-A of a correction or just Wave-1 of Wave-A. At this point in timethere is no reason to guess. We can let the market continue to unfold andprovide us with more information.The important factor is that it appears bonds have made at leas! aminor five-wave advance which signals Nov. II is indeed the completionof the major decline and a major correction is in the initial stages. Bondsshould eventually exceed the Dec. high without declining below the Nov.11 low. This factor itself is important information for traders as well asinvestors who arc concerned with the intermediate trend of interest rates.What should be anticipated following a five-wave advance? At least anABC correction. If an ABC correction appeared to unfold, we would havethe ideal set-up to enter long for a W.C or W.3:A.We can now assume that the major trend has turned from bearish tobullish. We would wait for some sort of correction to the minor five-waveadvance to unfold to consider taking another long position.
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Prepare To Enter Long Positions On CorrectionA W.2:A orW.B correction would typically make a low in the 50%78,6% retracement zone. If bonds declined into this zone, a tradingstrategy for a long position would be made.
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The next page shows the bond chart that includes the data followingthe Dec. 6 top. Bonds did not make a correction from the Dec. 6 high asanticipated. Bonds drifted sideways then up to the 61.8% retracement(8/2/94H-11/11/94L) and declined into a low on Jan. 6 labeled Wave-Aas shown on the chart on the next page.Bonds did not make the low-risk corrective set-up anticipated and notrade was considered.Until you have a firm opinion based on market action of the positionof the market a trade is not considered.Bonds continued essentially sideways to complete an ABC-flatcorrection at the Wave-C low on Jan. 25. We can clearly see the diagonalfifth-wave and ABC-flat correction after-the-fact, but, as it was unfolding,there was no way to determine how this market activity would play out.Take a sheet of paper. Place it just to the right of the Dee. 6 bar which wasoriginally considered a Wave-5 high. Move it to the right one day at a timeto the last break-out bar. Can you honestly say the market pattern provideda strong signal in advance of what was to come?The Jan, 25, outside-reversal-day low was made one day prior to thecoincidence of two important time factors: 61.8% Time Retracement and100% Alternate Time Projection.Only after the Jan. 27 wide-range breakout day to a new high did themarket provide a strong signal of its position. Bonds appeared to havecompleted a five wave advance and ABC-flat collection. Because bondshad not provided a set-up for a tread-reversal trade entry in a support zone,we now must consider a trend-continuation trade entry.
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1. When The long position was stopped out on Dee- 7 at the projectedtime and price for a W.5 high, Dec. 6 was assumed to be a completedminor five-wave advance which would be followed by a correction tothe 50% retracement or lower.2. Instead, bonds drifted to a new high making a top Dec. 28 at the 6retracement in what appears to be a diagonal-fifth-wave. Diagonalfifth-waves are usually followed by a greater than typical correction.Not this time.3. The Wave-A low was made just two ticks above the 61.8%retracement (not shown) of Wave-5.4. Wave-B tested the Wave-5 high. Wave-C was made just above theWave-A low to complete an ABC-flat correction.5. It was not until the breakout day of Jan. 27 that the market positionmade sense. Until the market itself provides a strong signal of theposition and most probable direction, a trade should not be consideredTrade market behavior, nor the forecast. When in doubt, stay out.6. No trades were considered for over six weeks after being stopped outof the long position on Dec. 7. Bonds had also advanced less than twopoints in this period of time. Trading junkies would not have thepatience to wail six weeks for a low-risk, low-capital exposure tradeset-up. Successful traders all have the patience to wait for the marketto set-up according to their trading plan.
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Trade Preparation WorksheetBonds are now in a position to consider a long trade. Since the bondactivity did not provide a trend-reversal trade entry set-up, we mustwait for a trend-continuation set-up unless and until bonds makea correction.Readers may wonder why a long trade was not entered on the breakoutof the double-top. We have not discussed breakout strategies ID this book.Only strategies described in the book will be considered. Breakoutstrategies have not been considered because they do not provide highlyobjective trade set-up and stop placement rules. Breakout strategies canbe very worthwhile strategies to consider, but require a lot of experienceand judgment on the part of the trader before entry is considered. Or, theyrequire a very wide stop.The safer strategy is to consider a trend-continuation trade or entry onthe initial correction following a breakout.Before completing the Trade Preparation and Initiation Worksheet,let's determine the Dynamic Time and Price resistance projections.
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Price Resistance ZonesThe assumption is the Jan. 25, 1995 low is the completion of an ABC-flatcorrection and (hat this correction was the B-Wave of a larger degreecorrective rally from the Nov. 11, 1994 low which will be labeled (A)-(B)(C). The chart below is the weekly, spot futures chart from the Oct. 1993high. This chart shows the 38.2%, 50% and 61.8% retracements.A correction to a five-wave advance or decline often terminates at ornear the extreme of the prior Wave-4. In this case, the prior Wave-4 pricehigh was 106.23 which falls just above the 38.2% retracement of the fivewave bear trend.
A C-wave is often equal to either 61.8% or 100% of the price range ofthe A-wave and/or 162% or 262% of the B-wave. These projections areshown on the March contract chart on the following page.
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If we combine the longer term retracements from the weekly, spotfutures data and the shorter term projections from the March contract, wehave the price zones shown below. Projections followed by an asterisk areusually the most important to considerIdeal Price Targets For Wave-(C)101.31: W.(C) = 61.8% W.(A) (March)102.03: W.(C) = 162% W.(B) (March)104.00: W.(C) = 100% W.(A) (March)*104.10: W.(C) = 262% W.(B) (March)105.13: 8/2/94H (spot futures)106.01: 38.2% Ret. (spot futures)*106.10; 50% Ret.-percentage change (spot futures)106.23: 6/6/94H-W.A:4 (spot futures, high price of Wave-4)*108.24: 61.8% Ret.-percentage change (spot futures)109.04: 50% Ret. (spot futures)The broad price zone of 104.00-106.23 should be the ideal price targetto complete Wave-(C) and the corrective rally. This price zone includesthe most frequent C-wave targets including where W.C = 100% W.A, a
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major retracement (38.2%) and the extreme of the prior Wave-4. If thecorrective rally continues to unfold as anticipated, the minor degree subdivisions should focus in on a much narrower duster of price targets.
Time Resistance Zones For Wave-(C)Let's take a look at the Time Rhythm Zones and Dynamic TimeProjections from the Nov. 11,1994 low to determine the time resistance projections for a potential corrective high.Time Rhythm Zone (TRZ): Feb. 28-June 9The TRZ shows that the corrective rally from the Nov. 11, 1994 lowshould not complete prior to Feb. 28, 1995 but should complete byJune 9, 1995. The minimum Dynamic Time Projections anticipatedfor a Wave-(C) high and shown on the next page is the Feb. 28-March 10period which falls at the very beginning of the TRZ. If bonds make newhighs after June 9, the odds are bonds are either making a much largerdegree correction than anticipated or the rally is a bull trend that willeventually exceed the Oct. 1993 high.
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Projected Turning Point Periods: Feb. 28-March 10 and April 8-11Feb. 28: 100% Time Retracement (8/2/94H-11/11/94L)*March 8: W.(C) = 162% W.(B)March 10: W.(C) = 100% W.(A)*March 10: W.(A)-(B) = 100% W.(B)-(C) (11/11/94L-1/25/95L projectedfrom l2/28/94H)April 8: W.(C) = 262% W.(B)April 11: W.(C) = 162% W.(A)*April 13: 38.2% Time Retracement (10/93H-11/94L)*If bonds make a new high after April 13, the odds are a typical ABCcorrective rally is not being made. April 11 is the time projection wherethe time of Wave-C would be equal to 162% of the time range of Wave-A,This is usually the maximum time projection of a Wave-C. If bonds makea new high after April 13, the rally is probably only Wave-( A) and thecorrection will be much greater in time and price than anticipated.
The following page includes the Trade Preparation and InitiationWorksheet that includes the time and price projections described in theprevious pages.
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The chart on the Trade Management Worksheet on the preceding pagewas current though the date of entry of the trade. A journal of commentaryis made at the bottom of the worksheet. A new Trade ManagementWorksheet is usually not completed unless the critical data such as thetime and price projections are changed or a chart pattern that is critical tothe analysis develops.In the current case with bonds, nothing critical or dramatic unfoldedwith the analysis, trading strategies or chart pattern as bonds continued toadvance and the long position was stopped out March 2. The chart belowshows the data following the date the prior worksheet was begun. Thedates of the commentary found in the worksheet are noted so you cancompare the chart activity as the comments were made.
The next page includes the Trade Critique Worksheet with commentsregarding the questionable position of bonds at this point in time.
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Corrective Top Complete?Did March 1, 1995 complete a major corrective top to the Oct. 1993 Nov. 1994 bear trend? The broad time and price zones anticipated tocomplete the corrective high are:TimeTime Rhythm Zone: Feb. 28 - June 9Dynamic Time Projections; Feb. 28 - March 10, April 7 - 13
Price (March contract): 104.00-106.23The March 1 high was made at 104.12 directly within the time and priceprojections for a corrective high. There is still almost two points of pricerange (to 106.23) and another lime period (April 7-13) from where acorrective high may be anticipated to complete.
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Trading Strategies For A Short PositionIf bonds have rallied into the broad time and price zones anticipated for amajor, corrective high, our trading strategy is to look for low-risk and lowcapital exposure trade set-ups to take a short position.The chart below shows the position of June bonds a few daysfollowing the March 1 high. We are now considering June bonds as theMarch contract expires in the later half of March. At the contract roll-over,June bonds will become the spot-futures contract month.
A low was made March 7 at 101.00, just one tick below the 50%retracement. We will consider this a potential Wave-1 low. We use thesame trade-entry strategy as before by looking to take a short positionin the typical retracement range for a Wave-2.Short Position Trading Strategy. Sell June bonds in the 102.13-103.07(50%-78.6% retracement zone) on the close of a daily reversal signal.
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The chart below shows June bonds following the March 7 low.Bonds continued to rally to above the March 1 high without making adaily reversal signal in the retracement zone. No short trade was signaled.
Bonds are still in the broad price zone for a major corrective high(103.24-106.23) which has been adjusted to begin at 103.24 to reflect theJune contract price projections. Another Projected Turning Point Periodfor a high is April 7-13. The chart on the following page with the TradePreparation and Initiation Worksheet dated April 6, 1995 shows bondsthrough April 6, the day prior to the Projected Turning Point Period.The new trading strategy to take advantage of an anticipated correctivehigh in the current time and price zone is to sell on the close of a dailyreversal signal or sell on a trend continuation signal if bonds decline tobelow the recent minor swing low of 103.00.
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Short Position Stopped OutOn April 7, bonds made an outside-reversal-day. A two-unit short positionis taken on the close at 104.12. The initial protective buy-stop is placed at105.17, one tick above the April 7, entry-day high. Five trading days lateron April 17, bonds made another new high on another outside-reversalday. The short position taken April 7 is stopped out for a loss and anothershort-position is taken the same day on the close at 104.18.I have not included the Trade Management Worksheet for this tradebecause it was short-rerm and no new information was made prior to theprotective buy-stop being hit on April 17.The following page is the Closed Trade Critique Worksheet for thestopped-out short position.
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As long as the conditions remain for a top, the short-sale trading strategyis maintained.On April 17, the same day the April 7 short position was stopped out,bonds made another new high on a wide-range outside-reversal-day witha close below the prior day's low. Another short position is taken on theclose of 104.18. April 17 was a Monday and just one trading day past theProjected Turning Point Period of April 7-23 that was a high probabilityprojection for a high. April 13 was a Thursday- April 14 was a non-tradingday holiday. The April 7-13 time period was considered the maximumtime period to anticipate a corrective high. New daily and closing highsafter April 13 indicated bonds should continue to rally to at least the nextprojected time and price zones. The April 7-13 period fell in the middle ofthe Feb. 28-June Time Rhythm Zone for a high. Bonds were still in thebroad price zone anticipated for a corrective high.The next page is the Trade Management Worksheet for the new shortposition. The commentary on this worksheet begins with April 17 whenthe second two-unit short position was taken. Note the May 1 commentswhen the protective buy-stop was changed to a stop-and-reverse order.The Trade Management Worksheet is followed by the Closed TradeCritique Worksheet.
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When A Market Doesn't Do What It Is Supposed To Do,It Will Probably Do Just The OppositeThe April 17 reversal-day high at 105.24 was less than one point from themaximum price projection anticipated for an ABC-corrective high(106.23) and one trading day after the April 7-13 Projected Turning PointPeriod anticipated for an ABC-corrective high. If these time and pricetargets were exceeded, the bond market has signaled that either a morecomplex and longer term corrective trend is underway or possibly animpulse bull trend. In either case, bonds should continue to rally to a muchhigher price level.Because of these factors, the protective buy-stop order was changed toa stop-and-reverse (S&R) order. Four units were bought when the S&Rorder was hit which resulted in a two-units net long position.
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Dynamic Time and Price ProjectionsIn early May, bonds have continued to rally above the price zoneanticipated for a corrective high and beyond the time zone anticipated fora corrective high. Let's take a look at the next price and time targets thatshould be reached.Time Rhythm Zone ProjectionThe chart below shows the Time Rhythm Zone that was shown earlier.The overlap period extends to June 9. Recall that this TRZ was projectedfrom 5%/2lCDs swings and the overlap period considers 80% of theswings. What this translates to is based on the swing statistics, bondshave a 90% probability of making a top by June 9 that will be followedby at least a 5% price decline that will last at least 21 CDs.The chart also shows that June 1 is the 50% Time Retracement of thebear trend.
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Dynamic Time ProjectionsThe chart below shows three important Dynamic Time Projections thatfall in June. From the cop of the chart they are:June 13:The two prior rally swings lasted 47 CDs and 50 CDs. June 13 isthe 100% Alternate Time Projection of the shorter, 47 CDs swingJune 16: The 100% Alternate Time Projection of the 50 CDs rally (notshown).June 1: The 100% Time Cycle Ratio of the previous High-to-High (A-C).Note from the previous page that June 1 is also the 50% TimeRetracement of the major bear trend.June 12: The 100% Time Retracement of the C-D trading range.
The two June 1 dates fall within the extreme range of the 80%-TRZwhich ends June 9. The June 12-13 dates are just a few days following theTRZ. With both the extreme TRZ and Dynamic Time Projections fallingin the first half of June, the probabilities are very high that a top will bemade in the first half of June, ideally near June 1 or June 12-16.
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Price RetracementsThe two charts on the next page show the major price retracements byboth price range and percentage change. Note how closely the retracementtargets from these two methods cluster.106.01-106.10: 38.2% range retracement and 50% percentage changeretracement108.24-109.04: 50% range retracement and 61.8% percentage changeretracement112.06: 61,8% range retracement and 78.6% percentage changeretracement116.19: 78,6% range retracement and 100% percentage changeretracement
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Dynamic Price ProjectionsThe chart below is also the continuous spot futures data and shows [he two100% Alternate Price Projections where W.E = 100% W.A or 109.12 and100% W.C at 112.0. These two projections fall near the retracementprojections shown on the previous page.The horizontal bars along the price scale represent the clusters ofretracement and alternate price projections which are the high probabilityresistance zones.
We now have the high probability time and price projections for a topand can complete a Trade Management Worksheet for the long positiontaken on the break above the recent time and price resistance zones. TheTrade Management Worksheet is followed by the Trade Critique Worksheet. These two worksheets provide all of the data and commentarynecessary to describe this trade.
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The table below is a summary of the bond trades described on theprevious pages.Trade Summary: Bond Trades: 8/17/94 - 6/9/95
Many other trading opportunities were available during this period ifthe parameters for accepting a trade were broadened from those in theTrading Plan described early in the chapter. Review the charts for thisperiod. Note how many trend-continuation trade set-ups there wereduring this period. If part of your trading plan is to include short-termtrend-continuation set-ups for 1-3 day trades, many other opportunitieswere available.Many other low-risk, low-capital exposure opportunities wereavailable if intraday data such as 30 or 60 minute charts were incorporatedinto the analysis and trading plan.
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June 2, 1995 did not complete a major corrective high in bonds asanticipated in early June. Bonds made a slightly higher high later in Junefollowed by a decline greater than 5% and longer than 21 days just asanticipated. Following a mid-Aug. low, bonds continued to rally making afinal top in Jan. 1996. The Dynamic Time and Price chapters describe theDynamic Time Projections, Time Rhythm Zone and Dynamic PriceProjections into the Jan. 1996 high.Remember, we trade the market, not the forecast. The March 1993high was also anticipated to be an important top followed by a continuedbear trend to new lows. Yet, the long position trades that followed later inMay were the most profitable of the past year. Once the June-July 1994highs were exceeded, bonds signaled another major advance wasunderway.Trading results for the period following the June-July, 1995 highsthrough the Jan. 1996 high are similar to the April-June 1995 period. Twoor three relatively small losses followed by two or three sizable gains asbonds eventually advanced to make a top on a direct hit of projected timeand price in Jan. 19%. If you have the bond data for this period, followthe same trading plan as the examples above and identify the trades for theperiod following the June 1995 high through the Jan. 1996 high.How To Learn Dynamic TradingThe best way to learn Dynamic Trading, or any approach to trading forthat matter, is to do what we have just done in this chapter. Develop aspecific trading plan and trading rules. Choose a period of time from thepast for a market and follow it day by day as if it were a current marketunfolding each day.Prepare all of the necessary time and price projections, complete thetrading worksheets, follow the plan and "paper trade." Better yet, choosetwo or three diverse markets such as bonds, beans and silver. Update thecurrent charts and projections each day as the markets unfold for at least asix month period. "Paper trade" them as they unfold. You will not onlycome to understand and appreciate the power of Dynamic Trading, butwill acquire the closest thing to actual trading experience.
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Chapter 8The Real World Of Dynamic TradingThe real difference between winners and losers is no! somuch native ability as it is the discipline exercised inavoiding mistakes. What separates the amateur fromThe old pro is that the pro makes fewer mistakes.Roy W. Longstreet
In This Chapter, You Learn ToTrade Market Behavior, Not ForecastsI have published an advisory letter since 1986. The following pagesinclude excerpts of the analysis and trade recommendations from recentissues up to the time this book was completed. This may be the mostimportant chapter of this book. There is nothing theoretical about thischapter. It demonstrates the real-time application of what has been taughtin this book.The excerpts are from my monthly Dynamic Traders Analysis Reportand Dynamic Traders Weekly Fax Report. It is easy for a trading orinvesting teacher to show historical examples of their methods that alwaysseem to work out perfectly. My advisory reports are a track record of thevalue of the Dynamic Trading analysis and trading strategies taught in thisbook. These examples have been included because they are "real-time,real-world." They are a matter of record. They were published in advanceof the market outcome and trading action taken. They provide a uniqueopportunity to show how the Dynamic Trading approach is put intopractice day-by-day.
These are only a few recent examples. Each monthly report is over20 pages, not counting the trading tutorials or special research reportsincluded each month. Each weekly report is 8-12 pages. That adds upto a lot of analysis and over 800 pages of material each year! All of theforecasts or projections did not work out as planned.. All of the tradingrecommendations were not profitable. But they all provide an importantpractical lesson to be learned.Each example includes follow-up comments, often including a chart ofthe subsequent market activity. There is not an attempt to explain in detailhow all of the time and price projections were determined. The methodsused have all been described in the preceding chapters. Each report iseducational in itself. You will learn a great deal by studying these reportsand their comments. You will become convinced that the DynamicTrading analysis and trading strategies hold great practical value.One of the most important principles of successful trading you willlearn from this chapter is that you trade market behavior, not forecasts.This theme is repeated throughout the follow-up comments. DynamicTrading technical analysis is meant for the trader and investor to form anopinion of the market position and the most likely outcome of the currentposition. The analysis techniques identify trend reversals and the highprobability time and price targets of the trend or counter-trend. Whilethese projections arc forecasts, traders must never fail to identify whatmarket activity will invalidate the projections of forecast and never fail totake action if the forecast is invalidated. A trader or investor who fails toexit a market when the market position has been invalidated by the marketactivity will not succeed in the business of trading.Trade Market Behavior, Not ForecastsBy studying all of the material in this book and applying it to your ownanalysis and trading strategies, you will also be able to put it into practicalapplication on a day-to-day basis just as illustrated in these real-worldexamples.The page lay-out of this chapter is wider than the previous chaptersin order to accommodate the format of the excerpts from the reports. Theexcerpts shown are just as they appeared in their respective reports. Theheadings in this chapter are the headings from the respective reports.More examples from the weekly fax report are included than from themonthly report. This is because the weekly fax report is more timely andoften able to provide specific trade recommendations and protective stoploss levels which is usually not possible with a monthly report. Themonthly report provides the intermediate to long-term position of amarket. This is critical information as the shorter-term trading strategies
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are always taken within the context of the larger degree trend position. Allsubscribers receiving the weekly fax report have also received the monthlyreport and are aware of the larger degree position of the market.Study these examples in light of what you have learned, and I knowyou too will become a confident Dynamic Trader. First, let's take a lookat the format of the reports so you will derive the most benefit fromstudying them.Report FormatEach section of the report often provides commentary and explanations.One of the important objectives of each report is to educate the subscriber.The more knowledgeable the subscriber, the more confident he or she willbe in the analysis and conclusions. More importantly, subscribers maythen formulate their own trading strategies in light of their understandingof market position.Comments: This section provides a brief commentary of the market activitysince the last report.Major Trend: Bullish or Bearish and from which prior pivot. Both theBearish or Bullish Reversal and Continuation Signals must have been electedto signal the direction of the major trend.Intermediate Trend: Bullish or Bearish and from which prior pivot. Theelection of the Bearish or Bullish Reversal Signal indicates the direction ofthe intermediate trend.Support and Resistance: Shows the price support and resistance zones andwhich contract or index they relate to. There are often explanatory commentsshowing how the price zones were calculated. The price zones underlined arethe most significant.Time Analysis: Shows the Projected Turning Point Periods (PTTP) and TimeRhythm Zones (TRZ). Those underlined are usually the most significant witha potential for an intermediate or major trend changePattern: Provides comments regarding the Elliott wave structure of themarket position and other pattern comments.Bearish or Bullish Reversal Signal: Price and/or time targets that, if elected,signal an intermediate degree trend change. The reversal signals are not completely objective or 100% mechanical, but based on the time, price and patternposition of the marketBearish or Bullish Continuation Signal: Price and/or time targets that, ifelected, signal the direction of the major trend.Minimum Time or Price Objectives: Often provides the minimum timeand/or price objectives for the current trendDynamic Trading - Chapter 8
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General Trading Strategies: Usually summarizes the current market positionand anticipated minimum, time or price targets for the current trend. Providesthe general trading strategies to consider given the market position.Last Week's Trading Activities: Only included in the weekly report.Describes any recommended trades entered or slopped out since the lastreport and/or adjustments to the protective stop-loss recommendations.Specific Trading Recommendations: Only included in the weekly report.Most recommendations assume a two unit position is taken, short and intermediate term. The initial protective stop-loss is always provided with the tradeentry recommendation. Recommendations for slop-loss adjustments are madeuntil the trade is stopped out. Only general, not specific, trade recommendations are made for the stock indexes due to the limitations of a weekly reportassociated with the high volatility of the stock indexes.The specific trading strategies recommended in the weekly report arelimited due to the limitations of a weekly report. Subscribers may developother strategies during the week to lake advantage of the analysis and outlookprovided. As you study these reports, consider trading strategies you may haveincorporated other than the specific trade recommendations described in thereports.While the Specific Trade Recommendations section is an important partof The report