trading tool, buying c on new highs andselling on new lows. It is a breakout method in the style of swing trading and can be used288 CHARTING SYSTEMS
 
as a leading indicator of the major trend. It requires frequent trading in most markets, withrisk varying according to the volatility of the market. Keltner’s Minor Trend Rule is the basisfor a number of current technical systems that vary the time period over which prior highsand lows are established and consequently increase the interval between trades and therisk of each trade. An advantage of the Keltner approach is that it imposes no arbitraryrestrictions on the analysis of prices (e.g., breakouts of 100 points).
Donchian’s Four-Week Rule
In the mid-1970s, Playboy’s Investment Guide reviewed Donchian’s Four-Week Rule as“childishly simple . . . was recently discovered to rank premiere among a dozen widely fol-lowed mechanical techniques.” And the rules are simple:
1. Go long (and cover shorts) when the current price exceeds the highs of the previ-ous 4 full calendar weeks.2. Go short (and liquidate longs) when the current price falls below the lows of theprevious 4 full calendar weeks.‘3. Roll forward if necessary into the next contract on the last day of the month pre-ceding expiration.
In 1970, The Traders Note Book (Dunn and Hargitt Financial Services), rated the Four-Week Rule as the best of the popular systems of the day. Based on 16 years of history, thebest performers were December wheat, June cattle, May copper, August bellies, Januarysoybean oil, and May potatoes.
The system satisfies the basic concepts of trading with the trend, limiting losses andfollowing well-defined rules. It bears a great resemblance to the principle of Keltner’sMinor Trend Rule, modified to avoid trading too often. Over the years this technique, clas-sified as a slow breakout system, has shown the greatest longevity. The system is so simplethat the only comments about it must also be simple: can a Four-Week Rule work for allmarkets? If price volatility increases dramatically, the high and low for a 4-week periodcould become astronomical, while at the same time lower prices could cause narrowranges in another market. That characteristic is both a key to its success and a problem forrisk control. The solution may be a price level-modified rule (called adaptive) thatreduces the number of weeks (or days) in the high-low measured period as prices andvolatility increase. A change of this sort would keep risk on a more even level but still relateto the basic volatility principle of the original system. This approach is discussed in Chap-ter 17 (‘Adaptive Techniques”).
Modified for the Finol Three Months
One system based on the Four-Week Rule uses only the last 3 months of each futures con-tract. Beginning 3 months before the delivery month, plot the highs and lows according tothe Four-Week Rule. For example, trading December silver, start on September 1 and plotfer 4 weeks. The first time the market price crosses the high or low of that 4-week period,take the appropriate long or short position and place a stap-loss of 244% of the entry price.Lf not stopped out, liquidate the position on the last day of the month prior to delivery. Ifstopped out, reenter a new position using the high and low established during the origi-nal 4 weeks.
The theory behind the modification is that breakouts are more valid and larger in thePeriod just prior to delivery. An advantage of the system is that it trades very little and has alow commission burden. The disadvantage is that the stop-loss counteracts the nature of thebreakout system and imposes an artificial risk level on a method that uses highs and lowsestablished by the market itself. This feature is likely to harm the robustness of the concept.SWING TRADING 289
 
The N-Day Rule
Computers have allowed us to take many simple ideas and examine them in great detail,sometimes to excess. One of the earliest applications of computer power was to changethe Four-Week Rule into the N-Day Rule, the predecessor of the n-minute and n-tick rules.The rationale seems logical. If the Four-Week Rule works but the equity drawdown is toolarge, shortening the time period should improve results.
The N-Day Rule states that a buy signal occurs when the current price exceeds thehighest price of the past N days; a sell signal occurs when the current price falls below thelowest price of the past N days. The determination of N is critical to the success of this sys-tem. The most obvious approach to finding N is by testing a broad range of values (as willbe shown in the next section). It has also been suggested that N could be variable based onthe relationship of normal volatility to current volatility?
N,=N;x awhere N, is the number of days used for today’s calculation
N, is the initial number of days used for normal markets- ¥, is the normal volatility measured over historical data
V. is the current volatility measured over a fixed period shorter than the normal; volatility, V,,
As the current volatility increases, the number of days used in today’s calculation decreases.This may also be classified as an adaptive technique.
Testing the N-Day Rule
Weekly breakouts, a limited case of the N-Day Rule, were tested by Hochheimer and sum-marized in his report as the Weekly Price Channel. Weekly breakouts produce a slow trad-ing system that depend on major moves for profits. About 75% of those futures marketstested in this 1982 study® showed higher risk (some very high), than the crossover systemstested earlier (also see Chapter 21).
The original purpose for the Weekly Rule was to look at prices only on Friday. The closeon Friday is considered in the same sense as the daily close—more important because it isthe evening up at the end of the day. Traders are attributed with the feeling that holding aposition over a weekend is the only thing worse than holding it overnight. This evening upwill prevent false signals that may never occur midday or midweek.
Typical trading rules for a Weekly Price Channel system would be
1. Buy (and close out shorts) if the closing price on Friday exceeds the highest closingprice of the past N weeks.
2. Sell (and close out longs) if the close on Friday is below the lowest closing price ofthe past N weeks. -
Because this model is always in the market, it is possible for the risk to become veryhigh. The commitment to a new long position is the difference between the highest andlowest closing prices of the past N weeks. In addition, even if penetrated, the position isnot liquidated until the close of Friday. This could be a very risky proposition; however,that risk is offset by the smoothing effect of only acting once each week. It may be thathigher risk is better than being subjected to more frequent false signals.
5 Andrew D. Seidel and Philip M. Ginsberg, Commodities Trading (Prentice-Hall, Englewood Cliffs, NJ, 1983).
* Frank L. Hochheimer and Richard J. Vaughn, Computerized Trading Techniques 1982 (Merrill Lynch Commodi-ties, New York, 1982).290 CHARTING SYSTEMS
 
Alternate rules were tested by Hochheimer in his study. Buy and sell signals were takenat the time that the intraday new high or new low occurred, No comparison was availableto determine whether the risk was greater or less than the conventional approach,Hochheimer also tested the Weekly Rule with the week ending on days other than Friday.It was not apparent that any one day was better.
Traders will find this basic breakout method is important as a benchmark study. Chap-ter 5 (“Trend Systems”) included the N-Day Breakout as one of the basic trending methodsin “Comparison of Major Trend Systems,” and shows 10 years of results for the Eurodollar.Included with the study is program code to help enter this program into a computer toallow further testing.
Avoiding Problems Programming the Weekly Breakout
The Weekly Rule is often thought of having signals only on Friday; however, when pro-gramming this method, it is important to remember that a number of weeks end on Thurs-days due to holidays. Identifying the last day of the week in advance is a problem for acomputer program. Although we can find the day of the week by simply using the function@DayOfWeek for Easy Language, or @WKDAY in Quattro, we have missed the day if the infor-mation returned jumps from Thursday to Monday.
The simpler and preferred method, using most intelligent market charting systems, isto request weekly data, or a weekly chart, rather than daily. The built-in conversion pro-gram will correctly change days to weeks. By looking at the-high, low, and close of theweekly bar you can decide whether a signal has occurred, and executing on the close willbe the last price of the week, regardless of the day on which it occurs.
WILLIAM DUNNIGAN AND THE THRUST METHOD
Dunnigan’s work in the early 1950s is based on chart formations.and is purely technical.Although an admirer of others’ abilities to perform fundamental analysis, his practicalapproach is contained in the statements:
“If the economists are interested in the price of beans, they should, first of all,learn all they can about the price of beans.” Then, by supporting their observationswith the fundamental elements of supply and demand, they will be “certain thatthe bean prices will reflect these things.” \
Dunnigan did extensive research before his major publications in 1954. A follower ofthe Dow theory, he originally created a breakaway system of trading stocks and com-modities, but was forced to drop this approach because of long strings of losses eventhough the net results of his system were profitable. He was also disappointed when his 2%Swing Method failed after its publication in A Study in Wheat Trading. But good often_comes from failure and Dunnigan had realized by now that different measurements shouldbe applied to each market at different price levels. His next system, the Percentage WheatMethod, combined a 24% penetration and a 3-day swing, introducing the time elementinto his work and perhaps the first notion of thrust, a substantial move within a predefinedtime interval, With the 2%%, 3-day swing, a buy signal was generated if the price of wheatcame within 2% of the lows, then reversed and moved Gp at least an additional 2%% overa period of at least 3 days.
For Dunnigan, the swing method of charting* represented a breakthrough; it allowedeach market to develop its natural pattern of moves, more or less volatile than any other
7 William Dunnigan, Selected Studies in Speculation (Dunnigan, San Francisco, 1954, p. 7).
* WD. Gann, How to Make Profits in Commodities (Lambert-Gann, Pomeroy, WA, 1976). This book devotes alarge section to swing charts and includes many examples of markets prior to Dunnigan‘s work.WILLIAM DUNNIGw.4 AND THE THRUST METHOD 291
 
market. He had a difficult time trying to find one criteria for his charts that satisfied all mar-kets, or even all grains, but established a $2 swing for stocks where Rhea’s Dow Theoryused only $1 moves. His studies of percentage swings were of no help.
The Thrust Method
Dunnigan’s final development of the 7hrust Method combined both the use of percent-age measurements with the interpretation of chart patterns, later modified with somemathematical price objectives. He defines a downswing as a decline in which the currentday’s high and low are both lower than the corresponding high and low of the highestday of the prior upswing. If currently in an upswing, a higher high or higher low will con-tinue the same move. The reverse effect of having both a higher high and low wouldresult in a change from a downswing to an upswing. The top and bottom of a swing arethe highest high of an upswing and the lowest low of a downswing, respectively. Itshould be noted that a broadening or consolidation day, in which the highs and lows areboth greater or both contained within any previous day of the same swing, has no effecton the direction. .In addition to the swings, Dunnigan defines the five key buy patterns:
1. Test of the bottom—where prices come within a predetermined percentage of aprior low
2. Closing-price reversal_—a new low for the swing followed by a higher close than theprior day
3. Narrow range—where the current day’s range is less than half of the largest rangefor the swing
4. Inside range—where both the high and low fall within the prior range
5. Penetration of the top—by any amount, conforming to the standard Dow theorybuy signal
All of these conditions can be reversed for the sell patterns. An entry buy signal wasgenerated by combining the patterns indicating a preliminary buy, with a thrust the nextday confirming the move. The thrust was defined as a variable price gain based on theprice level of the market (for 1954 wheat, this was from % to 14¢). Dunnigan’s systemattempted to enter the market long near a bottom and short near a top, an improvementon the Dow theory, Because of the risks, the market was asked to give evidence of achange of direction by satisfying two of the first four patterns followed by a thrust on thenext day. Any variance would not satisfy the conditions and an entry near the top or bot-tom would be passed.
The same buy and sell signals applied to changes in direction that did not occur atprior tops and bottoms but somewhere within the previous trading range. In the event allthe conditions were not satisfied and prices penetrated either the top or bottom, movinginto a new price area, the fifth pattern satisfied the preliminary signal and a thrust couldoccur on any day. This was not restricted to the day following the penetration. So that ifnothing else happened, Dunnigan followed the rules of the Dow Theory to insure that amajor move would not be missed. -
It has been said by followers of Dunnigan’s method that his repeat signals are thestrongest part of his system; even Dunnigan states that they are more reliable althoughthey limit the size of the profit by not taking full advantage of the trend from its start.Repeat signals use relaxed rules not requiring a new thrust because the trend has alreadybeen identified. Two key situations for repeat buy signals are:
1. A test of the bottom followed by an inside range (interpreted as market indecision)2. Aclosing price reversal followed by an inside range292 CHARTING SYSTEMS
 
A double thrust occurs when the first thrust is followed immediately by a secondthrust; or, after the first thrust, a congestion area develops, followed by a second thrust inthe same direction as the first. Although Dunnigan used a fixed number of points to definehis thrust, today’s traders may find the standard deviation of the daily price changes oranother volatility measure as a more practical basis for identifying significant price moves.
One-Way Formula
Dunnigan worked on what he hoped would be a generalized version of his successfulThrust Method and called it the One-Way Formula. Based on his conclusions that theThrust Method was too sensitive, causing more false signals than he was prepared toaccept, he modified the confirmation aspect of the signal and made the thrust into the pre-liminary signal. He also emphasized longer price trends which smooth performance andreduce signals.
With the upswing and downswing rules remaining the same, Dunnigan modified thethrust to require its entire range to be outside the range of the prior day. For a preliminarybuy, the low of the day must be above the high of the prior day. This is a stronger conditionthan his original thrust, yet only constitutes a preliminary buy. The confirmation occursonly if an additional upthrust occurs after the formation of, or test of, a previous bottom.There must be a double bottom or ascending bottom followed by a thrust to get a buy sig-nal near the lows. If the confirmation does not occur after the first bottom of an adjust-ment, it may still be valid on subsequent tests of the bottom.
For the One-Way Formula, repeat signals are identical to original confirming signals.Each one occurs on a pullback and test of a previous bottom, or ascending bottom, fol-lowed by an upthrust. Both the initial and repeat signals allow the trader to enter after areaction to the main trend. The Dow approach to penetration is still allowable in the eventall else fails, The refinement of the original thrust method satisfied Dunnigan’s problem ofgetting in too soon.
The Square-Root Theory
The two previous methods show a conspicuous concentration of entry techniques and anabsence of ways to exit, Although it is valid to reverse positions when an opposite entrycondition appears, Dunnigan spends a great effort in portfolio management’ and risk-reward conditions that were linked to exits. By his own definition, his technique would beconsidered trap forecasting, taking a quick or calculated profit rather than letting thetrend run its course (the latter was called continuous forecasting).
A fascinating calculation of risk evaluation and profit objectives is the Sguare-Root The-ory. He strongly supported this method, thinking of it as the golden” key, and claimingsupport of numerous esoteric sources such as The Journal of the American StatisticalAssociation, The Analysts Journal, and Econometrica. The theory claims that prices movein a square root relationship, For example, a market trading at 81 (or 9?) would move to64 (8?) or 100 (10%); either would be one unit up or down based on the square root. Themule also states that a price may move to a level that is a multiple of its square root. A sim-ilar concept can be found greatly expanded in the works of Gann (Chapter 14).
NOFRI’S CONGESTION-PHASE SYSTEM
Markets spend the greater part of their time in nontrending motions, moving up and downwithin a range determined by near-stable equilibrium of supply and demand. Most trend
° Bach of his writings on systems contained exampies of multiple-fund management of varied risk.1 Refers to the Greek description of Fibonacci ratios.OUTSIDE DAYS WiT:.AN OUTSIDE CLOSE 293
 
followers complain about the poor performance that results from markets that fail to movecontinuously in one direction. However, their systems are designed to conserve capital bytaking repeated small losses during these periods to capture the big move. Eugene Nofri’ssystem, presented by Jeanette Nofri Steinberg, is used during the long period of conges-tion, returning steady but small profits. Nofri’s system does not concern itself with the sus-tained directional move; therefore, the user of the Congestion-Phase System can wait to beCertain of a well-defined congestion area before beginning a trading sequence.
The basis of the system is a 3rd-day reversal. If prices are within a congestion range andhave closed in the same direction for 2 consecutive days, take the opposite position on theclose of day 2, anticipating a reversal. If this is correct, take the profits on the close of trad-ing the next (3rd) day. Nofri claims a 75% probability of success using this technique, andthe Theory of Runs supports that figure. If there is a 50% chance of a move either up ordown on day 1, there is a 25% chance of the same move on the next day, and 124% chanceon day 3. Considering both commissions and variation in the distribution, an assumptionof 75% is reasonable.
Because the basis of the Congestion-Phase System is an unlikely run within a sidewaysPrice period, the substitution of a 4-day run instead of the current 3-day run shouldincrease the profitability and reliability of the individual trades while reducing the numberof opportunities.
The Congestion-Phase System is only applied to markets within a trading range specif-ically defined by Nofri. Users are cautioned not to be too anxious to trade in a newlyformed range until adequate time has elapsed or a test of the support and resistance hasfailed. The top of the congestion area is defined as a high, which is immediately followedby 2 consecutive days of lower closing prices, the bottom of the congestion area is a lowprice followed by 2 higher days. A new high or low price cancels the congestion area. Any2 consecutive days with prices closing almost unchanged (for example, +2 ticks) are con-sidered as 1 day for the purposes of the system, These ranges occur frequently and can befound by charting prices using the last 10 days. In cases in which the top or bottom hasbeen formed following a major breakout or price run, a waiting period of 10 additionaldays is suggested to ensure the continuance of the congestion area and limit the risk dur-ing more volatile periods. Remember, systems that trade only within ranges offer manyOpportunities that should be exercised with patience.
A congestion area is not formed until both a top and bottom can be identified. Pene-tration of a previous top and formation of a new top redefines the range without alteringthe bottom point; the opposite case can occur for new bottoms. If a false breakout occurslasting 2 or 3 days, safety suggests a waiting period of 7 days. Logical stops are also possi-ble, the most obvious places being the top and bottom of the current congestion area, butcloser stops could be formulated based on price volatility.
The Congestion-Phase System can stand alone as a short-term trading method or canbe used to complement any longer technique. When trying to improve entry or exit fills,the system qualifies as a timing device but only within the congestion areas defined by therules. It is not intended to be used in all situations. The converse of the system says that anentry signal given outside of a congestion area should be taken immediately becauselonger periods of prolonged movement in one direction are most likely. But in a tradingrange, the Congestion-Phase System may turn a moving average technique from a loser toa winner.
OUTSIDE DAYS WITH AN OUTSIDE CLOSE
There are numerous chart patterns that can be profitable if they are properly identified andtraded consistently. Unfortunately, any one pattern may not appear very often and traders294° CHARTING SYSTEMS
 
may become impatient waiting for the opportunities. For others who may feel that overalltrading success is a combination of small victories, the outside day with an outside closeis one such successful pattern.
An outside day has the high and low outside the range of the previous day; that is, thehigh is higher and the low is lower. An outside close is one in which the closing price ishigher or lower than the prior day’s high or low, respectively. This is considered an attemptto move in one direction followed by a strong push in the other direction. If the close wasin the direction opposite to a recent price move, this is called a key reversal day;'' however,because the previous price direction is not distinguished, it is not necessarily a reversal butmay be a renewal of the trend direction.
A brief study by Arnold” showed that this pattern proved profitable for a small sampleof currencies, metals, and financials using the following rules:
1, Buy on the close of an outside day if the close is above the prior high; sell if theclose is below the prior low.
2. If buying, place a stop-loss just below the low of the outside day; if selling, place thestop just above the high.
3. Close out the position on the close 3 days after entry.
After studying exits on days 1 through 5 following the trade entry, Arnold concludedthat this formation predicts reasonably consistent price movements for the next 3 days.
ACTION AND REACTION
The human element in the market is not responsible for the ultimate rise and_:fall of prices,but for the way in which prices find their proper level. Each move is a series of overreac-tions and adjustments. Many stock and commodity analysts have studied this phenomenonand base entire systems and trading rules on their observations. Elliow’s Wave Principle isthe clearest and most well-known of the theories founded entirely on this notion. Tubbs’Stock Market Correspondence Course is the first to define the magnitude of these reactionsin the Law of Proportion; and, in 1975 the ‘Trident System was based on both the patternsand the size of the action and reaction.
Retracement of a major bull campaign is the mast familiar of the market reactions andthe one to which almost every theory applies. It is virtually unanimous that a 100% retrace-ment, back to the beginning of the move, enconnters the most important support level.The 100% figure itself has been discussed in terms of unity, referring to its behavioral sig-nificance. The next most accepted retracement level is 50%, strongly supported by Gannand commonly discussed by experienced speculators. The other significant levels varyaccording to different theories:
Schabacker accepts an adjustment of ¥% or %, considering anything larger to be a trendreversal.Angas anticipates 25% reactions for intermediate trends.Dunnigan and Tubbs look at the larger 4, %, Or 4 adjustment. -Gann takes inverse powers of 2 as behaviorally signifiednt: %, Yi, %,...-Elliott bases his projections on the Fibonacci ratio ard its complement (.618 and .382).Predicting advances into new ground is also based on prior moves. Gann believed inmultiples of the lowest historic price as well as even numbers; prices would find naturalresistance at $2, $3,..., at intermediate levels of $2:50, $3.50, ..., or at two to threeimes the base price level. Elliott looked at moves of 1.618% based on a Fibonacci ratio.11 See the discussion of key reversals in Chapter 8.™ Curtis Arnold, “Your Computer Can Take You Beyond Charting,” Futures (May 1984).ACTIONAND REACTIVA 295eee
Fibonacci Ratios
Along with the most common 1, %, 4%, and % retracement values, Fibonacci ratios are con-sidered of equal importance. Fibonacci ratios are found by dividing one number in theFibonacci summation series
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 14...
by the preceding or following value. The series is formed beginning with the values 1, 1,and adding the last two numbers in the series together to get the next value. The numbersin the series, especially those up to the value 21, are often found in nature’s symmetry;however, the most important aspect of the Fibonacci sequence is the ratio of one value tothe next. Called the Golden Ratio, this value Fy/Fy., approaches 1.618 as N gets large.Oddly, the inverse Fy. :/Fyv = 0.618, which is a feature that has drawn attention.
The Golden Ratio has a long history. The great pyramid of Giza, the Mexican pyramids,many Greek structures, and works of art have been constructed in the proportions of theGolden Ratio. These and some further examples are given in Chapter 14 where they arealso shown in context with trading systems. At this time it is important to recognize thatmany analysts who consider human behavior as the primary reason for the size of a pricemove and their retracements, use the Fibonacci ratio .618 or its reciprocal 1 ~ .618 = .382,as very likely targets. Elliott is the most well-known advocate, and applications of his WaveTheory are filled with these ratios.
Retracement rules have not been proved scientifically, but they are accepted by mosttraders. In general terms, the retracement theories, or revelation methods, can be cate-gorized as either proportional retracements or _time-distance goals. Proportional re-tracement states that prices will return to a level that is clearly related, by proportion orratio, to the length of the prior price move. The larger the move, the clearer the retrace-ment. The percentages and ratios expected to be successful are those that are most obvi-ous: 100%, 50%, 33%, and so on, in addition to the Fibonacci ratio 1.618 and its inverse0.618. The time-distance rule is popularized in the works of Gann (also found in Chap-ter 14), Gann’s retracement objectives can best be thought of as forming an arc of a cir-cle, with the center at the price peak. The goal is satisfied when prices touch any pointon the circle.
Tubbs’ Law of Proportion
The technical part of Tubbs course in stock market trading is intense chart interpretation.The Law of Proportion presented in Lesson 9 is a well-defined action-and-reaction law. Incases where the nearby highs or lows of a swing were not broken, Tubbs claims four out offive successful predictions with his principle. The law states:
Aggregates and individual stocks tend to run on half, two-thirds, three-fourths ofprevious moves. First in relation to the next preceding move which was made.Then in relation to the move preceding that.
Applied to silver, an initial move from $4 to $6 would react % to $5, % to $4.67, or 4 to$4.50. Tubbs does allow for traditional price support as a major obstacle to the measuredprice retracement, and so unity (a 100% retracement) may be added to the three propor-tions. Figure 12-5 shows subsequent reactions to the silver move just described; the sec-ond reversal could be any of three magnitudes (or back to major support at $4.00), endingat $4.50, a % reversal. Reversals 3, 4, and 5 are shown with their possible objectives. Thelast reversal, 5, becomes so small that the major support levels (horizontal broken lines)are considered as having primary significance, along with proportions of moves 1 and 2.Major support at $4.00 coincides with % of move 1 and % of move 2. This would normallybe sufficient to nominate that point as the most likely to succeed. Tubbs indicates that296 CHARTING SYSTEMS
 
_FIGURE 12-5 Tubbs’ Lawof Proportion.
6.00
      
Reversalnotation
AlaB: 23caNo letters: unity
5.50
 
 
(14,28)A(2C)
Priceobjectives
ec)SSFSFFSSSSSSSSSSS/?350 "778, 20)
 
these points rarely occur with exactness, but proportions serve as a valuable guideline. Theprinciple is one of reaction in relationship to an obvious preceding action.
Trident
The Trident Commodity-Trading System received its fair share of publicity when it wasintroduced at the beginning of 1975. An article in the 1977 Dow jones Commodities Hand-book had an excellent review of the background of the system and some of the conflictssurrounding its presentation and subsequent successes and failures. The system itself isnot unique in concept but in its implementation. It is based upon the principle of priceaction and reaction with formations similar to the waves of R.N. Elliott. Fot each pricemove, there is a point of undervalue and overvalue with subsequent reaction, or adjust-ments, in price as it moves irregularly in the direction determined by the ultimate balanceof supply and demand.
The object of the system is to trade in the direction of the main trend but take advan-tage of the reaction (or waves) to get favorable entry and exit points. The concept of trad-ing with the trend and entering on reactions is discussed in the context of commoditytechnical analysis as early as 1942 by WD. Gann and in the preceding section on action andreaction. The goal is to predict where the reactions will occur and what profit objective toset for each trade." Trident’s approach is easy to understand: Each wave in the direction ofthe main trend will be equal in length to the previous wave in the same direction. The tar-.get is calculated by adding this distance to the highest’or lowest point of the completedreaction. As witli Elliott’s principle, the determination of the tops and bottoms of the wavesis dependent on the time element used; the complex form of primary and intermedial ec‘waves would hold true with Trident (Figure 12-6). 2
Because there are inaccuracies in the measurement of behavioral phenomena, Tridentemphasizes the practical side of its theory by offering latitude in its choice of entry and exit.
 
3 Gann's work also discusses this topic specifically.
 ACTION AND REAC N 297
 
FIGURE 12-6 Trident entry-exit.
 
Target
ve 7~ w<. Average Recommended Selling (Exit)
  
S Sf at 75% Level. efi .ee ye ~< Midpoint=ef /wh qe Average