be| explained later.| < CorrectionRRh
in the chart above | have labeled a Reverse Ross hook (RRh),on the third bar after the Rh bar. The subsequent bar to the RRh barwas the fourth bar with all closes within the range of the Rh bar.You may wonder, "If the bar that makes the hook is also the barthat qualifies for congestion to have been entered, what takesprecedence, the RRh or the congestion?”
The answer to that question is forthcoming in great detailwhen we discuss filtering the Ross hook.
RRh's are important in spotting trend reversals. Some RRh'soccur in the correction that follows a market top.
An RRnh is created via the following scenario.
Demand is sufficient to take prices to new highs.
Then, profit takers sell into the strength of the rally to the top,pushing prices back down to what is to become the point of the RRh
prior to the rise to the next but not necessarily higher high.
Then, the remaining bulls step in again to push prices up.Usually volume is thin compared with the previous up legs.
 
68
 
pushingprice down through the RRh.
It is when you see a market approach a previously made Rh on,lower than previous volume, and then fail to take it out, that you {have one signal that prices may be ready to reverse. Such an eventis a first clue as to what the market may be saying.
Then, when prices drop down and take out the bar labeled ]RRh, you have a second signal to indicate a trend reversal is in themaking. At this point, you do not blindly take a breakout of thatRRh. There must be a filtering process. The filtering process willgive us the third signal that a trend reversal is taking place.
Let's look a step at a time at a chart that shows what | mean.
69cT DaAILy 7485
The wiggly line isa3 bar moving
  
* The 3 x 3 moving average of the close will be ourthird signal for telling us whether or not to“trade « breakout of the RRh. Watch it closely?
Me do not want to trade = breakout of the RRhbecause the 3 x 3 has not turned over. We wouldwant it to turn over as in the next chart beforeconsid ina chai
 
        
    
etree ton ttibllltyDEC JAN FEB63-87 O- 668S H- 6768 L-
1136 I- 9175 x- 6884 Y- 8 2-
ct DAILY 7as3 n ars
Motice that the 3 x 3 macdows not turn over untilAFTER the RRh i= taken out.
 
It can be argued that looking ahead, we can see that taking outthe RRh would cause the 3 x 3 MAC to turn over. This is true, andis a more refined, advanced way to trade, one that has made meconsiderable money. However, if a turnover by the 3 x 3 MAC isanticipated, we must be prepared to daytrade any breakout of theRRh, as the trade may be only short lived. If we try to trade theanticipation as a position trader using a daily chart, we must bePrepared to take a short term scalp by having a short term objectivestop. Breakouts of RRh's are often false. We keep that firmly inmind when we trade them. RRh's are not nearly as high percentagetrades as are Rh's preceded by 1-2-3's.
70
   
CT DAILY 7412
fA 1-2-3 in congestion has formed.
      
of waiting for the
prior to the hook’sbeing taken out.
3 point is not firmly in place as yet.
Care ld back anyst be taken at this point to hold be
Siades until tho market gives a more definite |
commitment as to direction. It may be going
a trading range.
  
 
, seoceccononengaLtooatant ilohutgativottetta ton lygat ini tatty
‘DE saa’ FEB
Here ue see the wisdom
Ye nay be seeing the beginning of # 1-2-3 high. The
In fact, by our definition of congestion, we are now seeing
congestion on the chart. Beginning with bar 1, we have had aan open-higher close-lower, an open-lower close-higher, and analmost doji. These, one after the other.» 3F3cT DAILY 7563Se"eSSehee CS Rals ontereaa congestion area? ftt
eases nei yl
If prices were to n
 
  
seeceeereeegatitiatoat ib batateettertietete bet Hi‘bE gal CT Pee MAR APR
71
doji,
RAPPER PRETcT DalLy
D Jani
; A double resistanceif you want to trade withi
CT DaILy
At the place where the number twwe could then start looking for Ross hooks.
7598
F
7479
  
mar
going short at the doubleresistance are now in themoney.
       
can be significant if itholde.
If the double resistancefeos hola, te wiir
vo formed a numberthree point. Bee
Antfe+
 
      
Notice that the 3 x 3 MAC ie stillrunning through the middle of prices.The congestion is still intact.
Many professional traders would sollat the close, as this is a low risktrade due to the double resistance.
   
   
vrestbnet bottled Hlttell
point gives a relatively low risk entry point,
in the congestion.
" 3F3Notice that the 3 x 3 MAC haeturned dounmard forture meen the secona 13Prices have formed = triple tt heresistance point. Traders t
     
hy
If you are a reader of any of my previous books, you may be
wondering why | am not writing about going short on or before the
breakout of the 1-2-3 high that has been forming.
72
© point would be taken out,
 
 
It is not my intention to go into that information here. It is asubject that has been treated in each of three other books | havewritten, Trading by the Book, Trading by the Minute, and Trading Isa Business.
Incidental information such as the concept of getting short atthe double resistance minor top is presented as "nice to know."However, such information is not the subject of this book. |have and will continue to reveal such information in my teachingletter, Traders Notebook, and in an additional book | intend to write,
called Trading in Congestion.
It is the combination of three things that determine that a trendreversal has indeed taken place. Let's review them here, noting thatnumbers 2 and 3 may be reversed in order of occurrence.
1. A failure to take out a Ross hook on lower volume atthe end of a trend, signifying weakness in the market.
3. The 3 x 3 MAC turning down ahead of the takeout ofan RRh, or a number 2 point. Later on, in the chapter on plainvanilla trading, I'll shown you how you can know, without anyindicators, whether or not to take an RRh trade.
I've shown the beginning of a trend reversal at a market top.If you want to see what such a reversal looks like at a marketbottom, simply turn the page upside down and hold it up to a mirror.
When there is a test of an extreme followed by a failure, beaware that you may be looking at a trend reversal. However, becautious. Before the trend reversal goes into full force, there may bea trading range or congestion area.
Such a trading range can be indicative of accumulation ordistribution. You cannot be sure which. Be sure to wait for definitecommitment by the market before beginning to look for Ross hooks.
Such commitment can be seen in the form of a 1-2-3 breakout,followed by the forming of a Ross hook.
2. A correction strong enough to take out an RRh. |
73Yes, you will miss a part of the move, but you will, if youfollow what I have shown, trade most of the time in an establishedtrend. Since most of the money to be made in the markets for offthe floor traders occurs in trends, this represents a conservative andeffective way to trade.
We've now seen something of trend reversals and ReverseRoss hooks.
We've seen that the RRh in itself is one signal that helps us tosuspect a trend reversal may be imminent. :
We've also seen that a filtering process is necessary incombination with the RRh for determining the plausibility of enteringa trade.
The RRh as a signal must be filtered. In the case shownpreviously, we used the 3 x 3 MAC as our filter for the RRh.
When | began trading, | did not have the luxury of a computer.| had to do everything by hand. | kept a book on the 3 x 3 MAC so!would always know where it was. | marked my chart by hand eachday. Eventually, | came to be able to see when to take an RRh ornot, based upon what the market was doing.
The computer relieved me of what to me was a grievous chore.Yet there are many today who still mark their charts by hand. Theyenjoy it, and | salute them. There is a certain feel you get when youdo charts by hand. It really helps you "feel" the market. That's theonly part of manually updating charts that | miss. I've never found asubstitute.
| have watched Neal Arthur (Muckler), who has a computerand live data, sit down each day and bracket his charts by hand.What great patience and love of trading he shows by doing that. Hedoesn't know it, but watching him do that brought a tear to my eye.Whatever happened to the things that worked in the markets?People have lost them. It is knowledge carried forward by only afew.
74
 
The old timers used to sit and watch the clacker board. Thefew left who do this can still trade the socks off most everyone else.
Traders used to keep a "book." They knew when a marketwas trending or in congestion. They knew where support andresistance were. They knew how to correctly use the study that hasbecome known as stochastics. The book gave them the feel of themarket. When they went home at night, they updated their charts.They knew the markets and how to read them. They understoodthe markets they traded. Their knowledge made them rich.
They were not trying to "get rich quick” as are so many oftoday's traders. They plied their trade as astute craftsmen of themarkets. They knew they would not get it all on one trade and theydidn't try. They took steady profits from the market without havingto go through all the emotional knee-jerking that are the hallmark oftoday's trading. They didn't need psychologists to teach them howto modify their behavior. They traded from knowledge of what they
saw.
What I've shown you to this point has been the way | tradedthe hooks from the time | first discovered them. | traded them that
way consistently for a long time.
In the chapters ahead we will be looking at various ways tofilter Ross hooks, and nuances, concepts, and intricacies that willhelp you. These will add immeasurably to your success in trading,especially if you are addicted to the modern day crutches called
technical indicators.
75Chapter 7
Conceptual ProcessesAnticipating Hooks
In Chapter 6 | said, "It can be argued that looking ahead, we
can see that taking out the RRh would cause the 3 x 3 MAC to turnover."
The key point was that a signal can be based upon “lookingahead". | call such a concept "anticipatory trading."
Here's how it works. When We see a market in an establishedtrend, we can anticipate that every bar in the direction of the trendhas the potential of becoming a Ross hook.
Let me show you a picture of what | mean.
 
In the above illustration we see pictured two trends, one up
and the other down. Let's assume that somewhere earlier they hadbecome established trends.
76
What if | were to change a single bar in each of the twotrends?
| would then have a Ross hook in each trend. For now, let'ssay | would want a resting entry stop above the point of the hook inthe uptrend and below the point of the hook in the downtrend.
Later, we will see ways to enter the market ahead of the actualbreakout of the point of the hook.
The idea that the extreme of any price bar may become thepoint of a hook gives rise to the following trading signal: In anestablished uptrend, buy a breakout of the high of any price bar. In
an established downtrend, sell a breakout of the low of any pricebar.
Why? Because that is what you would do were that bar tobecome the point of a hook. The anticipation is that you can jumpin front of the market and it will take you along for the ride.
77However, there must be some filters used with this concept.
1. Never enter on a gap opening past the trading range of theprevious bar, and never enter on the breakout of a long bar move
made by the previous bar.
Do not enter ona gap open -> - |
way
 
il -
Because the nostlikely thing tohappenis a reactiont
2. This type of trading should normally be limited to daytraders, because a hasty retreat may become necessary. Daily chartposition traders can take such trades provided they are able to giveexplicit instructions to their broker with an assuredness that suchinstructions will be carried out. This means the ability to give a setof contingency orders.
3. If there have been three successive bars in the same
direction, do not attempt to jump in front of the market; a correctionis usually imminent and a better entry will be obtainable.
78
 
Anticipating Correction
Even a cursory study of charts reveals that most moves in thedirection of a trend last only three to five price bars, with theaverage being four bars in the direction of the trend before a
correction of some type takes place.
Because most moves in the direction of the trend average fourbars, we want to be conservative. We do not attempt to jump infront of a market after three consecutive price bars in the direction
of the trend.
After three to five consecutive price bars in the direction of thetrend, a correction will normally take place, giving an opportunity toeither take a position in the trend or add to an existing position.
Anticipating Correction Length
Most corrections last from one to three price bars opposite tothe trend. It is here that we have a safe entry opportunity withrelatively low risk.
Anticipating Trend Resumption
In most cases, a trend will resume after one to three price barsof correction. Anticipation of the trend resumption is an important
~ factor in trading Ross hooks.
79Trading Anticipation
Now, let's put our anticipations together, and taking it onestep at a time, see how we would have traded a trending market.
 
high and the high
   
CL G DAILY 2317 CL G DAILY 2282{ 2348 2a idt 2320 buy1 ge 2300 fs the narket ff meWe don’t know it { c 2288 corrects, ve {yet, but this | 4 2260 try to buy \/uptrend is about Hf 2248 breakouts I iftoend. nt joo etn te an at this0 inescores: a buy a breakoutave Li, it of the point of2120 uf! i the hook,2108sulSEPCL G DAILY 2282 23404, G DAILY 23082b tf “buy 2320 tetWe would attempt to buy {I uy 2398 If ye could cover { |above the high of any | 228@ costs, our chart {corrective bar only if | Ithe the price diffe | 226@ would now look |{ tf 2242 like this one, i 4
mtof the hook Ilallowed us |at least I +f
costs.
 
      
Notice, vedropped the buyat the point ofthe hook,
| know I've cluttered up these charts, but there are a numberof lessons that must be learned here, and | did not want to use onechart to a page just to make the book larger.
In chart 1, I've marked a cadence count. See if you can follow
along moving from bottom to top.
80
2348232823082280226822482228228821862168214821282188
23482328
2288226822482228220021882168214821282168
 
1 - prices take out the high of the doji bar.
3 - prices have made 3 higher highs.
c - prices fail to make a new high.
1 - prices make a new high, but notice there is no followthrough at the next price bar. This is a warning of either atrend reversal to follow, or that we are entering a congestion
area.CL G DAILY 2317 _ G DAILY 22821 Hie a0 ZA Huy{fe 230@ As the market { iWe don’t know it | c 2288 corrects, ve {yet, but this | 14 2260 try to buy Juptrend is about i 2248 breakouts fto end, iB 2228 of the ii} 2200 correction alse at thissie, Idd tayo pent2140 ! | of the point of2120 v(t if the hook,2188
 
CL G DAILY
 
2282
 
2308
 
 
23482b PN “buy 2328 Hy bayWe would attempt to uy H ey 2308 If ye could cover i |Saoeeaet sf Be aan |tl price ‘fe-rential between tha Hl 2240 like this one, ft!high and the high il 2228 ilShowed ust 2200 Notice, vesiete Tita 100 fe] dropped the bay| cover our Torts. 268) ir at the point ofWf 2140 ae bt the hook,2120 {tt Ttir2168SEP’ oe81Prices do little for two days.
1 - prices make a high, moving out of the congestion
area.
3 - prices have made three higher highs.
c-a-correction occurs. Prices gap lower at the open and tradedown before moving up to give a new high. This bar is both acorrection and a 1 count.
3 - prices have made three higher highs.
c - a correction occurs.
fail to make a new high.
CL G DAILY 2317
We don't know it il ¢wets heuptrend is about at)
to end. feat
, iidI uy } iwy
ar
  
“ ILY
He would attempt to buy
2282
ey
above the high of anycorrective bar only ifthe the price diffe-’rential between that +fhigh ana the high 1]
of the hook I
— «td
costs.
iv ‘}
 
CL G DAILY 22822348azo 2A 1frqouy2300 As the market Hf i2288 corrects, ve226@ try to buy |2240 treats i {I2228 the |sree correction,» Wealso at thissim hss jg beautae hi f of the point ofazo fl} at the hook,
 
CL G DAILY 230823402320 3230 If ye could cover Hf ]2288 costs, our chart dl
2268 yould now look2248 like this one.
|2220 il! ijt
2200 Notice, we
21882168 l2140
21282108
the hook.
1"1 o ys
  
82
On a gap lower opening doji bar, we
dropped the buyat the point of
2348232823082288226822482228
21882168214021282168
 
CL G DAILY
1
We don’t know ityet, but this |uptrend is about fat!to end, tl
 
231723408
t 2320ie 2300
c 2280"4 22602248222022002190216021482120
a
CL G DAILY 2282us 23402b Nr buy 2328He would attempt to buy hk ku 2300above the high of any 2280corrective bar only if, Athe the price difte- | 2260rential between tha { 4 2240high and the high i 2228of the hook i 2200allowed us tjat least tl 2180cover our Toosts. 26a+ 2148wit ne
 
  
cL G DAILY
I
s)
  
Za
fs the marketcorrects; vetry to buybreakouts
of the
correction
highs. i!
4 vf at
cL G DAILY
|
3
   
We also at thistine try tobuy a breakoutof the point ofthe hook,
costs, our chart i
would now look
like this one.ill”
#1 ry at
  
i +4]
hy
Notice, vedropped the buyat the point ofthe hook.
1 - prices make a high taking out the high of the doji bar.
4 - prices have made four higher highs.
c - prices fail to make a new high on an inside bar.
1 - prices make a high gapping up at the open.
c - a correction occurs, after only a one count. This isimportant. We must suspect either a trend reversal is ahead,or a congestion area is coming.
Charts 2a,b, and 3 need no further explanation.
83CL GC DAILY 2267 1 2340" G DAILY 2278 1
Since ve never =}, \3 zaze C Thecorrection {34 buy openings { fr itt WE 2309 5 gives us a {i i
beyond the f | 2200 © chame to «=f |previous bar's, 3 2260 make our | i I"range, we 1 ahh 22a first 4 mewould miss i 222@ — connections||' The bar followingour first “bay point, but be 2200 the correction
Obviously, this trade21sevould have been 2149 {a loser,
ji git on our second , 2100
ud }oft"
    
     
takes out thetunber tuo pointvhich is an RRh.
's oct SEPCL G DAILY 22768 2340" G DAILY 2269 1bite trade appears th 2320 Viomations fh 3congestion, by i I 1g zzeo «followed bya i I ttvirtue of | I ml 226g supercedes, I |atternation tf The last 4 bars 224° mon 4] 2Rh1" have opened lou 2228 1) Therefore, ve have
closed high, 2208ytd opened high, 2489closed low, etc, **°°
BUT,——>
fnf siyet
 
84
hooki I abet above,
try} at
 
234823282308228022682248222822002188216821482120
CL G DAILY 2324
 
 
The loss taken on chart four would probably have been less for {a daytrader than for a position trader. A daytrader could havegotten out more quickly when there was a failure to at least covercosts. Depending on intraday price action, a day trader might havebeen able to reverse and go short, thereby making a profit.
If you are a daily chart position trader, don't feel badly aboutthis. Pure day traders leave a lot more money on the table thanmost of them would care to admit, with the exception of the S&P500, and possibly the Bonds. Daily chart position traders make farmore than day traders in virtually all other markets. I'll discuss thisfurther when | deal with the subject of market selection. For now,let's continue our step-by-step analysis of this market.
 
CLG DAILY ©2289 . nig mn 2325 . af5 Lest you’ve t t 2328 e ot ards t f 232!cate fie EY (ostuo Ross | I | 2268 Ross i J 226hooks in fH Rh 2240 rf Rh 224place. il 2220 i 22282200 le would be filled 22a2188 tel using the Traders 2182168 k Trick. TheTraders 2162148 { Trick will be ex- 21482120 yd Plained in the text a92100 following these charts ued
 
i
   
CLG DAILY 23292358
148 For nost, the th ik 2330 11 The Traders , i 238
2351
  
fillusing — f. 234
         
the T 2 2318 have ensured ihTrick | nT 229@ room to cover i | mT 2298would 227@ costs and I 227have 4 ih 2zsq evenmake | f th 22secone /f] t zag 2 sal yt 2230abaver|| the high of the zzig Profit. 1 2218ny with the arrow. 219¢ zal+ 2170 jd 2178aise t- 21502130 abt 21382110 2110 |
 For those of you who already know about the Trader's Trick,this will be a good review. For everyone else, | must take time outfrom our excursion to do a bit of explaining. We will resume ourexcursion right after this next chapter.
86
 
Chapter 8The Trader's Trick
The purpose of the Trader's Trick entry (TTE) is to get you intoa trade prior to the entry by other traders.
Let's be realistic. Trading is a business in which the moreknowledgeable have the advantage over the less knowledgeable.It's a shame that most traders end up spending countless hours anddollars searching for and acquiring the wrong kind of knowledge.Unfortunately, there is a ton of misinformation out there and it isheavily promoted.
What we are trying to avoid here is the damage that can bedone by a false breakout.
Typically, there will be many entry stops just beyond the pointof a Ross hook. This is also true of the number two point of a 1-2-3
formation.
The insiders are very much aware of the bunching of stops atthose points, and if they can make it happen, they will move pricesto where they see the entry stops bunched together, and then a littlepast that point in order to gather as many of those stops as possible.
Unless the pressure from the outsiders is sufficient to carry themarket to a new level, the breakout will prove to be false.
The Trader's Trick is designed to beat the insiders at their owngame, or at the very least to create a level playing field on whichyou can trade. When trading hooks, we want to get in ahead of theactual breakout of the point of the hook. If the breakout is not false,the result will be significant profits. If the breakout is false, we willhave at least covered our costs and pulled to breakeven.
 
87 
Insiders often engineer moves aimed at precisely thosepoints where they realize stops are bunched. It is exactly that kindof engineering that makes the Trader's Trick possible.
You know that stops are bunchedwithin a few ticks of this highmn = Point.
The best way to explain the engineering by the insiders is togive you an example. Ask yourself the following question: If youwere a large operator down on the floor, and you wanted to makethe market move sufficiently for you to take a fat profit out of themarket and know that you could liquidate easily at a higher levelthan where the market now is because of the stops bunched there,how would you engineer such a move?
[J feast on gpl aa ates{ | pita | | Fela
You would begin bidding slightly above the market.
i { yb begin bidding nere.
By bidding a large number of contracts above the market,
prices would quickly move up to your price level. |
! |p eet——----— — fees Would quickly rive to! Tat ee eee ee nuoneeOnce again by bidding a large number of contracts at a higher
level, prices would move up to that next level.
88 89
 Rn----------—_—_- You have succecdea
i! "| 7I ee . Sur or ‘the Congestion! ire]!
The sudden movement up by price, to meet your large-orderoverpriced-bid, will cause others to take notice. The others aredaytraders trading from a screen, and lesser floor traders.
Their buy orders will help you in moving the market upwardtowards where the stops are bunched. It doesn't matter whetherthis is a daily chart or a five minute chart, the principle is the same.
In order to maintain the momentum, you may have to place afew more buy orders above the market, but you don't mind. Youknow there are plenty of buy stops above the high point. These buystops will help you fill your sell orders when it's time for you tomake a hasty exit.
Who has placed the buy stops above the market? Theoutsiders, of course. They are made up of two groups. One groupare those who went short sometime after the high was made, andfeel that "way up there” is a safe place for their stop. The othergroup are those outsiders who feel that if the market takes out thathigh, they want to be long.
90
 
Because of the action of your above-the-market bidding,accompanied by the action of other floor traders and daytraders, themarket begins to make a strong move up. The move up attracts theattention of others, and the market begins to move up even morebecause of new buying coming into the market.
 
inpo |tHrleaty]
This kind of move has nothing whatsoever to do with supplyand demand. It is purely contrived and engineered.
Once the market nears the high, practically everyone wants inon this miraculous move in the market. Unless there is strongbuying by the outsiders, the market will fail at or shortly afterreaching the high. This is known as a buying climax.
i iMi,
= 11tan!thle]
What will cause this failure? Selling. By whom? By you and
all the others who are anxious to take profits. At the very least, themarket will make some sort of intraday hesitation shortly after the
high is reached.
 
If there is enough bu