interday pricing and let the market dictate howlong we’re in any given trade, just as it dictates how long we’re inany  ranging  or  trending  modes.
Trending
The very best trades never go wrong. A wonderful reaffirmation ofthe  underlying  justice  of  the  world  (for  a  trader)  is  a  trade  that  isprofitable  thirty  seconds  after  it’s  put  on  and  never  looks  back.Most likely, it’s a trend trade, one associated with a steady advanceor  decline  in  pricing,  though  it  could  be  something  that  meandersin a slightly profitable zone.
A  one-note  trading  strategy  will  usually  find  this  situation  andride  it.  That’s  fine.  That’s  progress,  but  there’s  more  to  be  done.We’d like to extract every bit of profit that’s coming to us and theway  toward  that  in  a  trend  is  to  pile  on.  The  questions  are“Where?” and “When?”
Briefly,  “where”  means  continuously  during  the  advance  and“when” is when prices are cheap or dear during an advance or de-cline.  I  believe  these  verbal  rules  can  be  executed  objectively  byreferring  to  your  experience  with  the  market  and  Chapter  5  is  de-voted to this topic, but for now take it that a period of trending is atime  for  working,  not  just  waiting.
Not  that  waiting  is  bad.  It  was  LeF&vre15  who  said  he  mademost  of  his  money  waiting.  Once  you  have  your  positions,  you  do
I4   I  don’t  mention  monthly  data  because  I’ve  never  ND   into  anyone  actually  trad-ing  from  it.I5 Edwin LeFBvre,Management Associates,  1980),  p. 68. The full quote is “I want to tell you this: It
 Reminiscences of  a  Bock  Operator  (Burlington, Vt.: Fraser
Classic  Stages  19
wait.  However,  in  the  campaign  mode,  you  must  constantly  seeknew  positions  using  a  variety  of  entry  criteria.  Like  an  infantrycompany commander,  you’re  always patrolling your front, probing.During a trend, it’s the same.
Breaking  Oui
Actually  getting  to  a  trend  from  a  trading  range  is  a  little  tough.First  of  all,  under  my  scheme,  you’ve  been  trading  back  into  therange, so to get right with the new trend you have to take a loss andreverse.
Perhaps more difficult (because the trade could be executed me-chanically  by  an  executing  broker)  is  reversing  your  mindset.   Iwon’t dwell on psychology in this book (though I’m not above re-ferring to the phenomena all traders  know),16  but you should knowthat  it’s  because  I  found  it  nearly  impossible  to  decisively  reversemy  own  opinion  that  I  had  to  develop  a  trading  system  that  couldbe  mechanically  implemented.  I’m  in  awe  of  traders  who  can,  ontheir  internal  fortitude,  see  they’re  wrong  and  get  right.  I  found  outearly  that  I  wasn’t  one  of  them,  and  just  about  everything  you  seein  this  book  is  the  result  of  an  effort  to  get  my  snap  judgment  outof the way of making money. I hope to show you a way where yourjudgment  in  analyzing  experience  can  lead  to  mechanical  rules  foranalysis  and  execution.
Perhaps reversing with a loss won’t seem so bad to you if you’vehad  the  good  fortune  to  be  trading  a  range  and  just  tradedprofitably  across  the  range  to  your  breakout  point.  If,  say,  yourrange is 90 points, you’ve built up a profit over what turned out to
never   was  my  thing  that  made  big  money  for  me.  It  always  was  my  sitting.  Gotthat?  My  sitting  tight!”I6  See  Jake  Bernstein,  The  Investor’s  Quotient,  2d  ed.  (New  York:  John  Wiley  &Sons,  Inc.,  1993)  for  as  good  a  treatise  on  trading  psychology  as  I’ve  seen.  Also,Alexander  Elder’s  mantra,  “I   am  a  trader.  I  have  it  within  me  to  do  great  harm  tomy  trading  account”  is  worth  keeping  in  mind.  See  Alex  Elder,  Tradingfor   o  Liv-ing  (New  York:  John  Wiley  &  Sons,  Inc.,  1993).
20  Campaigning
Classic  Stages  21
actually  be  the  start  of  a  trend  at  the  bottom  of  the  range.  If,  onthe other hand, you’ve just gone from a downtrend to an  uptrend,you  will  cash  in  your  profit  from  the  previous  trend  and  immedi-ately reinvest in the new move.
Adding Positions on the Trend
Once  we’re  into  a  trend  (and  the  best  early  indicator  is  the  entrytrade that never went bad), it’s time to add positions in the right di-rection. The best place is when prices are cheap or dear relative tothe advance or decline measure (in this book, a short, moving aver-age). Others use trend lines or trading bands. Waves of advance maybe  as  small  as  stairsteps  or  as  pronounced  as  retracements,  but  ifwe’re genuinely into a sustained advance the underlying channel canbe marked out using averages, trading bands, regressions, or trendlines.  I prefer averages, simply because they can’t go wrong and, inmy  experience,  they  have  been  consistent  over  the  past  12  years.
Use  an  average  that  skims  tops  and  bottoms  of  declines  or  ad-vances. You’ll probably find the length of the average is remarkablysimilar  to  the  cyclical  content  of  the  data  series.”  All  you  reallyneed to know, however, is that one characteristic or element of ex-perience that tends to define the trading channel for you during ad-vances or declines. You’re free to set it as tightly as you like. Justkeep in mind that when prices decline to an advancing average dur-ing a trend, your buy order will be waiting for them.
On the other side of the channel, prices will be genuinely frothy.If people are paying up or selling out at an extreme, prices must bedear  or  cheap.  If  dear,  let’s  sell  some  things  we  bought  cheaply;  ifcheap,  let’s  buy  some  things  we  sold  higher.  Caution:  Don’t  dropyour  underlying  position.  Whether  you’ve  kept  it  constant  sincetrend entry or have added to it, just squeeze out the add-on tradesyou took as the price fluctuated about its line of trend.
” John Ehlers: quoted in John Sweene): “Back to Averages,” Technical Analysis ofStocks and Commoditie.s
 (Seattle: Technical Analysis, I~c.~  April, 1991),  p. 98.
Ending  the  Trend
Just as I was not worried about the “optimal” trading rule, I’m notworried about your exit. As long as the exit rule is specified going in,we can observe the actual gains and losses from the trading strategy,which means we can control losses and thus end up winning.
It’s  unrealistic  to  shoot  for  the  top  price  in  an  uptrend.  That’snot going to happen except by a statistical fluke (the price extremeprobably  has  a  volume  of  one).  At  the  top,  as  all  along  the  way,traders  are  oscillating  about  some  changing  concept  of  value,searching  for  levels  that  will  generate  transactions.  Who  knowswhat  has  changed  in  the  fundamental  world,  if  anything?  You’reprobably not privy to it or aware of it. Folks who are privy wonderif  what’s  changed  will  make  a  difference.  The  uncertainty  is  re-solved  by  sheer  weight  of  numbers  and  the  timing  of  actions  takenby  disparate  traders.  When  that  weight  shows  itself  in  price  rever-sal, it’s time to act.
The  issue  for  the  campaigner  is  whether  the  reversal  is  simply  areaction  in  a  trend,  a  reversion  to  trading  range,  or  a  complete  re-versal  of  trend.  Only  the  price’s  action  can  ultimately  tell,  and  inthe  process  of  fighting  over  this  terrain,  more  tactical  loses  will  betaken,  eating  up  some  of  the  gains  from  the  trend.  The  basic  cluewill be violation of the theory we had before: that advancing trend-ing  prices  should  be  roughly  contained  along  the  lines  of  our  ad-vance,  whether  those  lines  are  trend  lines,  averages,  or  whatevermethod  you  use.  It  is  the  violation  of  the  previous  theory  that  tellsus change has occurred, not (or, rarely) fundamental news.
Reversing  the  Trend-Return  to  Ranging
Unless  you’re  trading  something  that  trends  with  the  economic  cy-cles (one reason I like currencies, rates, and indices), the most likelyoutcome after a trend is reversion to trading range activity, particu-larly  in  stocks  where  truly  new  information  is  scarce.  Having  nonew  ideas,  traders  pushing  the  price  around  are  unlikely  to  take  it
22  Campaigning
Summary 23
anywhere and newcomers to the issue are few. There’s simply a lackof  interest.
Once  the  trending  theory  has  been  violated,  the  question  iswhether  true  trend  reversal  or  range  trading  is  next.  Here  again,look  to  experience.  Study  the  typical  ranging  of  the  market  you’retrading. Bonds, if you had to pick a number, would probably flutterup  and  down  about  three  points.  At  the  bottom  of  this  expectedrange, we can take a low-loss stand. If correct, we have a great en-try into the range. If not, we have another trend (because both ourprevious trend theory and the range theory have been shown incor-rect)  into  which  we  reverse.
To  apply  concrete  rules  to  this  generic  approach  (and  therecould be many rules), we’ll simply use the price’s crossing and re-crossing  of  our  short-term  average.  Amplified  later.  we’ll  see  thatthis simple approach can find the ranges we seek.
ANOMALIES
Broadening  Ranges
One  experience  that  this  approach  cannot  handle  is  a  broadeningrange, one example of which came up in late 1994 (see Figure 1.7).A  broadening  range  is  simply  wider  and  wider  oscillations  about  apresumably  nonexistent  value  point,  Here;  it’s  gone  beyond  shoot-ing  for  stops  at  either  end  of  the  range  to  genuine  confusion  asmelee  after  melee  produces  higher  highs  and/or  lower  lows  withinthe  time  frame  we  trade.  At  each  extreme,  my  campaigner  will  re-verse  into  trend  mode  taking  a  loss,  only  to  reverse  back  into  therange  taking  another  loss.  Although  some  of  the  loss  will  be  madeup  traversing  the  range,  discipline  will  be  tested  severely  andfinancing  strained.
Fortunately,  broadening  ranges  are  rare.  There  is  no  protectionfrom  them  that  I  can  recommend,  and  we  must  trade  them-wemust  have  a  position  if  we  are  to  profit-with  the  financing  to  ab-sorb them.
FIGURE  1.7 BROADENING  RANGE.  The  trending-ranging  marketmodel breaks down when broadening chart formations occur. Here onepops up in late 1994.
SUMMARY
The  classic  campaign  was  one  of  accumulation  through  distribu-tion. A mass of longs or shorts was built up and then disbursed tothe crowd at more favorable prices. In the 1920s all the longs andshorts were held together analytically. No distinction was made be-tween  the  management  of  the  first  trade  and  the  management  ofthe  fifth,  which  was  brought  on  later,  sometimes  far  into  the  cam-paign.  Additional  trades  often  have  distinctive  characteristics  thatcan  be  observed,  categorized,  and  exploited.  It  makes  much  moresense  to  treat  them  this  way  than  to  pyramid  or  blindly  bump  upone’s  position.
In  contrast  to  the  old-style  campaign,  I  advocate  a  continuouscampaign  using  market  indicators  to  specify  the  mode  we’re  in,loss-control  techniques  to  generate  profitability  even  when  our
24  Campaigning
S u m m a r y   25
measuring  specific  experience  to  “mechanize”  the  definition  of  loss/reversal points. We need to find experience-based price levels wherestands  can  be  taken  with  minimal  loss  exposure  until  the  overalltrend or range becomes apparent. I say to measure the behavior ofthe  market  from  your  entry  points,  consistently  taken,  and  use  thatexperience as your guide.
Isn’t  this  w-hat  “experience”  has  been  for  centuries?  A  tradertakes  a  trade.  Something  happens,  He  takes  another.  Somethinghappens.  He  trades;  the  market  responds,  again  and  again.  In  hissubconscious  (or  in  his  trading  diary)  patterns  of  behavior  start  toform,  his  behavior  and  the  market’s  in  relation  to  his  entries.“Given  my  tactic,  this  is  what  happens  when  things  go  right,  thathappens  when  things  go  wrong, ”  he  mumbles  to  himself.  He  isn’tdoing  anything  glamorous,  just  accumulating  experience.
Is  it  realistic  to  think  that  something  of  this  real-world  experi-ence  can  be  captured  and  exploited  more  systematically?  Let  meshow  you  one  way.
trading  signals  aren’t  God-given,  and  varying  tactics  to  compoundour  position.
To  do  this,  the  first  innovation  is  measuring  everything  from  thepoint  of  entry  your  trading  rules  specify  for  the  market  modeyou’re  in.  This  puts  all  decisions  in  the  domain  of  price  movementfrom entry.
The second is the technique of measuring adverse excursion andfavorable excursion from the point of entry: how far winning tradesand losing trades go against you or for you. Measuring adverse ex-cursion  allows  you  to  manage  the  discrete  positions  accumulatedduring  a  campaign  of  trading.  This  way,  add-on  trades  in  a  trendwill  have  a  different  expectation  of  loss/gain/durationi8   than  thefirst  trend  trade.  More  generally,  each  tactic  of  the  campaign  willhave different trading characteristics that can be defined by the be-havior  of  the  trades  using  that  tactic,  behavior  that  is  characterizedusing the measurements of adverse and favorable excursion.
Everyone  trading,  particularly  those  adding  positions,  is  ner-vously aware that the market is constantly switching modes (or fak-ing  a  switch).  The  usual  response  is  to  sell  out  the  whole  buddingposition  on  the  first  adverse  twitch,  curtailing  profits.  Alternatively,nerves of steel are invoked to hold the position.
That  our  business  is  to  be  determined  by  the  emotional  stabilityof the trader is unacceptable. Instead, look at the characteristics ofthe trade taken: its price excursions, its rate of advance. and its du-ration.  These  characteristics  tell  you  what,  if  anything,  to  do  otherthan  wait.  Now  we  can  begin  to  manage  trades  quantitatively(though  not  formulaically),  a  practice  that  I  regard  as  a  major  stepforward  from  the  usual  bromides,  whatever  their  truth.
The Argument from Experience
In  this  book,  I  innovate  not  originate.  Practical  traders  have  hadthese  techniques  in  their  guts  for  centuries.  The  innovation  is  in
I8  Durafion as used here refers to the time of the trade, not  the  relation between abond’s price change and the change in its yield to maturity.
2Trading  the  Trend
bY!L
I  begin  with  trading  trends  because  it’s  the  idea  most  people  usewhen  campaigning:  getting  on  board  the  big  move.  For  our  pur-poses,  catching  the  trend  is  just  one  part  of  the  overall  campaign,albeit a major part, but catching a long move is clear in everyone’smind: we get in low or high, wait, ride it, and get out high or low.An  example  of  trading  a  trend  should  allow  me  to  introducesome other ideas I’ll use throughout the book. These ideas includefinding  time  horizons,  defining  market  modes  (trending  or  non-trending),  measuring  adverse  and  favorable  price  movement,  set-ting  stops,  and  managing  trades.  Each  of  these  is  easier  to  see  inthe context of a trend trade. Having seen them used within a trendtrade,  we  can  more  easily  apply  them  to  trades  in  trading  ranges,add-on 
trades.  or 
reversal 
trades.
TRENDS
Before  discussing  trading  ranges  or  trends,  we  should  really  dis-cuss  trends  that  go  nowhere,  as  well  as  those  that  go  somewhere.Here  I’m  using  “trend”  in  the  general  sense  of  prices  persistentlygoing  down,  up,  or  sideways.  This  isn’t  the  normal  approach,  sokeep it in mind. We ‘see’ a pattern when prices on a chart  persis-
27
28  Trading  the  Trend
Trends  29
I/
T i m e
TREND  TO  FLAT  TREND.  Our  term  “trend”  usually  refersFIGURE  2.1to  persistent  movement  up  or  down,  but  it  could  also   refer  to  persistentmovement  sideways.  A  trading  range  is  a  flat  trend.
tently   go  in  one  direction  rather  than  another.  This  ‘persistence’accounts  for  much  of  the  ‘behavior’  that  we  recognize  intuitivelywhen  looking  at  a  chart  and  many  of  the  ideas  people  have  fortrading. So  1  try  to  keep  in  mind  that  what  I  perceive  visually  andwhat  I  try  to  work  out  mathematically  may  not  be  the  same  thingat all (see Figure 2.1).
The  idea  of  trend  really  involves  the  ideas  of  persistency  andconsistency,  for  want  of  better  terms.  Let’s  call  the  direction  ofclzange   of  price  “consistency”  and  the  duration  of  that  consistentchange  “persistency.”  Just  as  Gann  would  reportedly  have  had  it,trend  is  perceived  by  the  attributes  of  price  (consistent  pricechange) and  time (continuing consistent price change).
That persistence’ involves time is the most difficult part for peo-ple  to  grasp,  but  it’s  easiest  to  just  imagine,  to  begin  with,  threeprice  bars  (Figure  2.2).  Unless  they  go  straight  up,  straight  down:or are completely flat. we don’t perceive trend (part 1).
Add a few more bars (more evidence, more time) and we applyconsistency visually (part 2). Add a few more bars (even more time)
’  Persistence  [MF  persister.  fr. L  persistere,  fr.  per-+  sistere]   to  take  a  stand.  standfirm;  to remain unchanged  or   fixed  in  a  specified  character,  condition,  or  position.Contrast  this  with  consistency:  reliability  or  uniformity  of  successive  results  orevents.
II’ ?-\ \‘? -
PERSISTENCE.  The 
FIGURE  2.2time  givesrise  to  our  perception  of  trend.  How  much  time  must  be  involved,  then,to  define  trend!
integration  of  events  with 
and  we  apply  even  more,  probably  broader,  consistency  (part  3),perhaps revising our earlier opinions. See how the mere passage oftime  necessarily  affects  our  opinion?  Not  just  that  another  daygives  us  another  price  bar,  but  the  linking  of  the  two  or  the  evolu-tion of price over time generates our perception.
Handling  this  perception  as  objectively  and  simply  as  possible,whether prices are going up, down, or sideways within the limits ofour  time  frame,  we’re  searching  for  and  trading  the  same  thing:consistent,  persistent  price  action,  either  flat  or  rising  and  falling.Instead  of  using  charts  or  fundamentals  such  as  lO&Ks   to  find  thissort  of  price  action,  we  use  quantitative  indicators  to  identify  thesecharacteristics.
Another point: since we’re always looking for the same thing, weend up trading the same way whether we’re in a trading range or atrend.  First,  we’ll  trade  in  the  direction  of  persistence;  then  we’lltry to add onto that basic trade; when that fails, we’ll try to reverseout  of  the  former  direction  of  price  movement.
30 Trading the Trend
Objective  Specification
The  practical  test  of  objectively  determining  trend  is  whether  thetechnique  can  be  programmed  to  find  solutions  that  look  good  inhindsight.  Ideally,  the  technique,  whatever  it  is,  will  be  practical  ona  day-to-day  basis.  Given  these  criteria  and  with  no  attempt  to  beinclusive of every idea out there, here are some of the ways peoplehave used computers to define trend:
1.  Drawing  trend  lines  on  charts.  The  simplest  definition  of  atrend  is  higher  highs  and  higher  lows  (or  vice  versa).  Trendlines  extend  this  idea  using  line.  That  is,  they  estimate  wherethe  higher  lows  would  be  in  an  uptrend   by  drawing  a  linesomewhere  along  the  lows  already  formed  and  extending  it.In a computer,  programs define pivot  points,*  track their rela-tive price level, and draw the trend lines.’ For an example, seeFigure  2.3.  And  they  can  even  define  trend  lines  for  us,  asshown in Figure 2.4.
2.  Defining  linear  regressions.  The  program  picks  up  from  thepoint  the  last  regression  broke  off  and  begins  a  new  regres-sion.  The  new  regression  continues  until  its  R2  starts  to  de-crease rather than  increase.4   Additional  tests  of  slope  can  beadded to this idea. For example, see Figure 2.5.
3.  Departures  from  probabilistic  paths.  In  these  techniques,short-term  estimates  of  probable  future  prices  are  definedeach  day  based  on  the  direction  and  range  of  prices  for  the
 is a high or low reached in the previous  n  days.  Another, older defini-z  Pivotpointtion  involves  the  floor  trader’s  expected  daily  support  and  resistance  levels  com-puted from the previous day’s OHLC values.3Exemplary programs: Personal Analyst by Trendsetter Software, (714) 547-5005,and Advanced Get by Trading Techniques (216) 645.0777.4 R2 is a measure of the fit of a line to a series of values. As new prices appear onthe chart and the regression is extended,  the~fit  will either increase or decrease. Ifit increases, the new value accords well with the old values and the trend is said tocontinue.  If  it  decreases  the  trend  may  be  breaking  off.  I  heard  this  idea  fromJohn Ehlers, who used it in some of~his  early software.
FIGURE  2.3 PIVOT  POINTS.  Advanced  Get  is  one  program  that  hasthe logic to select pivot points. These points are the starting gates formuch  further  analysis.
past n days. The price range is used to estimate the confidencelevel  of  the  forecast.  An  index  or  summary  of  the  n  days  ofpredictions  creates  a  consolidated  forecast  and  associatedconfidence  level.  Upon  excursion  outside  the  probable  range,a trend is declared and a new set of predictions begun, thesedefining  forecast  range  of  prices  above  or  below  current  lev-els. An excursion outside these levels calls for a trading rangeto  be  declared.
This  technique  is  custom-programmed  and  is  difficult  toshow in a diagram, but our only purpose at this point is to lista  number  of  ways  of  using  programming  techniques  to  defineprice  movement  as  trending  or  nontrending.
4. AI tests. Rule-based logic, often referring to price-based indi-cators,  is  employed  to  come  up  with  a  sequence  of  thought
32  Trading  the  Trend
Trends  33
FIGURE  2.4 DRAWING  TREND  LINES.  The  lines   drawn  by  PersonalAnalyst  might  not  be  those  you’d  draw  but  they  do  come  from  aconsistent set of rules.
REGRESSION.  Regression  lines  can  be  created
FIGURE  2.5mathematically  anywhere,  but  given  a  good  pivot  point,  a  trend  can  bedefined around one as long as RL  does not decrease significantly.
that  might  specify  trend  status.  AIQ5   is  probably  the  mostprominent retail product to do  this.
5.  Neural  networks  are  trained  to  recognize  conditions  identi-fied  by  humans  as  trending.  A  number  of  neural-net  productsare available to traders6
6.  Cyclical  tests.  If  you  assume  a  market  that’s  not  cycling  istrending,  a  market  that  doesn’t  cross  its  trend  line’  (the  priceabout  which  it  is  cycling)  within  a  period  of  half  the  domi-
5 AIQ Incorporated, (702) 831-2999.6  At  this  writing,  probably  the  most  convenient  is  NeuroShellGroup,  Inc.,  (301)  662.7950.  More  difficult  to  use  but  working  further is  Stock  Prophet  by  Future  Wave  Software,  (310)  540-5373.’ Ehlers also developed this idea. In it, the~instantaneous trend line is the simpleaverage  of  the  prices,  but  the  averaging  period  changes  from  day  to  day  as  themeasured  dominant  cycle  varies.  That  is,  as  the  measured  cycle  expands  from,  say,12  days  to  20  days,  the  number  of  days   in  the  average  expands  from  12  to  20.
  2  by  Ward  Systemsin  advance
nant  cycle  is  trending.  This  can  all  be  determined  mathemati-cally  in  our  search  for  trend.  A  program  that  takes  this  ap-proach is MESA, as shown in Figure 2.6.
Most trend ideas, from line drawing to regression, need a start-ing  point.  The  virtue  of  the  cyclic  idea  is  that  it  doesn’t  need  astarting  point.  Instead,  it  constantly  searches  the  data  stream  forthe  strongest  cycle  present.  The  length  of  that  cycle  defines  thelook-back period and the length of the average to be used for thetrend line.
A