profit is insufficient to take care of slippage and commission. Further study in thisarea could yield a profitable trading system.THREE-DAY EQUILIBRIUM REVERSEThe last three days action of a stock or commodity can often be used topoint the direction of the next minor effort. A turn in the minor trendcan take many forms. There are certain characteristics in three-daypatterns thai can occasionally be used advantageously for evaluatingpotential turning points in the minor trend.In any given three days' action, there are nine potential support/resistance points, three highs, three lows, and three closes. One rulemight be to buy on the close of the third day if the closing price is abovethe average of these nine points. Although a set of rules can be putdown, you must recognize they are not absolute. This is intended to bean additional tool and is not a trading system.The requirements for a reversal to the upside are:1. Three days' action with the first two days' closing prices in closeproximity to each other.2. First two days have a smaller range than the third day.
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THE ULTIMATE TRADING GUIDE
3. Close on third day is above the 62% point of the daily range andis above the two previous closes.4. Low on third day is above low of second day.5. Added significance of a possible minor turn is present if marketis in the buy zone for a buy. Note the third day has a wider spreadand a high close with the low above the second day's low.The strongest three-dayequilibrium (3DE) upside reversal is where the high andclose on the current day areabove the high of two previous days, and the close isgreater than the open. Thereverse of the above is truefor a reversal to the downsideFigure 3.20 shows a few FIGURE 3.20 Three-day equilibrium reverse.three-day equilibrium reversals on Advanced Digital Information Corp.The pattern in Figure 3.21 IB a change from supply to demand overa three-bar time frame or vice versa. This pattern occurs between 35 to
FIGURE 3.21 Change from supply to demand. Created with TradeStation 2000i byOmega Research1999.
BAR CHARTS AND THEIR FORECASTING ABILITY
57
40 times per year per futures or stock. The key to successful use of thispattern by one method is to wait one day for entry and buy on the closeof the following day. Markets generally have a pull back after a strongday in either direction. The numbers below are baaed on:• Buy on the close of the day following the three-day equilibrium.• Exit. A 0.5 range breakout off the open on any day after entry.• Trend: The closing price of two days ago is greater than the closing price of 50 days ago.• Closing price of second day back is less than closing price onfourth day back.These simple rules produce profits in all but three markets out of21 for futures, and 9 out of 12 for stocks, as shown in Tables 3.9 and3.10. It is not a stand-alone system but with some work on the exitrule and when to take the signal could yield a very profitable system.Figure 3.22 gives the combined equity on 21 futures in trading thispattern.
TABLE 3.9
Three-Day Equilibrium—Stocks
BUY ON CLOSE OF DAY OF PATTERN COMPLETION—100 SHARES PER SIGNALTEST PERIOD 1/1/96-l0/30/99SO ALLOWED FOR COMMISSION AND SLIPPAGE
THE ULTIMATE TRADING GUIDE
TABLE 3.10 Three-Day Equilibrium—FuturesBUY/SELL ON CLOSE OF DAY FOLLOWING PATTERN COMPLETIONLIQUIDATE ON OPENING RANGE BREAKOUT OF 0.5 RANGE Of PRIOR DAYTEST PERIOD 1/1/83-6/30/99-ONE CONTRACT PER SIGNAL--DAY TRADE$0 ALLOWED FOR COMMISSION AND SLIPPAGE
BAH CHARTS AND THEIR FORECASTING ABILITY
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FIGURE 3.22 3DE combined equity for futures.
PATTERN GAP
There are a number of different types of gaps. The pattern gap is onethat occurs more frequently than other gaps, and has the most utility intrading (Figure 3.23).The up pattern gap is where the low of the bar is greater than theclose of the prior bar. The down pattern gap is where the high of thecurrent bar is less than the close of the prior bar. For the up patterngap, the market is sufficiently strong such that it is unable to move
FIGURE 3.23
Pattern gaps.
THE ULTIMATE TRADING GUIDE
FIGURE 3.24 Pattern gaps on Royal Dutch. Created with TradeStation 2000i byOmega Research * 1999.
back to the close of the prior day. The strongest pattern gaps have thefollowing characteristics:• Range of bar is greater than the range of the two prior bars.• Close of bar is greater than the opening of the bar.• Close of bar is greater than the closes of the two prior bars.Early entry may be possible if the market is significantly abovethe opening at midday and the other requirements are in place. Sellsignals are the opposite. This is not a system into itself and some judgment should be exercised on which signals to take, The exit and stoploss points have not been identified on Figure 3.23 but it is apparentthai most signals lead to immediate profit opportunities. The entrysignal is great for getting on board a running market or catching amove coming out of congestion. The beat moves are the ones that havefollowed through within two days after entry and the two prior barsare narrow range bars. Figure 3.24 show some of the more obviouspattern gaps on Royal Dutch.HOOK CLOSINGA hook closing is a strong expression of demand or supply. It consists ofone or more bars in one direction followed by a relatively narrow range
BAR CHARTS AND THEIR FORECASTING ABILITY
FIGURE 3.25
Hook; and double hooks.
bar that closes against the trend. Thetheory is that the market will continueon the following day in the direction ofprior bars. A double hook, shown in Figure 3,25, reverses the trend.A hook coming after only a one-daymove is not as reliable as a hook comingafter a two-day movement. The hookshown in Figure 3.26A is more likely togo up than is the one shown in Figure3.26B.TABLE 3.11
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FIGURE 3.26
Hook comparison.
Hook Closing—Stocks
BUY ON OPENING OF DAY FOLLOWING PATTERN COMPLETION—100 SHAKES
PER SIGNAL DAY TRADETEST PERIOD 1/'l/96-10/30/99$0 ALLOWED FOR COMMISSION AND SLIPPAGE
THE ULTIMATE TRADING GUIDE
TABLE 3.12
Hook Closing—Futures
BUY/SELL ON OPENING OF DAY FOLLOWING PATTERN COMPLETIONLIQUIDATE ON CLOSETEST PERIOD 1/1/94-6/30/99—ONE CONTRACT PER SIGNAL-DAY TRADE$0 ALL0WED FOR COMMISSION AND SLIPPAGE
BAR CHARTS AND THEIR FORECASTING ABILITY
63
Hook closing prices as an effective trading vehicle was popularized byJames T. KneafSey in 1984. Computers can be used To determine the validity of the hook pattern. There are a number of variationS to the hookpattern. The following computer study was designed to determine if thehook pattern gives a statistical edge on a one-day basis. The rules for thestudy were.• The market has two consecutive up closes.• A down close follows that is below the close of the prior day butabove the close of the second day back.A purchase is made on the opening the following day and liquidatedon the close. The reverse is true on sell orders (futures only). Table 3.11on page 61 and Table 3.12 on page 62 demonstrate that this can be aneffective entry technique as it produced profits in all but three marketsin futures, and 8 out of 12 in stocks. This pattern sets up around 18 to30 times per year and it is in the market about 6% to 11% of the time.You cannot make money on this pattern alone; however, it can be an effective entry technique when combined with other technical tools.The bar chart in Figure 3.27 points out the occurrences of the hookclosing. Possible conclusions are:• 4 of the 5 occurrences would have yielded a profit the followingday.
FIGURE 3.27
Dow Jones Industrial average illustrates hook closings.
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THE ULTIMATE TRADING GUIDE
It seems to work best to buy in the buy zone of a congestion pottern or when the market is in the run-up phase. The opposite istrue for sell entries.NARROW RANGE BARSA narrow range bar is one where therange of the bar is less than the preceding number of bars. No one setamount ia required. Figure 3.28 illustrates that the last three bars have asmaller range. This represents a mar- FIGURE 3.28 Narrow range bars.kel coming to rest with supply and demand about equally balanced. Penetration of the high of the last baraccompanied by an opening range breakout is a strong indication ofTABLE 3.13
Narrow Range—Stocks
BUY ON OPENING BREAKOUT OF DAY FOLLOWING PATTERNCOMPLETION-100 SHARES PER SIGNALLIQUIDATE ON 0.5 RANGE BO ON ANY DAY AFTER ENTRYTEST PERIOD 1/1/96-10/30/99$0 ALLOWED FOR COMMISSION AND SLIPPAGE
BAR CHARTS AND THEIR FORECASTING ABILITY
TABLE 3.14
65
Narrow Range Trading—Futures
BUY/SELL ON OPENING BO OF DAY FOLLOWING PATTERN COMPLETIONLIQUIDATE ON 0.5 RANGE BO ON ANY DAY AFTER ENTRYTEST PERIOD 1/1/93-6/30/99—ONE CONTRACT PER SIGNAL—DAY TRADE$0ALLOWEDFORCOMMISSIOMANDSLIPPAGE
buying pressure entering the market with an up move likely. A tradingedge is gained. Table 3.13 on page 64 and Table 3.14 show the computergenerated numbers for this edge. Eight of 12 stocks produced profits.They were even more impressive on futures. The rules for the testswere as follows (long side only, sell side exact opposite):
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THE ULTIMATE TRADING GUIDE
• The range of the previous day is less than the range of any of thefive prior days.• Entry. Buy at the maximum of an opening range breakout of 0.5range of prior day and the high of the prior day.• Trend: The close of the prior day is greater than the close of 50days ago.• Exit the trade on any day at the market that has a 0.5 openingrange breakout.Narrow Range after Strong Demand or SupplyThis is a great tool for entering a running market. After a strong run,markets will frequently digest the movement by holding the gain forseveral days in a relatively narrow range. The urgent demand is likely toresume the movement after the third bar (Figure 3.29). The set up rulesfor trading are ( buy side only—sell side is the opposite):• The market has a sign of strength or a strong movement.• The slope of the 10-day moving average is up.• Market has corrected for one to three bars.• Range of one of the last several bars are less than the 10-day average bar range.• The last bar may slightly penetrate the low of the prior bar. Thisis not entirely necessary but it does show lack of supply.Buy on penetration of the narrow range bars high. Enter a stopbelow the low of the narrow range bar. Take profits at targets or by atrailing stop. Figures 3.30 and 3.31 show this method in action.
FIGURE 3.29
Narrow range in correction.
BAR CHARTS AND THEIR FORECASTING ABILITY
67
FIGURE 3.30 S&P's 60-minute chart (December 1999). Created with TradeStation2000i by Omega Research1999.
FIGURE 3.31 S&P's 60-minute chart (December 1999). Created with TradeStation2000iby Omega Research 1999.
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THE ULTIMATE TRADING GUIDE
TRADING THE NARROW RANGESNarrow ranges can be a useful tool in a trading plan. They must be integrated into the overall pattern for successful trading. The basic concept is to enter the market as it breaks away from a state ofequilibrium, which if characterized by one or more narrow range bars.If the market, rallies away from this point and later comes back to it, demand is expected to enter the market. This is a classic double bottom.This becomes a significant trading plan if you then combine this withthe accumulation/distribution set-up. Only take the trades in the direction of the thrust. Stops are entered on the other side of the narrowrange bar. For instance, Figure 3.32 shows entry points at either the Aur C-leg correction to the latest thrust.
FIGURE 3.J2
Trading the narrow ranges.
TRADING THE WIDE RANGE BARA wide range bar may be either bullish or bearish depending on where ittakes place in the set up. If it comes at the end of a buying climax, it isbearish. However, it is positive if it is breaking out of a formation. Figure 3.33 shows it coming out of a pattern. Most of the wide range barehave a pull hack on the following bar. The buy zone is in the lower 50%of the range of the bar. Conversely the take profit zone is 50% to 100%added to the high of the wide range bar. This obviously is for short-termtrading. The market tends to rotate by having a narrow range bar aftera wide range bar. This is not 100% objective and the definition of a widerange bar is subjective. This is where the art of chart reading comes into
BAR CHARTS AND THEIR FORECASTING ABILITY
69
focus. This talent ia developed only bylooking at many charts over a long period of time.
BUY ZONESThe buy zone is in the lower 50% of athrust, as shown in Figure 3.34. Ashigher thrusts are made, the buy zone itat a higher level. These are the areas tolook fur patterns for taking a long position. Prior to entering the market, knowwhere the stop should he and establish atarget level. Mark the buy, sell, and take FIGURE 3.33 Trading the wideprofit zones on your charts. Do not chase range bar.a running market. There are always candidates for market entry out of the vast number of stocks. Pick your zoneof entry. A step-by-step procedure might be:1. Buy only in the buy zones.2. Enter stop loss immediatelyafter market entry.3. Liquidate the trade if it enters the take profit zone. Doyou come out on a stop orsimply liquidate in the zone?This question is a trade off. Ifyou come out at the target,the market may go muchhigher. If you come out on astop, often significant profitsare given up.FIGURE 3.34Buy zones.The solution might be:• Tighten the stop.• Liquidate half your position and be either half right or halfwrong.• Liquidate on the first sign of supply overcoming demand (forlongs).• Use a lower time frame for stop placement. For instance, iftrading the daily bar and market enters the target zone, usethe 30-minute chart for moving a stop in tight.
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THE ULTIMATE TRADING GUIDE
STOP POINTHe who knows not what he risks, risks all.No one stop loss method is satisfactory for everyone. One must seek hisown comfort level in the area of risk versus reward. A number of suggested ways of plating a stop order are:1. Three ticks below the low of the most recent one to two pivots.2. One average range below either the low or close on the day ofpurchase.3. 50% opening range breakout after the date of entry. This particular stop works exceedingly well when combined with the otherpossible stops. For instance, a market may open below a stoplevel and this turns out to be the low for the day. We like to seesome movement away from the opening such as about eight ticksor a half range of prior bar.4. Three ticks below the lowest low or close of the two prior bars.5. Liquidate the trade after three bars if it is not profitable.6. Scratched the trade at break even, if possible, if it moves too faragainst you after entry and your stop has not been hit. Forgetabout profit at this point. All you are trying to do is protect yourstop and prevent significant loss.It is exceedingly important to have a plan in place for your investments. When you enter the market, ask yourself if this is a long-terminvestment which you will hold for five to ten years. Do not panic onshort-term market fluctuations. Are you a trader? Unfortunately, manypeople base their liquidation point or stop loss on the following:1. The stop is located at the point where they lose big time.2. The stop is based on the overall stock market movements. Whenthe overall market tanks, they will liquidate my investments.3. When everyone else is liquidating their positions in panic in yourparticular investment, you will liquidate your investments.4. Some analyst or broker said liquidate. This brings up a story.I had the honor of being on The Mark Haynes Show on CNBC a fewyears ago. Mark introduced me as an expert in the futures market.He asked me what gold was going to do. I replied that I knew exactlythe future movement of gold. However, before I answered that question his listeners should be aware that I was only correct 23% of thetime, but lately it had been improving. Thus, I am dangerous as I am
BAR CHARTS AND THEIR FORECASTING ABILITY
71
sometimes right. If the truth were known, I was having a hard timegetting bus fare back to North Carolina. Needless to say, after thatinterview, CNBC initiated a closer scrutiny of invited guests.The point of the story is to be careful of people who know all the answers. If you are going to be a trader, recognize that to be successful involves a considerable amount of work and is a lifetime pursuit of amonster you will never master, however you might learn to live with itand extract more than you give.TAKING PROFITSIf long and the market moves to the target area, profits may be protected by:• Liquidating position at market.• Liquidating if a close is below opening.• Liquidating position by a half range breakout to the downsidefrom the opening.• Carrying a stop below each day's low.• Liquidating on a close below two prior closes and below opening.• Liquidating on the third strong up period of the next lower timeframe. For instance, if the weekly bar chart reaches its target,get out on three up days on the daily chart.
ANTICIPATIONThese factors are useful in anticipation of pattern completion and reversal. One might take nibbles on a position prior to a close. Remember,the name of the game is to he profitable and not catch 90% of everymove. Learn to be satisfied with small chunks of the market. What youare doing is either taking profits at market or taking them at the firstsign of supply overcoming demand.The seven possible action points for Anticipation (Figure 3.35) of apattern completion:1. On the close of the bar if a narrow range indicating lack of supply or demand.2. Opening in the direction of a pattern completion.3. Opening range breakout in the direction of a pattern completion.4. 30-minute breakout in the direction of a pattern completion.
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THE ULTIMATE TRADING GUIDE
FIGURE 3.15
Entry techniques.
5. Mid-day price above opening and in the direction of a patterncompletion.6. On close when the pattern completion is in place.7. On a pullhack bar after pattern completion.It also is apparent on many patterns that the market will dip intothe buy zone but pattern completion will be above the buy zone. Takingaction at such points is a question of judgment.TIME BREAKOUT RULE
A popular theory is to trade the breakout of the first 30-minute barwith a stop loss on the other side of the 30-minute bar. This theory wastested on intraday S&P market data over a 14-year period. Trading thisrule will result in colossal losses as demonstrated on the equity curvein Figure 3.36. One should note that it has made money in the last couple of years. This clearly points out the hazard of reaching trading conclusions on a limited amount of data.This tool, buying/selling the breakout of the first 30-minulo bar,can be an effective means of entering a trade. A pattern act up must bein place. As with most of the tools, it cannot be used in isolation.
BAR CHARTS AND THEIR FORECASTING ABILITY
FIGURE 3.36
73
Thirty-minute rule trading S&Ps.
GAP HIGHER/LOW OPENINGSMarkets open on a gap either above or below the previous day's high orlow about 20 to 25% of the time or about 80 to 100 times per year permarket (Figure 3.37). The normal reaction to a gap up opening is thatthis is a sign of strength and the market should be purchased. The
FIGURE 3.37
Gap openings.
7*TABLE 3.15
THE ULTIMATE TRADING GUIDEGap Openings—Futures
BUY ON PULLBACK TO HIGH OF PRIOR DAY ON DOWNSIDE GAPOPENING (OPPOSITE FOR SELL)—DAY TRADE. NO STOPSTEST PERIOD: 1/1/77-6/30/99. ONE CONTRACT PER SIGNAL. DAY TRADE$0 ALLOWED FOR COMMISSION AND SLIPPAGE
BAR CHARTS AND THEIR FORECASTING ABILITY
75
exact opposite is true when placed under computer scrutiny. This ideawas tested by 2 methods:1. Sell a gap up opening,2. Sell a gap up opening but only if it pulls back to the prior day'shigh.The opposite was applied to the buy side, Both ideas were run on acomputer with no stops and as a day trade. The second approach wasabout twice as good, as the first one and is shown in Table 3.15 on page74. It trades about 60 times/year/future. It is making the market movein your direction prior to taking a position. It does show that you gainan edge on the markets by this signal. It is insufficient to overcome thecommission and slippage in most markets. It could be a valuable addition to your bag of trading tools when combined with other filters anduse of appropriate stops. Incidentally, the numbers show that this couldbe a profitable bond day trading system.This pattern is very similar to one developed by Larry Williamscalled Oops. The basic idea is the same, but how he treats entry and exitis not known. Possible uses of this knowledge might be:1. The signal is probably more reliable if market is extended ineither direction and this could signal the end of a move. If so,this could be a beautiful way to take profits on positions and perhaps reverse positions.2. Other studies might be to:• Look at entry signals on reversals of the previous close, anumber of previous closes, and a number of previous highsand lows.• Study carrying a half range stop once entry is made.• Study gap openings above or below a cluster of closes." Look at a half range reversal of the gap prior to taking aposition.These are simple computer studies that will quickly tell youwhether the opening in relation to recent market action gives one atechnical edge. Larry Williams and Toby Crabel have down some excellent work in this area. One could fill an entire book on studies of market action in relation to the opening and movement away from theopening.
4CHANNEL ANDTRENDLINE TRADING
This chapter w i l l be helpful in trade location because it identifies bothmajor and minor channels. This is of value in knowing when to act onreversal and continuation patterns. Use of simple trendlines combinedwith basic wave theory as an entry technique is also shown. Some of themethodology in this section defies computer programming into a system. However, it becomes very clear when viewing a chart with the linesand channels on them. This can almost be a systematic approach.One of the most useful tools in the trader's kit is trendline. Manypeople use indicators put out by some elaborate computer program.Thise indicators generally tell you the same thing: the extent of anoverbought/oversold market. Simple trendlines with a few additionalrules can be extremely effective in timing your trades. Learn how toread the charts rather than the indicators. We have yet to see an indicator that tells you that a spring or upthrust took place and if you have aposition, you better act promptly. A spring is when a market tradesbelow a pivot low or support point, finds no supply, and rallies aggressively. An upthrust in when the market trades above a pivot point high.encounters no demand, and immediately falls. This is further discussedin Chapter 6.TREND LINES AND PARALLEL MOVEMENTSA major pivot point high is followed by at least two lower pivot pointsprior to a new h i g h (and vice versa for lows). A major trend line connectstwo major pivot point lows or highs. The parallel movement is a parallelline drawn from major pivot points us shown in Figure 4.1. The targetfor the movement is where the price reaches the parallel line or the
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CHANNEL AND TRENDLINE TRADING
FIGURE 4.1
77
Trend line and parallel movements.
trend channel. Minor trend channels are the channels that connectminor pivot points.Figure 4.2 demonstrates the use of 0-4 lines for trading. Note thatthe bare are not shown which simplify reading the chart. The swings gofrom pivot point to pivot point. The 0-4 lines connect the major pivotpoints with the fourth wave. Shown are 0-4 lines for both a down moveand an up move with the waves marked. Trade entry is made when the
FIGURE 4.2
0-4 lines.
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THE ULTIMATE TRADING GUIDE
FIGURE 4.3 Japanese Yen (September 1999). Created with TradeStation 2000i byOmega Research 1999.
market penetrates the 0-4 line provided the 0-4 line is above the 0-2line for a buy and vice versa. A wide range bar with the close above theopening at this point is another indication of demand (long trade). Thetarget point is at the parallel trend channel. Figure 4.3 demonstratesthe use of this technique for trading the Japanese Yen.TRADING THE 0-2 LINETrading set up: Market has a demand thrust and is now in the correction phase (Figure 4.4). If wave C holds above the level of minor pivotpoint A, then a purchase may be made upon penetration of the 0-2 line,However, if pivot point C is below A, then it is best to wait to enter themarket after wave 4 sets up.Some subjectivity is involved in trading the parallel movements,0-4 lines and 0-2 lines. The logic for programming this into a mechanical system would be exceedingly difficult. However, the rules arerelatively simple and. entry and exit points are straight forward. A computer is not needed. Figure 4.3 on Japanese Yen demonstrates tie use ofthis technique.Figure 4.5 is an example for trading penetration of the 0-2 line.This is at the termination of an irregular correction.
CHANNEL AND TRENDLINE TRADING
FIGURE 4.4 Trading the 0-2 lines.
FIGURE 4.5 0-2 line trading the C-leg.
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THE ULTIMATE TRADING GUIDE
TRENDLINE AND FOUR-CLOSE SYSTEM (TL4C)This is a simple system that does not require a computer to run (Figure4.6). It requires judgment on the trend and whether the profit potentialis worth the risk.Setup for buy (sell is opposite):1. Trade only in direction of thrust or trend.2. Draw a trendline connecting the last two high pivot points.3. There are two or more rising or equal low pivot points within thelast 20 days.Buy on movement above this line if:• Close is above opening.• Close is above the four prior closes.• Range is greater than average.Stop is below most recent pivot point low. Liquidate on evidence offalse move such as a wide range reversal.Move stop to breakeven when breathing room exists so as to have afree trade. Breathing room is a question of judgment but one simplemethod might be to move stop just below the low of entry day if the highof entry day is exceeded by a half range.
FIGURE 4.6
Four-close trendline break.
CHANNEL AND TRENDLINE TRADING
81
FIGURE 4.7 Royal Dutch Petroleum. Created with TradeStalion 2000i by OmegaResearch1999.
Take profits at:1. Swing objective, or2. On a four-close trendline break that is against the trend, or3. On a half range breakout from opening if market enters the BellThese are suggestions. The basic idea is to liquidate the tradewhen it becomes apparent that supply is overcoming demand or it is abuying climax (reverse for shorts). Figure 4.7 on Royal Dutch illustrates these ideas.TREND CHANNEL SYSTEM
When the market hits a lower trend channel line, buy/sell on first positive indication of a trend change, in up move:* Buy higher opening.* Buy on 11:30 rule (market above opening at mid-day).• Buy on reversal day.• Buy on minor reversal patterns.
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THE ULTIMATE TRADING GUIDE
FIGURE 4.8
Use of lower time frame.
• Buy the pull back.• Lower time frame. Keep 30-minute chart and buy at trend channel parallels (basic daily charts) on first sign of strength on30-minute chart (Figure 4.8).
5SWING TRADING
This chapter presents the basic approach to swing trading combinedwith supply/demand characteristics of the bar chart and the wave theory. These factors are utilized in a coherent manner to use past pricemovements to project future prices and thereby gain a technical edgefor profitable trading. Elements of this chapter have been presented inother places in this book. The repetition is intentional. You cannot builda house with a hammer. Also, you cannot build a house without one. Thesame is true in trading. You cannot trade with only one tool. You musthave many and know from looking at the big picture which one is appropriate to use at the moment.SWING CHARTSA swing chart is a line drawn from one pivot point to the next on a barchart (see Figure 3.3). A movement is up as long as the bars are makingnew highs. It reverses to down when the low of a previous bar is penetrated. This adds clarity to the picture as openings and closing are notshown. A view of both is useful is determining which trading tools areappropriate.Action Points for Trading the Long SideThrust ActionTrade in the direction of a thrust (Figure 5.1). Contrary to some wavetheories, markets in one direction may have more than five waves, threeof which are in one direction and two in the opposite direction. As manyas eleven waves have been apparent on many charts A movement or trendwill continue in that direction until a counter wave occurs that is ofgreater magnitude than any of the prior waves. This is simply supply and83
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THE ULTIMATE TRADING GUIDE
FIGURE 5.1
demand. It does not necessarily mean the market will now reverse trend.It may mean, but as a minimum, the market has shifted into congestion.Parallel movement of up swings tend to be equal in magnitude andtime. Figure 5.1 demonstrates