frame. Although a lot of good trades are missed, so, too,are a lot of bad trades. The filtering technique using the Study, hasproved to be more than adequate.
This is a method | would suggest to anyone who is an over-trader, because it forces you to trade in the direction of the 39period moving average.
In the next chapter, I'm going to show you a neat trick. Ittakes advantage of a natural occurrence at market tops andbottoms.
245If you have software that allows you to calculate what hasbeen called "Uni-Channel", or moving average bands, you canapproximate the same conditions as the Keltner Channel.
Variations
A great deal of success has been derived from trading the S&P500 by using a 40-bar Keltner channel with a multiplier constant of5, and filtering hooks outside the bands using a 3-1-3 version of theStudy, on a 3-minute chart. Once again, the purpose is to keepfrom overtrading and taking only the best trades.
Choose a thirty-nine or forty bar moving average of the close,and then place the bands at a distance of about .15%. You mayhave to play with the numbers until it comes out right.
i
Hie RRR Rite
How will you know when it is "right?". When a market hasbeen outside the bands for forty bars, it should begin to reenter thebands.
A good money management technique for trading the S&P thisway is to watch the market carefully as it approaches a profit of40+ points.
The best way to show this is by illustration.
At fifty points a profit should be taken, and stops brought toSP2M.5 HIN uisea
breakeven on any remaining contracts. If the market blasts through
a3&*‘
    
  
  
         
and is really moving at 50 points, the stops may be held back some 1520in order to let the trade ride. aiaee144gAbout ninety percent of the time a stop is not even needed, Ld 41490though at the very least a mental stop should be used. A majority of 1 rh au tt 41360trades will reach 50 points of profit. Unless there is great lt I Hel TH 41320momentum, take profits and exit. | "i 41288[ype why ii 41240If at any distance between forty to fifty points the market | fli i 41208appears to hesitate, take profits and pull all remaining stops to lk S&P Snin uith 41168breakeven. noving average bands “us41988This type of trading will give lots of action on the days when y
prices are outside the channel. Be careful of trading ranges outside SP2M.5 MINthe channel. Until you see a 1-2-3 followed by a Ross hook, do not 41568attempt entry despite the fact that prices are outside the channel. oe| do not vouch for this technique for markets other than the 41440S&P 500 intraday. However, it would appear that it should work for ih | 41499any market. Using forty bars ensures that in most instances you will | iI by thy tise
. i, . rfbe trading hooks when a market is trending. | La ry i ize+t iTMoving Average Bands hen Ft My | “aeJ" Sap Sin with
For those who wish to trade this way but do not have access \ Yeltrer Channel tne4180
to the Keltner channel, there is another solution.
 
247
246
 Although they are not precisely the same, the two channels areclose enough for purposes of trading. Whether you use the KeltnerChannel or Moving Average Bands, you adjust the size of thechannel to suit your own comfort level. You don't want them sonarrow that you are taking too many trades. You don't want themso far apart that you are hardly ever trading.
From time to time due to changes in market volatility, you mayneed to change the setting for either one.
You might also want to change the settings or the time frameso that you are more comfortable with them.
248
 
 
 
 
Chapter 15A Neat Trick
In this chapter, I'm going to show you a neat trick that willenable you to give a trade more room. Ina sense, it allows you toset a "free" stop.
The strategy revolves around recognizing a 1-2-3 high or low.
The reason I'm showing it in this book is because it fits in well
with trading the Ross hook.
SMH DAILY
Here we see a classic basing action as evidenced by a 1-2-3 low.Our ob jective for the strategy I want to employ is to be able toplace our protective stop below the number 3 point and possiblyeven below the nunber 1 point.
|!loss on our hands if our stop is taken out?
ty
 
249
1988189818881878186818581848183818281818
17981778SMH DAILY
Here we see a classic basing action as evidenced by a 1-2-3 low,| our ob ject ive f or the strategy I want to employ is to be able to
place our protective stop below the number 3 point and
even below the number 1 point. po Possibly
| loss on our hands if our stop is taken out “ean meive
  
" wil
OcT NOU DEC
This typical basing action we see in the Soymeal chart usuallyforms a 1-2-3 low. Earlier in the book | described the fundamentalsthat cause such a formation to occur. Now we have an opportunityto take advantage of that knowledge.
You will recall that the number 1 point is created when thereare simply no more sellers in the market. Prices are so low thatsuppliers are not willing to bring their product to market at theseprices.
250
 
SMH DAILY
Here we see a classic basing action as evidenced by a 1-2-3 low.Our ob jective for the strategy I want to employ is to be able toplace our protective stop below the number 3 point and possiblyeven below the number 1 point.
| th
h The question is, hou can we do that and yet not have an expensive
 
srt lietee Hit ni
oct nov DEC JAN
 
Consequently, buying comes into the market because pricesare low, and supply is drying up. The only people left in the marketare buyers. Some of these buyers buy for fundamental reasons asthey are consumers of the product looking for a bargain. Otherbuyers do so because of technical reasons. When they see thatprices are starting to rise, they enter the market to take advantageof what appears to be a bear market rally, or correction of some
sort.
Subsequently, prices move up to the number 2 point due tobuying entering the market.
251
1988
1718169816881676
1658Being the smart traders that we are(?), we know that as pricesrise from the initial number 1 point, soon some of the techniciansand short term traders are going to take profits. To accomplish that,they will have to sell.
When they sell, those traders who are still bearish and viewthis upmove as a bear market rally will join in and sell too. This willdrive prices downward.
 
Now, here's what we will do. When we realize that the initialupthrust is over, and that the market is ready to turn toward thenumber 3 point (which may even result in a continuation of thedowntrend), we will sell short, and attempt to scalp a piece of themarket by staying short with a profit objective of 50% of the initialupthrust.
  
How we know when the initial upthrust is over? As pricesmove up, we place sell stops beneath the lows of each day. Ifour stop is hit, we will place a profit taking objective stop at a pointequal to 50% of the leg up.
 
This strategy will result in a counter trend trade on our part. Ifwe manage the trade and our money properly, we will seldom behurt by this tactic.
As always, we must use one contract set to cover costs. Wecannot think of taking profits until we have done that. If we canafford it, we will take another small profit at a distance of 1/3 of theinitial upthrust. If you are dead set on being a Fibonacci trader, youcan try for a small profit at a distance of.382 of the initial upthrust.Our final profit, after pulling up to breakeven, will be when priceshave moved a full 50% of the distance of the initial upthrust.
If we have an account that can afford only two contracts, we
must cover costs and then hope for a 50% retracement. As soon aspossible, move the stop to 1/3 the distance of the initial upthrust.
252
 
 
We are not in this trade to make scads of money. If pricescontinue down past the number 1 point, we must not grieve overprofits missed. Once prices have retraced 75% or more, we canattempt to short the market ahead of the hook that will have beenleft at the number 1 point.
If we do make money, we can use this money to enable us toset our stop further away from the price action.
Why would we want to do this? Because if a large 1-2-3bottom is being made, it signifies an eventual long term trend to theupside. We can add the money earned from our scalp to the amountwe would normally risk on this trade, and more comfortably tradewith a natural support point stop.
out.SMH DAILY
. 1988
The distance from the low at point 1 to the high at point 2 is 1898
98 ticks. Once ve see that the upthrust is more than 3 bars in 1888length, we start trying to sell a breakout of each low. 1878
This is done fairly safely on a sell stop, although to be very 1868t! conservative you can use a limit or an “or better” order. 1858
fis soon as ue can,we cover costs. Next, we take a small profit at 18301/3 the | distance of the up move - 38 ticks. Finally ve take a 4828
final profit at 1/2 the distance of the up move ~ 45 1818
Let's look at a few charts to see how this would have worked |th ticks. oy
 
oct NOU
 In the preceding example, the actual amount of the
retracement was 65 ticks. The approximate amount we could have
made was 75 ticks. We would then have 75 ticks of "free" money
to play with for our long term stop placement.
Now let's see how that would have worked out in actualpractice.SMH DAILY
The point of the Ross hook was at 1758. That means we would havetried to enter the trade, at the latest, at 1759. 1759 is the actualbreakout point.
1759, less the 75 “free” ticks, would place the stop at 1684. TheH number 3 natural support point is at 1691.
\
  
oct NOU DEC JAN
If we were willing to place the stop at the amount of volatility
19881898188818781868185818481838182818181888129817881778176817581748173817281718178816981688167616681658
plus the "free" ticks, we could place the stop even further back than
1684.
In this case, we can comfortably place the stop at 1690, onetick below natural support. If we are stopped out there, we are
really not hurting. We may be a bit disappointed, but there has been
no harm done to our account.
254
 
Let's look at a few more of these situations.
SH DAILY
oct
Looking at the major 1-2 upthrust, we see that it has a distance of22 3/4 points. From the first breakout of a low in the upmove, we
vould first cover costs. Since our entry was beyond a one-thirdretracenent, ve would have liquidated the rest of our position at a
5% retracenent of the upmove from 1-2.
| i i ilWi
3. point
1
   
NOU DEC JAN
255
61886158612868986868683860085978594859185888585858285798576857385788567856485618558855585528549854685438 
CH DAILY
This chart gives an excellent example of a failed attempt and a successful 2688attempt. Subsequent to the 1-2 upthrust,we dd not make a low prior to 2678making the number three point. The market continues up but we know it has 2668to correct! We make a failed attempt to sell and cover costs on the bar 2658marked “f." At that point ve still have not yet had the 2648anticipated correction. Vhen it finally 2638
comes, it is a strong move and ue can <- vorst entryfulfill our strategy. level on 2628| Ieee ue 2618nissed breakout-» f her 2688because of gap 2558| open 2588{ | 2 <- support closer 2578| to price action 266| it 2558} stop based on 2548<-free” ticks. 2530{ os = Lr failed correction 2528| | resulting in small 61gi loss. 25882498| } 3° natural support 2488| 247824681 245824482438
   
oct NOU
The upmove from point 1 to point 2 is 11 points or 44 ticks.After taking a small hit on bar "f", the market retraces 8 1/2 pointsor 34 ticks to the number 3 point. After covering costs, we cantake a small profit at the 1/3 retracement or 15 ticks. We then takeour final profit at 22 ticks. That gives us 37 "free" ticks to add toour stop.
  
 
What about intraday charts, will it work there too? Yes it willbut you must make sure there is sufficient volatility to make theneeded ticks.
256
 
A good bet is to start with 120-minute charts and work yourway down. You can try 60-minute, 30-minute, and even smallerintervals. Following the tick banking strategy, you can even use 5-minute charts in the S&P. But be careful because a 5-minute S&Pcan be very fast.Chapter 16
Bollinger Bands for Filtering Hooks
In this chapter I'm going to show you how to use BollingerBands for filtering Ross hooks. | believe the Bollinger Band studyalone is sufficient reason for purchasing a computer if you don'talready have one. If you do, and your software does not haveBollinger Bands, contact your software vendor and strongly requestits inclusion in the next update version.
The method I'm going to show you here is so good, | almosthate to part with it. But in keeping with my purpose of sharing whathas been so good for me, get set for something special.
 
According to the information | have, Bollinger Bands are bandsthat vary in distance from a moving average as a function of themarket's volatility. A simple twenty period moving average of theclose is used as the center line. Moving bands are calculatedconcurrent with the moving average and placed two standarddeviations above and below the center line.
| feel that trading bands are one of the most useful concepts intechnical trading that have come along in a great while.
The formula as | have it is:AV(erage) = the SUM OF THE LAST N PRICES/NDEV{iation) = (PRICE - AV) 2M(ean) D(eviation) = SUM OF DEViiations)/NS(tandard) D(eviation) = SQRT(MD)BOLLINGER = AV + 2(SD)The way Bollinger Bands are normally used is that sharp moves
tend to occur after the bands contract towards the center line.
258
 
A move outside the bands usually means continuation of thetrend, not an end to it. (I tend to partially disagree with that.)
Bottoms made outside the bands followed by bottoms madeinside the bands call for upward reversals of trend. Tops madeoutside the bands followed by tops made inside the bands call fordownward reversals of trend.
A move originating at one band tends to go all the way to theother band. This tendency enables you to project a price objectivefor such moves.
Now, let's look at the way I use these bands to trade the Ross
hook.
This next series of charts should be a real eye opener.BP H DAILY y28,2
Ve begin with a chart that’s not so easy \to see. I’ll label the overall picture
as I view it. Later we’ll see charts | {
that are very clear.
        
take next/break-
  
Prices havebeen mostlyin the lower channel so we do not takea breakout of the Rh.
   
1888818768186881858818488183881828816168188881798817888177881768817588174881738817288171881788816988168881676816688165881648816388BP H DAILY y28,2
Ve begin with a chart that’s not so easyto see. I'll label the overall pictureas I view it. Later we'll see chartsthat are very clear.
          
  
Prices havebeen most lyin the lower channel so we do not takea breakout of the Rh.
  
 
JAN FEB
  
We see an overall 1-2-3 formation followed by a breakout andformation of a Ross hook. Then prices take out the Ross hook.Should we trade that breakout? No! Why? Because prices need tobe almost entirely in the upper channel prior to our attempt.
Prices then fall back to make another hook. Should we tradethat breakout? Yes? Why? Because prices have been entirely inthe upper channel.
Don't forget, you can use the Trader's Trick on any of these toget in early. Although | won't be showing it, you can also use theStudy or CCI for additional confirmation if you have the need.
Bear with me, you'll get used to spotting these.
260
1888818788186881858818488
1828818188188881798817888177881768817568174881738817268171881768816988168801676816688165881648816388
 
CD H DAILY y28,2
   
<- No! Priceswere nostlyin upperchannel,
  
FEB
We want to take the hooks when prices are predominately inone channel. We don't want prices to be criss-crossing the centerband to the outer band on the opposite side of our trade.
We wouldn't take the last hook because of the gap opening.But we also wouldn't take it because prior to the enormous gapdown, prices were mostly in the upper channel and near the center
line.
261
874887.8?868668864862|86a!8588856)854852!8588848846)844842884aJY H DAILY y28,2
It’s okay to take breakouts of the number two point if pricesstay in the upper channel.
82888248826881688128a888488888796879287888784878887768722876887648768875687528748874487488736873287288
 
If you would like to take the breakouts of the number 2 pointprior to the hook, it's okay. Just make sure prices have beenpredominately in the upper channel.
Personally, | do not take the 1-2-3's when I'm trading Rosshooks.
262
“
ae: ey NS RIC i so
   
SF2H DAILY y28,2
74487488736873287288724872887168712870887048768869686928688868486888676867286688664866886568652864886448
 
wl
oct nov DES JAN FEB
   
Sometimes you have to view 1-2-3's in context of their overallpattern. This one wasn't very clear. The bar labeled "ouch" tookout an Rh (not labeled). Depending upon where your stops were andwhether you entered that last Rh, you were hurt only a little or a lot.
 
When you're trading you never win them all. Obviously, daytraders with live data could have done better here.
2636C J DAILY y28,2
If prices vere to suddenly take out the Ross hook to the upside, you wouldnot trade it now, However, if prices vere to begin to accumulate mostlyin the upper channe], you couldbuy a breakout.
   
<- No for now,
 
FEB
We wouldn't take the trade NOW because prices have notaccumulated in the upper channel. Taking the trade now would begoing against the trend. The odds are overwhelmingly againstsuccess. Prices are at the upper band of the channel and the trendof the upper band has been steeply down. If prices wouldaccumulate in the upper channel, the upper band would turn as it'sstarting to do. Another bar or two in the upper channel and theopportunity would change to a good one. A take out of the Rh atthis point may do nothing more than confirm the congestion.
38253818
3658367536683645363836153688388538783855354838253518349534883653458
             
 
 
y28,2
Whenever there is a congestionarea follouing a Ross hook, veuse the lous (highs) of thecongestion for the TTE. In thecongestion situation delineatedbelou, the TTE occurred on thesnall bar marked “E" as pricestook out the line demarcatingthe trend of the lous of thecongestion area.
    
I nissed this nove becauseof the gap opening. C’est lavie.
But notice, the congestionsubsequent to the hook yieldsa nice correction, therebyvalidating an entry via a TTEor a trade-through breakout ofthe hook itself.
   
RhNo! Gap opening ~: Hooks close
together.
<- Not
     
DEC JAN FEB
 
On the above chart, a congestion area is delineated by theupward slanting lines. It qualifies as a congestion area due to thealternating bars in which opens and closes go from low to high and
 
high to low.
NOTE: When Ross hooks appear very close together, you areoften about to enter a major congestion, or you are going to get a
trend change.
265
10358183)181828181581018120518081995899a8ssogaa975897889658 |968895589588319408sg583398 |SEH DAILY y28,2
 
An important thing to realize when trading with the BollingerBands is that the price action takes precedence over the Bands.Once you have a tradable formation inside the bands, you trade it.
266
44254488
435843254308
4258422542884175415841254188482540584825468839753958392539883875385838253868
 
 
 
CL H DAILY y28,22358
2325
2258
2225
2288
2175
2158
2125
2188
2875
2858
2825
2888
1975
1958
1925
1988
1875
That last no 1858| is because 4975the previous 1988
high was1775b ter.1 above center 1758
1725
  
 
oct nou DEC JAN FEB
 
Remember, we want prices to be predominately below the
center line in order to consider going short on an Rh signal, unlessprice action gives us a tradable formation. In the case of that last
"no", we do not have a tradable formation.
267SPH DAILY
How’s this one for sensational?Too bad I don’t trade the dailyS&P chart.
I could’ve done it on the NYFE,but I didn’t. My trading has
plenty of could haves and should
haves’, but I didn’t.
268
       
JAN
  
4248842288428884188841688414884128841888408884068840408402884008839888396883948839288398883488838688384883826838868378883768837488
 
US H DAILY y28,2
No, because a good part of the nove wasbelou the center line. There vere 6 closes below
           
Yes, because prices were entirely abovethe center line, The indicated bar took outthe congestion.
What do I mean by when J say, “it took outthe congestion?”
There was a congestion area follouingthe second Rh. The high of the
congestion is too close to the Rh Ahto yield a TIE.
    
1Therefore, ve take a breakout of the hook itself, because that breakout
clears, “takes out" the congestion area,
cnn |
oct NOU DEC
  
269
3888
96169688951695889416
5768CC H DAILY y28,21
   
 
  
No because ofgap opening, 3
   
 
<-congest ionvait forbreakout
 
oct NOU FEB
On the upper part of the chart, notice that the upper band isfairly flat to rising. The upper band is not in a downtrend. Thelatest prices are mostly in the upper channel. A breakout of the Rhsignals an upside move as opposed to a correction.
Be patient, wait for a breakout of the lows at the right-handside of the chart. We would want to see a breakout of the lowestlow (the Rh) by about 3 ticks to be sure of the breakout. Anotherway to know if there is a continuation of the downtrend is if thebreakout is preceded by a strong down move or gap.
270
13681352134413361328132813121384129612881288127212641256124812481232122412161288128811921184117611681168
 
 
 
YX H.5 MIN y28,2
 
i,
  
On this chart there was 1-2-3 high prior to the first Ross hookshown. Unless you are in early on a stair-stepping market, it's bestto stay out of them using most trading techniques.
If you happen to get in early on the move, then maintain adistant stop and let the market run. It usually will run far longer
than you might expect.
Silver, from 1987 through 1991, stair-stepped in just thismanner. In Trading by the Book | showed how to trade this kind ofmarket under the subject of ledge trading.
271
2312523188
2275822788226752268822558SH DAILY
 
 
Hilo ttle
DEC JAN FEB
 
oct NOU
| didn't see any other moves on this chart, did you?
Hooks are best traded in trending markets.
272
y28,2
61886158612868586868683868885978594859185868585858285798576857385768567856485618558855585528549854685438
 
 
 
SH H DAILY y28,2
Because Soymeal trended nore than Soybeans,it traded much better.
     
HQ, most of the move vasbelou the center line.
    
crcl Ott
oct NOU DEC JAN FEB
273
198818981888
1868185818481838182818181888179817881778176817581248173817281718178816981688167816681658C2H DAILY y28,22688
267826682658264826382628261826882558258