and the public bought a bill of goods. They were trappedinto an emotional buy, and the distributors of stocks or commodities most likely unloaded, on strength, to themasses.A specialists' buy trap is just the opposite. Look for a downtrending market that stabilizes sideways for5 to 10 days, then breaks out to the downside, with a naked close lower than all the daily lows of the tradingrange. In theory, you would think this would plummet prices much lower. The truth is it usually does. But,if a snapback takes place, lifting price above the true high of the break day, a market reversal has mostlikely occurred. All the sell stops below the market were triggered; the public started the breakdown and isnow afraid to buy the trend reversal.I am showing a few actual examples for your observation (Figures 7.18-7.25). The last chart is that ofExxon, a stock.
Figure 7.18 Comex Gold (daily bars). Graphed by the "Navigator"(Genesis Financial Data Services).
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A Vital Note-This Works on Shorter Time Frames as WellOver the years, I have seen many successful trades using these smash day and traps on 5-minute,30-minute, and hourly price charts of market activity. You very short-term traders will want to add this toyour intraday arsenal of trading techniques. These patterns represent excellent points of entry for short-termtraders. The key, though, is to make certain you have something else backing the trade, somethingsuggestive of the action you are taking, otherwise you are just using price to predict price. Your best tradeswill come from loading the trade with several qualifiers, not just a price structure.
Oops! This Is Not a MistakeIf there is any mistake to the pattern I am about to reveal, it is my mistake to go public with thispattern. It is the most reliable of all short-term patterns I have researched and traded. Numerous otherauthors and system developers have incorporated it in their work. A few (e.g., the highly talented LindaBradford
114Ratschke; Bruce Babcock, the critic's critic; and Jake Bernstein) have been honorable enough to give mecredit, whereas many more fail to or even claim credit for this pattern that I first taught to my followers in1978.The pattern is based on an overemotional response, then a quick reversal of the concomitantoverreaction of price. The overreaction is a large gap in price from last night's close to the next morning'sopening. The precise overreaction we are looking for to give us a buy signal is an opening that is below theprevious day's low. Such a rare occurrence indicates a potential market reversal. The setup is the extremeselling that causes people to panic with a rush of selling as price opens, so much so that price opens less thanthe prior day's range. This is a most unusual occurrence as price almost always opens within the prior day'srange.That is the setup. The entry comes when, following the lower open, price then rallies back to theprevious day's low. If the market can muster up enough strength to do that, most likely, the selling pressureshave been abated and a sharp market rally will follow.As you might suspect, a sell is just the opposite. You will be looking for an open greater than the prior day'shigh. The emotional response or setup is a huge amount of buying right on the open that causes a large gap,driving price above the prior high. Our entry then comes from price falling back to the prior high, telling usthe gap could not hold, giving us a strong shortterm suggestion of lower prices to come.The name Oops! comes from the price action as the public pitches their positions and sells short on theopening based on news, charts, and the like. For a moment, they appear to be on the right track, but about thetime price rallies back to the prior day's low, their broker calls to tell them price is moving against themusually saying something like, "Oops! We may have done the wrong thing [again], price is coming backpretty strong. Do you want to stay short?"By the time the collective public makes up their mind to now get out of the losing trade, price is aboveyesterday's low and their new buying or short covering adds momentum to the rally we positioned ourselvesfor. Figures 7.26 and 7.27 show how the Oops! signals will appear.Okay, now let's see how we might use this pattern as short-term traders. We can start with taking buysignals in the S&P 500 on any day of the week except Wednesday or Thursday, the days of the week weknow are most apt to lead to declines (see Figure 7.28). The results speak more loudly than anything I mightsay about this pattern: the 82 percent plus accuracy, $42,687 of profits, and a very large average profit pertrade of $438 are quite remarkable considering the trade usually lasts 11/2 days. That is, we buy today andare out on the opening tomorrow. The stop was a flat $2,000 loss. You may want to read about stops andexits (Chapter 11) to improve on what I am presenting here.
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Figure 7.26 The Oops! buy signal.
Figure 7.27 The Oops! sell signal.
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Figure 7.28 The Oops! pattern at work.
How about the Bond market? Here we will take long trades any day of the week except Wednesdayand a stop-loss of $1,800 from the point of entry. Our exit is the bailout technique, soon to be discussed. Asshown in Figure 7.29, the results here sure blow the random walk academicians out of the water and offtheir ivory towers with 86 percent accuracy, 527,875 profits, and a very nice average profit per trade of$201, after commissions of $50.On the sell side, the rules are to sell on Wednesday if our Oops! opening gap and failure occur. Since1990, there have been 55 trades with 31 winners netting $9,875 using a closer $1,000 stop and 4-day bailout
Figure 7.29 Using Oops! on bond trades.
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Figure 7.30 The results of the Oops! technique.
exit. In the S&Ps, the best day to sell has been Thursday, which shows 78 percent winners and $14,200 ofprofits. Check out the results as shown here to solidify the value of this technique (Figures 7.30 and 7.31).The most value will come, not from a mechanical rote approach to trading, but from using thistechnique with some intelligence or layered on top of a setup market. Here is one such example of this typeof thinking. The results in Figure 7.32 are derived from taking my Oops! buy signals in the
Figure 7.31 More results with the Oops! technique.
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Figure 7.32 Buying on any day but Thursdays with the Oops! technique.
Bonds on any day but Thursday if Friday's 9-day moving average is less than Thursday's. The entry is Oops!as taught. The exit is the close on the first profitable opening after 3 days in the trade: 81 percent of thesetrades made money, $24,625, in fact. Check out the high average profit per trade of $373. On the sell side,the results reflect taking Oops! sell signals on Wednesday if the 9-day average is greater on Tuesday thanMonday, which reflects an overbought market. These signals have been 79 percent accurate netting $13,406,and a surprising $394 profit per trade-not bad for a short-term trade, using the same rules as above for stopand exit as on the long trade (see Figure 7.33).
Figure 7.33 Oops! sells on Wednesday.
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S&P Oops! TradingThe same idea meets with success in trading the S&P; here the best buy days, given the oversoldcriteria as established by the 9-day trend, are Tuesday, Wednesday, and Friday. This combination shows 81percent accuracy and $22,650 of profits with an average profit, after losses, of $456, a remarkable feat forgetting in and out the same day (see Figure 7.34). The idea of the. 9-day moving average to set up the tradeis based on work by Joe Krutsinger, a protege of mine and avid system developer.The best sell in this market, using the 9-day overbought technique is to take sells on Wednesday tomake $18,962 with 89 percent accuracy on 35 trades (see Figure 7.35). The average profit of $486 pertrade drives home the validity of the approach.Now let's look at another way of using our Oops! entries in the S&P 500. For years, researchers havenoted that stock prices tend to rally around the first of the month. This sets up a perfect Oops! trade. Shouldthis pattern occur at the end of the month, and trading day after the 17th trading day of the month, ourpattern and the monthly influence come together. These are good trades!Knowing this end of the month rally spills into the next month, I tested taking all Oops! in Bonds afterthe first TDM through the 5th. The results are equally impressive. This combination setup is one of themost powerful shortterm trades you will find to consistently appear, month in and month out.Some observers may suggest we are curve-fitting things here by taking the Oops! signals only duringa limited window of opportunity.
Figure 7.34 Oops! buys in a down trend on Tuesday, Wednesday, and Friday.
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Figure 7.35 Oops! after the 17th trading day of the month.That could be, but let me hastily add I first became aware of this "window of opportunity" in 1962 when Iread Art Merrill's classic, The Behavior of Prices on Wall Street. I believe Merrill, a delightful, white-hairedgrandfather figure, was the first to note the rally tendency at this time and fully discussed it in his works.All I have done is add my Oops! entry, a reasonable stop and exit, to a known market bias. To the bestof my knowledge, no one noticed this same pattern or tendency exists in Bonds until 1988 when I revealed itto my students; so again, we have lots of out-of-sample experience. This is not a conclusion looking for apromise. Merrill and others, notably Norm Fosback and Glen Parker, have suggested the end-of-the-monthstock rally is due to mutual funds balancing and window-dressing their holdings. Once I discovered thatBonds rally at this time, I took the position that stocks rally not because of the funds but because of Bonds.As go Bonds, so go stocks. Always keep in mind Bonds (interest rates) are the dog that wag the tail, which isstocks.Virtually any time you have a bullish outlook or bias in the market, Oops! buys are worth taking, just asOops! sells are worth taking when you have a bearish outlook. This pattern works wonders, given anunderlying reason. It is the single best pattern I have discovered; enjoy it, treat it with care, use it withwisdom.
Chapter 8
Separating the Buyers from the Sellers
If it is true there is a buyer for every seller, how can prices move up and down?
Which came first, the chicken or the egg, the buyer or the seller I suppose this is the ultimate Zenkoan that speculators must answer before attaining enlightenment. On the surface, it seems prices shouldnever vary much if you must have a seller to give shares or contracts to a buyer. Shouldn't they balanceeach other out,.In a perfect world they would but this is an imperfect world and an even more imperfect game ofchance. Reality, as read in your daily newspaper or spoken in quotes from your broker, tells us prices domove, often wildly. The reason for price changes is not the amount of shares or contracts bought and sold;after all, they are matched. The reason price fluctuates, is thar one side, the buyer or the seller, blinks.In other words, one side in this equation wants to establish a position and will pay up, or sell down.The imbalance that causes price change is. not one of volume but of immediacy, the side that wants it andwants, it now, is the side that pushes prices higher or lower.
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122As mentioned, we can break down the amount of buying and selling that took place in a given day byusing the opening price. This chapter describes the elements of a trading system and approach I used to makemore than $1,000,000 in 1987.Consider this: each day the commodity opens for trading at a price established by an open outcry basedon the buy and sell orders that have built up overnight.On March 27, 1998, May Bellies opened at 46.20, traded down to a low at 45.95 and up to a high at48.60. Buyers were able to "push" prices 2.40 points above the open and .25 points below the opening. Wehave two swings here, the upswing of 2.40 points and a downswing of .2 5. Price closed for the day at 48.32up from the previous day's close at 46.40.The following charts show the greatest swing values marked off so you can visually see the actualworkings in a real market. Figure 8.1 is of Soybeans in March 1990. Each day you have a buy swing and asell swing. The direction of the close ± the open tells us which side won the battle. In this case, after theopen, a selling wave was established and price went down that .25 in Bellies amount; we then closedhigher. If the day after the up close, price moves more than .25 points below the opening, we have a new"amount" of sellers in the marketplace. Thus a sell signal may be in effect as we have drawn more sellersin today than yesterday.
Figure 8.1 Soybeans (daily bars). Graphed by the "Navigator"(Genesis Financial Data Services).
123We can take this a little further. If I add up all the open to low swings for the past few days, I have anaverage of the amount of selling swings that have taken place and suspect that any swing from today's openthat exceeds this average may be indicative of a sell signal.But hold on, it is a bit more complicated. To really get a handle on the sellers, you need to take thismeasure on just days that closed above the opening, as this swing value is the amount price could declinewithout triggering a down close day.By the same token, if you were to add up the swings from the open to the daily highs (on down closedays), you would arrive at the swing values the market could rally without setting off a wave of buyingresulting in an up close.
Greatest Swing ValueI call this concept "greatest swing value (GSV)." It can be used in many profitable ways. The morework you do with the concept, the more you will appreciate the logic of finding the upswings on down daysand downswings on up days. I categorize these swings as "failure swings": the market could swing thatmuch, yet not hold it or follow through, and then closed in the opposite direction.Let's look at some things you could do with these values. You could determine the average failureswings, say for the past few days, and use that as your entry added or subtracted to the next day's opening.Or how about taking all the failure swings for X number of days and then take one or two standarddeviations of that value added to the value to trigger your entry?I will start with a simple and profitable way of using these values for trading the Bond market. Myfirst step is to create a setup for the trade, as I don't want to trade on just one technical goody all by itselfMy setup will be an oversold market: prices have been declining so a rally of some sort should be in thefuture, and I am combining this with one of my prized possessions, the TDWs, as discussed earlier.In this case, the first part of the setup is to have today's close lower than the close 5 days ago,suggesting Yin may turn into Yang. I also want to limit my buying to only one of 3 days of the week; theyare Tuesday, Wednesday, and Friday.Once that part of the setup exists, I will take the difference from open to the high for each of the past 4days and divide that by 4 to get the average "buy swing." I want real proof the market is tracking in freshground, new territory, so I will be a buyer above the opening at an amount equal to 180 percent of the4-day swing value average.
124The sell signal is a mirror image in that I take the distance from the open to the low for each of the last 4days and divide by 4 to get the average. This is also multiplied by 180 percent and subtracted from theopening if the sell setup exits.The sell setup consists of Bonds closing greater than the close 6 days ago, and for even betterperformance, I would also like to see the price of Gold lower than the price of Gold 20 days ago.Whether long or short, my stop is $1,600. I will take profits on the first profitable opening after being inthe trade for 2 days. The results of this program from 1990 to 1998 are shown in Figure 8.2. As you can see,they are rather remarkable telling us the importance of setup criteria coupled with the greatest swing valueconcept. Frankly, I do not know of any Bond systems being sold by all the technical hot shots that can matchthese results.
Stock Index Trading with Greatest Swing ValueThe same basic formula works for trading the S&P 500. Again, we will take 180 percent of the 4-dayaverage buy swing value (the highs minus the opens) and, for sell, the 4-day average swing sell value (closesminus the lows). As you might suspect, the results can be dramatically improved by demanding Bonds closehigher than 15 days ago for a buy and lower than 15 days ago for a sell. Fundamentals do make a difference;don't let any frayed cuff chartist or fast-talking technician tell you otherwise. Our TDW filter will be to buyon Monday, Tuesday, or Wednesday. Shorts will be taken any day but Monday. The setup also consists of aclose lower than 6 days ago for a buy, higher than six days ago for a sell, giving us an overextended marketcondition.The results say it all, $105,675 of profits with 67 percent winning trades using a flat dollar stop of$2,500 and the bailout exit (Figure 8.3). Not as much money was made on the short side, but money wasmade; and considering the gargantuan bull market this took place within, the results are pretty good. Proofcomes from the average profit per trade of $427.
Better than It LooksThe results shown may also be considerably better than they appear. This is because my computersoftware does not allow us to bring into play a protective stop on the day of entry, that you can use inreal-time trading. Thus our real time trading stop is most likely going to be closer to the market than whatthe
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Figure 8.2 Greatest swing values in the bonds.
computer shows. In real-time trading, I will use a stop at or slightly above or below the open, once I am filledon a long or short.If price goes back there, after rallying the percentage of the swing value required to trigger a signal, themove we were playing for is questionable, we got a momentum run, but it didn't stick. In absence of thisstop, you certainly must have one taking out the low of the day, this would be a sure sign of failure, thusresulting in less loss than illustrated by the computer printout.
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Figure 8.3 Greatest Swing value at .80 in the S&P 500.
More Uses for the ConceptIhave also used this idea to help me when I am confused. If I am in a position and looking for a placeto exit, or maybe want to establish a position but do not have any clear-cut entry points, I will use the GSVto tell me when the current spate of buying/selling has been reversed. All I need to do is calculate the buyand sell swing values running the average as a tight stop or entry point.
127Intraday traders can use this value a bit differently. What many of them want to do (not me, though)is sell what should be an overbought area and, buy an oversold area. In this case, the GSV will tell youabout how far above the open you can sell, the largest failed value of the past few days, and then youwould place a stop and reverse slightly above that value. You would buy below the open a distance of thelargest failed down swing value, with a stop below that.Here is a case in point. Table 8.1 shows the daily action of the S&P 500 in March 1998 along withthe sell swing values. Once we arrive at the 4-day average on March 16 and multiply it by 180 percent wehave a buy point (5.50 points) that much below the opening on the 17th with a fill at 1086.70. Table 8.1shows how it looked.Your stop on the long should be 225 percent of the 4-day average swing value of 3.57 or 8.00 - the1092.20 open giving us a stop at 1084.20.You can always determine the general area where a market should find support and resistance withthe GSV concept. My work suggests contra trend moves of 180 percent with a 225 percent stop workquite well.Yet another way I have traded and made money with this idea is to wait for a down close in the S&P500 on Friday. I then buy Monday at the open plus Friday's high minus Friday's open swing value. I backthis with Bonds closing on Friday greater than they did 15 days ago. The following results show simplyusing the bailout exit and a $2,500 stop. Practically speaking, I exit the trade at the open minus the swingvalue, unless the swing value is very large. In that case, I admit defeat if price trades below the lowestprice seen in the day prior to going long. The time period here is from 1982 through March 1998. This isthe most successful interday mechanical trading technique I know of.It does not require a quote machine, any software, or constant phone calls to your broker. Once thesetup is present (Bonds greater than 15 days ago, and Friday closes down), you buy at the next day's openplus the buying swing value from Friday. Certainly, this takes no great skill, only the willingnessto
Table 8.1 Daily Action of the S&P 500
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Figure 8.4 Greatest swing value buying on Mondays following a down close.
patiently wait for trades, then the gumption to put them on (see Figure 8.4).Similar trading strategies can be developed for all markets using the GSV concept; just make certainyou first define valid setups for the buys and sells. My favorite setups are days of the week, highly correlateddata2 streams, seasonals, market patterns, and overbought/sold conditions.
Some PointersOver the years, I have tried various time periods to see whether there is any ideal number of days to usein the calculation. My original thought was that one would want to use a 10-day period to arrive at the bestaverage; after all, the more observations of swing value variance the more stable the answer should be, or soI thought. I was wrong on that. In almost all cases, the previous 1 to 4 days produce the best value in tradingor developing systems.The basics here involve volatility breakouts above or below the opening. The amount of breakout weare looking for is the amount that contained moves up to this point. Thus a critical element is to only takebuy signals after down days, sells after up days.Finally, keep in mind this is a "dumb" technique, it knows not when a big trade will come or evenwhen a winning trade will be delivered on a silver platter. That is why you cannot pick and choose thesetrades, you must simply take them, one at a time, as they come out of the hopper. If you pick and choose,you will invariably pick the losers and walk away from the winners. It is nothing personal, we all do, and theway to beat this devil is to take 'em all.
129To my way of thinking, the GSV concept is the most solid and logical approach to volatilitybreakouts. This failed swing measure has such great merit that I hope someone else, maybe you, will takeit past the point I have reached. Perhaps the better answer lies in the standard deviation approachmentioned earlier, perhaps in using the GSV in relationship to the previous day's range. I am really notcertain. What I am certain of is that this is one of the most powerful techniques in my bag of tricks andperhaps the most durable. It has served me well since I had the insight into the idea in 1977. Fancy mathmay improve the results, but it is not necessary to make this work.
Chapter 9
Short-Term Trading from a Quote Screen
The markets can be understood looking backward but must be traded looking forward
What I have shared with you so far is the general way- I trade. I use daily- bar charts to set up patternsand relationships that usually spur short-term moves of 2 to 4 days. This is my style it may not be yours.People like the idea of (day- trading as there Is no risk of anything “hapening overnight." Theirfear is a large adverse move may take place from today's close to tomorrow's opening. Their fear is news.change. and uncontrollable price action. They like the idea that at the end of the day it is all over, win,lose, or draw. There are no anguishing losses to take home and interrupt your sleep. Make no mistakeabout it, all this is true. but for every-thing you get in life you give up something in life. What you giveup when day trading is any opportunity at all to catch a large and sustained move as mentioned earlier.To most people, the term “short-term trading" means being glued to a quote screen throughout themarket trading day. They envision images of high-pressure guy or girl with a phone in each car, screamingsomething, like "Buy Chicago, sell New York.".
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132Certainly, this type of trading is hectic, and if you are going to trade this way, you had better makecertain you have the temperament required for the job. I will tell you what I think that temperament is, thentell you what my quest for this Holy Grail of commodity trading has revealed.Quote screen traders need three qualities; intensity, the ability to make intelligent choices, and thecapacity to react without any more thinking to the conditions at hand.If you are the type who needs time to make a decision, or freezes, refusing to take action once adecision has been made, this is not your game. Winning at this game requires making instant decisions andimmediately reacting; there is no time for pontificating or reconsidering. If you cannot make decisions thisway, you will be slaughtered in a matter of months. It is a game of the quick and the dead. If you are notquick, you will be dead. It is as simple as that. Shortterm trading of this nature requires the physical abilityto instantly pounce on a market and just as instantly reverse the decision you made just a few seconds ago, ifthat is what conditions dictate. It is a good thing the meek inherit the earth because they will never get richas day traders.Following the interday ebb and flow of prices on a screen, day after day after day, requires the ability tobe focused and intense every hour of each trading session. This is not an occupation for daydreamers. If youcannot maintain concentration, you will get hurt; it is forgetting to do what you should do, not being there(physically or mentally) at that one critical minute, 60 seconds, that spells the difference between life anddeath in your trading. It is not easy work to stay this focused and intense, particularly when your spouse callsto ask you some mundane question about the garden or plumbing at home, or a close friend calls to chat. Doyou have the guts to tell them you can't talk now, to hang up on a close friend, to refuse to take calls fromyour wife or husband, If so you are qualified for the job, if not, better rethink day trading.I assure you the instant you get distracted by that phone call is the instant the market will have a majormove, catching you off guard. Well, don't say I didn't warn you. Now let's look at the object of this game.You must also be able to change your view of the future in an instant. This is not a career for hardheadedpeople.
How a Quote-Screen Trader Makes MoneyA short-term trader has one objective: to catch the current trend of the market. That is it. That is all youshould try to do.It sounds easy, but trust me-it is far from simple, and for two reasons. The first is that trendidentification is an art and science unto itself, and more abstract art at that.
133It is a blend of Picasso and Cezanne with a splash of Chagall tossed in for fun. Second, even if youcorrectly spot the trend change, your reactive mind may screw things up and blow it for you. This isespecially true if you are long with a loss or nominal profit and suddenly get a sell signal.Do not confuse day trading with your long-term outlook; that is about something happening in thefuture. Day traders don't-can't-care about the future. Your only concern is being in phase with the currentshort-term trend. Your mission, should you accept this assignment, is to mimic what the market is doing. Ifit is up, you should be long, if down, short. Trying to forecast short-term tops and bottoms is a surefire wayto rapidly deplete your bankroll. You want to be with the trend; it is your only friend.Since greed is a stronger emotion than fear, your response will most often be to "hold and hope"which means you bypass the current new trend, holding on to the long position hoping the sell will bewrong when you should have spun on a dime. Dopes hope, winners are spinners.My point is we are trying to do two very difficult things, beat the identification of trend changes andbeat our "brains" by outsmarting ourselves. That is the challenge. My first technique for identifying trendchanges comes from the short-term "ringed" high and low concept we went over in Chapter 1. Thisconcept allows us to identify short-term swing points. A trend change from up to down occurs when ashort-term high is exceeded on the upside, a short-term trend change from down to up is identified by pricegoing below the most recent short-term low. Figure 9.1 depicts such trend changes in a classic manner,study it well because reality comes next.
Figure 9.1 Classic patterns of trend change.
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Swing Points as Trend Change IndicationHere are a couple of pointers on this technique. Although the penetration of one of these short-termhighs, in a declining market, indicates a trend reversal to the upside, some penetrations are better than others.There are only two ways a short-term high or low is broken. In an uptrending market, the low that isviolated or fallen below will be either a low prior to making a new rally high, as shown at (A) in Figure 9.2,or a low that occurs after decline of a high that then rallies making a lower short-term high; it then declinesbelow the low prior to the rally that failed to make a new high, as shown at (B).The "better" indication of a real trend change is the violation of the low shown at (A).
Figure 9.2 Breaking a short-term high or low.
135By the same token, a trend reversal to the upside will occur in one of the two following patterns: in(A) the rally peak prior to a new low is violated to the upside, or in (B) the market makes a higher low, thenrallies above the short term high between those two lows. In this case, again, the (A) pattern is the "better"indication of a real trend reversal.With that in