.
Note that these are the basic rules. The next lesson will go into con-siderably greater detail regarding the many effective uses of the MAC. SeeFigure 10.1 for an example of a daily futures chart and Figure 10.2 for anexample on a stock chart.
IT LOOKS EASY
The two examples I cited make the MAC seem easy; but there is a lot moreto the MAC than what I have shown you to this point. Here are a few morevery important aspects of the MAC:
(cid:2)
(cid:2)
(cid:2)
When the MAC has triggered a buy, the MA of the low serves as supportin the new uptrend.When the MAC has triggered a sell, the MA of the high serves as resis-tance in the new downtrend.The more consecutive bars that comprise a new signal, the more signif-icant the new trend is likely to be.
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SF-055:  Swiss Franc (Pit) Cont 1st (Daily bars)
MovingAvg (L,8)  MovingAvg (H,10)   08/08/05  05:37 = 0.7959 (+0.0018)
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10-period MA of the high
Sellsetup
Trigger
8-period MAof the low
Major declineafter selltrigger
Buysetup
Buytrigger
Buysetup
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06/01/05
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87
0.855
0.85
0.845
0.84
0.835
0.83
0.825
0.82
0.815
0.81
0.805
0.8
0.7959
0.790.78840.78710.785
0.78
0.775
0.77
0.765
FIGURE 10.1 The MAC on a daily chart of Swiss Franc futures showing setup,trigger, and follow-through.Source: Courtesy of www.GenesisFT.com.
(cid:2)
(cid:2)(cid:2)
(cid:2)
A narrowing channel in an uptrend tends to precede a correction downor a possible top.A widening channel in an uptrend tends to precede a sharp rally.A narrowing channel in a downtrend tends to precede a correction upor a possible bottom.A widening channel in a downtrend tends to precede a sharp decline.
GOOG:  Google Inc. (Daily bars)
MovingAvg (L,8)  MovingAvg (H,10)   08/05/2005 = 292.35 (-5.38)
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Buysetup
Trigger
Buysetup
Trigger
Sell setupNo trigger
Sell setupNo trigger
320
310
300297.90
292.35
280
270
260
250
240
230
220
210
200
190
180
170
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05/02/05
05/16/05
05/31/05
06/14/05
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07/13/05
07/27/05
08/10/05
FIGURE 10.2 The MAC on a daily chart of Google (GOOG) stock showing setupand trigger.Source: Courtesy of www.GenesisFT.com.
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BP-055:  British Pound (Pit) Cont 1st (Daily bars)
MovingAvg (L,8)  MovingAvg (H,10)   08/08/05  06:01 = 1.7863 (+0.0110)
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Sell setup
Trigger
Resistanceat topof channel
Resistance
11th daybelow channelVery bearish!
Widest channelsince start ofnew down trendBearish!
Buy signalnewuptrend
Support fornew uptrend
1.92
1.91
1.9
1.89
1.88
1.87
1.86
1.85
1.84
1.83
1.82
1.81
1.8
1.791.78631.78
1.771.76681.76
1.75
1.74
1.73
1.72
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05/03/05
05/17/05
06/01/05
06/15/05
06/29/05
07/14/05
07/28/05
08/11/05
FIGURE 10.3 The MAC on a daily chart of British pound futures showing setup,trigger, and result.Source: Courtesy of www.GenesisFT.com.
All of these are discussed in detail in Lesson 11. Figures 10.3 and 10.4
show annotated examples of these conditions.
PRACTICE, PRACTICE, PRACTICE
Now that you have learned the basics of the MAC, it is time to practice.Spend some time with the MAC. You will ﬁnd that in a “choppy” market it
MSFT:  Microsoft Corporation (Daily bars)
www.GenesisFT.comMovingAvg (L,8)  MovingAvg (H,10)   08/05/2005  = 27.76 (+0.44)
Uptrend isreconfirmedby 2 days aboveMAH.
Buy setup isfollowed by trigger.
Correction downholds at MAL support.
Channel narrowsprior tocorrection down.
28
27.76
27.6
27.4
27.2
27
26.8
26.626.5126.4
26.18
26
25.8
25.6
25.4
25.2
25
24.8
24.6
24.4
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FIGURE 10.4 The MAC on a daily chart of Microsoft (MSFT) stock showing setup,trigger, and result.Source: Courtesy of www.GenesisFT.com.
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89
has some “issues” that seem to decrease performance. In the next lesson, Ishow you several ways to rectify those situations.
REVIEW
In this lesson you learned about the MAC method, which consists of twoMAs. The MAC uses a 10-period MA of the highs and an eight-period MAof the lows. The MAC triggers for a buy and a sell were discussed. TheMAC also provides a way of determining support, resistance, and strengthof trend.
Congratulations! You have now completed the ﬁrst lesson in your MACmethod. In Lesson 11, we will look at Part 2 of my Moving Average Channel(MAC) to see more speciﬁcally how it can work as a trend indicator, timingindicator, and support/resistance swing trading method.
LESSON 10 QUIZ
Instructions: Circle the correct answers.
1. The MAC is
A. A method that uses two moving averages, one of the lows and one of
the highs.
B. A method for trading meat and livestock futures.C. Is a risk management method called “Managed Account Concept.”D. None of the above.
2. In order for a price bar to be valid, either as a setup or a trigger it must:
A. Close higher than it opened.B. Use the 14 period slow stochastic.C. Occur within 6 days of the last signal.D. Be completely outside the channel.
3. When the MAC widens in an uptrend this tends to indicate:
A. The end of a bull market.B. The start of a bear market.C. That the market will likely move sharply higher.D. That the commercials are not in the market at this time.
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4. The more consecutive bars above the channel:
A. The less likely the market is to rally.
B. The more the odds favor a large up move.
C. Lower the trading volume.
D. The greater the odds of a seasonal decline.
5. In a declining market after a sell trigger:
A. The MAL serves as resistance.
B. The MAH cannot be used for triggers.
C. The MAH serves as approximate resistance.
D. The channel is not useful.
6. When the MAC becomes very narrow in an uptrend:
A. The odds have turned 50/50 for a rally.B. A seasonal buy signal is likely with the PMF method.C. A correction down to support is likely.D. It means that open interest is rising.
7. The MAC uses:
A. Exponential moving averages.B. Weighted moving averages.C. Gann angles.D. None of the above.E. All of the above.
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L E S S O N 11, D A Y 11
Using the MovingAverage Channel:Part II
L esson 10 discussed the MAC basic aspects. In this lesson, we ﬁnalize
application of this method in its various forms. Note that the MAC isvery versatile. It can be used in at least ﬁve different ways. I urge youto study my suggested applications and then decide on which of them to ﬁtyour needs best.
The moving average channel (MAC) can be used for swing trading con-
sistent with the trend. The rules are as follows:
(cid:2)
(cid:2)
If the MAC trend is up, then buy at the moving average of the low (MAL)and take proﬁt at the moving average of the high (MAH) or implementa trailing stop once you have achieved your initial proﬁt target—theMAH.If the MAC trend is down, then sell at the MAH and take proﬁt at theMAL or implement a trailing stop once the proﬁt target has been hit.
MAC APPLICATION AS A TREND INDICATORAND TREND CHANGE INDICATOR
The simplest application of the MAC is to use it as a trend and trend changeindicator.
The rules are as follows:
(cid:2)
Two consecutive price bars above the MAH constitutes a new uptrendand a change from an existing down trend.
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JY-200509: Japanese Yen (Pit) Sep 2005 (Daily bars)
www.GenesisFT.comMovingAvg (L,8)  MovingAvg (H,10)   8/9/05 05:33 = 0.8962 (+0.0001)
Sell at MAH.
Sell at MAH filled on openbecause open was above theMAH.
Sell at MAH.
MAC selltriggered.
Exit short atMAL oruse trailingstop.
Sell at MAH filled on opensince open was above MAH.
Exit short at MALor use trailing stop.
Exit short at MAL or use trailing stop.
Exit short at MALor use trailing stop.
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06/30/05
07/15/05
07/29/05
08/12/05
FIGURE 11.1 Short-term swing trading with the MAC.Source: Courtesy of www.GenesisFT.com.
0.9420.940.9380.9360.9340.9320.930.9280.9260.9240.9220.920.9180.9160.9140.9120.910.9080.9060.9040.9020.9001
0.89730.89620.8940.8920.890.8880.8860.8840.882
(cid:2)
(cid:2)
(cid:2)(cid:2)
Two consecutive price bars below the MAL constitutes a new down-trend and a change from an existing uptrend.You can buy or sell or reverse positions accordingly, however, I stronglysuggest using another trend change indicator to conﬁrm trend changesignals based on the MAC in order to increase accuracy. The AD/MAindicator (to be discussed later in this lesson) can be used for thispurpose.You have achieved your initial proﬁt target—the MAL.The stop-loss on this trade is twice the width of the channel as measuredon the day that the trade is entered or a reversing MAC signal.
See Figures 11.1 and 11.2 for examples.
MAC APPLICATION USING THE FIVECONSECUTIVE BAR PATTERN
The last lesson indicated that the more consecutive bars either above orbelow the MAC as part of a new signal, the greater the odds of a large move.This method uses ﬁve consecutive bars as a trigger for a speciﬁc method.The rules are as follows:
(cid:2)
When a new MAC buy signal occurs with ﬁve consecutive bars abovethe MAH, buy on the open of trading the sixth bar. The proﬁt target isthe range of the ﬁve bars. Take proﬁt at the proﬁt target or take partialproﬁt and trail a stop.
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SB-200510:  Sugar #11 Oct 2005 (Daily bars)
www.GenesisFT.comMovingAvg (L,8)  MovingAvg (H,10)   08/08/2005 = 10.10 (+0.02)
Exit long at MAH or use trailing stop.
Exit long at MAH or usetrailing stop.
Exit long at MAH oruse trailing stop.
MAC buysignal
Buy at MAL.
Buy atMAL.
93
10.4
10.3
10.2
10.10
109.939.9
9.8
9.7
9.6
9.5
9.4
9.3
9.2
9.1
9
8.9
8.8
8.7
8.6
8.5
8.4
8.3
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FIGURE 11.2 Short-term swing trading with the MAC.Source: Courtesy of www.GenesisFT.com.
(cid:2)
(cid:2)
When a new MAC sell signal occurs with ﬁve consecutive bars belowthe MAL, then sell on the open of trading the sixth bar. The proﬁt targetis the range of the ﬁve bars. Take proﬁt at the proﬁt target or take partialproﬁt and trail a stop.Initial stop-loss is the range of the ﬁve bars or a reversing signal.
Figures 11.3 and 11.4 show examples of this method.
EU-200509:  Euro FX (Pit) Sep 2005 (Daily bars)
MovingAvg (L,8)  MovingAvg (H,10)   8/9/05  06:39 = 1.2355 (-0.0028) 1.27
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Range of 5 bars is1.2408−1.2248.
Profit target hitexit part of positionand trail stop or exitentire position.
New 5 bar buy patternRange is 1.2425−1.2205.
New MAC sellwith 5 bars belowMAL.
1.265
1.26
1.255
1.25
1.245
1.24
1.2355
1.23011.2280
1.225
1.22
1.215
1.21
1.205
1.2
1.195
1.19
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07/15/05
07/29/05
08/12/05
FIGURE 11.3 Example of the ﬁve-bar MAC pattern.Source: Courtesy of www.GenesisFT.com.Note: If you use a 57 period of MA of the AD you will tend to have fewer signals, butwith somewhat higher accuracy.
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New MAC buy signalRange 123.44−121.31.
SPY:  SPDR Trust Series I (Daily bars)
Profit target hit.Exit or use trailing stop.
www.GenesisFT.comMovingAvg (L,8)  MovingAvg (H,10)   8/9/05  07:10 = 123.05 (+0.40)`
Buy on opennext day.
06/02/05
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07/15/05
07/29/05
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FIGURE 11.4 Another example of the ﬁve-bar MAC pattern.Source: Courtesy of www.GenesisFT.com.
125
124.5
124.15124
123.5123.31
123.05
122.5
122
121.5
121
120.5
120
119.5
119
118.5
118
MAC APPLICATION USING THEACCUMULATION-DISTRIBUTION MA
The last application of the MAC is to use the basic MAC buy and sell signalswith the Williams accumulation distribution/moving average indicator(AD/MA). Here are the rules of application followed by several examples:
(cid:2)(cid:2)
(cid:2)
(cid:2)
(cid:2)(cid:2)
Use the basic two-bar MAC buy and sell signals with the AD/MA.Use the Williams accumulation distribution indicator and a 28-periodmoving average of the AD. Note that you will not be using the volume-based accumulation-distribution indicator.When AD moves above its MA for two consecutive postings, a buy istriggered.When AD moves below its MA for two consecutive postings, a sell istriggered.Conﬁrm the MAC signals with the AD/MA signals and vice versa.The stop-loss is the reverse of the current signal.
Figures 11.5 and 11.6 illustrate this approach.
SUMMARY
The MAC is a highly versatile method that has a variety of applications asdiscussed in this lesson. These applications are not mutually exclusive. By
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AMGN: Amgen Inc. (Daily bars)
www.GenesisFT.comMovingAvg (L,8)  MovingAvg (H,10)   8/9/05 07:38 = 79.49 (-0.91)
MAC buy trigger
ADD/MAbuy trigger
MovingAvg (28) Williams AccumDist
95
84
82.36
80.6779.49
78
76
74
72
70
68
66
64
62
60
-40
-45.89
-51.14
-55
-60
-65
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FIGURE 11.5 How the AD/MA signals work.Source: Courtesy of www.GenesisFT.com.
this I mean that you can apply all of these at the same time. The way inwhich you do so is up to you. Here are some important tips for using theMAC successfully:
(cid:2)
Use the MAC in active markets only. If a market is thinly traded, thenthe price bars will be small and the accuracy of the MAC poor. If youuse the daily price chart for futures, then use the lead month or activemonth.
LH-200510:  Lean Hogs (Pit) Oct 2005 (Daily bars)
www.GenesisFT.comMovingAvg (L,8)  MovingAvg (H,10)   8/9/05 07:44 = 59.350 (-0.100)
MAC buy trigger
Still long because therehave been no reversingsignals on both indicators.
MovingAvg (28) Williams AccumDist
AD/MA buy trigger
65
64
63
62
61
60
59.35058.950
58
57
56
55
54
20
18
16
14
12
10.109.20368
6
MAC sell trigger
AD/MA sell trigger
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FIGURE 11.6 Another example of how the AD/MA signals work.Source: Courtesy of www.GenesisFT.com.
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If you use the MAC in the intraday time frame, then I recommend younot use the MAC for time frames less than 10 minutes.Remember that when you use the MAC swing trading method, yourproﬁts are limited as a function of the width of the channel for thegiven market in which you are trading.The MAC methods require experience and should not be used in a totallymechanical fashion. Get some experience before you attempt to use theMAC methods described here.You can use the MAC with the Williams accumulation-distribution/moving average indicator as described in this lesson if you are look-ing for a more systematic methodology. You can use either a 28 or a57 MA of the AD.
Now that you have learned the different methods in which you can usethe MAC, it is time to practice again. Spend a good amount of time with theMAC.
REVIEW
Congratulations! You have now completed the MAC method. In this lesson,you learned the additional applications of the MAC and their speciﬁc rules.In Lesson 12, we look at a speciﬁc price pattern designed to help short-
term traders achieve consistency and proﬁtability.
LESSON 11 QUIZ
Instructions: Circle the correct answers.
1. The MAC can be combined with the AD/MA to:
A. Give you a complete trading method that improves accuracy.B. Give you detailed information on insider trading.C. Produce a good spread trading method.D. None of the above.
2. The ﬁve-bar MAC pattern:
A. Is based on the commercials and their market activity.
B. Is the method of choice for spreads and options.C. Gives a buy signal when there are ﬁve consecutive bars above the
MAH as part of a new buy trigger.
D. Is one of the few methods that does not have a proﬁt target.
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3. When using the MAC as a swing method:
A. You buy at the MAH in an uptrend and wait for a breakout.
B. You only use the MAC in sideways markets.
C. You buy at the MAL in an uptrend and take proﬁts at the MAH.
D. None of the above.
4. The basic MAC buy and sell signals are:
A. 88 percent accurate.
B. Only used on weekly charts.
C. A valuable method when used with a conﬁrming indicator.
D. All of the above.
5. Select all items that are true:
A. The MAC has several speciﬁc applications.B. The MAC can give you a very speciﬁc idea of trend.C. The MAC can help you spot changes in trend.D. The MAC should not be used in thin markets.
6. The initial proﬁt target for an MAC buy swing trade is:
A. 0 percent of the range of the last 21 trading sessions.B. The high of the last ﬁve bars.C. The MAC high of the last 27 bars.D. The MAH.
7. The ﬁve-bar MAC pattern proﬁt target is:
A. The range of the ﬁve bars.B. The weighted moving average of the ﬁve-bar close.C. The Fibonacci ratio of the angle of ascent.D. The AD/MA.
8. The stop-loss for the ﬁve-bar MAC pattern is:
A. The same as the proﬁt target.
B. The AD/MA low.C. The MAL.D. All of the above.
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L E S S O N 12, D A Y 12
Three PowerfulPrice Patterns:Part I
L esson 11 ﬁnalized my discussion of the moving average channel
(MAC). Lessons 12 and 13 show you three speciﬁc price patterns inthe stock and commodity markets. Each is effective in its own right.These are relatively short-term indicators; however; their implementa-tion can also lead to longer-term opportunities. While some of these patternsmay seem familiar to you, please note that I do not necessarily implementthem the way most traders do. So please note well the differences and aboveall observe that these methods all use the setup, trigger, and follow-throughmethod discussed in previous lessons.
I also want to reiterate that the STF structure is the most importantprocedure that you can follow in all stock and futures trading (as well asmost other forms of speculation and investing). This lesson is considerablymore detailed than what you have seen in the lessons so far. You need to readit over a few times to get it straight. Note that, although these are primarilyday trades, they do not require you to watch the markets all day long.
If you do not have an interest in day trading then you can skip thischapter. Nevertheless, I think that the concept of the gap will be helpfulto you because gap days tend to mark important turning points above andbeyond the day that they occur.
PATTERN 1: THE GAP TRADE
The gap trade (GT) is one of the simplest short-term methods in existence.Paradoxically, it is also one of the most misunderstood methods. Here are
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the rules of application:
(cid:2)(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
Use day-session daily-price data only (i.e., pit session).If a market opens below the low of the previous day, the market has setup a gap buy trade.If a market opens above the high of the previous day, the market hasset up a gap sell trade.After a gap trade buy setup (GTB), a trigger occurs when and if themarket goes back up through the low of the previous day by a certainnumber of ticks.After a gap trade sell setup (GTS), a trigger occurs when and if themarket goes back down through the high of the previous day by a certainnumber of ticks.There are three follow-through methods as follows:(cid:2)(cid:2)(cid:2)
Exit on stop-loss (to be discussed).Exit on close of day win or lose if not stopped out.Exit on ﬁrst proﬁtable opening (FPO).
These three follow-through methods will be discussed later in this lesson.
THE IMPORTANCE OF GAP DAYS
Gap days are very important because they often have the following commoncharacteristics:
(cid:2)(cid:2)(cid:2)(cid:2)
(cid:2)(cid:2)(cid:2)(cid:2)
Many major tops and bottoms occur on gap days.The trading range on gap days tends to be large.Gap days often occur as a result of news.Gap days provide very reliable day trading and short-term trading op-portunities.Gap days tend to be highly emotional.The close on a gap day tends to be near the extreme of the day.The opening on a gap day tends to be near the extreme of the day.Trading volume tends to be large on gap days.
Figures 12.1 and 12.2 show