side of the brain withthe mind-set needed to not lose.
The human mind is a goal seeking mechanism. Onceprogrammed correctly, it will strive day and night, awake or asleep,in an attempt to bring about fulfillment of the goals with which ithas been programmed.
In my book Trading Is a Business, | show how to deal withevery aspect of your life that might affect your trading. The bookdeals with the "Life Index" and its use in gaining control overyourself so that you can trade properly.
As a trader, you can control only one thing — yourself. Youcannot control the market. As pointed out by Mark Douglas in hisbook The Disciplined Trader, one of the reasons most people fail inthe market is because they try to control it.
22
 
Most people who trade are of above average intelligence.They are used to solving problems by controlling their environment.Often, they are used to being part of the solution.
Unfortunately, when trading the markets in front of a screen orfrom a set of printed charts, you cannot control the environment.This calls for an entirely different approach to problem solving fromthat which most people employ throughout their entire lifetimes.
| strongly recommend reading Mr. Douglas’ book along withTrading Is a Business. Between the two, you should have all theammunition you need to begin to change the way you think and theway you behave when trading in the markets.
Capitalization
| receive phone calls from far too many would-be traders whoare tremendously undercapitalized.
| know the urge to "get rich quick” is a powerful drive ofhuman nature. But | must say, if you cannot place an order for atleast two contracts, you have no business trading in the market inwhich you are placing your trades.
 
If you haven't sufficient margin to trade two contracts in somemarket, then you surely need to obtain that margin beforeattempting to trade.
The one contract trader, unless he accidentally runs intoimmediate success and good fortune, cannot in reality hope to be awinner.
 
The one contract trader has all his eggs in one basket. His onetrading decision must not only see him through cost covering, but
must also deliver a profit.
People call to ask me if they can succeed by trading onecontract. My answer is "yes," if you get very lucky. It has beendone, but the winners are few and far between. The odds aretremendously against a one contract trader. For most, it amounts to
nothing more than gambling.
23Perhaps the odds are a bit better than the lottery, but I'm notsure of that.
Lot Size
Once a trader can go beyond a three lot, he should trade inmultiples of five. That would be a five lot, a ten lot, a fifteen lot,etc.
Care should be taken to not enter trades with an “odd lot"such as four, six, seven,...twenty-three. It is too difficult to getdecent fills with odd lots.
Even more care should be taken on final exit from a trade. If |have traded a ten lot and need three contracts to cover costs, | willcash five contracts at the cost covering level. That accomplishestwo things:
1. Simultaneous with covering costs, | take a profit out of themarket.
2. | am left with a five lot for my final exit. At each step |will, on average, be able to obtain better fills.
Prices
Consideration should be given to prices when entering amarket. It is essential to give the correct price. Contracts such asthe British Pound, Heating Oil, Unleaded Gasoline, Pork Bellies, LiveCattle, and Live Hogs trade in amounts that can trade with last digitsending in numbers that rise or fall other than in increments of 1 or 5with each tick.
Although many brokers will accept orders with wrong digitalendings, and although they may also be accepted by the floor, suchorders cannot actually be filled at the price given, and so slippageoccurs, destroying your anticipation and expectation from a trade.
24
 
 
Orders
| use three types of orders for my trades. As a rule, | entertrades only at a price. That means using limit orders. This isextremely important when trading large size orders, but should beimportant to any trader. | feel it is important to learn to trade marketentries with price orders the majority of the time. | cover costsmostly with MIT orders, and | exit sometimes with a market order,but mostly with a resting stop order which becomes a market order
if prices trade at or through my price.
I will include more of these matters as they come up in contextand at the correct places throughout the book. However, youcannot really begin to read this book without a basic understandingof how | manage my affairs as a trader.
If | were a beginning trader, or a trader attempting to build anaccount in order to be able to trade more contracts, here is how |
would manage my money:
| would enter each trade with three contracts. Assuming thetrade went my way within a short time, as soon as | could coverimmediate costs (commissions and fees), | would cash two of thosecontracts. One contract would take care of immediate costs, andthe other would give me a return equal to my costs, thereby givingme a 100% return based on immediate costs.
As soon as possible, | would pull my third contract tobreakeven. This could be immediately or after a short time. There isno way to know in advance just how soon. Each trade is different
and must be adjusted to the market action.
At breakeven (the original price of entry), | would expect to bestopped out 7-8 out of 10 attempts. The other 2 or 3 tries wouldresult in medium to very large wins.
What if the trade does not go my way immediately, or after ashort time? Then I would get out. Something is wrong! If my entrydoes not result in immediate, or almost immediate success, | would
exit.
25Immediate costs are cheap compared with the losses mosttraders suffer because they lack the discipline to quickly extractthemselves from a trade.
The problem with most traders is that they view each trade asthough it were the 'be all’ to 'end all'. This is simply a wrong view.Trades must be viewed as a series of events, the majority of whichwill earn money for you if you have the discipline to follow a plan ofaction.
Once a method or system has been proven to work most ofthe time, then the rest becomes simply a matter of discipline andproper trade, risk, and money management.
Philosophy
| like variety in my trading. The thought of sitting anddaytrading the S&P on a three minute chart is anathema to me. |would burn out in short order doing that. | like to trade a variety ofmarkets and a variety of time-frames.
| would agree with many professional traders on the need forspecialization — for them. For me, it's boring.
Many have strong feelings regarding daytrading. They want totrade a single market, in a single time-frame. For me it's difficult todo. My thought is that trading that way is like going to a buffetdinner and choosing to eat only the roast.
| want the bread, the vegetables, a salad, dessert, and a drinkalong with my roast.
There is strong agreement among professionals that you shouldtrade only extremely liquid markets and only those with goodvolatility, especially when daytrading.
| agree with that wholeheartedly.In the estimation of many, the only markets that have
sufficient liquidity and volatility for daytrading are the currencies,Bonds, S&P, and Soybeans.
26
| disagree with that. Corn has excellent liquidity, possibly morethan the Beans. Traded on a sixty minute chart, Corn can bedaytraded successfully, and much more easily than the Beans.There is an advantage to trading Corn that is not available in thecurrencies. You can more easily turn a day trade into a positiontrade. In addition, studies have shown that Corn trends more than
the Beans.
Sugar can be a wonderful trending market on thirty and sixtyminute charts. It has great liquidity.
With the exception of trades designed specifically to scalp, |believe the only way to trade off the floor is to position trade. Byposition trade, | mean any trade designed to keep one in the marketas long as possible relative to the time frame traded.
Whereas a scalp trade is designed with a short term targetedprice zone, a position trade has no such targeted price zone. Insteadit is a trade designed to stay with a trend in the market for as longas possible, even to the point of transcending the current shorterterm trend in favor of matriculating to an overall longer term trend.
When | daytrade a five minute S&P chart, | position trade itmost of the time. The same is true for the currencies. | positiontrade them intraday. By that, | mean I take a position based uponthe intraday trend, and hold until near the close.
In fact, any market that will form up’ on a one minute chartcan be safely position traded intraday.
In all markets except the S&P, if | can turn a daytrade into anovernight, longer term position trade, | will do so.
| have heard many daytraders say that the reason theydaytrade is because in trading the daily charts they leave too much
money on the table.
I say "Nonsense" to that kind of thinking. I've tried it bothways, and can honestly tell you that it is the pure daytrader who isleaving most of the money on the table.
 
27| have seen daytraders lose scads of money in markets thatwere trending beautifully. The daily-chart position traders werepicking up a fortune, and the daytraders were fighting their way intothe market every single day and losing on the intraday action.
There are a great many bugaboos and false beliefs that havebeen propagated through the years.
For instance, who says that a weekly chart needs to consist offive trading days? Why not make three day charts and obtaindifferent signals from everyone else?
Why do daytraders think they have to use five, fifteen, thirty,or sixty minute charts? Why not use a seven minute chart and tradefrom a completely different set of signals?
| have used, and still do use, twelve minute charts. | do itbecause | want to see the chart form somewhat differently from the
way others see it.
| have traded, and still do trade bonds from a 120 minutechart. | do it because | do not want to go along with the pack. Atheart, I'm a contrarian.
| strongly believe in trading where | feel most comfortable. |am not afraid to take a trade in cocoa, or orange juice, if a goodopportunity arises. | simply lengthen the time frame, so that theliquidity is there to go along with the volatility.
Orange juice may be a thin market on a daily basis, but howabout trading it from the weekly chart? There is sufficient liquidityin an entire week to trade orange juice. Volatility due to a thinmarket, especially during the cold months, is not a problem.
| refuse to be rigid in my trading. But | am as rigid as | can beabout self-discipline and self-control. | will put up with no nonsensefrom myself in those areas.
I think that many who try and fail do so because they think
that by being rigid in their trading, they are being disciplined traders.But that is the wrong place to be rigid.
28
 
 
If you are going to be rigid about anything in your trading, itmust concern your work habits and mental outlook. Be rigid indetermining to not lose. Be rigid in setting your heart to win, Berigid in keeping good records and statistics about your trading thatwill enable you to be a better planner and executor of your trades.
| am comfortable with variety, so | trade a variety of marketsand time frames. | prefer to be eclectic. | want to smell all theflowers, not just one. | want to sample every market, not just one.
I've learned to trade where I'm comfortable. I've learned totake only the best of the best trades. | place stops where I'mcomfortable. | insist on being a happy trader. If trading everbecame like work, | would find something else to do.
Conclusion
My final thought in this introductory chapter is that there issomething for everyone at the table. Daytraders can daytradeexclusively if that's what they desire. Daily-chart position traderscan trade the daily charts to their heart's content.
Others can do as | do, and combine both, and in varying ways.We won't all do it the same. We will trade in different markets, andwith varying degrees of success. It's always been that way, andwill continue to be that way.
The notion that if | reveal my secrets, everyone will begindoing what I do which would spoil the method for everyone, is theheight of naivete. You will never trade exactly as | do, nortrade exactly as you do. To even make the attempt would befoolish. We are wonderfully and individually different. | cannot beyou, and you cannot be me.
 
The best thing you can do with this book is to integrate thethings you care for into your own style of trading. You must beyourself in the markets. You trade within your own frame ofreference and your own comfort level. Trading must make sense toyou or you will not have the confidence — the courage of convictionthat you need to be a winner.
29This book contains a history of the Ross hook, yet | am readyto stand by each and every nuance in trading it as being a valid wayto trade. One method is not necessarily any better than the next. Itis only as good as it meets with your needs.
Some will ask, "Which one do you recommend now?”, or"Which one is the one you do?" The answer to that is that | wouldbe willing to do them all as the mood suits me.
Remember? | told you | like variety. But when I do select amethod, | stick with it for awhile, sometimes as much as a year.
In the chapter entitled "Vanilla Hooks,” you will see mypersonal preference for trading the Ross hook. That does not meanthat the other methods shown are bad. They all work, and all arederived from real life experiences of myself and my students.
In my entire trading career | have avoided the use of oscillatorsand technical indicators of every kind as a means of direct decisionmaking. | simply have not needed them. | show them in my booksonly because | know that others relate to them, and so they yield acommon ground for communication.
| am totally aware of the use of technical studies andindicators. | do use them indirectly. | have studied and am verymuch cognizant of how others use them. Other professionals havedone the same thing. | will use such studies against those who usethem. If | detect that an indicator or study has become popular andthat a large number of traders are using that particular study orindicator, then | will adjust my trading accordingly in order to takeadvantage of those traders and use it against them. There is greatdanger in trading along with the crowd, so let the trader beware!
| try to not close off my options to change, because marketschange. The Ross hook is for use in trending markets. There havebeen years when markets didn't trend. Then | had to set aside theRoss hook, and use other methods. It is not the Holy Grail of trading
by any means.
30
 
This should be of interest to the pure daytrader. If you aregoing to exclusively trade the S&P, for instance, there are plenty ofdays when the market doesn't trend. Then you must either useother methods, or wait until the S&P does trend intraday.
| have students who tell me that they have waited patiently foras much as two weeks in the S&P, using a five minute chart to tradehooks in combination with the filters they are using. They aremaking a lot of money doing this.
This has been a rather long first chapter. | felt it necessary togive you some sort of foundation upon which | could build. Now it'stime for me to begin the history | promised.
The first step is for me to tell you how | came across what hasbecome known as the Ross hook.
31Chapter 2
How It Started
The year was 1959. My education and apprenticeship in the academicsof business and markets was over. My real education in trading and businesswas about to begin. Apart from the rigorous discipline | had encountered from astint in the Navy, and from time spent with my great-uncle, | had only a fewtools with which to make my living as a trader: | knew how to identify a trend,| knew what constituted a 1-2-3 high or low, | knew how to identifycongestion, | knew the five functions of a manager, and | knew how to giveorders to brokers in a forceful and intimidating way. | knew something of thefundamentals that drove the various markets, but | also knew that | couldn'tafford to accumulate the information needed to trade based upon fundamentals.That remains true to this very day. lustrate the basic tools available for mywork.
 
 
 
1-2-3 Highs and Lows
| suppose | can never cease showing this most basic and essential offormations in the market. In my view, the 1-2-3 high or low is the buttress ofalmost every great move ever made in a market. Why? Because virtually everytrend, great or not so great, can start from it.HIGH
I prefer thatthe formationconsist of atleast fourbars.
I will acceptthree bars whentrading the
five minute SaP.
On dally charts,the more bars inthe formation,the better I likeit.
 
them as well. They occur at major and intermediate highs and lows in a marketOf course, what constitutes a major or intermediate high or low is somewhatinterpretive — one of those things that is in the eye of the beholder. I'm sorryabout that, but whoever said that trading was a science? There is not! {foolish than to attempt to apply scientific principles to the art of trading.
 
 
 
 
I've stated before, and will state again here, that there is nothingscientific about the actions and interactions of markets. Market action is notmathematical, geometrical, cyclical, statistical, or theoretical. The marketsmove based upon the perceptions of those who trade them. Therefore, marketsare emotional, at times bordering on hysteria. For the most part, money ismade in markets by those who most correctly read and act upon theperceptions of the masses who trade the markets.
 
Notice that | said, "for the most part.”
Often market moves are initiated by those who have an interest in, andthe ability to engineer, such moves. Many moves, particularly short termintraday moves, are totally contrived.
Nevertheless, it is the perception by traders of market action, and theirexpectations for a profit, that trigger the buy/sell orders that almost continuallycause markets to tick up and down.
 
The emotions and human behavior driving the markets can be seen in theprice action as revealed on a simple bar chart showing the open, high, low, andclose of any given time period. This is true whether time be measured inseconds, minutes, hours, days, weeks, months, or years.
  
The more adept one is at reading the finer points of a price chart, thecloser to the reality of what is actually happening in the markets one canbecome. The ability to read the finer points of a price chart increases theprobability of incurring a successful transaction when trading.
In a moment I'll show what a 1-2-3 means, and how it can evolve into anestablished trend. The 1-2-3 is a gateway to the practical use of momentum.Momentum is created by the emotional drives of human nature as they affectthe various markets. Remember, we are dealing here with human emotion asn of market direction. There is nothing exact
 
expressed by human percepabout
 
331-2-3's look like thi:
 
LOW
 
I prefer thatthe format ionconsist of atleast fourbars.
I will acceptthree bars whentrading thefive minute S&P.
On daily charts,the more bars inthe formation,ve better I likeit.
The usual objective with 1-2-3 highs and lows is to enter a market on abreakout of the number 2 point. That is an overly simplified view of 1-2-3'sand how they are traded, but it will suffice for now. The main thing is to
recognize what they are. When trading in conjunction with hooks, we do nottrade the breakout of the number 2 point.
Here is what | was taught about the anatomy of 1-2-3's.
34
nome
Ee am MSH AO
1-2-3 Lows
A 1-2-3 low is characterized by a market reaching a major or intermediatelow. The low is evidenced by prices then making an up leg away from the low.The low is the number 1 point marked on the chart. This up leg is immediatelyfollowed by a correction as the market moves briefly back towards the low.
The move back towards the low leaves behind a high which can be labeled asthe number 2 point. If the correction is such that it reaches or exceeds theformer low, the 1-2-3 low ied in favor of a downside move or a
conges'
 
 
 
If the correction fails to reach the low and then begins to move upward,it leaves behind a’somewhat higher low which can be labeled as the number 3
point.
 
The Meaning of a 1-2-3 Low
Since 1-2-3 lows can come at the end of a downtrend, or also after aperiod of consolidation, it is reasonable to ask what is taking place in the marketto cause this formation to occur.
When a 1-2-3 low occurs at the end of a downtrend, the number 1 pointis brought about by the following events:
First, there simply are no more willing sellers in the market. Prices havebeen pushed as low as they can go. At that point, supply shifts from too muchto too little, and prices begin to move up. When those who were short, therebypushing prices down, realize that prices have started to move up, they buy backtheir short positions in order to extract profits. Their buying in order to liquidatetheir short positions causes the market to move up. Would-be longs who havebeen sitting on the sidelines waiting for these short bears to finish having theirfun, then begin to buy, adding to the upward price movement. Prices are then
driven upward from point 1 to point 2.
  
 
Soon those early longs, especially those with a short term view, begin totake profits by selling out at least a part of their long position. This tends todrive prices downward again away from the number 2 point towards thenumber three point. This downward move or correction is aided by those bearswho think the market is going to go down forever. They perceive the upwardmove as a bear market rally, and move to establish or re-establish their shortpositions in hopes of a continuation of the downward trend.
 
35If they are correct, prices will go down and take out the number 1 point,thereby nullifying any new uptrend. If they are wrong, and prices will not bepushed lower, new buying will come into the market and drive prices back awayfrom the number 3 point and towards the number 2 point. If prices then takeout the number 2 point, a new trend may be in the Process of being established.How long it last or how far it will go remains to be seen.
 
 
It is of the utmost importance that you understand the scenario I've justdescribed. It has everything to do with the stop placement and the moneymanagement plan I've already mentioned and | will be showing later on.
It is entirely possible that the breakout will go nowhere as the bulls andbears battle the market into a consolidation phase. This consolidation mayrepresent accumulation prior to a later move upward, or it may representdistribution resulting in a later continuation of the downtrend. Only time wi
 
 
If a consolidation phase does occur, the 1-2-3 may form from within thePrice structure of the resulting trading range. Be aware that the 1-2-3 can formfrom the high of the range and result in a breakout to the downsi le from a 1-2-3 high. Conversely, if the 1-2-3 forms from the bottom of the range, it canresult in a breakout to the upside from a 1-2-3 low.
Prices will break out to the upside if the consolidation was indeed anaccumulation phase. Once the supply of the commodity is gobbled up at thelow prices, there will be a shortage of supply and prices will rise according tothe amount of demand in relation to the shrinking. supply.
 
 
A 1-2-3 low breakout to the upand the bulls have won.
le usually signals that the battle is over
The Meaning of a 1-2-3 High
A 1-2-3 high breakout to the downside usually signals that the battle isover and the bears have won. Many downtrends in markets are preceded bythe formation of a 1-2-3 high. 1-2-3 highs tend to be larger from top to bottomin most markets. This is because markets generally fall faster than they rise.Such is not the case in the currencies. Currency markets rise and fall relative toone another. When one is rising another correspondingly falls. A steep declinein one currency will be reflected in a correspondingly steep rise in another.
 
36
1-2-3 Highs |
A 1-2-3 high is caused by the exact opposite phenomena of the 1-2-3low. When there are no more buyers in the market, and prices refuse to rise toany greater heights, prices begin to stabilize or even to drop. The bulls, sensingthat for the time being the upward move is over, begin to liquidate their longpositions and take profits.
  
The bulls liquidate their long positions by selling what they have bought.This tends to drive prices down even more, and a number 1 point is formed.This downward action attracts the bears who are looking for an opportunity toenter the market from the short side. Their entry pushes prices down evenfurther. Prices move away from the number 1 high and toward what wibecome the number 2 point. Soon the early bears begin to liquidate at least aportion of their position by buying back their shorts.
 
 
This drives prices back towards the number 1 point, leaving behind a lowthat can be marked as the number 2 point. Eager bulls, and those anticipatingeven higher prices, jump on the bandwagon and buy, expecting new highs.They view the downward move as a bull market reaction. This drives priceseven higher. If prices come all the way back and take out the number 1 point,ied and the uptrend is still intact. The bulls have won.
 
If prices fail to take out the number 1 point because they are simply too |high, prices will begin to move downward again, leaving behind a number 3point. Longs will have to cover their positions by selling. This action, coupledwith the bears jumping on the wagon to go short, may cause prices to take out |
 
the number 2 point. The taking out of the number two point to the downsideestablishes the downtrend.
Whether or not prices will continue to slide cannot be known. Prices maygo into a consolidation phase. If this happens, we have come full circle, as I'vealready explained the possible breakouts from the trading range surrounding theconsolidation.
If you want to know how | trade the breakouts of distributive and
accumulative congestions or "Trading Ranges,” please refer to Part | of my firstwork, Trading by the Book. That topic is beyond the scope of this book.
37In the days when | first started trading, taking the breakout of 1-2-3formations was a pretty good way to trade. Even today a high percentage ofthem work out for the good. This is an especially good trading signal for daytraders, as the momentum needed to carry through the number 2 point on thedaily chart generally gives enough thrust to cover costs and yield a profit.
! have only one rule as pertains to 1-2-3 formations: they should be welldefined, and easily seen as a 1-2-3. On the daily charts, | insist that it consistof at least four bars. The more bars, the better, so that the formation reallystands out as being a 1-2-3.
On intraday charts there must be at least 3 bars, but you will have toexperiment on your own. Three seems to work on a five minute chart.
However, this is not a book about 1-2-3 formations. It is about the Rosshook. It is via the 1-2-3 that | came upon the Ross hook. It is the number 2point that led me to pursue further my search for viable tra g situations,
 
| Discover the Hook
My discovery of the Ross hook is somewhat akin to Columbus' discoveryof America. What has become known as "America" was here all the time. Itwasn't discovered by Columbus.
And so it was with Ross hooks. They were there all along. They've beenthere since the first bar chartist drew a bar chart. 1, being the opportunist that |am, gave them a name. It is through publicizing them in my writings andseminars that they have become known as Ross hooks. We have come to callthose who trade them “hookers.”
My discovery of them came as with most discoveries — | was looking forsomething.
Columbus was looking for a shorter Passage to India. | was looking for away to enter trending markets.
 
By virtue of my training and ine, | had learned to recognize andtrade the number 2 point of the 1-2-3 formation. |;
38
But as | looked over and studied my charts, | noticed there were plenty ofother “pointy” places on the chart. Amazingly, | was able to find nothing thatindicated that anyone was trading these “pointy” places. It was as if everyonewere trading right past them and somehow no one was seeing them. It was as
though they were invisible.
What a find! What a rare treasure! Here were acres of diamonds, andeveryone else was stumbling past them, kicking them to the side as they would
any ordinary stone.
| can't say for sure that no one else had ever utilized these “pointy”places. In fact, | think there must have been plenty of others who used them.There are a good number of secret traders one never hears of. | know, because| was one. But | couldn't find anyone who.had ever written about these pointyplaces. My brokers certainly didn't know about them. | felt like the man whohas found a pearl of great price. It is only since | began imparting my tradingknowledge to others that I've been willing to share what | know about these“pointy” places on the chart, which | have named the Ross hook.
An Evolution
This book is the story of the evolution of the Ross hook. In it | will showstep by step how | began to use it, how and why it works, and why | think itwill continue to work in the markets. Perhaps, more importantly, | believe thatit will work no matter how many people trade it. If enough people do trade it, itmay become self-fulfilling.
 
My use of the Ross hook, and its development, came over a period ofyears of trading it in the markets. Its use, for me, has encompassed theimplementation of everything | love about trading.
it has evolved as | learned to read market action as depicted by a barchart of prices showing the open, high, low, and close.
 
 
My use of the Ross hook has been, and still is, a continuing growthprocess, | am happy now to have shared it with others. It gives me greatdelight and pleasure to be witness to the wonderful innovations my students
have come up with surrounding the Ross hook.
 
| thrill to the way they are learning to use it, taking it further than | evercould have trading it selfishly and by myself.
 
39Suffice it to say, many of them have become and are becoming rich bytrading these “pointy” places in the markets.
Since | do not normally trade with technical indicators other than to fadethose who do, every one of the concepts and tricks | will be showing in thisbook are included by permission of my students, with the exception of “plainvanilla” trading of the hook. My students, too, have learned that it's better toshare.
It's a strange thing about learning to give. What you give comes back toyou many times over, and in ways you would never expect. It's as thoughthere were an invisible law at work.
One of the greatest benefits is that giving up selfishness in the marketsmakes one a less selfish trader. Selfishness in trading, “wanting it all," hasbeen