- 0 4
D e c - 0 4
J a n - 0 5
F e b - 0 5
M a r - 0 5
A p r - 0 5
M a y - 0 5
J u n - 0 5
J u l - 0 5
A u g - 0 5
S e p - 0 5
O c t - 0 5
FIGURE 8.2 This trade also triggered and followed through as noted.Source: Courtesy of www.GenesisFT.com.
PRACTICE
I have stated, perhaps overstated, that the most important thing you cando after having learned the MOM trigger method is to practice. This is even
AFFX:  Affymetrix, Inc. (Daily bars)
A
www.GenesisFT.com
8/1/05 07:14 = 46.94 (+0.25)
D
C
X
Short
PT1 and PT2both hit.
B
Selltrigger
E
Momentum (C,28)
60
58
56
54
52
50
48
46.9446
4410
8
6
4
2
0
-2
-4-4.8200-6
-8
May-05
Jun-05
Jul-05
Aug-05
FIGURE 8.3 This stock established a bearish pattern (A–D and C–B), which wastriggered at E. A short position entered as shown at 54.53. The range between Aand D was 59.73 to 50.56 or 9.17. PT1 was, therefore, about 4.56, which, whensubtracted from the entry price was 49.97 and the full target price was 45.36. Bothtargets were achieved on the same date when the stock dropped sharply.Source: Courtesy of www.GenesisFT.com.
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i s h   P M F   s e t u p   a  
t r i g g e r   w a s   h i
E U - 2 0 0 5 0 9 :t
  a n d   a  
  E u r o   F X   ( P i
t )   S e p   2 0 0 5   ( 3 0   m i n u t e   b a r s )  1 . 2 0 6 3 .
  T h e  
l o n g   e n t e r e d   a t
  D   w a s   1 . 2 0 7 1 .
  P T 2   w a s   8 1   p o i n t s   a n d   P T 1   w a s   4 0   p o i n t s .tl e v e l s   w e r e   h it e r  
  p r i c e s   m o v e d   h i g h e r   a f
t h e s e  
  N o t e   a l s o  
t h a t
l o w   a t  N o t e  t h a t  T h e   n e x t.
  A   w a s   1 . 1 9 9 0I
  h a v e   m a r k e dl e s s o n   w i
l
l
t e r   a   b u l
lt h e   h i g h   a t
A fa n d  b o t h   p o i n t s .d i s c u s s   h o w  
t h e  
l a r g e   m o v e s   c a n   b e   c a p t u r e d .
X
P T 1
P T 2
D
C
B u y  
t r i g g e r
A
E
B
www.GenesisFT.com
8 / 1 / 0 5   0 7 : 4 0   =   1 . 2 2 6 1   ( + 0 . 0 1 1 1 )
M o m e n t u m   ( C , 2 8 )
0 8 / 0 1 / 0 5
1 . 2 2 8
1 . 2 2 6 1
1 . 2 2 4
1 . 2 2 2
1 . 2 2
1 . 2 1 8
1 . 2 1 6
1 . 2 1 4
1 . 2 1 2
1 . 2 1
1 . 2 0 8
1 . 2 0 6
1 . 2 0 4
1 . 2 0 2
1 . 2
1 . 1 9 8
0 . 0 1 6 0
0 . 0 1
0 . 0 0 5
0
- 0 . 0 0 5
- 0 . 0 1
- 0 . 0 1 5
FIGURE 8.4 This is yet another example of the complete process through initialfollow-through. Note that prices continued higher after exit. The next chapter willshow you several methods for capturing such moves.Source: Courtesy of www.GenesisFT.com.
more important now that you know the setup, trigger, and initial follow-through.
The quiz for this lesson is visual. As with Lesson 7, I ask you to drawin any divergence patterns and triggers you see based on the rules given toyou in this lesson and in the previous lesson.
REVIEW
You have now completed the ﬁrst lesson in your PMF method. In this les-son, you learned how to identify the trigger point (E point) for bullish andbearish MOM setups using the MOM indicator. The lesson outlines a step-by-step or “cookbook” procedure for ﬁnding and identifying the triggerpoint.
In Lesson 8 we will look at a very simple but comprehensive method
for adding follow-through to the MOM divergence setups and triggers.
LESSON 8 QUIZ
Instructions: Using the following charts and a ruler, mark the bullish or bear-ish divergence patterns using the A, B, C, D, and E points shown in the ﬁgures
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in this lesson. Mark any buy and sell signals (if any). Then mark the approx-imate ﬁrst and second proﬁt targets. Since you do not have the actual pricelows and highs, you can use approximate numbers in responding to thisquiz.
1.
CL-200509: Crude Oil NY (Pit) Sep 2005 (Daily bars)
www.GenesisFT.com
07/20/2005 = 58.02 (-0.67)
62
60
58.02
56
54
52
50
1210
8
6
4
1.65000
-2
-4
-6
-8
1600
1575
1550
1525
1500
1472
1450
1425
1400
1375150
100
50
0
-50-73-100
-150
Momentum (C,28)
May-05
Jun-05
Jul-05
Source: Courtesy of www.GenesisFT.com.
2.
CC-200509:  Cocoa NYBT Sep 2005 (Daily bars)
www.GenesisFT.com
8/1/05 08:02 = 1472 (-7)
Momentum (C,28)
Jun-05
Jul-05
Aug-05
Source: Courtesy of www.GenesisFT.com.
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3.
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BO-200509:  Soybean Oil (Pit) Sep 2005 (30 minute bars)
www.GenesisFT.com
7/8/05 08:00 = 24.92 (-0.42)
Momentum (C,28)
06/20/05
06/27/05
07/05/05
Source: Courtesy of www.GenesisFT.com.
4.
SP-200509:  S&P 500 Index (Pit) Sep 2005 (10 minute bars)
www.GenesisFT.com
8/1/05 08:28 = 1237.3 (-1.8)
Momentum (C,28)
07/28/05
07/29/05
08/01/05
Source: Courtesy of www.GenesisFT.com.
26.6
26.4
26.2
26
25.8
25.6
25.4
25.2
2524.9224.8
24.6
24.4
24.2
24
23.8
23.6
3
3
10.8500
0
-1
-2
1248
1246
1244
1242
1240
12381237.3
1236
1234
123210
8
6
4
2
0
-2.3000
-4
-6
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5.
PA2-055:  Palladium (Comb) Cont 1st (Daily bars)
www.GenesisFT.com
07/29/2005 = 194.60 (-1.00)
Momentum (C,28)
May-05
Jun-05
Jul-05
Aug-05
Source: Courtesy of www.GenesisFT.com.
6.
EU-200509:  Euro FX (Pit) Sep 2005 (Daily bars)
www.GenesisFT.com
08/1/05 08:45 = 1.2224 (+0.0073)
Momentum (C,28)
Jun-05
Jul-05
Aug-05
Source: Courtesy of www.GenesisFT.com.
75
206204202200198196194.60
192190188186184182180178176174172170
20
15
10
52.15000
-5
-10
-15
-20
1.28
1.27
1.26
1.25
1.24
1.23
1.22241.22
1.21
1.2
1.19
0.000900
-0.02
-0.04
-0.06
-0.08
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L E S S O N 9, D A Y 9
PMF:Follow-through:Part II
T he last few lessons gave you a speciﬁc explanation of the STF structure
that is part of the PMF method. As you well know by now, every traderequires a setup, a trigger, and follow-through. This is true for the PMFmethod as well as every method I will teach you. Unless you plan to useluck as your trading system, you will not fare well. If you follow the STFstructure no matter what your trading methodology may be, your odds ofsuccess will improve substantially.
In Lessons 7 and 8 I taught you how to ﬁnd the setup as well as thetrigger and initial follow-through. This lesson will teach you the PMF fullfollow-through method that is designed to maximize your proﬁts by lettingthe big winners run. The full follow-through method gives you the followinginformation:
(cid:2)
(cid:2)(cid:2)(cid:2)(cid:2)
(cid:2)
A speciﬁc method for determining the initial stop-loss for a trade oncethere has been a setup and a trigger.The exact procedure for different position sizes.How and when to trail stop-losses.A general idea of whether the move will be large or small.A speciﬁc method for trailing a stop-loss when trades make explosivemoves in your favor.A conservative, aggressive, and professional follow-up approach de-pending on your account size and degree of risk tolerance.
77
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REVIEW OF THE METHOD
From the previous two lessons, recall that the PMF method is fully objective.It is based on a step-by-step procedure. The only way to achieve consistencyin your trading is by following the steps. The only way to learn from yourmistakes is to know where you may have gone wrong.
There are two types of losing trades—the unavoidable loss and thedumb loss. The unavoidable loss occurs when a method loses money simplybecause not all methods are right all the time. The dumb loss occurs whenyou make a mistake in applying the method. The dumb loss is a loss that youmade due to your own ignorance, lack of discipline, or lack of organization.The dumb loss is unacceptable. The only way you can learn how and whenyou took a dumb loss is by looking over your procedures. Here are thespeciﬁc procedures for PMF:
1. Find the PMF setup.
2. Determine the buy or sell trigger point.3. Enter the trade once it has triggered.
4. A trigger can only occur at the end of a price bar—do not sit and watchthe trigger within the time frame of the price bar—it is a waste of timeand will drive you nuts.
5. If you are certain that a trade has triggered at the end of a price bar, thenenter on the close of the bar. If you are not certain (i.e., the MOM value istoo close to the trigger point), then wait for the bar to close and if thereis a trigger then enter on the OPEN of the next bar.
The exact procedure from this point forward depends on your positionsize. There are three levels of position size, each of which depends on yourdegree of risk tolerance and account size.
CONSERVATIVE STRATEGY
The conservative strategy is simple. For the futures trader, it involves tradingin one contract of the given market or 100 shares (round lot) of a stock. Manytraders have asked me if I recommend options as a substitute for a positionin futures or stocks.
My answer is no. The problem with options is that the price execu-tions are often very poor, liquidity is often what accounts for poor price
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executions, and they lose time value. Instead, I advise trading the PMFmethod for futures, futures spreads and/or stocks.
The conservative trader has three choices when using the PMF method.
Here are the choices and their pros and cons:
(cid:2)
(cid:2)
(cid:2)
Place a proﬁt taking order at PT1. The good news is that you oftenmake a proﬁt because PT1 is frequently hit. The bad news is that ifthe market keeps moving in the given direction, you will leave a lot ofmoney on the table. The worse news is that you may make as manyas 10 small proﬁts in a row but, take my word for it, you could giveit all back plus more on one losing trade. I do not recommend thisstrategy.When PT1 is hit, change your stop-loss to breakeven (i.e., the priceat which you entered). See the seasonal Lessons 2 and 3 or a morethorough description of the breakeven stop. The good news is that youare giving the market plenty of room to reach PT2 or even better levels.The bad news is that you may get stopped out at breakeven many times.And this will make you mad. Unfortunately, as a one-contract trader, youdo not have a choice. If you trade PMF in stocks, you could split your100 shares into three units and use the aggressive strategy describedbelow.The best strategy for conservative traders is to place a stop-loss atbreakeven when PT1 is hit and then to use the TS (trailing stop) proce-dure when PT2 has been hit (see trailing stop procedures below).
MODERATE STRATEGY
This follow-through method requires you to trade in units of two. If youtrade futures, then you will trade either 2, 4, 6, 8, . . . contracts. If you tradestocks, then you will trade 200, 400, 600, 800, . . . shares. You will exit yourpositions as follows:
1. After entering your position, you will place a proﬁt taking order at PT1
to exit ∼HF (high frequency) of your position.
2. When PT1 is hit, you raise your stop-loss breakeven on the remaining
∼HF of your position.
3. When PT2 is hit you will begin to trail a stop at 50 percent.4. If a trade produces an open proﬁt of twice PT2 implement a 75 percent
trailing stop.
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AGGRESSIVE STRATEGY
This follow-through method requires you to trade in units of three. If youtrade futures you’ll trade either 3, 6, 9, . . . contracts. If you trade stocks,then you will trade 300, 600, 900, . . . shares. You will exit your positions asfollows:
1. After entering your position, you will place a proﬁt-taking order at PT1
on one-third of your position.
2. When PT1 is hit, you will raise your stop-loss breakeven on one-third ofyour position with a stop-loss that locks in 50 percent of your proﬁt onanother one-third of your position.
3. When PT2 is hit you will exit another one-third of your position unless
stopped out.
4. When PT2 is hit and you have closed out one-third of your position, you
will trail a stop on the remaining one-third of the position.
5. If a trade produces an open proﬁt of twice PT2, implement a 75 percent
trailing stop.
The aggressive strategy allows you to take a proﬁt, to trail a stop, and tohold a position for the bigger move should it occur. The moderate strategyalso allows for this possibility. The conservative strategy can also allow youto ride a trade past PT1 and PT2; however, you will not be able to enjoy thebeneﬁts of taking some proﬁts. It would be an “all or nothing” strategy forthe conservative trader. As you can imagine, this is anathema to the smalltrader who is intent on taking proﬁts as often as possible. If you use theconservative strategy, you fare better in the long run than if you trade forthe bigger moves.
Naturally, the decision is yours. But I think you substantially increaseyour odds of success by going after the big moves rather than the smallmoves.
EXAMPLES
Figures 9.1 and 9.2 show two detailed examples of PMF trades from startto ﬁnish with all three strategies. Note that the procedure is the same forfutures and stocks. The only difference is in the vehicle that is being used.
STOP-LOSSES AND THE DANGER ZONE
Now let us look at the PMF stop-loss. Most traders tell you that your stop-loss should be placed at a level that you can afford. This is nonsense. The
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Low at A = 519.5High at X = 593PT2 = 72.5PT1 = 36.25Long entered at 546.
S-200511:  Soybeans CBT (Pit) Nov 2005 (Weekly bars)
PT2 hit exit 1/3. Raise stoploss to lock in 50%.
Raise stop to 75%trail since 2 x PT2was hit here.
PT1 hit. Exit 1/2 or 1/3. Raisestop loss to breakeven.
Raise stop
X
Long on open
www.GenesisFT.com
08/05/2005 = 687^4 (+0^6)
Stopped outon 75% Trailingstop. See text.
Momentum (C,28)
D
C
A
Buy trigger
B
2005
81
800^0
775^0
750^0
725^0
700^0687^4675^0
650^0
625^0
600^0
575^0
550^0
525^0
500^0
200
154.75
100
50
0
-50
-100
FIGURE 9.1 A PMF trade with setup, trigger and initial follow-through.Source: Courtesy of www.GenesisFT.com.
market does not give a darn about what you can afford to risk. Stop-lossesmust be dynamic and system related. Your stop-loss should be a functionof the market and/or the system.
The PMF initial stop-loss procedure is simple:
1. Stop-loss on long position is based on MOM. If MOM closes below point
C, then you exit the trade.
2. Stop-loss on short position is based on MOM. If MOM closes above point
C, then you exit your position.
DNA:  Genentech Inc (60 minute bars)
PT1 = 1.16PT2 = 2.23
PT2 hit exit 1/3 and raise stop to lockin 50% of profit.
PT1 hit. Exit 1/2 or 1/3 of position and/ortrail stop at breakeven.
X=88.08
Continue to raise trailing stopevery time a new high is made.
D
Buy @ 87.64.
A=85.85
www.GenesisFT.com
8/2/05 06:51 = 91.53 (+0.44)
How canyou getthis movetoo? SeeLessons10−13.Stopped out ontrailing stop.
92
91.53
91
90.5
90
89.5
89
88.5
88
87.5
87
86.5
86
85.5
Momentum (C,28)
3.9000
E
C
B
07/25/05
08/01/05
FIGURE 9.2 This trade triggered and followed through as noted.Source: Courtesy of www.GenesisFT.com.
2
0
-2
-4
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30 DAYS TO MARKET MASTERY
3. You can get an estimate of what your stop-loss should be initially byworking the MOM formula backwards. In other words, determine whatprice would be required for point C to be penetrated.
4. You are in the danger zone (i.e., risk of being stopped out at a loss) until
PT1 is hit.
5. Another more precise stop loss is to use the PT2 amount as your stop-
loss.
If you are not clear on how to calculate the approximate risk send basedon the point C penetration, send me an e-mail at jake@trade-futures.comand I will tell you how.
PRACTICE, PRACTICE, PRACTICE
I want to emphasize again that the most important thing you can do afterhaving learned the MOM trigger method is to practice. This is even moreimportant now that you know the setup, trigger, and full follow-through.
REVIEW
In this lesson you learned how to manage the risks and rewards in the PMFmethod for three different levels of risk tolerance. You also learned theproper stop-loss procedures.
You have now completed the ﬁrst lesson in your PMF method. In Les-son 10 we look at Part 1 of my Moving Average Channel (MAC) to see howit can work as a trend indicator, timing indicator, and support/resistanceswing trading method.
LESSON 9 QUIZ
Instructions: Circle the correct answers.
1. The DANGER ZONE refers to:
A. What happens to you when you use any method other than PMF.
B. A margin call.C. The time you are in a PMF trade prior to PT1 being hit.D. Any time you trade options.
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2. The 75 percent trailing stop is implemented when:
A. Twice PT2 has been hit.
B. You get concerned about a trade.
C. Your broker calls you.
D. You have made at least $400 proﬁt on a trade.
3. PT1 is:
A. The term used for an aggressive portfolio method.
B. A method for triggering spread trades.
C. The stop-loss for all PMF trades.D. One half of PT2.
4. The aggressive PMF strategy is:
A. To trade options and futures in a diversiﬁed portfolio.B. To trade units of three for futures and 300 shares for stocks.C. To use no stop-losses until PT3 is hit.D. To double up your position at PT1.
5. If MOM closes above point C after triggering a PMF sell:
A. Call your broker and ask for a refund.B. Add PT1 and PT2 and place a trailing stop of 75 percent.C. Spread your position into a related market.D. Exit the trade since the stop-loss has been hit.
6. The conservative strategy for PMF:
A. Is not recommended under any circumstances.B. Is for nervous traders only.
C. Is best used as if the one unit was the 3rd unit so as to maximize
proﬁts.
D. Is recommended for options traders only.
7. The aggressive strategy for PMF is:
A. The best way to capture major proﬁts.B. To use no stop-loss.C. Worthless unless you have a PhD in economics.D. Only for new traders.
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8. To calculate PT1 and PT2:
A. Take the difference of the highest high and the lowest low between
points A and D inclusive.
B. Use a Gann Angle calculator.
C. Use Fibonacci numbers.
D. Use the Black-Scholes options pricing model.
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L E S S O N 10, D A Y 10
Using the MovingAverage Channel:Part I
T he moving average channel (MAC) is a method I have developed and
reﬁned over 20 years ago. It is very useful and effective in stocks andfutures. It offers:
(cid:2)
(cid:2)(cid:2)(cid:2)(cid:2)
(cid:2)
A speciﬁc method for determining the initial stop-loss for a trade oncethere has been a setup and a trigger.The exact procedure for different position sizes.How and when to trail stop-losses.A general idea of whether the move will be large or small.A speciﬁc method for trailing a stop-loss when trades make explosivemoves in your favor.A conservative, aggressive, and professional follow-up approach de-pending on your account size and degree of risk tolerance.
THE METHOD
The MAC is based on moving averages of highs and lows, as opposed tothe use of traditional moving average crossover systems, which use themoving average (MA) of closing prices The MAC uses two MAs, one of thehigh price and one of the low prices. In so doing, the MAC is quite differentthan traditional moving averages and it is not subject to many of the samelimitations that inhibit the performance results with traditional moving av-erages. Typical results with MA-based systems that use closing prices are
85
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30 DAYS TO MARKET MASTERY
very poor, usually in the range of 30 percent to 45 percent accuracy. TheMAC improves the odds considerably because it is a total method that usesmy STF (setup, trigger, and follow-through) approach.Here are the rules of application for the MAC:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
Calculate an eight-period simple MA of the low price for each bar (i.e.,daily or weekly or intraday).Calculate a 10-period simple MA of the high price for each bar (i.e., dailyor weekly or intraday).A buy setup occurs when one complete bar occurs above the movingaverage of the high (MAH).A BUY trigger occurs when a second consecutive complete bar occursabove the MAH.A SELL setup occurs when one complete bar occurs below the movingaverage of the low (MAL).A SELL trigger occurs when a second consecutive complete bar occursbelow the MAL.
Very important! The price bars must be completely above or below the MAline to be valid. Please note this carefully—the entire bar must be outsidethe channel