or isformed just outside the most recent congestion.
The Slaughterbeck buy point (marked 's') gave a good entry.
 
I'll show you what | mean.BP WEEKLY282882088819888 ©19688194881928819888188881868818488
|||||a |||||||
 
i | | rna
| "Fyogh') 3
 
qefy 16288
 
w
16080— 15888
1 156081540815288
 
sal
as ON DIFMN ANS JIA SON DJ FH@2-28 0-17348 H-17682 L-17288 C-17518 Y- 11999 I- 23892
 
On the above chart, the #2 point of the 1-2-3 high is formedwell below the recent congestion. The #2 point of the 1-2-3 low iscontained within the recent congestion.
301 |Now let's look at some additional charts. After all, the whole
world doesn't revolve around the British Pound.
SF WEEKLY1
effectively.
I ) The Rh follous a 1-2-3 highq at | | | that {s too big to trade
|
iyz ih 2 i Meati etaes!
 
the 1-2-3 low is tlthe kind to look for.
     
Ss oN DJ FRU- 17311 I- 34799
 
DJIFASA-21 O- 6692 H- 6735 L- 66!
Lc WEEKLY
1, the 1-2-3 high is not well formed.
| The gap ruins the formation. If ituere filled in, we would have a situationsimilar to the BP and the SF.
tor IFi atl : =
low gets you into thetrade quite well at the RhSlaughterbeck buy point .
The Rh after the 1-2-3 “lit | ,
 
302
7588
84889325
817561688825795828757888
7658
75757588
2275
¥
 
CL WEEKLY
1340 mi 4808On 1-18 minute intraday charts, as well as 3988
weekly and monthly charts, it is not necessaryto have the 1-2-3 forned of at least 4 price 3888bars. A3 bar formation is adequate. 3768
| na
sell points (marked 's') would have gotten you 3808into each trade. 2988
Rh 2888{ 2768
| 2688
2588
2468
Nyt 23882Rh dy syle 1, ce| fylco ni | {t 2088| Li ise3 18881 17681688
   
POPPE bee Peet rete ee EPP E LEE E PORTED EEE POCO Reet ns
asson DJFM ANS JIA SON
 
DJ
 
Although the Crude chart above was a tough one to workwith, the formations are clear and would have resulted in goodtrades.
The only thing wrong with the 1-2-3 high is that the #3 pointretraces more than 2/3 the distance from #1 to #2.
Notice that the #2 point of the 1-2-3 high culminates in whatturned out to be a congestion area.
The 1-2-3 low, and the subsequent hook turn out just fine. Anice profit would have been made.  
 
W MONTHLY | BO MONTHLYRh? 4708 3508t 4608 | 34804588 | 3308| 4488 =m| 4388 31883 4288 30884188 29894998 26883988 | Ra3808 | | 26803788 | 25803688 X- Level of a previous | 1 24883588 #2 point. | I 2308I 3488 | 798| = Pe| 3208 20683188 ih | 19883088 I f 18882988 | | 1788me aul =2788 | ih 15892688 | 14982588 | 13492488 | 12882388 11882288 1888ul ul liliThe Rh following the first 1-2-3 low has a Slaughterbeck buy This is your chance to practice. Write down everything youpoint. The Rh following the 1-2-3 high has a Slaughterbeck sell know about this chart. My own observations will be found inpoint, but we miss the move due to the gap down opening beyond Appendix A. Hint: The chart began, prior to what is shown, with athe trading range of the bar giving the Slaughterbeck entry. The 1-2-3 high. | marked the level of the previous #2 point.
third 1-2-3 (poorly formed, but there), followed by a Rh does notgive a Slaughterbeck entry, but it does give a Trader's Trick entry.In the case of neither signal, we would trade the breakout of the
hook itself.
304 305
 
 Chapter 19Plain Vanilla Money, Trade, and Risk Management
I've shown you how | trade the Ross hook without anyoscillators or technical studies. Now, how do | manage my money,my risk, and the trade itself?
 
To my way of thinking, each one of these items, normallylumped together as "money management," are each separateentities and are to be treated as such.
Trade Management
Unless | can get a trade off properly, | have no need to beconcerned with risk or money management.
These are the things | include in trade management.1. Placing the entry order.2. The type of order to use.3. Placing the stop orders, both protective and objective.4. Placing the final exit order.
Inherent in the above is my relationship with those who takeand execute my orders.
I have very strict rules as regards trade management.
| write out each entry order on an order ticket before calling it
| tape record every order. | date and time stamp every orderby verbally stating it on the tape.
| verbalize the fact that this is a recorded order.
306
 
 
 
My orders are like this: "Account 144, May 11, 9:15 A.M.,this is a price order: buy 100 contracts of July Wheat, 369 3/4. Iffilled, sell 30 contracts of July Wheat 370 3/4, MIT.
The MIT order is my initial profit objective designed to covermy costs and give me a small profit.
l ask the order taker to repeat the order. That also goes ontothe tape. | then play back the entire order process and double checkwhat | said and what the order taker said, against my script.
| do this even when the broker also records orders.
Over the years, this has saved me thousands upon thousandsof dollars by avoiding costly errors, arguments, law suits, and timespent quibbling over trades.
Whenever possible | use price orders. | use "or better," limit,stop limit, and fill or kill orders. On 100 contracts of wheat, |cannot risk slippage. her | get my price or | don't want the fill. Ifprices move past me without a fill, | cancel. | do not like to be filledby prices moving back to my entry price, they are going the wrongway.
 
 
There are plenty of times that I'm not filled and the trade goeson to make a lot of money without me. | do not care. | follow mydiscipline and my rules. My price, or no price.
Someone will say, "But my broker won't take a price order onthe CBOT." My advice is, get another broker. The traders on thefloor at the CBOT will take a limit order, but only if prices are belowthe entry point if you go long, or above the entry point if you goshort.
Not every floor broker will do this. It's up to you to find theones who w
 
When | am notified of my fill, | do one of two things dependingupon how busy! am. 1. | place a protective stop order in themarket. 2. | retain a protective mental stop, and place it quickly if
things go wrong.
307Risk ManagementThe things | include in risk management are:1. Covering costs with an objective stop.2. Timing and expectation. |3. Position apportionment.
4. Amount of risk and loss minimization
Most of the time, prices move my way sufficient for me tocover costs (commissions & fees). |
If the market moves quickly toward my cost coveringobjective, | move my protective stops (2/3 of my position) to breakeven. In this situation, | usually cover costs with 1/3 of my total |position. Since I've covered costs, break even means just that, | cando no worse than break even except for slippage. Once I've coveredcosts, if the market makes a serious move towards my breakevenstop, | will leave 1/3 of my position at breakeven, and liquidate 1/3of my position so | am assured of a profit on that 1/3.
If the market pokes around and doesn't quickly move towardsmy cost covering objective, | will increase the number of contractsto 2/3 of my position at the cost covering objective. If the marketcontinues to deny me my cost covering objective, | liquidate allcontracts in an attempt to come out ahead, or at least minimize thecost per contract.
 
1 want to make the next statement very clear: | do not and willnot risk more than $50 per contract when trading the Ross hook.
| can live with many small losses, | cannot abide large losses.
308
 
 
What is the proper anticipation? Most of the time | will covercosts, and make a small profit. This will happen two out of threetimes. Of ten times that | cover costs and make a small profit,seven or eight of these trades will end there. Two or three timesout of ten, the market will run and | will make a very substantialprofit.
 
Of the times | lose, | try to minimize the loss and keep it at nomore than $50. If | cannot watch the market, | will lose the $50plus costs. When | can watch the market, | rarely lose as much as$50 plus costs. | am very quick to get out if things are not goingmy way.
 
When you win two out of three times, and keep your lossessmall, there is no way you are going to be a loser in the markets.
Money ManagementItems | include in money management are:
1. Protecting profits.
 
3. Timing exits.
Once | am comfortably settled into a trade, have coveredcosts, and not had my breakeven stop taken out, I then trail a stopone of two ways: 1. | traila 50% stop. 2. | trail a natural supportor resistance stop. These can be intermixed.
If a natural support or resistance stop is greater than a 50%stop, | will use a 50% stop. | prefer to stay with a natural stop.
 
By 50%, | mean trailing a stop so that | don't risk more than1/2 of the unrealized profits I've seen in the trade.
If | am unable to watch the market intraday, then one of thesetwo methods will have to do.
309If | am watching intraday on a day trade, | will trail the stop byone of these two methods until | see that hooks are coming closetogether, the market is making new extremes on reversal bars, dojisor near dojis, volume, or closes that are in the lower half of theday's trading range, even though they are above the open. Theseare things that make me suspicious and indicate to me that themove may be over.
| will then tighten my stops until | am stopped out by themarket. My goal then is to be stopped. out with a profit.
If | am trading the daily or longer term charts, | do not need toand will avoid watching intraday data with the possible exception ofreport days which affect the particular market I'm in. If I'm notwatching the market intraday, the profit protecting stop will have to
do the job.
Once a trade is profitable, | will consider adding to my positionas each additional hook is formed. | will continue to do this as longas the hooks are not coming too close together, i.e. no closer thanthree bars, and volume is not drying up in the direction of the trend.
| also watch for symptoms of exhaustion. After the markethas made and taken out two hooks, if it begins to make long barmoves in the direction of the trend, or begins to gap in the directionof the trend, this is an indication that at least temporarily, the trendis ending, and there will be either a congestion or a trend reversal.
Another way to know when a correction is imminent is whenthere have been five or more successive higher lows in an uptrend,or five or more successive lower highs in a downtrend.
Yet another way to know when a correction is at hand is whenyou see five or more successive open-high, close-low bars in adowntrend, or five or more successive open-low, close-high bars inan uptrend.
310
 
Chapter 20Don't Take That Hook
Are there conditions under which you do not want to take aRoss hook?
Yes, there are. They are not all absolute, and certainly youwould want to proceed with great caution. 1 will explain each after
this brief summary.
Be careful taking hooks...When markets suddenly become volatile.When hooks come too close together.When volume dries up.
When a hook is too far away.
When the point of the hook is not taken out withinthree bars following a correction.
1 will explain each of these concepts more fully for you. 
A Market Becomes Too VolatileCBT Wheat(soft winter) —- WNCBT Soybeans —- SN
i
i| iy | al \r \ i
i
i"
  
In February, the Wheat market suddenly became very volatile.Had prices risen up to challenge the hook marked on the chart, |
| would tend to be very cautious about taking the Ross hook if would not have attempted entry by any available means. Suchit had been taken out within a couple of days of being made. As events take place in conjunction with weather, political, war, oryou can see, the market has settled down and is now more orderly. other major news scares.
The problem with sudden volatility as seen on the Soybeanchart is that the market moves too fast. It does not trend up, itexplodes up. A correction is inevitable. The correction, if it resultsin a congestion area as above, gives market makers a perfect placeto run stops just above the point of the hook. | would want to seeat least one close above the hook, and then go long on a secondtime through the point of the hook.
312 313
 ‘ | _| |
| | Mi
 
 
 
At points a and b, the market is much too volatile to attemptto take upside hooks had they been challenged. At d, we see themarket is much more orderly when it takes out the point of the hookatc.
 
A couple of thoughts must be kept in mind. Volatility, as seenby long bars and gaps, is not as meaningful in a downtrend as in anuptrend. Markets as a rule drop much faster than they rise.However, this is not true for the currency markets. That is becausecurrencies are traded relative to one another. If one goes down,another must correspondingly go up.
314
 
 
IMM Deutch Mark — DMM
| would not take either of the Ross hooks shown on the chart.The market is too volatile. Even though | would have made a niceprofit on the downside hook, | am willing to bypass such moves infavor of a more orderly market. All too often, when a hook is veryfar from the #2 point, the move is all but over, and I'm sorry | gotExperience has shown that most of the time these do not work well.
  
When Hooks Come Too Close Together
Normally, when a market is trending and making Ross hooks,each hook will have from one to three days of correction and thenthe market will resume its movement in the direction of the trend.
 
Each move in the direction of the trend will consist of three tofive bars. A move in the direction of the trend may consist of onlyone or two bars if they occur as long bar moves or gaps.However, if the market begins to have only one or two bars inthe direction of the trend, without the benefit of long bars or gaps,and then after one or two bars it corrects, Ross hooks will be veryclose together. When this happens it is a warning that the move, atleast temporarily, probably is over.
When Volume Dries Up
When a market has trended for awhile, sometimes a longwhile, it will reach a point of exhaustion. It cannot continue to makenew highs or to make new lows. Normally, exhaustion is reflectedin a market coincident with a drying up of volume. New highs aremade on low volume, or new lows are made on low volume. Themarket simply can no longer sustain new extremes without manyparticipants. The market is either running out of sellers or runningout of buyers.
It is hard to know how to account for volume especially sincetoday's volume may be shown on tomorrow's bar. | cannotsatisfactorily explain how to use it. It is not necessary, and onlycoincidental to my trading. But when | see a large move on lowvolume, typically after a large bar move or a gap, | sense that for thetime being the move is over. | suspect a hook will occur and mostof the time it does. But a severe reduction in volume may occur oneither side of what turns out to be a selling or buying climax.
 
When you see the point of a hook made on low volume, refrain :from attempting that hook. Do not trade a takeout of the point ofthe hook, nor attempt a TTE or Slaughterbeck entry.
This is true no matter what the time frame. On the daily chart,we look at the volume for the contract we are trading. It comes aday late. Estimated volume is not usable for hooks. Use actualtrading volume as reported for the day of what becomes the point of
 
 
the hook. You will usually have a day or two to obtain it as themarket corrects.
Intraday, use the tick volume. Tick volume is current althoughnot perfect. It counts the number of times trades are made. It doesnot give any indication of the lot size. A single tick could representa one lot or a fifty lot trade.
316
Take a look at the Gold chart as it made a low just prior to acorrection. The day of the point of the hook, volume dropped offsharply. The point of the hook was made on low volume. The nextday, the reason the volume was higher than the previous days, wasbecause of all the people covering their short positions. Note thereversal bar at the point of the hook. The market has run out ofsellers. Near the end of the downtrend, most of the volume iscoming on days where the close is higher than the open. This, too,indicates the market is running out of sellers.
COMEX Gold GC — 6CH
Notice how close together the hooksare falling as they approach the endof the middle of May.
ni "
= 3382= 3053Open = 395.6Close = 336.3
 
 
 
317Copper did a similar thing. Volume dropped off just before thepoint of the hook was made on April 2. The high was made onrelatively low volume. It wasn't until the next day, when pricesreversed, that the volume picked up sharply, showing that themarket had run out of buyers. The volume was made up of sellers,those covering their long positions, and bears who felt the movewas now over and wanted to get short. Who did the buying fromthese sellers? Mostly the public, who, in their greed to "get tichquick,” felt the move up was not yet over.
COMEX Copper — HGNdl i
 
Htiy F
 
 
 
318
 
When a Hook Is Too Far AwayA hook is too far away under two conditions:
1. When the 1-2-3 which preceded it is very large from thenumber 1 point to the number 2 point.
2. When the point of the hook is far from the number 2 point.
When either of these occur, there is usually very little room forprices to move subsequent to the hook being taken out.
This situation occurs more often in down markets than in upmarkets. However, it can occur in any market in any time frame,regardless of the direction of the move.
The D-Mark chart below is an example of the #2 point beingtoo far away from the #1 point. There was little downside potentialfor a takeout of the point of the hook.
 
IMM DEUTSCHEMARK FUTURE JUN —~ DMM
  
in 1| ul { \
 
 
   The five minute Sugar chart below illustrates a situation inwhich the point of the hook is too far from the number 2 point of
the 1-2-3, and the number 2 point of the 1-2-3 is too far away from
the number 1 point of the 1-2-3.
BC SUGAR #11 FUTURES JLY -- SBN
Vib 112 9.25
prong
f 9.70
| 560
   
| ___« 1600 1200 18 11:00 12 5 tin
   
| wouldn't want to take a breakout of the hook, aSlaughterbeck entry, or a TTE, with the market having moved sorelatively great a distance.
320
 
 
Saree
 
Here's what happened later in the day. You can see that itwas indeed wise to let the breakout of that hook go by. Most of themove was consumed by the relatively great amount of movement byprice in forming the 1-2-3 and the Ross hook.
1B 1125
Iheie? my 1
321Too Long a Time Period fs long as volume has not fallen off, take a breakout of the Rh.the Trader’s Trick, or the Slaughterbeck entry.
This is a very important consideration regarding hooks. It isthis situation under which most traders will make mistakes. Rh
It is a virtual certainty that the last hook in a series will come TTE or SEand develop into some form of congestion. The only time this ptdoesn't happen is when a market makes an abrupt Vee top or —-tbottom. True \/ tops or bottoms are rare, and not worth the riskinvolved in trading them. There is certainly no way to predict themahead of time.
What start out to be /\ tops usually end up becoming some sort iof /\\ tops. What start out as \/ bottoms usually end up as \/V/
 
bottoms. These are actually forms of congestion and therein lies the %danger of the Ross hook that forms just prior to congestion. 3o&Please note the following: ,&6As long as volume has not fallen off, take a breakout of the Rh. &the Trader’s Trick, or the Slaughterbeck entry.Rh As long as volume has not fallen off, take a breakout of the Rh.the Trader’s Trick, or the Slaughterbeck entry.TTE or SE |leomses. fhTTE or SE—ant| -—3AI3£f: ;&: ;i 5&&As
322 323Do not attempt any of the hook type entries. Ve have nou had norethan three bars of correction.
Rh
TTE or SE
i-—3
prior trend—>
There is an extremely important concept to grasp here. Whena trend has a correction containing more than three bars, we havewhat | call a defined trend. The original trend is broken, and wehave now defined a minor trend that may prove to be a trendreversal or a congestion. (For more detail on defined trends, see mybook Trading by the Minute).
The Ross hook is still there, but in order to trade it on a plainvanilla basis, the point of the hook itself must be taken out not oncebut twice. It is on a second time through breakout that | will takeentry of the hook. Additionally, if there has been congestion, | wantto see a close beyond the hook, a retracement back into congestion,and then a second time through breakout of the point of the hook.
 
 
If it doesn't happen that way, | will let it pass me by.
324
  
 
NY LT CRUDE Oi FUTURES LY ——CiH
 
  
fi ry "t
 
   
    
yj
    
Exanple of second-tine through entry
The Rh at ‘a’ gets taken out only once. | would not take thatfirst breakout even though it turned out to be a good trade.
You must be very careful about taking the Ross hook thatoccurs at the beginning of congestion.
Why? Because it is just beyond those hooks that the floortraders will run stops. They can see those stop orders. You, too,must train yourself to see them. Once the stops are run, it's okay totake the breakout of the hook. Generally, once the stops are run, amove beyond the hook will result in a valid breakout and acontinuation of the trend.
 
325Chapter 21
Another Kind of Filter
At times traders, either because of limited funds, or because ofunwillingness to commit sufficient money resources, find themselvesundercapitalized for the trading of some markets.
Naturally, if market volatility is sufficiently great in any market,the risk may prove to be more than can be comfortably traded for
the size of the trading account.
; In that event, sufficient thought and consideration should begiven to daytrading the markets in order to take advantage of thelower volatility available in the shorter time frames.
The investment in a live data feed, software, and a computermay seem expensive. However, it may be less costly than theamount of losses that can quickly accrue by trading the daily charts,which may often require larger stops than those with which thetrader is comfortable.
This, of course, will hold true only for those who havesufficient time to devote to daytrading. | have a number of studentswho have been able to arrange their full-time work hours toaccommodate daytrading on a part-time basis.
If this cannot be done, and the account is to be small, the onlyway to logically trade and not gamble is to be extremely patient andwait to take only those trades that offer opportunities well withinthe liquidity and size of the account.
This can mean waiting for weeks or months to take a tradethat exactly fits the account size. There are not many new traderswilling to exert this kind of discipline and patience. Typically,traders are eager to place a trade in the market. If only they wouldpatiently wait for the right situation, there would be a great manymore traders who would succeed rather than fail in the markets.
326
7
 
The volatility on a one minute, three minute, five minute, or tenminute chart will fit well with many small accounts. The wins willbe proportionately small, but with careful trading, an account can bebuilt to sufficient size to move up to a larger time-frame.
On a lesser time interval chart, stops can be placed at naturalsupport and resistance levels without the greater risk that occurs on
the daily charts.This will afford additional trading opportunities more quickly.
The concept I'm setting forth here is the use of time-frame as afilter for trading. Use a time-frame in which sufficient tradingopportunities arise that are consistent with your temperament andthe size of your margin account.
Trading Ross hooks with the proper filters helps you to get intotrades early. Trading Ross hooks virtually forces you to trade withthe trend.
| have consistently and persistently taken a simple approach tomy own trading of the markets. Most people who want to trademake trading far too complicated. It's as though a simple method isnot worthy of the markets.
Perhaps some feel guilty about making money easily. Theyfeel unless something is sophisticated, intellectual, scientific, ormathematical, that it can't possibly be any good. That attitude andmind-set seems to be a result of the technical society in which welive. Too bad, because so many have lost so much attempting totrade in a complicated manner.
Stop placement when trading is a matter of individual choice.The sooner you realize that, the better off you will be. Run far andfast from anyone who tries to tell you otherwise.
Ross hooks, by themselves, constitute a trading method that isabout 65% accurate depending upon money and trade management.
327Adding the 1-2-3 formation and the filters of your choice canbring the percentage of winning trades much higher than that.
The most important statistic in your trading must be moneywon versus money lost. Once you have a sound method for tradingsuch as the Ross hook, the amount of money you win or lose
becomes a function of managing the trade, your money, the amountof risk, and yourself.
To properly engage in good Management, you must learn todiscipline yourself. Unless you have vast amounts of capital, youcannot change the market, nor can you become a part of thesolution in solving the problems the markets present to you whentrading.
You must come to realize that the only thing you can change isyourself, and the way you react to market stimuli. Your self-discipline, or lack of it, will determine in large part the way youmanage your money, trades, risk, and self.
You must trade with the realization of what trading is all about.To do that you need to study.
You must learn how the floor operates, how they determine"safe" sell areas and "safe" buy areas. You need to know how thefloor determines where today's high is supposed to be, and wheretoday's low should be.
You need to know at which point floor traders will bail out ofthe market and abandon it, and why. You should learn to recognizethat condition when you see it ona chart. Why? Because when
they abandon a market, that is exactly when you want to be in themarket.
   
You must come to realize that trading is a high risk business.Even when you are right about a trade, you can lose money.
 
There are plenty of vultures out there who can turn wonderfulwinners into sudden losers. Risk lies at every level of trading. Fromyour broker, to the trading desk, to the floor, you can be cheatedand robbed of your profits. If you trade without realizing this fact,you will soon be parted from your money.
As if that were not bad enough, large commercials, funds,other large traders, and market makers can all run the markets insuch a way as to cheat you of your potential profits. Markets areengineered by these interests, and you can be sure they do not haveyour interest in mind.
They can make markets go limit up and turn around and makethem go limit down — all within a single day. If you don't believe it,| suggest you take a look at the grain markets of February 10-11,1992, as a single example of the many hundreds I've witnessedthroughout my career.
engineered by those on the floor. Whenever trading becomes tootight, the market makers will run prices, first one way, and then theother. They do this to create "trading room" for themselves.
That doesn't mean you can't make money in the markets. Itdoes mean