versa. Liquidating a position should be easier then entering a new position. Don't get married to a position and don't fret when you only gel10% of a possible move because you came out too early. Try to maketrading as mechanical as possible. Also, there is no substitute for hardwork in your studies.Good trading and remember:A trader who dies rich, dies before his time.—John Hill
7DRUMMOND GEOMETRY AND THE
PLDOT: AN INTRODUCTION TOTHE FUNDAMENTALS
The short-term movements have captured the imagination of traders fora long time. It is believed in some circles that the greatest profit potential exists in trading for the three-bar moves be it hourly, daily, weekly,or other periods. Many have tried to put these patterns into a coherentsystematic approach. The leaders in this endeavor are Ted Hearne andCharles Drummond who wrote this chapter.WHAT IS DRUMMOND GEOMETRY?It is a unique form of market analysis developed over a 30-year periodby Charles Drummnnd, a Canadian trader. Drummond Geometry isboth a trend-following and a congestion-action methodology. It leadsrather than lags the market, and uses projected charts to map futuremarket activity. It foretells the most likely scenario that shows thehighest probability of occurring in the immediate future and can becustom fitted to one's personality and trading style.The key elements of Drummond Geometry include a combination ofthe following three basic categories of trading tools and techniques:Ted Hearne is a Chicago-based trader. The material in this chapter is adapted from the30 Lessons of the P&L School of Drummond Geometry (Copyright 1999, Ted Hearingand Charles Drummond). Contact Hearne via the web sites www.tedtidk.com andwww.pldot.com.
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1. A series of short-term moving averages.2. Short-term trendlines.3. Multiple time-period overlays.The fundamental concepts of this methodology are simple, but havebeen worked out to a high degree of sophistication. In this introduction,we will look at the PLdot, the first major building block of DrummondGeometry, PL stands for Point and Line, two of the main techniques ofDrummond Geometry.The concept of flow is central to Drummond Geometry. Thismethodology reflects how all of life moves from one extreme to another,flowing back and forth in a cyclical or wave-like manner. The marketsalso move with a rhythmic flow that traders can learn to see. By discovering the flow's underlying form through visualization, traders canmonitor the market's flow and utilize that information to realize aprofit. This is one important function of the PLdot.The PLdot can he applied to any commodity, future, or stock and isa short-term moving average based on three bars of data that capturethe trend/nontrend activity of the time frame that is being charted. ThePLdot from the last three bars is plotted as a dot or line on the next barto appear. The formula for the PLdot is the average of the high, low, andclose of the last three bars.
The PLdot is a series of points which describe the consensus of market activity in a mathematical sense. The first thing to note is that thedot bears a constant relationship to the immediate past—somethingthat captures the recent energy of the hour, of the day, or of whatevertime period the trader is looking at.Think for a moment about the human activity that lies behind thecharted record of trading. The PLdot is a short-term average and it represents the collective activity of the three latest bars lor time periods).One could say it is the center, the gut, the solar plexus or the heart of allthis activity. One can say that it represents the collective opinion, expressed in action, of the current group, crowd, or mob as you may preferto call it (depending on the intensity of market activity). This is important, because the concept of the crowd is one of the key elements oftrading, market psychology, and market activity.We all know that a crowd can be incredibly powerful. When itmoves, the crowd wants to move everything and everyone with it. Whenit stops, it wants to make everything around it stop as well. The crowdis collective energy and manifests attractive energy. It is built out of
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the need to belong; the need for protection; the need for safety; and theneed to feed, reproduce, and continue in its existence. The crowd hasmomentum and it has power. If a trader follows the crowd, or "goes withthe flow," he will not be hurt, because the nature of the crowd is to protect its members.The crowd does not always go in the same direction—it stops and itchanges direction. But the crowd is always overshooting its goal, because in its wild rush it does not realize that it has gone too far until itsweeps past the target.The key point in Drummond Geometry is that the crowd momentumdoes not stop at some random point in time and space—it is forced tostop at certain specific areas dictated by larger or smaller energy flows.All energy forces are wave-like in nature and in their various configurations; energy flows are the root cause of economic conditions, emotional states, and all collective and most individual actions.These energy flows can be monitored and acted upon in a widerange of human endeavors, including trading for profit. But the energyflows that are reflected in the charts of market activity are not exclusive to the market itself. Similar wave-like energy flows exist throughout the natural universe and can be witnessed in a wide range ofphenomena, from the easily observed waves of ocean surf, to large-scalepatterns such as sunspot activity to the wave-like cycles of history.The PLdot moving average has been empirically arrived at and hasproven its usefulness in a multitude of markets. The PLdot moves in astraight line when the market is in a trend, but moves horizontally acrossthe page in congestions. It is extraordinarily sensitive to trending markets, and is very quick to register the change of a market out of congestion into trend. But it is sensitive to a trend that is ending as well.Figure 7.1 is a chart of the weekly S&P 500 Index, we see the PLdotmove in a relatively straight line horizontally across the page on bars3,4,5,6,7, and 8. Then we see a short down trend and following that thedots move in a straight line upward for the last 5 bars of the chart. Thetendency of the PLdot to move in a straight line can be very helpful inmonitoring a trend.Many traders find that just one simple observation—trade with thetrend if the market is on one side of the dot and in congestion if the market closes on both sides of the dot—is Enough to bring profitable participation in the markets. In Figure 7.1, we see the close of the bar first onone side of the PLdot and then on the other side of the PLdot in bars 4,5,and 6. This is a sign of the market in congestion. In bars 6,7,8, and 9, wesee closes below the PLdot, indicating trending activity to the downside,in bars 10 through 14 we see each bar close above the PLdot, indicating atrend to the upside.In Figure 7.2 of the daily T-Bond futures, we see two trend reversals.On March 29th through April 1st we saw the market in a down-trend and
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FIGURE 7.1 The PLdot is a key building block of Drummond Geometry. Createdwith Omega Research ProSuite 2000i 1999.
the PLdots were above the close of each bar. The trading strategy wouldbe to sell resistance. But on the 2nd of April, we saw the market closeabove the PLdot and this marked the end of the down-trend. As the market moved into the up-trend the PLdot switched sides and we do not see aclose on the under side of the dot until April 13th, when the close moveddecisively under the PLdot and the trend is over. From April 2 until April12 the strategy is to buy support. Note that the dots move in a straightline until the trend is over, and then immediately stop moving in a
FIGURE 7.2 The PLdot is a sensitive indicator of trend/congestion activity.Created with Omega Research ProSuite 2000i 1999.
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straight line. When the new trend resumes to the downside, the dotsagain move in a straight line on April 14, 15, and 16th.As you examine market activity through the lens of the PLdot, wesee that prices will often veer away from the PLdot, but then come backto it. The pattern in Figure 7.2 is called the Return to the PLdot. It is avery simple, tradable pattern. When prices get a long way away from thePLdot, it is likely that they will return to the PLdot to check out thewarmth, safely, and acceptance of the center of the crowd. The trick isto know exactly when and where "a long way away from the dot" actually is. The action of the PLdot along with short-term trend lines, timeframe analysis and many other Drummond Geometry tools and techniques can help traders determine when that point is likely to be occurring with a high degree of certainty. The art of Drummond Geometryas a method of technical analysis comes in the application of these toolsin various combinations under various market conditions.In Figure 7.3 we see a number of bars marked with the Return to thePLdot pattern. When prices move far away from the dot, the trader wouldbe alert to signs that the market will turn and return to the PLdot. Thusin the fourth full bar we see that the market is far away from the PLdotand moves back to it. The market continued through the PLdot and in thenext nine bars we see good examples of this tendency for price to returnto the vicinity of the PLdot. In each of these situations the trader wouldtake & position against the trend by going short at the apex of the bar.The exact price at which to take a position would be marked by otherDrummond Geometry tools such as the short-term trend lines and thetime frame overlays. But the tendency of the market to turn and retraceits path when it is far away from the PLdot and move back to the PLdot isa constant in the market that is enormously helpful to the trader as he orshe attempts to anticipate direction.
FIGURE 7.3 The "PLdot refresh." When the market is a long way away from thePLdot, Drummond Geometry says it will return to it to "refresh" its energy. Createdwith Omega Research ProSuite 2000i 1999.
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Another observation based on the PLdot is the PLdot Push. In thispattern, when a trend is underway, the PLdots seem to be pushing thebars in the direction of the trend, either upwards or downwards, depending on the direction of the move. You can imagine that the dots aredoing the work, that they are pushing the market up. In fact, in Drummond Geometry the trader generally envisions that the dots contain alot of energy, and that their energy waxes and wanes depending on thecircumstances. If the dots push strongly, they create a very strongtrend: if they sometimes lose energy, the trend weakens. This methodology has created a metaphor for market energy that can reap rich rewards as these techniques are further developed.In Figure 7.4 of quarterly S&P we see the PLdot Push pattern atwork in a strong up-trend. The PLdot gives traders a great deal of support in trending markets. When an up-trending market retraces to thearea of the PLdot (or the "live PLdot." which is "tomorrow's dot today"),the trader goes long or adds to his long position. When in a down-trendingmarket the trader goes abort or adds to his short position. When the market moves to a position far away from the dots, the trader takes partialprofits or reverses position, depending on his or her trading style. Thusin Figure 7.4, we can see that the trader could initiate or add to a longposition at any time that the market retraced to the PLdot. The conceptalso holds for the live dot as well, as shown in the last two bars on thechart. (The live dot is an advanced concept in Drumrnond Geometry thatindicates the point on the current bar where the PLdot for the next baris forming.)Once these first concepts are grasped, then the trader applies thesein multiple time frames—another big concept of Drummond Geometry.
FIGURE 7.4 The "PLdot Push." In a trending market, Drummond Geometry saysthe PLdots tend to "push" the price bars in the direction of the trend. Created withOmega Research ProSuite 2000i 1999.
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Let's pause and review for a moment. We have seen that there arethree fundamental elements to Drummond Geometry. The first is theuse of short-term moving averages such as the PLdot. The second fundamental element is the use of short-term, two-bar trend lines. Like thePLdot, these short-term trend lines are projected into the future, wherethey indicate points of interest on the first upcoming bar, the futurebar that haa yet to trade. The Drummond Lines indicate areas of energytermination, where the market it likely to stop its movement. There area number of these lines and in the world of Drummond Geometry theyare drawn in various configurations under different market conditions.When used by a trader knowledgeable in Drummond Geometry, thesetwo main sets of tools—the short-term moving averages and the shortterm termination trend lines—can establish support and resistanceareas in the near-term future with surprising accuracy.In Figure 7.5, these two tools are shown in action. The trend is defined and supported by the PLdots, and the Drummond termination linesforecast the extremes of the bars. The green areas above and below thelast bar to the right show the support and resistance zones. These zonesare defined by the Drummond Lines.Although it is obviously very helpful to know where support and resistance will form in the upcoming bar, the bar that, has not yet traded,this information alone is not enough to trade successfully.Success in trading depends not just on knowing where support andresistance is located, but whether or not that support or resistance will bestrong or weak. Strong resistance will hold, and drive the market hackdown, whereas weak resistance will break and permit the market to risehigher. Similarly, strong support will hold, and send the market higher,
FIGURE 7.5 Dow Jones Industrial average LAST—Daily. Created with OmegaResearch ProSuite 2000i1999.
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while weak support will break, and let the market move lower. Knowingwhen support or resistance is strong and when it will be weak is the nameof the game in trading. Once a trader can reliably make that determination, then it is possible to trade with confidence.This challenge has perplexed traders for many decades. The problemis especially thorny because there is often little if anything on any singletime frame chart that will tell a trader if support or resistance will hold.And yet without question this is the fundamental problem of trading—will the support or resistance hold, or will it break?The trader who wishes to make progress in resolving this questionmust learn to look at the market in context. Establishing market context, and showing how market context can be used to determine if support or resistance will be strong or weak, is accomplished through timeframe coordination. The coordination of support and resistance in different time frames is the third major tool of Drummond Geometry.In principle, the concept of time frame coordination is simple andclear. Basically, it is this: If you can align support and resistance levelson various time frames and take action when they coincide, and avoidaction when they do not reinforce each other, your success ratio will bemuch better than if you rely on a single time frame atone.Charles Drummond came to his understanding of time period interaction empirically, some 30 yearn ago, as he was establishing for himselfthe ways that chart patterns played out in a single time frame chart. Ashe was looking at the short-term moving average and some of the shortterm, two-bar trend lines that form the basis of his methodology, he realized that these patterns existed on any chart. It did not matter if theywere hourly, daily, weekly, monthly, or yearly.Reflecting on this simple observation, Drummond realized that itwould be interesting to see what happened when the charts were superimposed onto one another. And furthermore, he thought it might be relevant to see when the support of one time frame would line up with thesupport of a higher time frame. Thus he would look at the daily supportor resistance in the area of weekly support or resistance, and weekly resistance in the area of monthly resistance, and so forth. When this wasdone, viola!The multiple time frame approach has proven to be a fundamentaladvance in the field of technical analysis and one that can significantlyimprove trading results.Today we find many traders looking at more than one time framechart when they analyze the market. But few have developed the approach into a comprehensive, effective, trading methodology that combines analytical sophistication with tradable rules and principles.Some technicians have experimented with time frames, others havenot. Yet this area is most probably the most important new direction incontemporary technical analysis, and will likely be the most fertile
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ground for exploration in the next few yearn. The current popular approaches rotated to fractals, chaos, complexity theory, and the like, areall fiddling with the fundamental concept of time frame analysis.Let's look at the concept in detail. What is meant by the word timeframe anyway? A time frame is any regular sampling of prices in a timeseries, from the smallest such as one minute up to the longest, whichmight for practical purposes be capped out at in a ten-year bar chart(each bar representing ten years), although there is no theoretical limit.A single time frame chart might commonly be hourly, daily, weekly, ormonthly.There is no magic in selecting one time frame over another as a starting point. All time frames are somewhat arbitrary and are set more bycustom than by science. With the advent of 24-hour global trading eventhe common sense division into daily and weekly charts can be calledmore arbitrary than not. In purely theoretical terms, there is no difference in validity between a weekly chart and a nine-day chart, nor any intrinsic superiority of a 16-hour chart over a daily. In practical terms,however, Drummond Geometry analysts generally stick with conventional customary divisions into hourly, daily, weekly, and the like.The essential starling point for time frame coordination is to notethat the Drummond support and resistance tools are valid for any chartbased on any time frame. Minute, hour, day. week, month—it does notmatter, the patterns formed and the termination points indicatedflagged by the tools of Drummond Geometry lines will appear and canbe followed on bar charts in any time frame. Consider:• The Drummond dot and the Drummond Geometry support and resistance lines appear on any time frame (e.g., daily, hourly, and15 minute).• If market analysis is coordinated to show the interaction ofthese time frames, then the trader can monitor what happenswhen the support and resistance lines of the different timeframes coincide. This is an extremely powerful concept, becausesupport or resistance on one time period has a much higher likelihood of holding when it is hacked up by support or resistanceon a higher time period.How does Drununond Geometry approach time period coordination?First, the trader must decide what he or she is trying to do, for that willdetermine the arrangement of time frames. If the trader is trying totake as much as is possible out of a weekly bar (i.e., to sell the weeklyhigh and buy the weekly low), then the trader has a "weekly focus" andthe weekly chart would be the trader's "focus time period " The focustime frame creates that bar chart on which the trader is trying to placehis or her trades.
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If the trader is trying to pick off the daily highs and lows, then hehas a "daily focus." If he is trying to sell the monthly high and buy themonthly low, then he has a "monthly focus."Second, to see the market in context, the trader would then select ahigher time period. If the focus time period is daily, then the highertime period would be weekly. If the focus time period is weekly, thenthe higher time period would be monthly.Third, the trader would select a lower time frame. The lower timeframe would he used to monitor the market at key decision points andto determine at the earliest possible moment exactly what is occurringat those areas where the market is encountering significant support orresistance levels.Let's say that you wish to trade a weekly focus. If this is so, and youwould like to see if the integration of time frames holds potential, thenyou need to look at both a higher time frame and a lower time frame.The next higher time frame would be the monthly and the next lowertime frame would he daily.Figure 7,6 shows an example of a coordinated look at three time periods. Now what can be observed? On the monthly chart we see thePLdot pushing the trend up, and providing support. On the weeklychart during the first week in June (the last bar to the right) we see aDrummond Line establishing support for the weekly bar. On the dailychart for June 2nd I the last bar to the right) we see support areas set upby the Drummond Lines. This coordination of monthly, weekly, dailysupport means, that the support will likely be strong.Note that this powerful technique of time frame coordination combined with the projection of support and resistance areas permits thetrader to accurately and confidently make a hypothesis in advance about
FIGURE 7.6 Dow Jones: Monthly-weekly-daily. Created with Omega Research