beginning of thenew trend as suggested by the time, price and pattern dynamic tradinganalysis.2. To enter a long position, as long as the low of the day prior to theinside-day has not been exceeded, on the day following the inside-day,buy at one tick above the high of the day prior to the inside-day.3. Place the initial protective sell stop one tick below the lower of the lowof the inside-day or the low of the entry day.Inside-Day Entry Set-UpAs long as the low of the day prior to the inside-day has not been exceeded,buy the break above the high of the day prior to the inside-day.Place the initial protective sell-stop one tick below the lower of the insideday or entry-day low.
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Inside-Day Entry Strategy
All of the inside-days (ISD) for the period shown for the S&P aremarked by the software program with a small solid box above the insideday. For these examples, we are considering the inside-days out of thecontext of any technical analysis and trend position. We will assume thetechnical analysis signals the trend is up throughout this period and onlybuy-signals would be considered.ISDs #1-4: Each of these four inside-days were ideal trend-continuationtrade set-ups. In each of these four set-ups, the day following the insideday exceeded the high of the day preceding the inside-day and provided abuy signal.ISD #5: A long trade was not elected as the high of the day prior to theinside-day was not exceeded prior to the sharp decline.ISDs #6 and 7: Each were ideal trend-continuation trade set-ups where thetrend continued higher.ISD #8: The day following ISD #8 exceeded the low of the ISD but notthe low of the day prior to the inside-day. A long trade was elected withthe initial protective sell-stop one tick below the entry-day low.ISD #9: The day following ISD #9 opened below the day prior to theinside-day voiding a buy entry signal.
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Assume the Dynamic Trading analysis signaled the trend was up fromthe Sept, 6 low, dawn from the Dec. 3 high and up again from the Jan. 29low. Which inside-days would have been followed by a trade entry?Which would have been stopped out with a small loss?Trend Up From Sept 6 - Only Long Trades Considered#1: No trade entry. The day following the inside-day did not exceed thehigh of the day preceding the inside-day.#2: No trade entry. The day following the inside-day did not exceed thehigh of the day preceding the inside-day. However, as we will see in thenext section, the day following the inside-day was an outside-day entryset-up.#3; No trade entry.#4: An ideal trade entry. The bullish trend continued without slopping outthe inside-day entry strategy.#5: Another successful trade entry. The trend continued up.#6: The trade would have been stopped out on the second day followingthe inside-day. If the market was at or approaching a time and price targetfor a trend-reversal top in late Nov.-early Dec., the trade would not betaken.Trend Down From Dec, 3 - Only Short Trades Considered#7: Two consecutive inside-days. A short trade was not triggered.
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#8: A short trade was not triggered. The day following the inside-day didnot exceed the low of the day preceding the inside-day.#9: No short trade was triggered,#10: A short trade was triggered and stopped out the same day for a smallJoss.Trend Up From Jan. 29 - Only Long Trades Considered#11: A long trade was not triggered.There were twelve inside-days during this five month period forbonds. Four inside-day trade set-ups were triggered. Two were profitableentry strategies as a consistent bull trend continued after the long positionentries. Two were small losses.While inside-days occur frequently, a trade was not triggeredfollowing each inside-day. Whether a trade is triggered depends on thetrend direction and the price range following the inside-day.In several of the cases with these two charts, the day following theinside-day did not exceed the range of the day preceding the inside-dayand a trade was not triggered- The rules could be expanded to include abreakout in the trend direction of the day prior to the inside day at anytime following the inside-day. If this rale were added, trade entries for thebond period shown above following ISDs numbers 2, 8 and 11 would havebeen successful entries.Why haven't I broadened the rules to include a breakout of the rangeof the day prior to the inside-day at any time following the inside-day?Because I haven't thoroughly tested this broader rule on a wide variety ofmarkets, and I only want to present to you those strategies that have beenthoroughly tested which have the highest probability of success.
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Outside-Day Trade Set-UpsAn outside-day is a period of range expansion, A market usually continuesin the direction of the close of an outside-day. The outside-day entry setup requires the market to be monitored during the day.Outside-Dav Trade Set-Up Entry Rules
If:
1. Only enter in the direction of the trend.2. For a buy set-up, if the market first exceeds the low of the prior daywithout having exceeded the high of the prior day, buy one tick abovethe high of the prior day.3. Place the initial protective sell-stop one tick below the low of the entryday up to the time the trade is entered,4, Exit the position on the close if the close is below the current day'sopen and prior day's close. The failure of the close to be in theanticipated trend direction is a negative signal and reason to exit thetrade.
Outside-Day Entry Set-UpIf the market has first exceeded the prior day's low, buy the break above theprior day's high.Place the protective sell stop one tick below the low of the entry day.Exit the trade on the close if the close is below the current day's open and theprior day's close.
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Outside-Day Plus Entry Strategy (OSD+)The outside-day entry strategy described above requires the market to bemonitored during the day. If this is not possible, enter on the break of theoutside-day the following day if the break is in the direction of the trend.Also use this entry strategy even if the outside-day entry was exited on theclose. Maintain the buy order until the market has broken out of the rangeof the outside-day.Outside-Pay Plus Entry Rules1. Only trade in the direction of the trend.2- For a bull trend, place a buy-stop one tick above the high of theoutside-day. Maintain the buy-stop until the price range of the outsideday is exceeded.3. Place the initial protective sell-stop one tick below the low of theoutside-day.
Outside-Day Plus One (OSD+)Only take a signal in the trend direction.Buy one tick above the outside-day high.Place the protective sell stop one tick below the outside-day low.
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Outside-Day Entry Strategies
Trend Down - Only Consider Short EntriesEach outside-day for this period is marked by a the solid box above theday- A bear trend began Sept 12. Only short position trade set-ups areconsidered. For short position set-ups, the high of the previous day mustbe exceeded during the day before the sell-stop below the previous daymay be made.Sept. 23: An outside-day was made, but the open was below the low ofthe prior day. A sell order was not considered as the low of the previousday was encoded before the high. An OSD+ may be possible thefollowing day. As long as the high of the outside-day is not exceeded,maintain a sell-stop one lick below the low of the outside-day. Three dayslater, the sell order is elected. The protective buy-stop is placed one tickabove The high of the outside day. It was never elected as the trendcontinued down.Oct. 2: The open is above the prior day's high. Place the sell-stop one tickbelow the prior day's low. The sell order is elected later in the day. Theclose is below the current day's open and prior day's close. The protectivebuy-stop is placed one tick above the Oct. 2 high. Traders who didn't entershort on Oct. 2 may place a sell-stop one tick below the low of the outside
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day for an OSD+I sell strategy. This would have been elected thefollowing day.Oct. 21: Beans opened one Tick above the prior day's high. A sell-stop isplaced one tick below the prior day's low. It is elected later in the day. Theshort trade is not exited at the close of the outside-day because the close isbelow the current day's open and prior day's close. The protective buystop is placed one tick above the high of the outside-day. The shortposition is stopped out three days later.
Trend Up - Only Consider Long Trade EntriesSept. 6 was an outside-reversal-day which began the bull trend.Sept. 10: Since the trend is up, only set-ups for long trades are considered.This outside-day did not meet the conditions for a long entry.Sept. 23: Perfect outside-day entry set-up. Bonds opened below the priorday's low. Place a buy-stop one tick above the prior day's high. The buystop was elected later in the day and the close was above the current day'sopen and prior day's close. The protective sell-stop is placed one tickbelow the low of the outside-day. Bonds continued straight up.Oct. 9: The set-up conditions for a long position were not made.
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Oct. 25 and 29: These were both ideal outside-day trade set-ups for longpositions. A buy was elected each of these days one tick above the high ofthe previous day.Nov. 20 and 25: Both these days were also perfect outside-day trade setups for long positions. The protective sell-stops below the lows of theoutside-days were not elected.Of the seven outside-days during the Sept, 6 low - Dec. 3 high bulltrend (9/6 reversal day not counted), five met the conditions for a longtrade entry. Not one of the five was stopped out. The trend continued upin each case.Outside Day Plus One: Each of the days above that made thetrade entries also could have been entered on the day following theoutside-day with the OSD+ 1 entry strategy. The capital exposure wouldhave been slightly higher for each of these entries as the buy price wasslightly higher.Outside-day trade entry strategies are very high probability withrelatively low capital exposure. Like all trade entry strategies, they mustbe considered in the context of the trend direction and the position of themarket within the trend. If the dynamic technical analysis is signaling atrend is near termination, new trade entries should not be consideredexcept for very short-term trades of 1-3 days.
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Gann Pull Back Trade Entry Set-Up (GPB)The Gann Pull-Back entry strategy is based on W. D. Gann's observationthat minor corrections in trending markets usually only last three days orso. This is a correct observation as anyone who has studied market trendsis aware. The Gann Pull-Back trade set-up is designed to enter a trade onthe minor corrections against the main trend.Gann Pull-Back Entry Rules
1. Only enter in the direction of the trend.2. For a sell set-up, the three most recent days must each have higherhighs or any combination of two higher highs and an inside-day. Justthe opposite for a buy set-up,3. For a sell set-up, place a sell-stop one tick below the low of the priorday once the set-up conditions are met.4. If the market makes a new high, adjust the sell-stop one tick below thelow of the prior day.5. Place the initial protective buy-stop one tick above the higher of thehigh of entry day or the day prior to entry.6. Exit the position on the close of the entry day if the close is above thecurrent day's open and the prior day's close.
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Gann Pull-Back Trade Entry Set-UpIf the market has made at least a three day counter-trend, sell one tick below theprior day's low.Place the initial protective buy-stop one tick above ihe high traded for thecorrection.
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Trend Up - Only Consider Long Trade Set-upsThe S&P bull trend was well established in Oct. 1996. The Gann PullBack trade entry technique should only be used to initiate long positions,The days following the Oct. 21 high ate numbered for reference,Day 3: The set-up conditions have been met. The S&P had made threeconsecutive lower-lows on Day 3. A buy-stop is placed one tick above theDay 3 high.Day 4: The buy-slop above the Day 3 high was not elected, A new low ismade on Day 4. Adjust the buy-slop to one tick above the Day 4 high toenter a long position.Day 5: The buy-stop was elected. The initial protective sell-stop is placedone tick below the low of Day 4. The low of Day 4 was one tick below theprior day's low. This protective sell-stop was hit later in the day for asmall loss on the day. Because the market has made another consecutive,new low. a new buy-stop is placed one tick above the high of Day 5,Day 6: A new low is made without electing the buy-slop one tick abovethe previous day's high.Day 7: The buy-stop to enter a long position is adjusted to one tick abovethe Day 6 high. The buy-stop is elected. The trade is exited on the closefor a loss as the close is below the current day's open and prior day'sclose.
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The following day, the bull trend resumed. The Gann Pull-Back entrystrategy has not placed the trader in a long position on the six day correction. The rule to exit the trade on the lower close on Day 7 took the traderout of a long position on the day prior to the resumption of the bull trend.Professional traders stick to the entry rules, even if the rules occasionallytake you out of a trade.Three days later on Day 10, the S&P made an inside-day trade set-up.The following day (Day 11) triggered a long position on the inside-daytrade set-up and the S&P went straight up from there more than makingup for the two small losses on the Gann Pull-Back trades.I purposely chose an unsuccessful example first, so you would keepa firm grasp on reality and the principles of trading. Not all tradingstrategies are successful all of the lime. The key is to follow the tradingstrategy rules which are designed to keep losses small. It is also importantto have two or three trend-continuation entry strategies as part of thetrading plan. When one fails, the other is likely to be successful.
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Trend Is Up - Only Consider Long Trade Set-UpsThe above chart shows the first correction that followed the Oct. 1996correction on the previous chart. A high was made Nov. 26 followed bythree days that traded within the range of Nov. 26. On the third tradingday following the Nov. 26 high, the S&P made the first lower-low.Day 3: The third lower-low. The set-up is complete. For a long trade entryon Day 4, place a buy-slop one tick above the Day 3 highDay 4: The buy-stop is elected to enter a long position. The initialprotective sell-stop is placed one tick below the Day 3 low. However, thetrade is exited on the close for a small loss. The close of entry day wasbelow the current day's open and the prior day's close.Day 5: At the end of Day 5, the set-up conditions of three lower-lows ortwo lower-lows and one inside-day are not met The S&P has not madethree consecutively lower-lows. The S&P rallies for two days (Days 6-7)followed by a resumption of the decline.Day 10: A new set-up for a potential long trade is in place. The S&P hasmade three consecutively lower-lows at the completion of Day 10. A buystop to enter a long position is placed one tick above the Day 10 high.Day 11: The buy-stop is elected as the Day 10 high is exceeded. Theinitial protective sell-stop is placed one tick below the Day 10 low. Thesell-stop is elected later in the day for a loss. Even though the prior day's
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high was exceeded, the S&P is still making lower daily lows, A new buystop is placed one tick above the Day 11 highDay 12: A new low is made and the buy-stop above the prior day's highis not reached. The buy-stop is adjusted to one tick above the Day 12 high.Day 13: The buy-stop is elected for a long position. The initial protectivesell-stop is placed one tick below the Pay 12 low. The S&P ralliesstrongly. Within just a day or two, the gain from the long trade has morethan off-set the losses from the first two attempts to position long.A minor high is made Dec, 31.Day 16: The S&P has made three lower-lows for a Gann Pull-Back tradeentry set-up. A buy-stop to enter a long position is placed one tick abovethe Day 16 high,Day 17: The buy-stop is elected. The initial protective sell-stop is placedone tick below the Day 16 low. The bull trend continues to new highs.As you can see from the set-ups and trades of these two charts, theGann Pull-Back trade entry technique is designed to enter in the directionof the trend following minor corrections to the main trend. It may take twoor three attempts to enter. The key is that unsuccessful trade entries onlyresult in relatively small losses which should be quickly recovered byprofits of the successful trade entry.As with all trend-continuation entry techniques, it is critical to firstdetermine the main trend direction and only take trades in the direction ofthe larger degree trend. It is also important to be alert if the DynamicTrading analysis indicates a trend is nearing completion. If it appears to benearing a zone with a high probability of completing the trend, tradeentries should be avoided.There are many other trend-reversal and trend-continuation entrystrategies that are applicable to unique situations. Whole books have beenwritten on short-term entry strategies such as Connor's and Raschke'sStreet Smans and Cooper's Hit and Run, both of which are highlyrecommended. If incorporating other short-term entry strategies, keep inmind to only consider them within the context of the trend direction andmarket position.
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Protective Stop-Loss Adjustment - Protecting Unrealized ProfitsThe prior sections described the initial trade-entry strategy and the initialstop-loss placement. If the trade-entry strategy is successful and the initialprotective stop-loss is not elected prior to the trend continuing in the direction anticipated, the next objective is protecting the unrealized profits ofthe trade.If a protective stop-loss is brought too close to the current position ofthe market, the trade may be stopped out on a short-term reaction prior tocontinuing the trend. If the protective stop-loss is kept too far from thecurrent position of the market, a substantial portion of the unrealizedprofits may be "given back" if a trend reverses prior to an anticipatedreversal.While there is no perfect solution to this conundrum, Dynamic Tradinganalysis and trading strategies will help to limit losses and protect themajority of unrealized profits.The Principles of Stop-Loss PlacementDynamic Trading analysis methods help to identify how long in time andprice a trend is likely to continue, the specific time and price zones with ahigh probability for trend reversal and the pattern that signals a trendtermination.1. The protective stop-loss should be kept relatively far from the currentmarket position until the trend is confirmed.2. The protective stop-loss should be brought relatively close to themarket position when the Dynamic Trading analysis signals a trendhas a high probability of terminating.3. As a trend continues, traders must have a plan to adjust protectivestops to either reduce the capital exposure for a loss or protectunrealized profits.4. If a marker approaches a set-up of projected time, price and patternthat signals the trend has a high probability of terminating, theprotective stop-loss should be brought very close to the current marketposition.There are many protective stop-loss strategies that may be utilized.The most effective and logical ones will be contingent on the marketactivity as it unfolds.The initial protective stop strategies for trend reversal and trendcontinuation trade-entry have already been described. It is usually prudentto keep the initial stop away from the market in the initial stages of a trend
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until the market has confirmed that a new trend is underway. The initialstages of a trend can often be volatile with the market coming back to testthe pivot extreme. What about when a trend is underway? How is the stopadjusted on a periodic basis as a market trend progresses?Swing Stop-LossThe simplest method for stop-loss placement is to place the protectivestop-loss (PSL) just beyond the prior swing low or high. The definition ofa bull market is the market that makes higher-highs and higher-lows. If themost recent low is exceeded, the bull trend is probably over. If the mostrecent high is exceeded, the trend is confirmed,A strategy to adjust the protective stop-loss in a bull trend is to place itone tick below the prior swing low. As higher swing lows are made, thePSL is adjusted to the new low. Swing highs and lows must be objectivelydefined. What are the draw-backs to this simple but logical method ofstop-loss placement?1. In a strong trending market, price may move a great distance withoutmaking a new swing pivot. The PSL may remain a great distance fromthe current market position and a substantial unrealized profit may begreatly reduced before the PSL is elected.2. If a market enters a prolonged, volatile trading range, the trader maybe whipsawed to ruin prior to the trend getting underway. In the longrun, net profits will only accrue from markets with large and consistenttrends. Consistent losses will occur in trendless, choppy, trading-rangemarkets. The relatively large profits that accrue from the major trendswill often not overcome losses from high-volatility, trendless periods.A swing high or low should only be considered as a maximum stoploss position. The initial stages of a trend usually have larger reactionswith greater volatility as the consensus of traders is not yet-one sided. Inthe latter stages of the trend, reactions against the trend are usuallyrelatively shore in price and time as the vast majority of traders are onesided in their opinion of the market position.
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Three-Day Low or High (3DL or H)If a trend is valid, there should only be minor corrections to the trend. Ifyou examine long histories of daily charts for many markets, you will findthat once a trend is underway, the market will usually not retrace the rangeof the prior three days. The three-day high or low may be used to adjustthe protective stop-loss as a market trend progresses.A three-day low is the lowest price of the three days from the extremehigh, inclusive of the high day. Inside-days are not counted. It is not thesame as the low of the most recent three days.
Three-Day LowThe lowest price of the three days from the extreme high, inclusive of the high.Inside days are not counted.
In the figures above, the three days used to determine the three-daylow are labeled 1,2 and 3, Day one is always the highest price of theimmediate trend. In figure one above, the inside-day following day-two isnot counted. In figure two, day-three is not an inside-day. In figure three,the two days following day-two both traded within the range of day-two.Neither day is counted for the 3DL. Day-a is an inside-day to day-two.While day-b is not normally considered an inside-day because it traded
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outside the range of the prior day, it did not trade outside the range of daytwo. The next day will not be counted until the range of day-two isexceeded. In figure four, the 3DL will not change until price movesoutside the range of the high of day-one and the low of day-two. A threeday low is not the lowest price of the prior three days, but the lowest priceof the three days from the extreme high inclusive of the high and exclusiveof inside-days,Adjusting Protective Stop-Losses To The 2DL and 1DLStop-losses placed one tick below the 3DL will usually keep you in themarket through the majority of the trend. As a market nears a target with ahigh probability of completing the trend, the stop-loss should then beadjusted daily closer to the current market position to the two or one-daylow.The charts on the following pages illustrate when three-day lows andhighs were exceeded for several markets. These chart illustrations aresimply for you to be able to identity the position of the three-day highsand lows. Other analysis and trading factors are not considered.
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Three-Day LowsDuring the Dec. 17, 1996 to Feb. 19, 1997 rally, the S&P exceeded the3DL three times as noted by the bold horizontal bars on the chart below.Daily reversal signals are also noted.
The main trend of the S&P was very bullish during this period. As youcan see, the S&P remained above the 3DLs throughout this period right upto the minor tops prior to the corrections.Only the 3DLs that were exceeded are marked by the bold horizontallines an the chart. The dates of the swing highs and lows arc noted. Followthe daily bars one day at a time beginning with the Dec, 17 low and noteeach new 3DL. Remember to not count the inside-days.
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Three-Day Highs (3DH)
Silver was in a consistent bear trend from the Aug. 1996 high intothe Jan- 1997 low. The first 3DH to be exceeded was the trading dayfollowing the Nov. 6 low.Note that the 3DH in late Sept. was far above the market and wasnever exceeded during the three week correction that began from theSept, 20 low.
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Three-Day Highs (3DH)
Bonds exceeded the 3DH just three times during the Dec. 3,1996 toJan. 29, 1997 decline. Remember that these examples are only to show thepositions of the 3DHs without consideration to market position or Tradingstrategies.A 3DH or L would not be used as a protective stop-loss target if thetime, price or pattern analysis signaled a trend was near termination. Thestop-loss would be adjusted to the two or one-day high or low.
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Multiple Contract Positions - Short and Intermediate Term TradesInitial positions should be taken with two or three units. A unit is aspecified number of contracts. For our discussion, we will consider oneunit is one contract. If two contracts are traded, one contract should beconsidered a short-term position and one an intermediate-term position.If the market moves in the anticipated direction, the objective is to lakeprofits on the short-term position relatively quietly and remain in themarket with the intermediate-term position for the majority of the trend.Why cover the short-term position relatively quickly? If the technicalanalysis of the markets was right-on all of the time, we would hold allpositions to the ultimate trend objective. No analysis method is correct allof the time. The objective is to take profits on one unit relatively quicklyin the event the market does not reach the trend objective,Profit Objective For Short-Term PositionsWhat is the target for profit-taking on the short-term position? As withevery aspect of trading, the first consideration is the philosophy or conceptbehind the trading guideline.
Short-Term Profit ObjectiveThe minimum profit objective for the short-term position should bethe minimum price target anticipated if the main trend is not in thedirection anticipated but is only a correction.For instance, if the trader believes that anew bull-trend is beginning,what would the price objective be if the rally was only a typical correctionto the prior bear-trend. In other words, what is the minimum expectationof the rally if it is only a corrective rally to a bear trend and not a new bulltrend? The short-term long position would be covered if the marketreached the minimum price anticipated if the main trend had not turnedand the rally was only a correction.
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Price Objective For The Short Term PositionThe minimum price target if the main trend is not in the direction anticipated.With the case below, if the rally is a correction and not the beginning of a newbull trend, the minimum objective anticipated for an ABC correction is usuallywhere wave-C equals the price range of wave- A.
In the example above, profit should be taken on the short-term positioneither at or near the 100% Alternate Price Projection or the trailingprotective sell-stop on the short-term position should be adjusted close tothe market such as one tick below the prior day's low if the 100% APP isreached.The examples of short-term profit objectives on the following pagesdo not attempt to show all of the possibilities. They only show theassumed major trend and where is the short-term profit objective. Theyare designed to make you think. If you know how to think in terms ofyour trading objective, you will be able to make a logical trading decisionregardless of what ever market activity unfolds.The examples on the following pages do not show how the marketactivity progress after the short-term profit objective was met. We are onlyconcerned at this point in time with how to arrive at a profit objective forthe short-term units of a multiple-unit position.
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Short-Term Profit Objective
Let's assume that our analysis of the bond market concluded that theDec. 3 high was the beginning of a bear trend that should continue todecline below the Sept. low. Where should the profit objective be for theshort-term units of a short position?The profit objective for the short-term position should be at the pricetarget that would be anticipated if our outlook for a new major bear trendwas incorrect and the decline from the Dec. 3 high was a correction to abull trend and not the beginning of a new bear trend.If a bear ttend is underway, Dec. 17 should be a Wave-1 low andDec. 30 should be a Wave-2 high. If the decline is a correction, Dec. 17should be a wave-A low and Dec, 30 a wave-B high. The price zone of109.22-109.17 would be the logical objective for a wave-C low if thedecline is a correction. This price zone includes the 100% Alternate PriceProjection where W.C = 100% W.A and the 61.8% retracement of theprior rally. On Jan. 10, bonds tagged this price zone. Either profits shouldbe taken at this price or protective sell-stops brought very close to themarket position on the short-term units,It is important that you understand the line of thinking here. We are notconcerned whether bonds continued lower or not. We are only concernedwith the process of taking profits on a portion of the short position.
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Short-Term Profit Objective
Crude made what