enough to fill me in on the truth. That means Rick mighteven be older than | am. It means he's been trading a long, long,time. When you see how it is really done, | think you w bepleasantly surprised. | include it in this book because it works sowell as a filter for the Ross hooks via the Trader's Trick Entry.
First, let's make sure you know the original formula and how tocompute it.
189The Process
[ot [wi [to [wis [tos[or[es[us|os[x[na[va] pa] [ot ]o-s]Pitz fas | s [e[z fe [os [sofas | a2 | oa [14 [is | 6 |
Column 1 = Today’s DATEColumn 2 = Today’s HIGHColumn 3 = Today’s LOWColumn 6 = Today’s CLOSE
Take the highest figure in Column 2 for five days including today, and place itin Column 4,
Take the lowest figure in Column 3 for five days including today, and place itin Column 5.
Take the difference between Columns 4 and 5 and put it in Column 7.
Take the difference between Columns 4 and 6 and put it in Column 8.
Take the difference between Columns 7 and 8 and put it in Column 9.
Total the last three days of Column 7, including today, and put it in Colum 11.Total the last three days of Column 8, including today, and put it in Column 12.Total the last three days of Column 9, including today, and put it in Column 13.Divide the total in Column ? into the total in Column 9, and put it in Column 18.Divide the total in Column 11 into the total in Column 13, and put it in Column 14.Total the last three days of Column 14, including today, and put it in Column 15.Divide Column 15 by 3 and put the answer in Column 16.
 
Column 14 is D. Column 16 is D smoothed over a three day period.
If you have software that performs the arithmetic for you, thenmake sure you set it at 5,1,3, or 5,3,1. How you set it will dependon your software. When | use Market Detective | set it at 5,1,3.When | use Ensign software, | set it at 5,3,1. Apparently differentprograms use the numbers differently. If you see only one plotinstead of two, then switch the parameters. You need a "K" plotand a "D" plot.
To the best of my knowledge, Columns 15 and 16 were notcomputed in the origina! formula.
In his book Techni. , by JohnJ. Murphy, he states, "The Stochastic Process was invented byGeorge Lane (president of Investment Educators, Inc., Des Plaines,IL, 60018) many years ago..."
 
190
 
 
 
My own research has shown this is not true. In his own book,
hasti I RSI he Moment of Decision, byGeorge C. Lane, Mr. Lane calls his version "Lane's Stochastics,"implying that there is another "Stochastics" that precedes "Lane'sStochastics."
    
   
From what I've been able to ascertain, George Lane did notinvent the version of the study shown above. This type of studyhas been. around a lot longer than George Lane. Nor did he inventthe "Stochastics Process.” By definition of what stochastics is, noone could have invented the process. Progressions of randomvariables have existed throughout time.
The truth is that there are few living traders who know howthe so-called "stocastics process" originated. Prior to George Lane'sassociation with Investment Educators, C. Ralph Dystant ownedInvestment Educators and was teaching %D. Rick Redmont wastaught my Mr. Dystant in 1966. Over the years Mr. Dystantimproved the documentation with new ideas which you will see inthis book. Mr. Dystant began teaching the slowed version around1972-73. He claimed it was only for "slow thinkers." %D came tobe named "Stocastics” by Mr. Tim Slater, presently the head ofComputrac. Tim felt that Stocastics sounded better than %D. Theearly documentation calculation page reads "Stocastic Process."
C. Ralph Dystant died of a massive heart attack in 1978.Lane's "Stochastics" would require a setting of 5,3,3 ona
computer, rather than 5,1,3. Compare the following method ofcomputation by Lane with the original previously shown.
191Without a computer, here's how | calculate Lane's Stochastics.
close - 5 day low1OOX ~-----------nnnn-nnnenenenneenee = %K5 day high - 5 day low
(sum 3 %K)/3 = %D(sum 3%D / 3) = Slow %D
Enter today's high in column 1.
Enter today's low in column 2.
Enter highest high of last 5 days in column 3.
Enter lowest low of last 5 days in column 4.
Enter today's close in column 5.
Subtract 5 day low from today's close and enter it in column 6.Subtract 5 day low from 5 day high, and enter it in column 7.Divide the number in column 6 by the number in column 7 andmultiply by 100. This is %K.
Enter %K in column 8.
Sum last 3 day's %K. Divide sum by 3. This is %D.
Place %D in column 9.
Sum last 3 day's %D. Divide sum by 3. This is Slow %D.Place Slow %D in column 10.
 
[momnnnrn nnn nn nnn naan nn nnn nnn nnn nnn nn nnn naam woncsecnoresnsnnn\[2 |] 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 J10 |
wancenmanonn | |sK | %D | sD-s |
----------------- wann-----/
 
. Now if you don't mind, | will no longer call the original studyStochastics." It annoys me to call something by a name that it isnot. From now on, let's call it "Study."
 
Now let's get on with the use of the original Study.
192
 
The method is based upon an observation: As price increases,daily closes tend to accumulate closer to the highs of the dailyrange. The opposite is also true: As price decreases, daily closestend to accumulate closer to the lows of the daily range. Thisobservation is derived from intraday monitoring of closes, but worksin any time frame.
There are two valid signals available when working with theStudy and the Ross hook.
1. Buy and sell signals are based entirely on a crossing of the"D" plot by the “K" plot.
2. Divergence indicates that a hook should not be takenbecause the trend may be ready to end.
For example, when prices have made a new high, then react,
and subsequently move to a higher high, while corresponding peaksof "D” make a high and then a lower high, a bearish divergence has
taken place. The ascending trend may be almost over.
If prices have made a new low, then react, and subsequentlymove to a lower low, while corresponding troughs of "D" make alow and then a higher low, a bullish divergence has taken place.The descending trend may be almost over.
Here is a very important refinement: The original signal was toact upon the divergence when the "K" plot line crossed on the righthand side of the peak of the "D" plot line at a top, or on the righthand side of the trough of the "D" line at a bottom.
This concept still works and is especially true when a market isin congestion. But when we are dealing with Ross hooks, we areonly interested in how the Study is to be understood in a trending
market.
193
||||||||||When trading Ross hooks, all we care about is the fact that the"K" plot line has crossed the "D" plot line. It makes no difference infiltering the hook entry as to which side the crossover takes place.We do care at which level the crossover takes place. We don'twant a crossover above 75 for an up move or below 25 for a downmove, but we most certainly don't care about any such foolishnessas "overbought", or "oversold."
Let's look at the crossover concept so you'll know what |mean by crossover. This is nice to know information, not something
to use.
K crosses D on the left-handX crosses D on the right-hand 4 ->. side of the peak.side of the peak.
      
Left-hand cross-over.
 
   
<- Right-hand cross-over,
*  K crosses D on the right-hand* side of the trough.
->: ~ Left-hand cross-over.
K crosses D on the left-handside of the trough.
Now let's look at how this would have affected some of our
Ross hook trades in Crude Oil.
194
SRS Saati Fete
ixii
 
The more wiggly line is the "K" plot and the less wiggly line isthe "D" plot. At times the crossover may be dead center.
CL G DAILY $5.1.3
1Let’s notice a feu 3things on the AO 2275chart. at! tah
      
23752325
2225
 
            
There vas a crossing of "D"by "K" one bar after thetop. By the time the Rh was take
out, we knew to go short.
ee oer , JAN
2175212528752025197519251875182512775
 
ocT DEC Ji
NOU. A13 bs O- 2315 H- 2343 L- 2314 C- 2329 V- 18667 I- 36729 X- 82 Y-
The fact of the relative divergence by the "D" plot from prices,
72
coupled with a crossing of "D" by "K", gave a strong indication that
it would be okay to take a breakout of the Ross hook.
195CL G DAILY $5.1.32375
As prices fall and each
high is lower, ay at 2325“D” also makes 44," t 2275lover highs. 24!" vill, 2225
hed 217sbuy
‘pet 2125More importantly, "D" is not making 2075higher lous. 202519751925187518251775
       
This tells us that all is well and thatue can continue selling this market.
 
Ss
2375232522752225ee “"aL7s21252075202519751925Toman nnn nnn mm tm NB mmf bem A fa iw 187518251775,
SEP ocT vu,11-18 O- 2242 H- 2245 L- 2194 e 2202 V- 9@3i T- 37689 X- og
196
 
CL G DAILY $5.1.3 {23)
Notice on the second trade
 
 
There are tuo trades cf, thy, : up «232%to consider on this At pa! there was divergence by "D. 22'chart, at! H h “D" made a new high, but 22ied t 44 prices did not. amtire hy tt aie!The first was a continuation of uhat we have | 20already deternined as a good thing, to keep Rh il { 20:selling the market. There was no divergence to ttvorry about and there was a crossover of by I My 19“Y 1925
$ <The second trade is the sane one we didn’t take Rh I iil 18earlier in the book. At that time it vas becau: 18:
    
CCI failed to reach -158. | 1775sipCL2G DAILY
237
2325227;22:an2125207,262)19719251879182177!
 
 
 
SEP ocT NOU DEC Jan12-16 O- 1992 H- 1999 L- 1962 C- 1974 Y- 3537@ I- 66487 X- 35 ¥- 5@
I've shown an unusual thing in the chart above. Normally you eewould look only at the lows of the "D" plot for divergence. Butwhen | trade the hooks, | look for divergence from either the highs orthe lows of the "D" plot. That divergence in conjunction with thefact that CCI failed to reach -150 would be enough to keep me fromtaking that last Rh.
As you can see from the more recent charts above, the markethas gone into congestion and is beginning to look as if accumulationis taking place.
197 |By the way, for you daytraders who think the only game intown is the S&P, take a look at how that very last daily bar looked
intraday.
CL 6.5 MIN191?
[.< 1914191119881985198219991896189318981887188419811878187518721869186618631868195?18541851184818451942
 
We need to look at a few more charts so you can see somemarkets other than Crude O
 
Please look carefully at the following daily Bond chart. There isa very important concept | want you to see.
198
 
 
Moree
You will recall that Ross hooks are to be traded when marketsare trending. That concept would have resulted in a single entry intothe Bond market shown on the chart.
 
Notice that the market makes a very subtle 1-2-3 formationjust prior to a minor trend. Subsequently our Study starts to haverising bottoms. This is the tip off of what is to come.
               
US H DATLY 16788Ve see prices in a trading range. 10680Then we see prices begin to trend. 1¢580Prices then correct slightly, creating 1e4eaa congestion area and leaving behind aRoss hook. 44308
wn eae, 16288Ve want to knou if it’s okay to trade thatsa : i4,wee tt | Hf A My 9908feng ly val J 9800
Hil tt Mey 9708
Ue look to our Study and see that K has crossed D. 960089508
Therefore ue place a resting stop to buyabove the Ross hook.
  
  
jou DEC JAN12716 o-10018°H-10024 t-10016"" 10022 y- 345166 [-253278 X- 41 ¥- 4?
199With our next series of charts, let's start putting together someof what I've been teaching you.
We'll take a Eurodollar chart from the inception of a trend to asfar as we have data for it.
  
  
Eurodollars started fron a base that forneda 1-2-3 lou.
  
 
We'll blow up the boxed off area tobegin vith and then blend soneconcepts into a uinning trade.
 
 
0=9286 H=9288 L=9277 C=9278200
 
 
 
  
h <- Ye vant to know if we can use the Trader's2 [ | Trick to pick up an early entry before
          
the Rh. {
Since the market is presently ina+sreveeteeeene } congestion area, we compute tomorrow’s9265 | typical price, and dummy~in a typicalae bar for tomorrou.
 
1 39257 i Ve will then run a study to see if we“to cross "D."
  
The last bar on the chart is as follows: O= 9286, H=9288,L=9277, C=9278. Our formula is (O +H +L + 2(C))/5 =Tomorrow's Typical Price.
We have: + 9277 + 2(9278) = 92815
 
Tomorrow's projected high = 2(9281) - Today's low of 9277= 9285
= 9274
We can insert 9280 for both tomorrow's open and close.
We then run our study to obtain the following chart:
Tomorrow's projected low = 2(9281) - Today's high of 9288201 |D
Assuming a TTE at the point shown by the<- arrow, we see that “K" will have easily{ crossed “D."
<- Hypothetical bar
<- Since "K" crossed "D" here, it will easilyross it at the TTE. We can place a restinguy stop above that high.
 
 
a “d= 32.60=9288 H=9285 L=9274 C=9288
Our assumed prices are shown at the bottom of the chart.How did that compare with what actually happened on the followingday?
ED H.D
We were off by one tick on the high, tuoticks on the low, and three ticks onthe close. “K" crossed "D" furtherthan we had calculated.
Now let’s look and see what happenedas the TTE was taken out.
 
“K= 44.44 ZD= 35.820=9279 H=9284 L=9276 C=9284
202
   
          
  
<- Natural support resting protective{ stop.
2 » ifah i mn
   
 
 
 
Here's the picture of how it would have all worked out for thatparticular trade.
The next picture shows how | could have curve fit a VolatilityStop study to the new trend in the market.
 
 
203
 ED H DAILY Y5,1.9
   
I got as close as I could to the twonatural support points.
That gave me a 5-bar averagevolatility with a 1.9 multiplier.
Hath t alti
JUN JUL
Now, let's get on with another leg of that magin Eurodollars.
204
 
931833159312938993869383S3889297929492919288928592829279527692733278926?92649261925892559252924992469243
 
 
      
   
atetaken out
ED H.D {
t 1 { te Hould "K"
  
[ayy
Each day as prices correct away fron thehigh we project a price at which "kK"vill cross “D." At the tine of the lastbar shoun, we perforn our projection
as indicated in the text belou.
>< What vould happen
     
9248
    
high of the last}» bar?
     
stoc5 1 3 ~
  
By definition, we are in a congestion during this correction.We have had four closes (and opens) all within the range of the barthat made the point of the hook. As each bar forms, we can insert aprice, or ask our program if "K" will cross "D" if the current high istaken out. If there is enough room to cover costs at that price, and"K" cross "D", we place a resting buy order (1 use Stop Limit) atthe price that constitutes a taking out of the current high.
 
The current bar has a price range of O=9298, H=9304,L=9297, and C=9302. Using our formula for Typical Price(O+H+L+(2C))/5, we arrive at 9301. The Typical Price will always
be our open and our close.
2(9301)-9304 =9298 = Tomorrow's projected low.2(9301)-9297 = 9305 = Tomorrow's projected high.
We can insert a bar with those prices to get an idea of howtomorrow might look. In order to make sure | cleared the latest twobars, | set the breakout point at 9306 instead of 9305. As you cansee on the next page, "K" projects a crossing of "D" with easeNow, let's look at what really happened.
ED H.D
The market opened at 9385probably filling our restingbuy order at 9386.
 
It also would have filled
any orders we might havehad at the Ross hook.
 
 
 
  
“K= 69.22 vD= oe Projected plot readings.0=9381  H=9306 L=9298  C=9306 By now, you should be getting the idea of how this works. I'll
print out some more of the chart with the Study on it so you can seehow the projections would have worked out.
 
206 207ED H.D
There was not enough room to try the TIE.
The point of the hook was at 9313. The bar prior tothe breakout had prices of 0=9312, H=9312, L=9389,C=9318. These gave a Typical Price of 9311. I setthe breakout point to 9314, which would take out theRh. A projection shoved that a bar based ona TypicalPrice of 9318, vith a high at 9314, and a low of 9318,vould cause "K" to pass through "D."
 
 
Eurodollars broke out and continued to march on. Stops couldhave been successfully trailed at natural support points, or with a
curve fitted volatility stop. A curve fitted moving average of thelows would also have worked.
The next segments up were almost all able to be projected fora"K", "D" crossover. You can spot them on the next chart. Afterthat I'll show you something interesting that took place.
208
 
 
 
 
 
“K= 96.15 “D= 98.38‘ 0=9389  H=9323 L=9388 = C=9322
Up until the high on the chart above, prices had been movingup steadily.
Then came a more severe correction. This correction was:warned of when the "D" line began to diverge from prices. Duringthat correction, there was one critical juncture at which it waspossible to be stopped into the market at a wrong time.
I've shown that series on the three charts that follow.
209                                            
    
As you can see, eventhe previous day’s high by one tick,there was no crossing of "D" by "K.
janes 7 : Typical price was 9418.g4g9 Each day, as we project abar based upon 1+} ped jected high was 9416,
js Somrevense typical price, we test to see if "K" will ia : Projected low was 9485.
aifet
9378, cross "D," Apt :aI : The next chart shows || i how our projection | Fron here the correction became moreheel 1 : looked on the chart. peel t’ pronounced, and ended up in a tradingpare pore range.pel But, don’t forget, we've left behind
pel
 
a Ross hook.
 
 
 
 
  
Y=0=941 H=9413 L=9482 © C=9418
  
ED H.D
 
Prices have been moving Rhsideways for awhile. Each |: ;time the hook was it...challenged, there |was no follow- rth... through. |This tine, ift
...we have acrossing ft,} ‘just prior to this test of the
“py yoo} hook high.
crosses "D."
Notice “D™ has been maki7 higher highs and lows. ng
  
stocS 1 3Y= 90.32 “zD= 82.790=9414 H=9422 L=9413 C=9419
 
On the next chart, we’ll see what really happened.
210 211     
Because the crossing is. above the 75 level, wewill not attempt a
. trade. Therefore, Jve don’t need ope
          
. insert a
projection f
    
. such as theone 1, ft. shoun pe this chart.
+4, J
           
Itwas too high up.
         
 
0=9413
   
H=9422 L=9413 C=9417
 
                      
Prices gapped up RhN ki Iabove: the hook. Mas, 4 old Rh mgt A Nien ae, and raed 82w+ GoEsC host of ‘the day: hyp } dat trade gap openings,3. This trade is not quiteBigtiggatanastion AO 1) [rh] 2 RintHeer groans, yl} + Soslan gins aan ttteht *
    
their shortders on this
  
ten double up J
breakouteshooxt 1* DOM
The £2 fals;
  
ind of trade
 
  
att# Now jets sep cihat happened as prices approached this
     
thy rol
 
ED H.D
fs prices congest near the newRh, we get a crossing of "D" by
Ve place a resting stop limitbuy order above the hook.
Since ue have a crossing of "D" by "K,"
there is no need to make a projection.
— WY" Crosses "D"
 
 
Hopefully, ve are filled as pricesyt take out the point of the hook.
If we are using natural supportpoints for our stop, we place itas shoun. Otherwise, we can usea volatility stop.
 
 
 
We can see how the trading progressed, and show the chart atthe next decision area.
213   
The point of the hook is at 9458, so there is room9448 enough for us to cover costs on a breakout of thecurrent high. Three ticks in Eurodollars yt tt
2419... 4s $75. Leys stiphtetswee
                   
rl 44 Typical price is 9444.:! 1"*] Projected high is 9446;1 Projected low is 9442.
  
 
  
j= 73.530=9446 H=9446
     
L=9442 C=9443
 
pete
 
tt
 
af
  
stapltett
    
| ishtThe projection is insufficient for us toattempt entry on that basis alone.
           
But what if prices were to take out the hookitself? Let’s look at that next.
       
 
 
   
L=9442 C=9444
 
214
 
“Let’s take a peek at this chart again to see if ue Rh!.. can make a slightly different projection based + tyupon the point of the hook at 9458. yt :
ley } atipttetsfi | [ Tets]
ftet ‘
 
| the true range.
0=9446 H=9446 L=9442 C=9443
The true range would be from today's close at 9443 to onetick above the point of the hook at 9451. We could figure today'sTypical Price as (9443 + 9451)/2 =9447. That would give us a barwith which to insert a projection for tomorrow.Let's check out the projection to see if it gives us a crossover ED H.D
of "D" by "K."
ED H.D
“Even a move such as the one described would not result.... in a crossover of "D" by "K." +414
Our stop limit order had a good chance of being :filled since the market opened at our price and then : i
traded doun and later back through.
 
 
  
 
 
“K= 86.66 ~D= 68.88 |stocs 1 3 0=9451 H=9457 1L=9446 C=9455“k= 59.99 “D= 63.53O=9447 0 H=9451 0 L=9443C=9447 The next trading opportunity is very similar to the precedingones, the difference being that a stop placed at a natural support |ED H.D point would have been taken out.- ——— This is why it is so important to cover costs as soon asReal prices conb ined in such a way as to cause possible, and then to take some sort of profits early in the trade.. ' The next chart shows a concept you might want to consider4 : ; atypbtete? learning.) | [rts]| t!rtttt With the crossover in effect, we can nowplace a stop limit buy order above the hook.There is not sufficient roon to cover costsona take out of the current high.
 
0=9446 H=9448 L=9445 C=9447216
 ‘Tnnediately after the vertical cursor, you;_can see that the study was predicting ait | Hailfor "K" to cross "D." Folloving_the breakout of the hook, price: hel ‘a antslmade tuo dojis and a reveran|T
_bar. Vhen I see price t :action , that, yi 4,11 take my profits and run. I find that I can
. fit "+ usually reenter the market later on. When [} [ | ty say I take my profits and run, I mean profits on the latest: {
 
entry into the market. [ may be holding positions fromfurther back, and trailing stops on different bases,depending upon where I first entered the market.
   
“K= 24.99 zD= 52.880=9448 = H=9452. ss L=9446 0 C=9449
There is no need to wait around holding your breath, andwatching yourself take a bath. The market is talking. Dojis indicateindecision in the market. A series of them is a way the market hasof telling you something is about to change. That doesn't mean itwill always change, but more often than not, some underlying factor
you are not aware of is causing a stand-off between the bulls andb