ERESES SSN Aas es
  
J and combination, as well as the fact
l that there were four consecutive le3 closes within the trading range of a 318measuring (the large) bar. HS4883465HO435
AUG SEP oct Nov DEC JAN
160
 
Another important realization to consider when setting a 50%trailing stop is the concept that markets retrace to the + 50% levelfairly often. This is often a self-fulfilling prophecy because so many |people believe in it. Be very aware of where the move started. Theretracement will often be from the inception of the move to the pointwhere the correction starts, not from where you entered the marketto the point where the correction starts.
 
If your 50% trailing stop is in the pathway of a 50%correction, it is virtually sure to be hit. Therefore, try to wait untilthe market has made a correction from the current leg before youbegin to trail a 50% stop.
161Chapter 12
Filtering the Ross Hook
There are a number of way to filter trades. Many of them haveto do with the very same parameters that are taken intoconsideration when setting stops.
As a quick review, let's look at some of them.
1. The use of Stop Limit orders automatically eliminatessome trade entries because you are never filled.
2. Too much or too little volatility can keep you out of atrade. Too much volatility means you have to place your stopfurther away than is comfortable. Too little volatility arises whenprices are moving so little, as to give little or no promise ofmovement sufficient to cover costs and make a profit.
/ 3. Placement of stops at natural support and resistancepoints may keep you out of a trade. They may be too close or toofar.
4. Technical studies such as the Volatility Stop may keepyou from trading. They may call for your stop to be set too faraway for comfort, or too close to be practical. If you are using theVolatility Stop study, too little volatility occurs when the study failsto yield a number that is not outside the range of current prices.
   
5. The 3 x 3 MAC can keep you from entering a trade.It may not confirm the breakout.
6. Your choice of market(s) and time-frame in which totrade. Recalling that Ross hooks are intended to be traded intrending markets, the fact that a market is not trending in the time-frame in which you choose to trade will filter you out of the market.Therefore, it's vital for you to be able to identify congestion.Congestion, then, is also a filter.
 
162
 
All of these parameters have been covered previously. Theyare ways to filter trades. With proper implementation, you will enteronly the trades you want at a price you want. They are trades thatoccur in a trending market with an affordable stop protection level.They are trades having a reasonable expectation of covering costs
and making a profit.
There is a lot to keep in mind when trading. It involves workand thought. You must always be asking yourself if everything isright about a trade, and then take only the best trades. To me, thefiltering I've just talked about is fundamental to good trading. Itmeans you simply cannot take every trade that comes along. Itmeans you cannot trade too many markets simultaneously. Tradingmore than four to six markets at once is almost too much to bear. Itis over trading. Doing the work necessary for conservative filteringof trades is in itself a filter. You must select the best of the best
trades.
That means sitting down each day and poring over weekly anddaily charts to get market perspective. You must do that even ifyou are a daytrader. Getting the overall picture will filter out manyintraday trades, simply because perspective shows you thatelsewhere there are more likely candidates for a winning trade.
| suggest making yourself a checklist that asks the kinds ofquestions I've raised. Then strain each contemplated trade throughthe filter of your checklist. Ask yourself:
"Is the market trending?”"Can | identify congestion?”
"If | were to place my stop ‘here’ how would | feel if my stopwere hit?” "Could | stand either or both the pain or dollar loss?”
"If prices move with the same volatility with which they'vebeen moving, can | cover costs?" "Besides covering costs, is theresufficient momentum that | can also expect to make a profit?”
 
"Is this market giving better signals in another time frame?""Is it perhaps more liquid in another time frame?"
163"Where is the closest natural support or resistance?" "Is it tooclose or too far for comfort?"
Confirmation Filters
| want to make something perfectly clear! Although | havetraded and won with every one of the technical indicator techniquesthat will be shown in this and the next few chapters, | prefer totrade with only what | see on the bar chart. | do not normally usetechnical studies or indicators. In the chapter on plain vanilla tradingyou will see how | filter trades simply by reading what the bars aretelling me.
Much of the work done on the studies has come from mystudents who are willing to share their knowledge andexperimentation. There are no techniques contained in this bookthat have not been proven to be consistently successful. However,be forewarned that in trading, one person's success with a particulartechnical indicator study is often another person's failure using theidentical indicator. The distinction is in the deployment, discipline,management, and other ingredients that comprise the differencebetween the winning trader and the losing trader.
There are technical studies that can serve as confirmationfilters.
"Does the 3 x 3 MAC show containment?"
The 3 x 3 MAC is often important in deciding about tradeentry. The angle at which the 3 x 3 MAC changes direction, andthen begins to show containment, gives an excellent idea of themomentum behind the trade, Assuming containment of prices,when the angle formed by the 3 x 3 MAC's change of direction isbetween 45 and 65 degrees, this is indicative of a strong trend inthe making.
But there are better confirmation filters than the 3 x 3 MAC.One of these is the Commodity Channel Index (CCl).
164
 
When you write a book, you always want to include somethingthat few have ever seen. Something that makes the book unique.I'm going to do that right now. I'm going to show you how you canuse the CCI study in a way that few have seen before. I'll take it astep at a time. | want to be sure you follow what I'm going to do.
First, a bit of history.
introduced and developed by Donald Lambert, it was intended toreflect cycles in the market.
The CCI measures the mean deviation of today's Typical Pricerelative to N day's average Typical Price. Typical Price is computedas the high plus the low plus the close, divided by three. This givesa close-weighted Typical Price.
The number of bars to use (N) was selected according to thefutures cycle or half-cycle.
It was my friend Sandy Stith who introduced me to the CCIstudy. He has experimented with it for years. Others who tried ithave abandoned it as worthless.
Being the contrarian that | am, | wanted to make it work wherothers could not.
First, | realized that there was a potential error in the way cclis computed. In arriving at Typical Price, gaps were ignored. Inmost cases this didn't matter, but in some cases it made thedifference in whether or not | would take a trade.
It is my understanding that when the CCI was originally {|
Second, | realized that there was another possible error in theway CCl is constructed. CCl was supposed to show overbought andoversold within the futures’ cycle. It had three lines: + 100, 0, and-100. However it was theoretically, if not practically, infinitely |expandable. At what value would it be oversold or overbought?
165 |There was one great advantage to the scale. It wasincreasingly difficult for CCl to make ever greater extremes in itsreadings. It took more and more momentum to push the CCI plotfurther out on its scale.
| read about how you were supposed to buy when CCI crossedthe +100 line from below and how you were supposed to sell whenCCI crossed the -100 line from above.
Sandy Stith's work was of great help to me. He suggested a30-bar CCI. | tested it all the way to 50 bars and agreed that 30bars was best.
| then enlisted the help of my friend George Damusis whoprogrammed the Market Detective software package. Heconstructed the CCI so that it would reflect the true range of pricesto include the gaps.
Then | asked him to do something special. | asked him toprogram the CCI study so that it could be projected ahead to showwhere it might be tomorrow.
He did that for me in two different ways: 1.1 could ask theprogram what the price would be if the CCI were to have a certainvalue reading on its scale. 2. | could ask the program what thevalue of the CCI would be if the Typical Price tomorrow were X.
 
If you don't have software that will allow you to projecttomorrow's price bar, then | recommend either Market Detective orInvestograph Plus Special Edition/RT. They are the only programs |know that will do this projection. They are available only throughRoss Trading.
If you don't want to buy either of these programs, I'll showyou another way that you can use the CCI study. If you havesoftware that will let you insert tomorrow's Typical Price, then youcan do it with the software you already have. If you do inserttomorrow's Typical Price, be sure to erase the bar once you havewhat you need.
166
 
To insert tomorrow's price, you need to be able to create ahypothetical price bar for tomorrow, and place it in your data base.Once you have placed the hypothetical bar in the data base, thensimply run the CCI study with the hypothetical bar in place, and seewhat the reading will be.
The hypothetical bar need only have one price for all fields.The open, high, low, and close can all be a Typical Price, but youcan also insert a high and a low if you want to do the extra work.
How do you know what tomorrow's Typical Price might be?
I'll show you two ways to do it. Then, I'll show you how touse CCI with the Ross hook.
Figuring tomorrow's Typical Price in congestion has been doneessentially this way since the inception of floor trading. Each daythe floor traders come into the pit with these figures in hand. Theytend to sell at or near the typical high and buy at or near the typicallow. If either the high or the low are violated by more than a fewticks, you will see the floor traders bail out and run for their lives.This shows up on a chart as an extra long intraday bar.
 
Figuring Tomorrow's Typical Price In Congestion(Open + High + Low + 2(Close))/5 = X
2X-High = Tomorrow's Projected Low2X-Low = Tomorrow's Projected High
Example: (6023 + 6054 + 6000 + 2(6040)) /5 = 6031
Tomorrow's Projected LowTomorrow's Projected High
60086062
2(6031) - 60542(6031) - 6000
Tomorrow's Typical Price = (Tomorrow's Projected Low +Tomorrow's Projected High) / 2
(6008 + 6062) / 2 = 6035Figuring Tomorrow's Typical Price In a TrendTomorrow's Typical Price In an Uptrend.
To compute tomorrow's Typical Price in an uptrend, we needto find the average rate of ascent. It's important to use 3 bars forthis computation.
What we want to know is on average how much are pricesmoving in the direction of the uptrend. To find out, we measure
from low to high.Tomorrow’s typical price = 96-18,
96-27->) = Tomorrow’s projected high.
 
95-28->28732
<- 9§-18--------| —-—-.
Here are the steps to follow:
; 1. We measure from one day's low to the next day'shigh, to see how far prices move over a two day period. We do thisfor three overlapping two day periods. In the example shown wehad 28, 30, and 26/32nd's for each of the three periods.
We then add those together and divide by three.
28+ 30+ 26 = 84. 84/3 = 28/32 on average.
168
 
Adding 28/32 to the last known low, we obtain a number of96-27 for tomorrow's projected high. 95-31 + 28 = 96-27.
Next we need to determine tomorrow's projected low.
2. We measure the average volatility for the last threedays. Average volatility equals the sum of the differencesbetween high and low, divided by three.
We have 96-16 - 95-31, 96-08 - 95-22, and95-28 - 95-10.
The three differences are 17, 18, and 18.
Summing these and dividing by 3 = 53/3 = 17.6666 =18 (rounded).
Subtracting 18/32 from the projected high, we obtain anumber of 96-09 for tomorrows projected low. 96-27 - 18 =96-09.
The final step is to add the projected low and the projectedhigh and divide by two to come up with a Typical Price. In thiscase, (96-09 + 96-27) /2 = 96-18.
It's important to realize that this is not an exact science, butyou might be surprised how often we can come within a tick or twoof being right.
You can also compute the Typical Price differently bymeasuring from high to high to get the projected high.
To obtain the projected low, you would then do as we've justdone and subtract average volatility for three days from theprojected high.
A third idea is to also measure from close to close to come upwith a projected close. Then you could add the projected high +the projected low + the projected close and then divide by three tocome up with a close weighted Typical Price.
169 
I guess the ultimate would be to project an open and throwthat in there as well. Then you could substitute the four prices intothe formula | gave for finding Typical Price in a congestion.
The choice is yours. With today's software in many instancesbeing programmable by you, you can figure all the different waysand then take your choice.
Tomorrow's Typical Price In a Downtrend
To compute tomorrow's Typical Price in a downtrend, we needto find the average rate of descent. It's important to use 3 bars forthis computation.
What we want to know is on average how much are prices
moving in the direction of the downtrend. To find out, we measurefrom high to low.
48768 <> Here’s another way to look at it.
 
48619 —>) = Tomorrow’s projectedhigh.
49580 ->| = Tomorrow’s projectedlou.4959S = Tomorrow's typical price.
170
 
   
Here’s another way to look at it.
48638 \>'
48618 ->) =Tomorrow’s projectedhigh.
4e508 —>| = Tomorrow’s projected
low.48595 = Tomorrou’s typical price.
Here are the steps to follow:
1. We measure from one day's high to the next day'slow, to see how far prices move over a two day period. We dothis for three overlapping two day periods. In the exampleshown we had:
80, 60, and 65 for each of the three periods.
We then add those together and divide by three.
80 + 60 + 65 = 205/3 = 68.3333 = 70 (rounded up) onaverage.
Subtracting 70 from the last known high, we obtain a numberof 40580 for tomorrow's projected low. 40650 - 70 =
40580.
171Next we need to determine tomorrow's projected high.
 
2. We measure the average volatility for the last threedays. Average volatility equals the sum of the differencesbetween high and low, divided by three.
We have 40725 - 40680, 40695 - 40665, and40650 - 40630.
The three differences are, 45, 30, and 20.
Summing these and dividing by 3 = 95/3 = 31.6666= 30 (rounded).
Adding 30 to the projected low, we obtain a number of40610 for tomorrow's projected high. 40580 + 30 = 40610.
The final step is to add the projected low and the projectedhigh and divide by two to come up with a Typical Price. In thiscase, (40580 + 40610) / 2 = 40595 = tomorrow's Typical Price.
formula for the CCI it's as follows: .
172
 
Four steps to calculate CCI
“typical” price, using high, low, and close:
1. Compute today’s is sae LG)
2. Compute a moving average of the N most recent typical prices:
X= WF x
3. Compute the nean deviation of the N most recent typical prices?
 
 
CCI = Xr x)
Where:
N = number of days in the data base
X4 = today’s typical priceX2 = yesterday’s typical price
X3 = day before yesterday's typical price...Xy = eldest typical price in the data base
Nstands for the sun of the items following the symbolstarting with 1 and ending vith N, e.g.isaNX= Ky Xgt Xgee Xni=1
ignifies “absolute value”; differenceShould be added as if all were positive
numbers.
173If you think | have any idea of what all that mathematicalnotation means, you have another think coming, but it sure isimpressive. | had to take that to a mathematician to have ittranslated. To the best of my knowledge, CCI shows you therelationship (expressed as the mean deviation) of today’s TypicalPrice to a moving average of Typical Prices.
Now it's time to show you how to make money with thisconcept. The charts are going to look somewhat different as |switch to the Market Detective software.
Rules
1. Here are the rules we will use to filter the Ross hooksthrough the CCI: The CCI must either have passed through two ofthe visible horizontal (VH) lines (+ 100, 0, -100) prior to taking thehook, or it must be projectable that it will pass through two of thevisible lines. Any two visible lines will do: +100, 0, -100. OnceCCI has moved beyond the +100 line, we will take all Ross hooksthat occur, as modified by Rules 3-6.
2. Taking Ross hooks implies that we will, wherever possible,enter ahead of the hook by placing orders at correction extremes.We will also use the Trader's Trick for entries.
3. If taking out the point of a hook will not result in a tradablereading for CCI, we will not take a breakout of the hook. Tradablereadings are as follows:
CCI having moved from 0 to +100
CCI having moved from +100 to +150
CCI having moved from +150 to +175, or anyincrement of +25 thereafter, such as from +175 to
+ 200, or +200 to +225, on to infinity. Beyond +100,all lines are invisible.
4. With CCI at +150 or beyond, if CCI recrosses one invisibleline, it need only cross that same line again to be tradable.
174
i hued delpes
 
 
 
 
 
 
  
5. With CCI not having achieved a reading of +150, if CCIrecrosses one visible line, it must cross two lines (one visible and
one invisible) to be tradable.
6. If CCl recrosses any two visible lines, we will considerourselves back to the beginning, waiting for CCI to cross two visible
lines.
Following are some illustrations to help clarify the above rules.
175Rule 1
CCI nust have passed through tuo UH lines prior to taking thehook. or it must be projectable that it will pass through two VH lines.
 
 
     
 
+108 eaThrough tuo lines, Through tvo lines,+106 26. @ & +108.a -z >,Through tuo lines,8 & -100.Through tuo lines,-108 a8.—108\c
 
Rule 1
CCI must have passed through tuo UH lines prior to taking thehook. or it must be projectable that it will pass through two VH lines,
 
    
    
 
     
     
 
/+108 >Through one line, Through one line\ +188, and projectable @, and projectable\ to cross 6. to cross +108.e \ &\<\Through one line, — /@, and projectable\ \ te cross ~188- Through one line,-188, and projectable to\ cross 8.-168 t<
 
176
 
Rule 5
If CCI recrosse2 one VH line, it must cross tuo lines, one visibleand one invisible, in order to trade.
he Must cross +158
 
“a= . = or be projectable tocross. . . +158 before it is. . .* tradable.e .
 
. Must cross —158 orbe projectable to. cross -158 before it
+ + <-is trable.
Rule 6
If CCI recrosses +108 (a), it must cross both +108 (b> and +158 Cc).
If CCI recrosses any tuo lines, ve vill consider ourselves backto the beginning, waiting for CCI to cross two lines.
 
If CCI recrosses -188 (d), it must cross both —188 (e) and -158 (fF).
177Rule 6 You should be familiar with our old friend Crude Oil.
if CCI recrosses +188 (a), it must cross both +188 (b) and +158 (c).
5S Iie SFE linia
I {Ye want to know if we should use the Trader’s Trick here.
If CCI recrosses any tuo lines, ue will consider ourselves backto the beginning, waiting for CCI to cross two lines.
 
Ve look to see uhere CCI is now and if it hascrossed both @ and +188.
If CCI recrosses -108 (4), it must cross both —188 (a) and —158 (f).
 
 
 
0=2145 H=2168 L=2143 = C=2155
- We now have formed another hook. Since the CCI
fms been above 158, we will not take the TTE,unless by doing so the CCI reading will be+158 or greater.
WARNING:If that won’t do it, we'll see if taking outthe next higher bar will do the job.
The charts shown for CCI were created with the Market Detectiveprogram.
 
When CCI has been tested on other programs, the signals havediffered dramatically. However, the signals given by other programsproved to be valid within the context of those programs.
 
 
 
0=2171 H=2173 L=2162 C=2171
178 179
 cL G.D 82/91 918723 to 918931 /DECIMALY * |
This time, projecting a price atthe Trader’s Trick will not do theJob.
Instead, we have to project a price
rh [| that will take out the point of the1 tt | t : hook. We see from the projectionTt ;
  
cL G.D
  
Ve project that a Typical Price of2174, which represents a break-
: out of the previous high, will give us
iF a CCI reading of 162. This is
         
2168fr sufficient for us to attempt to buyat that price.
      
  
that a price of 2193 will give us
 
a CCI reading of 166.
 
a. YU \ : Ve can set a buy stop at 2193.: The oscillator shows the projection.
   
The computer has projected wherehe oscillator will be tomorrow.
   
   
 
 
 
           
  
C=2174 0=2178 H=2193 L=2178 C=2193
  
0=2174 H=2174 L=2174
| CCI has remained above +158, therefore
Once again we want to know if we should } ue can use the TTE if CCI recrosses +175.
<- take a breakout of the Trader’s Trick.
Since CCI has been above +158 and then below itagain,uve will project a price at which CCIwill be above 158.
et
 
 
 
0=2239 H=224? L=2238 C=2238
 
0=2174 H=2188 L=2167 C=2188
180 181
il If the doji high is taken out, we go long. |CCI is above +158 so we can attempt abreakout of the point of the hook.Notice that prices are too close to We want to know if we can use the ththe point of the hook to attempt Trader’s Trick at the snall congestion | Phanton barthe Trader’s Trick upon the recrossing area inmediately following the hook. ptt -'Leof +175. Between the lows of the congestion Rh->
and the point of the hook, there In this instance, we ask CCI
is sufficient room for us to what price it would take forcover costs. =, prt! it to reach a value of ~1.mili oy f The program projects the CCIft and a phantom price bar to
* Wrat HH. spall shou us what things would lookjud 1 like at CCI = -1.
 
 
 
0=2296 H=2386 L=2291 C=2386
CCI has now plunged below the +188line to a level of 95. CCI wouldnou have to recross the +168 lineand go to a level of 158 in orderfor us to consider trading thehook.
{ The projection was{i 1; right on the button.| We are short here.
fH j
 
  
 
0=2386 H=2386 L=2288 C=:
 
182 183. on the day of the big move up. A projection},has shoun that taking out the low of the yf 1. big up day will not !ig up day cause CCI to reach hr
1 tick below the lou of the bar nl!
ihe HY, {
ryt
|
 
ene ttl Loy
 
0=2228 H=2235 L=2192 C=2196
a s | o [ D i
 
  
 
    
Before ve can take the next Trader’s Hy fy {Trick, we have to know that taking {f ‘| | |out the low will cause CCI to move df | ptt Phanton
  
+f
 
CCI has recrossed the -188 line. alt
    
  
i ene
    
   
The projection tells us itvill be OK. fed~ Modyt a vfth Ettd Laurel if
 
184
 
ee
  
 
Prices begin their movetoward 2191.
 
 
=-12?0=2242 H=2245 L=2194 C=2282
 
fs they pass the Trader’s Trick point, ,CCI passes —158 and we are filled. {The next day forms another hook. d }A takeout of the low is too }close to the point of the hook i 4
to give us room to cover a
costs, We can put a mt
stop ihunder
Nek h W
 
 
0=2195 H=2282 L=2168 C=2163
185           
Prices take out the Rh and move yf
doun, Anew Rh is formed. Because |/ t
of the way prices close, there is if | {4
toon to try the Trader's Trick | ff
entry as marked by the arrow. if! iJ
      
          
CCI=-1520=2184 H=2122  L=2886 = C=2121
Prices move up on a gap. This takes CCIback above -158. We cannot use the TTEunless by taking out the indicated
entry point, CCI would again cross 1 fa ft
below the ~158 line, | UyThe projection shous that yy-158 would be reached only nl!at a takeout of the point |
+.
of the 5, iH
    
iy
       
  
 
        
  
0=2128
 
H=212?
 
L=2895 C=2897186
Prices continue their marchdownward forming another hook
41 aft
weww ae ; arytet
ny
CCI moves above -158 towards the -188 line. We cannotdo anything other than to project a price at which CCI will move
below ~158.
 
 
 
0=1983 H=1997 L=1959 C=1994
 
  
4-
At this point, prices have not yh { hy
reached a point that would 4 A J pu 4
bring CCI to -158. nth! afl,wa") shed tL
wr Myon! InitEven a takeout of the point of the hook will not do the job. li
Therefore we do not take this trade. It is espec ially importantto stick with our plan because CCI has already moved above the
-188 line by this time.
                        
    
1 4if ‘y
 
 
0=1958 H=1958 L=198S C=1912
187CL G.D
+ This is how this market ended up. As you can
+ taking out that last hook, CCI never recrossed -158.
pa2/91 918928 to 911238
HtIh,
see, it uent into a trading range shortly after
 
 
188
 
 
Chapter 13
Stochastics Filtering
Stochastics has probably become the most corrupted of alltechnical analysis studies.
Not only is the study named incorrectly, but its original formand usage have all but been forgotten. It is sometimes referred toas "stocastics," and elswhere as "stochastics."
However, a contemporary of mine, Mr. Richard Redmont, hasbeen kind