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Wave 5 sub-divided into a smaller degree five wave structure in textbook Elliott wave manner. The ideal target for the end of wave 5:5 was the96.14-95.11 price zone which fell just below the larger degree target of97.16-96.24. Ideally, we like to see the price targets of two degreesoverlap. When they do not but are close to each other, the smaller degreetarget is preferred.Wave 5:5 Price Target: 94.14-95.1196.14: Wave 5 = 38% Waves 1-39531: Wave 5 = 100% Wave 195.11: Wave 5 = 162% Wave 4
Bonds made the Wave 5:5 low at 96.01 on Nov. 11. a direct hit ofthe coincidence of projected time and price for a high probability trendreversal. The pattern couldn't have been more perfect. It was an almostideal five wave decline from the Oct. 1993 high. Wave 5 that began withthe Aug. 2 high sub-divided into an ideal five wave structure.The implications of identifying a completed five wave decline aresignificant for traders and investors: The subsequent rally should exceedin time and price all rallies since the Oct. 1993 high, offering a majorOpportunity for long position trades and investments.
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Dynamic Time Analysis
Time and Price Into The Bond Top Of Jan. 4, 1996Bonds rallied relentlessly from the wave five low of Nov. 11, 1994. Infact, they rallied beyond what was anticipated for a typical corrective rallyto a five wave bear trend. However, when the top came, it was made on adirect hit of time projections for a top even though the price target was notas right on.From the Aug. 15, 1995, wave B low, the TRZ projection for a top wasthe relatively broad period of Dec. 17- March 12. For further explanationof this TRZ, see the Time Rhythm Zone section which used this projectionas an example. The Dynamic Time Projections pointed to two periods inDec. and Jan. that had a high probability of making a trend change. Theseperiods were Dec. 1-2 and Jan. 2-6. The Jan. 2-6 period overlapped withthe TRZ period providing a high probability period for trend change.
The chart above illustrates three of the TCRs that fell near the Jan. 2-6FTPP for a top as well as the 144 calendar day count from the Aug. 15low. Bonds made the final high on Jan. 4. directly within the coincidenceof the PTPP for a top (Jan, 2-6)and the TRZ for a top (Dec. 17-March 12).
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Typically, a corrective rally does not exceed a 78.6% retracement.Many end right at 78.6%. The June-July triple lops were made just belowthe 78,6%.retracement. However, bonds subsequently continued to rally tonew highs.When the June-July highs were exceeded, new price projections for atop were made. Bonds made another triple top in Dec.-Jan. at the coincidence of the 62% Alternate Price Projection and 162% Price Retracementof Wave B. These two projections fell just below the Oct. 1994 high at122,10. Unfortunately, the choppy pattern of the rally did not provide awide variety of swings to make projections from. When high confidenceprice projections are not available, traders rely on pattern and time projections to signal the position of the market In this case, the time projectionsaccurately signaled the exact day of the high.Price Projections At Jan, 4 Top120.23: Wave C = 162% Wave B121.02: Wave C = 61.8% Wave ASee The previous page for the time projections. Note that the Jan. 4 topwas made where Wave C equaled 61.8% of both the price and time ofWaveA!
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Dynamic Time Analysis - An Important Key To Trading SuccessConsistently reliable time analysis is a very important factor to the successof Dynamic Traders. If you will include Dynamic Time Projections andTime Rhythm Zone time analysis into your technical analysis trading plan,you should find immediate and significant results.
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Chapter 6Trade Strategies and Trade ManagementIt is not too difficult to make money in commodity trading.The problem is to keep it.Roy W. Longstreet
In the Trade Strategies and Trade Management chapteryou• Learn low-risk and low-capital exposure trade entrystrategies including trend-reversal and trendconiinuation entry techniques.• Learn how and where to place the initial protective stoploss on a position and strategies to adjust the stop-lossas a market progresses.• Learn about short, intermediate and long term positions• Learn how and when to take profits.• Learn how to keep a trading log.• Learn how to develop a trading plan.
Trading Strategies and Trade Management
Trading StrategiesThere are many entry strategies available to enter a market. 1 suggesttraders stick to the simple trend-reversal and trend-continuation strategiesthat have the highest probability of resulting in a profitable trade with theminimum amount of capita] exposure. The following pages describe theseentry strategies and the initial protective stop-toss placement. First, let'sreview what we are trying to accomplish and the basic assumptions lorDynamic Trading strategies.1. The objective of Dynamic Trading Technical analysis is to identifyopportunities within the context of The analysis methods. The technicalanalysis methods will not accurately describe the position of everymarket, all of the time. That is not the purpose of technical analysis.The purpose of technical analysis is to identify markets that are in aposition to allow a trade with relatively tow risk and acceptable capitalexposure.2. Loss control or identifying the protective stop-loss level is the mostimportant factor in trading. It is the only factor that the trader hascontrol over. The potential profit of any trade is always no more thanguess work and can never be defined. I always get a kick out oftrading, educational material that teaches a trade should not be takenunless there is a"3-to-l risk/reward ratio." When ever you see this,you know the person probably has no successful trading experience.First of all, risk is the probability of an event occurring. It hasabsolutely nothing to do with a dollar amount. More importantly, youcan never define the potential profit. You can only define the potentialcapital exposure by where the protective stop-loss is placed. This is noteven a sure thing given a market can gap against you, beyond the stoploss price.3. The protective stop-toss level must always be determined within thecontext of the same methodology that determined the tradeopportunity. The same information that describes a trade opportunitymust provide the exact market activity that voids that opportunity.4. The protective slop-loss level must always be determined before atrade entry is initiated. Before initiating a trade ask yourself: "What isthe market activity that invalidates the decision to make this trade."That is your protective stop-loss.Once the protective stop-loss level is determined, the price level thatis acceptable for a trade entry is precisely defined within the amountallowed for capital exposure on any one trade. If the market activity
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does not allow trade entry within the acceptable parameters far capitalexposure, the trade cannot be initialed. For example, consider thefollowing situation;A, Your trading plan allows a maximum capital exposure on a goldtrade of $500 per contract.B, One of the entry strategies of your trading plan allows trade entrieson the close of a daily reversal signal and the protective stop-tossmust be placed one tick beyond the extreme of the daily reversalsignal.C, The technical analysis indicates that gold is approaching a target formajor low.D. Gold makes a wide-range key reversal day with a low at $370 and aclose at $377.E. According to the trading plan which allows a maximum $500capital exposure per contract on a gold trade, the protective stoploss can be placed no lower than $372 which is $500 from theentry price at the close of $377. However, the trading plan alsostates that the protective stop-loss can be placed no nearer theclose-only entry price than one tick beyond the daily extremewhich is at $370 or at $369,9 which would be a $710 capitalexposure.F, What is the trading action in this case? None! A trader must followhis or her trading plan. The trade entry strategies require the stop tobe placed outside the acceptable maximum capital exposureallowed, so the trader cannot take this trade on the close of thereversal day. The trader would have to wait for a set-up, such as atrend-continuation trade entry, where the capital exposure is withinthe limits of the trading plan.5. Generally, the Protective Stop Loss (PSL) on the initial trend-reversaltrade entry should not be adjusted until the market activity hasconfirmed the trend reversal. If a trade is entered at or near a suspectedtrend reversal, traders should not be too quick to bring the protectivestop loss (PSL) close to the market. The PSL is adjusted each time thetechnical analysis describes a price level that should not be exceeded ifthe trend is to continue.Consider this example:A- Your analysis indicates that the market has made a bear market low,has reversed trend and is in the initial stages of a new bull trend.B. Bull trends are described by a market making higher swing highsand higher swing lows,
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C. Once the market exceeds the initial swing high, it must not exceedthe prior swing low if it is in a new bull trend.D. The maximum price level for the protective selt-stop for a long tradewould be placed just below the prior swing low. It may he placedmuch closer, but this is the maximum protective stop-loss level.E. This is a simple example of how to think in terms of protective stoploss placement. The question to ask each day is: "At what pointwill the market demonstrate within the context of my analysistechniques that it will not continue to trend in the trade direction."That is always the maximum level where a protective stop Joss isplaced.6. There is mere than one protective stop-loss technique that is a part of atrading plan. The stop-loss technique implemented at any one timewill depend on the position of the market relative to the analysismethods. The PSL technique in the initial stages of a trend should hedifferent than in the latter stages of a trend. Dynamic Trading analysiswill signal what stage the trend is in.7. Let the market take you out of a trade. It is usually best to let themarket stop out the trade rather than to take a profit at a priceobjective. If a market reaches a price objective or the analysis indicatesthat a trend is at or near completion, the protective stop-loss can bemoved very close to the market such as just below the prior day's lowor high or on any day a market closes below the open, etc. Thisprevents a trader from exiting a trade where the market may continuethe trend beyond expectations, hut still allows only a small amount ofthe unrealized profit to be given up if stopped out.The amount that will be gained by remaining in a market thatcontinues to trend beyond expectations will more than offset theamount of potential profit that is given up in those cases where themarket takes you out of the trade with less profit man may have beengained if exiting at a price objective. Allowing the market to take youout of a trade is dealing with things as they are. Taking a profit at anobjective is speculating on the future when it is not necessary to do so.The exception to this plan is with multiple position trading. Oneposition may be exited at a profit objective while the balance are not.8. Always consider if the protective stop-toss should also be a trigger toreverse position, in other words, a stop-and-reverse order. Does theanalysis indicate that if the protective stop-loss is hit, that the trendwill continue in the opposite direction? This is often the case.Unfortunately, traders often become personally involved in theirtrading decision and find it very difficult to reverse position at some of
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the most opportune times. Always remember: The business is trading,not predicting the future. The objective is to go with the market flow.not be right in any one particular trade. A stop-and-reverse order isonly considered if the same order that is the stop-loss would also be atrade-entry order.
Entry Strategies and Initial Protective Stop-Loss PlacementThe two types of entry strategies depending on the current market positionare trend-reversal and trend-continuation strategies. Several of these entrystrategies will be described in this section along with their initialprotective stop-loss placement.1. The main concept for the initial protective stop-loss placement is asfollows: The same analytical methods and trading strategies that signala trade entry opportunity must also signal if the analysis or entrystrategy was invalid. The protective stop-loss is initially placed wherethe entry strategy is invalidated.The objective of the initial stop-loss placement is to immediatelyexit the position with a relatively small loss if the entry strategy oranalysis is invalidated. Remember, the overriding requirement forlong-term trading success is capital preservation. If capital is needlessly reduced by remaining in losing trades beyond the invalidationsignal, capital will be less available for the trade signals that result inthe profits necessary to remain in business.If the market moves in the anticipated direction following [hetrade-entry, the next objective is to remain in the trade for the majorityof the trend.2. The main concept for the protective stop-loss adjustment as a trendprogresses is as follows: The protective stop-loss is kept relatively farfrom the current market activity in the initial stages of the trend untilthe new trend direction is confirmed. The protective stop-loss isbrought relatively close to the market when the technical analysissignals that the market is near a position to complete the trend.In other words, different protective stop-loss strategies are useddepending on the position of the market.
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Trend-Reversal Entry TriggersTrend-reversal entry strategies are designed to buy at or very near thebottom and sell at or very near the top. Most academic trading advisorsand educators regurgitate the often repeated trading "rule" to never try tobuy the bottom or sell the top. That is because their technical analysisstudies are always lagging indicators. They do not have methods thatproject in advance the time and price zones for trend reversal and thepattern studies mat signal trend termination.Dynamic Traders are usually prepared in advance for the highprobability, specific time and price zones for trend reversal. DynamicTraders are often able to buy the bottom and sell the top with very lowcapital exposure.There are three reversal patterns that have a high probability offorming a pivot high or low if made at a time and/or price target. These areReversal Day (RD), Signal Day (SD) and Snap-Back Reversal Day(SBRD). These will be described relative to an established bull trend and ashort position trade-entry. Just substitute high for low, etc. for longposition examples. The descriptive examples are daily bars. They may alsobe applied to intraday bars.
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Reversal Day (RD) Entry SignalA reversal-day top is made when a market mates a new daily high butcloses below the prior day's close and the current day's open. The trendto new highs is not able to be sustained by the close of the day- Variationson the reversal day are the key-reversal-day, outside-reversal- day andoutside-key-reversal-day.Key Reversal Day (KRD): The market opens below the prior day'sclose, makes a new high, but closes below the prior day's close and thecurrent day's open. A KRD is a stronger reversal signal than a RD.Outside Reversal and Key Reversal Day (OSRD, OSKRD): Thesereversal days meet the criteria of a reversal day and arc also an outsideday. OSRDs are an even stranger reversal signal than a reversal dayand an OSKRD is a stronger signal, yet.Initial Protective Stop Loss: One tick above the high of the RD.
Reversal Day VariationsEach reversal day variation makes a new high and a close below the currentday's open and below the prior day's close.The initial protective stop-loss is placed one tick above the reversal day high.
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Signal Day (SD) Entry SignalThe market opens above the prior day's close, makes a new high and theclose is below the current day's open. The open must be in the top 1/3 ofthe daily range and the close must be in the bottom 1/3 to qualify as avalid signal day. Unlike a reversal day, the signal day close does not haveto be below the prior day's close, only below the current day's open.Gap Signal Day (CSD): A very strong daily reversal signal. Theentire daily range of the signal day is above the prior day's rangewhich leaves a gap at the end of the day. Analysts and traders whoonly consider closing prices would view a GSD reversal as a positiveday because the market closed up.Initial Protective Stop Loss: One tick above the high of the SD.
Signal Day and Gap Signal DayOpen above the prior day's close followed by a new highThe open is in the top l/3 of the daily range and the close in the bottom 1/3.The close does not have to be below the prior day's close.The initial protective slop-loss is placed one tick above the signal day high.
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Snap-Back Reversal Day (SBRD) Entry SignalA two-day reversal signal.Day One: The market makes a new high with an open in the lower 1/3 ofthe daily range and the high in the lop 1/3 of the daily range. It appears tobe a very bullish day.Day Two (snap-back day): The open is in the top 1/3 of the daily rangeand the close in the bottom 1/3 of the daily range. The second day does nothave to reach new highs or lows compared to Day One, The wider therange of each day, the stronger the signal. A stronger SBRD would resultif the second day's open was below the prior day's close with a new dailylow and a close below the prior day's low.Initial Protective Stop Loss: One tick above the higher of the two days.
Snap Back Reversal Days (SBRD)Day 1: New high and open in the lower 1/3 of the daily range and close inthe upper 1/3.Day 2: Open in the upper 1/3 of the daily range and clone in the lower 1/3.The two days may be in any position to each other.The initial protective slop-loss is placed one tick above the higher high ofthe two days.
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Trend Reversal Signals Only Valid At Time, Price and PatternReversal Set-upsThese daily reversal signals are only valid as trend reversal signals whenthe technical analysis indicates the market is in a position for trendreversal. Ideally, time, price and pattern projections are all in a positionfor attend reversal set-up. In other words, a daily reversal signal is onlyconsidered as a trade-entry trigger at the coincidence of a time and priceobjective for a reversal and at the completion of a trend-terminationpattern such as wave 5 or wave C.These daily reversal signals will frequently occur in a trending marketand not result in trend change unless the market is in a time and priceposition for a trend change. Many studies have been done on the validityof trend change following daily reversal signals. All of those studiesconcluded that they were not reliable indicators of trend change. None ofthese studies have considered the position of the market when the reversalsignal was made. If the market is not approaching a set-up for trendchange, these daily reversal signals should be ignored.For most markets, one of these three daily reversal signals will occur at70%-80% of trend reversals of all degrees. These three reversal signalsare not triggered until the close of the day, as the signal is based on theposition of the close. If a market is trending up and makes a new high forthe day, the criteria necessary fora reversal day is known - the prior day'shigh, today's open and today's high. The definition of a reversal dayincludes a close below the current day's open and prior day's close. AStop-Close-Only (SCO) order may be entered at a price just below thelower of the prior day's close or the current day's open. If the marketcloses below the prior day's close and current day's open after havingmade a new high, it is a reversal day.In the case of a signal day or snap back reversal day, we do not knowif one of these signals will occur until near the close when we know thecurrent day's range. If all of the criteria except the close has been met forone of these days, we wait until 5-10 minutes before the close and placethe appropriate SCO order at a price that must be met on the close in orderto satisfy the requirements for either of these reversal signals. If a trader isnot able to collect the open and range price information, the entry may bemade on the open of the following day.
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Initial Protective Stop For Trend Reversal EntriesWhere is the Protective Buy Stop (PPS) or Sell Stop (PSS) placed if oneof these three daily reversal signals occurs? In the case of one of thereversal days or a signal day. the protective buy stop for a short sale isplaced one tick above the high of the day as each of these signals involveshaving made a new high. If these are to result in a valid daily reversalsignal, the high should not be exceeded. If the high is exceeded, it is nolonger a valid daily reversal signal, and you want to immediately be out ofthe market and wait for the next trade set-up and reversal signal. In thecase of a snap back reversal day, the stop-loss is placed one tick above thehigher of the high of day one or day two.One of these three daily reversal signals will not always occur at atrend reversal or the ideal coincidence of time, price and pattern. Thetrader has one of two choices in this case:1. Do not take the trade at the time, price and pattern set-up unless one ofthese three reversal signals is made. You may miss entering trades atsome important tops and bottoms, but, so what? If the conditions werenot all in your favor at the trend reversal, a trade is not warranted. Ifyou limit your entry trigger to one of these three signals, you may havefewer trades, but you should have a higher percentage of wining tradesthan if you broadened your acceptable entry techniques.Trading junkies may not like this recommendation, but theirobjective is not to maximize profits but to always be in the marketregardless of the consequences. If your objective is to maximizeprofits, you will only enter with reliable signals that you have provento yourself are valid. Remember, there is always another trade set-upapproaching that will meet all of the criteria of your trading plan,whatever that criteria may be.2, Include entry techniques other than these three trend-reversal signals.It is not necessary to enter a trade at the trend reversal. Other tradingtechniques provide entry strategies after a trend reversal has unfolded.There are other entry techniques that may be considered at trendreversal projections. One of these is the Reversal Confirmation Daydiscussed next. The most important factor is to allow the market to provideat least some minor indication of the new trend direction.
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Reversal-Confirmation Day (RCD) Entry SignalTechnically, the daily reversal-confirmation signal is, not a trend-reversalsignal. Because it is usually made within one-three days of the actual pivothigh or low, I have included it with the trend-reversal signals and not thetrend-continuation signals. The reversal confirmation signal is used if themarket is suspected of having reversed at a projected trend-reversal zonebut one of the three trend-reversal signals described above were not madeat the pivot high or low. The description of the reversal-confirmationsignal assumes the market has made a pivot high and the objective is toinitiate a short position.Reversal-Confirmation Day Entry Rules1. A trend reversal is suspected of having taken place, but one of the threetrend-reversal patterns were not made,2. Sell on the close if the close is below the current day's open and priorday's close,This is a minor trend-confirmation signal that does not have all of thespecial conditions of the three reversal signals described above. It does notconsider the relationship of the dally range of the entry day, but doesconsider two important factors. The close below the prior day's close andcurrent day's open shows at least a minor degree of trend direction.A more reliable signal is to add the qualifier that the low of entry daymust exceed the prior day's low. In other words, sell on the close if themarket has exceeded the prior day's low and the close is below the currentday's open and the prior day's close.
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Reversal-Confirmation Day SignalSell on the close if the close is below the current day's open and prior day's close.The maximum distance of the protective buy stop is one tick above the pivot high.
In figure 1 above, the pivot high was not made on one of the threedaily reversal signals. While the first two days following the pivot highmade lower closes and lower lows, each of these days closed above theopen. The third day after the pivot high was a RCD where the marketclosed below the current day's open and prior day's close.In figure 2 above, the first two days following the high are the same asin figure 1, Day three is a RCD, The close was below the current day'sopen and prior day's close plus the day exceeded the prior day's low. Thisis a stronger trend direction signal, but also usually results in the protectivestop-loss being further from the closing entry signal. There is usually atrade-off with any new qualification for an entry signal. In this case, thesignal has a higher probability of being correct, but the initial capitalexposure is usually greater.In figure 3, day four following the high is a reversal-confirmation daywhile the fifth day is a RCD with a new low.
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What is the logical protective stop placement for entries following aRCD signal? The market activity that would invalidate the outlook that atrend reversal has been made is if the market exceeds the pivot that isconsidered the trend reversal extreme. In other words, the protective stoploss is placed no further than one tick beyond the last pivot. The onlyinviolate rule for stop loss placement with a RCD entry is the maximumstop-loss position, one tick beyond the pivot extreme. There may be alogical place to place the protective stop-loss that is closer than the pivotextreme. In the case of figure 3 above, the protective stop-loss may beplaced above the minor swing high prior to the RCD entry signal.Because a market may have moved away from the pivot price beforemaking a RCD signal, the capital exposure on trade entries made on aRCD signal will often be more than if a daily reversal signal were made.All traders must have a maximum acceptable capital exposure amountfor any one trade that must be part of their trading plan. If the tradeentry/protective stop-loss strategy calls for more capital exposure thanacceptable to the trading plan, the trade simply cannot be taken.The charts on the following pages illustrate many of these reversalsignals at trend reversals. The purpose of the charts is only to point out thereversal patterns at highs and lows, not the reversal patterns that occurredwithin the trend. As you will see. almost every top or bottom was made onone of the three trend-reversal signals. If a trend reversal was not made onone of the three reversal patterns, a reversal-confirmation day followed thehigh or low within three days and only a few points away from the pivothigh or low.
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Trend-Reversal Entry Signals
Almost every minor and intermediate degree trend change was madeon one of the three trend-reversal signals. The high in early Dec. was notmade on one of the three reversal signals but a reversal-confirmation daywas made the day after the extreme high.If you scan the chart day-by-day, you will find many of these dailyreversal patterns that were not followed by a change in trend. The threetrend-reversal patterns are not considered reversal signals unless thedynamic technical analysis signals a trend is at or near completion.The reversal-confirmation-day entry-strategy is used if a market hasreached a time and price zone anticipated for a trend change and a trendreversal signal is not made. The reversal-confirmation signal will provideat least a minor confirmation a pivot has been made and allow the trader toenter with relatively small capital exposure.
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Eight out of eight trend changes in soybeans shown above were eitherSnap-Back-Reversal-Days (SBRD) or Outside-Reversal-Days (OSRD).
Only about half of the highs and lows tor this period in silver were madeon one of the three trend-reversal signals. A reversal-confirmation-day(RCD) was made within three days of the other pivots.
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The two charts below show either one of the three trend-reversalsignals at each pivot high or low or a reversal-confirmation-day within twodays of the pivot.
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Trend-Continuation Entry StrategiesMany traders are under the illusion that trades cannot he entered with anacceptable capital exposure after the new trend is established. Of coursethis is not the case, While the trend-reversal entry strategies are designedto buy the bottom and sell the top, we must also have trading strategiesthat allow us to enter after the new trend is confirmed. Trend-continuationentry strategies do just that,It is important to keep in mind that we are trading against a pivotreversal. The Dynamic Trading analysis factors of time, price and patternare each designed to identify trend reversals as well as the probable extentin time and price of the new trend. There are several entry strategies withlow-risk and low-capital exposure to use after the new trend is established,Inside-Day Trade Set-upsAn inside-day is a day when the high of the day is lower than the high ofthe previous day and the low of the day is higher than the low of theprevious day. In other words, the price range of an inside-day is within theprice range of the previous day.An inside-day is a day of indecision. It is a day when traders do nothave a strong conviction as to the trend of the market. An inside-day oftenoccurs after a wide-range day when the range exceeded the average rangeof the prior few days. Inside-days also often occur either after a trendreversal when traders have not yet made the decision that the trend hasreversed or after a fast move and represents a brief period when tradersare catching their breath, so to speak.Usually, the direction of the breakout from the inside-day is thedirection that the trend will continue. Even more reliable, the directionof the breakout of the day prior to the inside-day is the direction that thetrend will continue.Because no single entry strategy is foolproof, each trading strategymust provide the trigger that tells us tells the market is not going to goour way. In other words, the stop-loss strategy associated with a particularentry strategy must be formulated within the same context of marketactivity as the entry strategy, Traders must always keep in mind: Allmarket analysis and trading strategies are a matter of probabilities,Losses are inevitable and a cost of doing business. The trading planmust provide a stop-loss approach that minimizes losses when they occur.
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Inside-Day Trade Entry Set-Up Rules1. Only enter in the direction of the trend. What is the direction of thetrend? Against the last pivot reversal considered the