4.4) 1200
Exit dateclosed at1130.80.
Long on close at1124.80,
Sl buy trigger
Stopped outon trailing stop.
75% trailing stopraised every time a newhigh for move has been made.
StochK (14,5)
10/28/04
11/11/04
11/26/04
FIGURE 5.1 Seasonal trigger for the S&P trade.Source: Courtesy of www.GenesisFT.com.
1190.7
1180
1170
1160
1150
1140
1130
1120
1110
1100
1090
100
75
62.95
50
25
0
(cid:2)
(cid:2)
strategy was to close out the trade on the close of trading 11/1/04, theexit date.
RESULT: 6.00 proﬁt (× $250 for the dollar value of the proﬁt).
Two units. If the trade was entered in units of two, then the 6.00 proﬁtwas taken on the exit date and the remaining one-half of the positionwas held using a trailing stop of 75 percent. This means that we werewilling to give up no more than 25 percent of the proﬁt. The stop wasraised every time a new high was made. The second unit would havebeen closed out at about 1,170 for a considerably higher proﬁt than theﬁrst unit.Three units. If the trade was entered using three units, then one unitwould have been closed out at the average proﬁt per trade. However,the average proﬁt per trade was not achieved by the exit date. As aresult, two units were closed out on the close of trading on the exit dateand a trailing stop of 75 percent would have been used.
SOME IMPORTANT DETAILS
There are some important details that you must remember when imple-menting the seasonal trading strategy discussed in these ﬁrst ﬁve lessons.Far too many traders make careless mistakes. Such mistakes are unaccept-able. It is hard enough to make money in the markets. There is no reasonto make it more difﬁcult by making careless mistakes.
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TABLE 5.1 The Seasonal Trade Setup in S&P Futures
Long Dec S&P
Enter:10/27
Exit:11/1
Stop %:1.50
P/L Ratio:211.6
Trade#121731308
ContractYear
Date In
Price In
DateOut
PriceOut
Proﬁt/Loss
19821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004
27-Oct27-Oct29-Oct28-Oct27-Oct27-Oct27-Oct27-Oct29-Oct28-Oct27-Oct27-Oct27-Oct27-Oct28-Oct27-Oct27-Oct27-Oct27-Oct29-Oct28-Oct27-Oct27-Oct
135.2167.15167.6188.1239.2228.6279.25337.2304390.6418465.7467.2583.5700.358741074.51305.514011073
891.81030.71124.8
1-Nov1-Nov1-Nov1-Nov3-Nov2-Nov1-Nov1-Nov1-Nov1-Nov2-Nov1-Nov1-Nov1-Nov1-Nov3-Nov2-Nov1-Nov1-Nov1-Nov1-Nov3-Nov1-Nov
137.45165.6170.4191.2245.95257.75280.15343.3308.45391.8422.05469.45469.15588.25706.5945.71121.21362.514311082
898.51054.21130.8
2.25−1.552.83.16.7529.150.96.14.451.24.053.751.954.756.15
71.746.7573096.723.56
Total
2.250.73.56.613.3542.543.449.553.9555.1559.262.9564.969.6575.8147.5194.2251.2281.2290.2296.9320.4326.4
Trades:23
Avg. Proﬁt:14.9068
Winners:22
Avg. Loss:−1.55
Losers:1
% Avg. Proﬁt:
2.35
% Winners:95.65
% Avg. Loss:−0.92
Daily PF:2.9813
Bottom
of Form
(cid:2)
When entering a seasonal trade and exiting a seasonal trade on the entryand exit dates do so on the close of trading. This is usually achievedby using a market-on-close (MOC) order. Some traders do not like touse such orders since they believe that bad price executions will be theresult. In my experience, it can work both ways—sometimes the ﬁllswill be better, sometimes worse. Most often they are reasonable. If youdo not want to use a market-on-close order, then you will have to placeyour orders as market orders in sufﬁcient time to be ﬁlled.
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(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
Trailing stop orders are limit orders (i.e., orders at a speciﬁc price). Inother words, they are not MOC orders.Stop-losses are stop-close-only orders (SCO). Some traders do not likethese orders because they feel that they result in bad price executions.I disagree.If a market is closed on the ideal day of entry or exit, then the trade isexecuted on the close of trading the next business day.If you are uncertain as to whether a trade will trigger on the ideal entrydate, then wait until the close of trading to see if there has been a triggerand if there has been one enter on the open the next day.Allow a 15 percent leeway of the length of the trade after the ideal entrydate. Round off all decimals to the next highest day. In other words, ifa trade enters on 6/10 and exits 6/20 then the length is 10 days. A 15percent window is 1.5 days, which rounds up to 2 days.The SI indicator I use is based on the calculations from my GenesisNavigator software. Because there are many different ways in whichthe SI is calculated, you may get slightly different numbers if you usea program other than Genesis to get your SI trigger values. There isnothing that I can suggest to you other than using Genesis. You canlearn about the Genesis Navigator charting software at the company’swebsite, http://www.gfds.com.
In a future lesson, I will teach you the Parabolic trading stop because
it can be used with other methods.
PRACTICE, PRACTICE, PRACTICE
The most important thing you can do once you have learned the seasonalmethod is to practice. I strongly suggest that you practice at least 20 tradeson paper until you feel comfortable with the method. You can go backinto the history at SeasonalTrader.com and see how the trades would haveturned out using historical price charts.
REVIEW
Congratulations. You have now completed the ﬁrst method on your road totrading mastery. In this lesson you learned how to follow-through on sea-sonal setup and trigger trades using several different strategies dependingon position size. In Lesson 6, we begin a new method. The quiz this time ismore extensive. Please take your time with it.
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LESSON 5 QUIZ
Instructions: This quiz is different from those in the last four lessons. Pleasetake your time with this one and refer to and use Table 5.2 as needed inresponding to the questions.
TABLE 5.2 The Seasonal Trade in S&P Futures
Stop %:1.50
P/L Ratio:211.6
Trade#121731308
PriceOut
Proﬁt/Loss
Total
Long Dec S&P
Enter:10/27
ContractYear
Date In
Price In
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
27-Oct
27-Oct
29-Oct
28-Oct
27-Oct
27-Oct
27-Oct
27-Oct
29-Oct
28-Oct
27-Oct
27-Oct
27-Oct
27-Oct
28-Oct
27-Oct
27-Oct
27-Oct
27-Oct
29-Oct
28-Oct
27-Oct
27-Oct
135.2
167.15
167.6
188.1
239.2
228.6
279.25
337.2
304
390.6
418
465.7
467.2
583.5
700.35
874
1074.5
1305.5
1401
1073
891.8
1030.7
1124.8
Exit:11/1
DateOut
1-Nov
1-Nov
1-Nov
1-Nov
3-Nov
2-Nov
1-Nov
1-Nov
1-Nov
1-Nov
2-Nov
1-Nov
1-Nov
1-Nov
1-Nov
3-Nov
137.45
165.6
170.4
191.2
245.95
2.25−1.552.8
3.1
6.75
257.75
29.15
280.15
343.3
308.45
391.8
422.05
469.45
469.15
588.25
706.5
945.7
0.9
6.1
4.45
1.2
4.05
3.75
1.95
4.75
6.15
71.7
46.7
57
30
9
6.7
23.5
2-Nov
1121.2
1-Nov
1362.5
1-Nov
1-Nov
1-Nov
1431
1082
898.5
3-Nov
1054.2
1-Nov
1130.8
6
2.25
0.7
3.5
6.6
13.35
42.5
43.4
49.5
53.95
55.15
59.2
62.95
64.9
69.65
75.8
147.5
194.2
251.2
281.2
290.2
296.9
320.4
326.4
Trades:23
Avg. Proﬁt:14.9068
Winners:22
Avg. Loss:−1.55
Losers:1
% Avg. Proﬁt:
2.35
% Winners:95.65
% Avg. Loss:−0.92
Daily PF:2.9813
Bottom
of Form
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1. The seasonal setup above meets:
A. All ﬁve factors for a valid setup.
B. Four of the ﬁve factors.
C. Three of the ﬁve factors.
D. None of the ﬁve factors.
2. The ideal seasonal follow up method trades in:
A. Units of two contracts.
B. One contract at a time.
C. Units of three contracts at a time.
D. Spread trades only.
3. Once a seasonal trade has reached its average proﬁt per trade:
A. You use a 15 percent trailing stop.
B. You initiate a spread position.
C. You look at the stochastic indicator for a new signal.
D. You raise your stop-loss to breakeven.
4. The correct way to enter a seasonal trade on the entry date is:
A. To use a market on close order.
B. Use a stop close only.
C. Use and MIT order.
D. Use an OCO order.
5. The trailing stop procedure on seasonal trades is:
A. Used once a trade has reached its seasonal exit date and remains
proﬁtable.
B. Not a good method.
C. Uses the stochastic indicator for short term trades.D. Is only used by short term speculators.
6. If a market is closed on the ideal date of entry for a seasonal trade then
entry occurs:
A. On the opening of business the next trading day.
B. Two days after the ideal entry date.C. On a 50 percent correction.
D. On the close of trading the next business day.
7. If a seasonal trade fails to trigger on the ideal entry date then:
A. You allow the trade 15 percent additional time based on the length of
the trade.
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B. The trade is canceled.
C. You enter a different trade available at SeasonalTrader.com.
D. You use an MOC order with the parabolic indicator.
8. The reason for holding a winning seasonal trade past the ideal exit date
is:
A. To be greedy.
B. To maximize proﬁt.
C. To avoid paying another commission.
D. To give the stochastic indicator an opportunity to change direction.
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L E S S O N 6, D A Y 6
Trading thePowerMomentumFormula (PMF)
I consider momentum to be one of the most effective, yet simple indi-
cators that a trader can use. The proper use of momentum (from thispoint on referred to as MOM) can yield a host of beneﬁts, not the leastof which is highly precise timing of market entry very close to signiﬁcantmarket turning points. This lesson introduces you to my understanding andapplication of MOM.
MOM provides the following information when used according to my
suggestions:
(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
An evaluation of market strength or weakness.An advance indication of a top or bottom.An advance indication of trend change.Bullish and bearish divergence.Timing trigger.Trade setup.Stop loss and proﬁt target.Trailing stop loss.
INTRODUCTION
MOM is a very simple indicator that is easily calculated. MOM is also knownas rate of change (ROC). Both are essentially the same indicator, but theyare derived using different mathematical processes. In order to calculatethe ﬁve-day MOM of a market, subtract today’s price from the price ﬁve daysago. The result is a ﬁve-day MOM. If today’s price is 50, and the price was
51
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30 DAYS TO MARKET MASTERY
60 ﬁve days ago, then the ﬁve-day MOM is −10. If today’s price is 50, andthe price ﬁve days ago was 40, then today’s ﬁve-day MOM would be +10.
MOM is a rate change indicator because it provides you with an idea oftrend strength. When MOM is moving down very quickly, it is an indicationthat prices are changing rapidly on the down side with large price moves.When MOM is rising rapidly, it is an indication that the market is trendingstrongly higher. MOM can be used as a trading indicator by applying someobjective rules.
NORMAL AND ABNORMAL RELATIONSHIPSBETWEEN MOM AND PRICE
The normal relationship between price and MOM is for them to exhibitparallel trends as well as similar times for highs and lows. They are “insynch” or coordinated most of the time; but when they are not (i.e., out ofphase), we can derive valuable information about market strength and/orweakness.
MOM versus price relationships is discussed in this chapter. First, I willillustrate some typical or popular applications of MOM for the purpose oftrading. I will show you some very effective applications of MOM whilestressing that these are merely applications and not systems. I believe thatthey have considerable potential. But they will require additional rules be-fore they can be considered systems. Remember that we will use the setup,trigger, and follow-through method previously discussed.Figures 6.1 and 6.2 show normal MOM relationships.
Abnormal Condition 1: Bearish MOM/PriceRelationship
Prices Move Higher as Momentum Moves Lower This is a very im-portant condition since it is one in which price and MOM diverge from oneanother. In other words they go in opposite directions. If momentum leadsprice and if MOM begins to decline while price is moving up then it’s a rea-sonable assumption that at some point in the future price will move down.Unless MOM takes a new direction up, prices are likely to move in thedirection of MOM. When the direction of prices and MOM begin to move inopposite directions, the market is telling us that a change in trend is likely.Please remember this rule. I will refer to it again and again.
Rising Price with Falling Momentum Tends to Precede a TopMomentum can be evaluated in any time frame. While most traders usemomentum divergence with daily price charts, some want to use weekly or
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Trading the Power Momentum Formula (PMF)
C-055: Corn CBT (Pit) Cont 1st (Daily bars)
www.GenesisFT.com07/26/2005 = 234^2 (+3^6)
D
Momentum (C,28)
B
C
A
53
265^0
260^0
255^0
250^0
245^0
240^0
235^0234^2
230^0
225^0
220^0
215^0
210^0
40
35
30
25
20
15
10
5
0
06/16/05
06/30/05
07/15/05
07/29/05
FIGURE 6.1 A normal relationship between price and MOM. As you can see frompoints A, B, and C, price and MOM were moving in unison, making highs and lowsat about the same time.Source: Courtesy of www.GenesisFT.com.
intraday charts. The rules of application are similar no matter what timeframe is being used.
Let’s look at a few charts that show this condition in various time frames.Figures 6.3 through 6.5 illustrate this important condition. Please take a fewminutes to examine my notes.
QQQQ: NASDAQ-100 Index Tracking Stk (Daily bars)
www.GenesisFT.com
07/08/2005 = 37.77 (+0.71)
38.5
3837.77
37.5
37
36.5
36
35.5
354
3.5
3
2.5
2
1.5
1
0.5
0
-0.4400
-1
Momentum (C,28)
05/12/05
05/26/05
06/10/05
06/24/05
FIGURE 6.2 Similar trends in price and MOM. This is a normal relationship. Asprices moved higher so did MOM. As prices moved lower, so did MOM.Source: Courtesy of www.GenesisFT.com.
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QQQQ: NASDAQ-100 Index Tracking Stk (Daily bars)
www.GenesisFT.com
07/26/2005 = 39.42 (+0.15)
D
C
A
B
Momentum (C,28)
40
39.539.42
39
38.5
38
37.5
37
36.5
36
35.5
4
3.5
3
2.5
21.72001.5
1
0.5
0
-0.5
-1
05/18/05
06/02/05
06/16/05
06/30/05
07/15/05
07/29/05
FIGURE 6.3 The Bearish MOM divergence pattern is clear here. Note that as pricewas making a high at point A, MOM was NOT making a new high at B. The simplerule here is this: If price at A is higher than price at D, while MOM at B is lower thanMOM at C, the pattern is BEARISH and a top is likely.Source: Courtesy of www.GenesisFT.com.
Abnormal Condition 2: Prices Move Lower whileMOM Moves Higher: Bullish Divergence
This is a critical condition because it is one in which price and MOM divergefrom one another in the opposite direction from the condition previouslydescribed (i.e., bearish divergence). In other words, they go in opposite
C-200512: Corn CBT (Pit) Dec 2005 (30 minute bars)
www.GenesisFT.com
7/26/05 11:24 = 245^0 (+3^4)
Momentum (C,28)
275^0
270^0
265^0
260^0
255^0
250^0
245^0
240^0
235^025
20
15
10
5
0.7500
-5
-10
-15
-20
-25
07/14/05
07/15/05
07/18/05
07/19/05
07/20/05
07/21/05
07/22/05
07/25/05
07/26/05
07/27/05
07/28/05
FIGURE 6.4 This bearish MOM divergence pattern developed on the 30-minuteintraday corn chart. Note that AFTER the pattern occurred the price declined sharplyand persistently for ﬁve days.Source: Courtesy of www.GenesisFT.com.
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DX-055: US Dollar Index Cont 1st (Daily bars)
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7/27/05 05:14 = 90.15 (+0.23)
Momentum (C,28)
05/19/05
06/03/05
06/17/05
07/01/05
07/18/05
08/01/05
55
91
90.15
89
88
87
86
85
84
5.5
5
4.5
4
3.5
3
2.5
2
1.5300
1
0.5
0
FIGURE 6.5 Bearish MOM divergence pattern in the dollar index futures. Thispattern is in the development stage. Remember that these patterns are setups. Theymust be triggered.Source: Courtesy of www.GenesisFT.com.
directions. If MOM leads price and if MOM begins to rise while price ismoving down, then it is a reasonable assumption that at some point in thefuture price will move up as it follows MOM. Unless MOM takes a new tackdown, prices eventually move in the direction of MOM.
As I stated earlier, when the direction of prices and MOM begin tomove in opposite directions, the market is telling us something importantabout its intended direction. And, we had better listen carefully. Here isanother simple rule to remember. Please do not forget this relationship aswell because I will refer to it frequently throughout this book.
Falling Price with Rising Momentum Tends to Precede a LowFigures 6.6 through 6.8 illustrate the bullish condition, which is described inthe ﬁgure captions that accompany them. Note again that the time frame ofthe charts, whether daily, weekly, or intraday, is not a factor when evaluatinga divergence setup, trigger, or follow-through. The PMF method can be usedfor stocks as well as futures.
RULES OF APPLICATION
Here are the rules for bullish and bearish MOM setups:
1. Examine the last 60 price bars. In other words, if you use a daily chart,then you will be looking for divergence over the last 60 trading days.
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SF-055: Swiss Franc (Pit) Cont 1st (Daily bars)
www.GenesisFT.com
07/26/2005 = 0.7734 (-0.0020)
0.84
0.83
0.82
0.81
0.8
0.79
0.78
0.77340.77
05/18/05
06/02/05
06/16/05
06/30/05
07/15/05
07/29/05
Momentum (C,28)
0
-0.005
-0.01
-0.015-0.0191
-0.025
-0.03
-0.035
-0.04
-0.045
-0.05
-0.055
FIGURE 6.6 A bullish MOM setup continues to develop. When you learn the triggerin the next lesson you will see that this market has already triggered a buy signal.Source: Courtesy of www.GenesisFT.com.
2. There must be at least six price bars inclusive in the pattern. By this Imean that between points A and D (including A and D in the count) theremust be six bars (see Figures 6.6 through 6.8).
3. If price low at A is lower than price low at D, while MOM at B is higher
than MOM at C, then you have a bullish MOM setup.
4. If price high at A is higher than price high at D, while MOM at B is lower
than MOM at C, then you have a bearish MOM setup.
C-055: Corn CBT (Pit) Cont 1st (Weekly bars)
www.GenesisFT.com
07/29/2005 = 234^2 (+0^6)
D
C
A
B
260^0
250^0
240^0
234^2230^0
220^0
210^0
200^0
190^0
503725
0
-25
-50
-75
-100
-125
Momentum (C,28)
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sep-05
Oct-05
FIGURE 6.7 A weekly bullish MOM setup in corn futures. Note that after the bullishsetup developed at points A through D the market moved consistently higher.Source: Courtesy of www.GenesisFT.com.
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MOT: Motorola (Monthly bars)
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07/29/2005 =