ying to overcome all the selling, themarket will continue up. If not, the insiders will have a wonderfultime selling the market short, especially those who know this was
an engineered move.
91 
What happen is that not only will selling be done for
purposes of liquidation, but also for purposes of reversing position
  
and going short. This means the selling at the buying climax may beclose to double the amount it would normally be if there were onlyprofit taking.
 
The buying from the outsiders will have to overcome thatadditional selling.
Because of that fact, the charts will attest to a false breakout.Of course, the reverse scenario is true of a downside engineeredmove resulting in a false breakout. .
It is very important to realize what may be happening when amarket approaches a Ross hook after having been in a congestionarea for awhile. The prior pages have illustrated this concept.
92
 
With the preceding information in mind, let's see how toaccomplish the Trader's Trick.
@= prices approach the highpoint of « Ross hook, ue buy
have traded for free, havingcovered our Immediateoverhead.
There were two bars on either side of the bar that made thehigh. As prices approach the area of the hook, we buy a breakoutof the high of whichever bar leaves us enough room to cover costsand is closest to the point of the hook.
verz,
 
“|
Let's assume the high was at 7080, and you had costs of $25per contract including exchange fees. Let's also assume we aretalking about the Swiss Franc, and that we are going to enter anorder for a three lot.
Our immediate costs are going to be $75. If we are tosacrifice one of our contracts to cover costs, we would need sixticks in the Swiss to cover them (6 x $12.50/tick=$75). Obviouslywe cannot take a breakout of the high of the bar whose high is7075. Our entry would have to be 7076. If prices rose only to theprevious high, we would earn only four points — not enough tocover costs.
93Our choice then would have to be the bar whose high was7072. There, we would seek entry at 7073. If prices made adouble top, we could realize costs with a single tick to spare.
What if, in that same illustration, we were talking about LiveCattle. Then, the picture changes. Live Cattle is only $10 per tick.In order to cover costs for Live Cattle, we would need 8 ticks.
Rr| vers
Theevarz,recs|
If we sought entry at 7073, that would leave us wanting forone tick. We would therefore seek entry at 7067, or two ticksabove the bar whose high was 7065.
Why 7067? Why not 7066? Because Live Cattle trades donot have prices ending with the number 6.
Let's put some’general rules around the Trader's Trick conceptand we'll be ready to resume trading hooks where we left off inChapter 7.
Risk management is based upon the expectation that priceswill go up to at least test the point of the hook.
If unable to monitor the intraday action, we must enter ourorder as follows: With the point of the hook at 7080, and if thistrade is three contracts of the Swiss Franc, we enter an order to buyat 7073, which is a breakout of the high nearest the point of thehook that still yields sufficient room to cover costs.
94
 
rers
ar
We instruct our broker to liquidate two contracts at 7079 MITto cover costs of $25 per contract, and if filled, to set a stop at7073, which is our breakeven point.
If our anticipated scenario works out, we will cover our costsand pick up a small profit. Barring any horrible slippage, the worstwe can do after setting our stop to breakeven is to be stopped outwith some sort of profit for our efforts.
We usually limit the Trader's Trick to no more than three barson either side of the bar that made the point of the hook. However,there is an important exception to this rule. The next chart showsthe use of double or triple support and resistance areas forimplementing the Trader's Trick.
95The exception is, that whenever there has been aRh tight congestion area, with double or triple
support or resistance, it is preferable to take
a breakout of that area for the Trader’s Trick.
|buy here.
 
| <-triplesupport,sell here.
RhOf course, our rule still remains that there must be sufficient roombetween the entry point and the point of the hook to at least covercosts.
Now for some finer points.
Covering costs means covering cost for an entire contract set.If you are trading two contracts, you would use one of them tocover costs for both contracts. If you are using a three contract set,you would use one of them to cover the costs of all three contracts.If you are trading a five contract set, you would generally use two ofthe contracts to cover the costs of all five. Should you elect tocover costs with three of the contracts, you can pick up a profitover and above costs. The next step is to use two contract sets, fora total of ten contracts (five contracts in each set). Ona tencontract set, you can typically cover costs with three to fivecontracts. This will usually result in receiving a profit beyond costs.
 
In covering with one contract of a two contract set, you mustpull the second contract to breakeven almost immediately, even ifthis results in being stopped out at breakeven. This may happen asoften as eight out of ten attempts. If you can afford only twocontracts, you will have to be patient and build your account so thatmore contracts can be placed. On daily charts, this can be severalmonths. What you are looking for are the trades that break out andnever look back. You will make your money only on the two out often trades that have that kind of breakout.
96
 
If you are covering with one contract out of three, you can pullone contract to breakeven immediately after covering costs. Theremaining contract should be held back and allowed to lag behind forprofit taking. However, if the second breakeven contract is stoppedout, you must consider exiting immediately with the third contract.
Here, too, you want to greatly limit losses. On three contractset trading, | prefer to cash two of the contracts at the point whereone of them would cover costs. | then immediately move myremaining stop to breakeven. If | am stopped out there, | havecovered costs and made a profit. If two out of ten trades break andrun, | will have a very nice profit to show for my efforts.
When trading a five contract set, a similar approach can befollowed. Cover costs with two contracts. This may result in asmall profit depending on market volatility.
| prefer to cover costs with three contracts and therebyguarantee a profit. | then immediately move my stops to breakeven.
For instance, if Gold has moved six ticks ($60) in my favorbeyond my entry fill, | will liquidate three contracts to cover costs of$100 ($20/contract for five contracts). That will leave me with $80profit [$60 x 3 contracts - $100].
 
| then have two alternatives from which to choose. Usually |will bring the stops on both of the remaining two contracts tobreakeven. If | see prices moving against me, | will try to exit beforemy breakeven stop is hit. If | salvage only $100 from the trade, Iam making 100% over costs.
Less frequently, | will risk the profit | have made on the firstthree contracts ($80 in the example above) and place the stop onthe fifth or last remaining contract $80 below breakeven.
Any time a business can consistently make that kind of profit,that business is going to prosper. Add to that profit the hugeamount of money made on the two out of ten trades that never lookback, and you can readily see that enormous profit is available fromtrading futures.
97
||||||||||||The management method | use shows you why it is soimportant to be properly capitalized. Size in trading helpsenormously.
The method also shows you why, if you are undercapitalized(most traders are), you must be patient and gradually build youraccount using the two contract method.
Whenever possible, | use Stop Limit for my entry order. Eventhe CBOT will take Stop Limit orders (broker not held) as long asprices are below our entry when going long, and above our entrywhen going short.
You never want to place an order ahead of the open without alimit order of some kind. If you cannot obtain a limit order, then youmust instruct your broker to wait until the market opens beforeentering your order, and to cancel the order if the market gaps pastyour price.
If you are not able to tend to your own orders intraday, it maybe well worth your while to negotiate with a broker who willexecute your trading plan for you. There are brokers who will dothis, and you may be surprised to find that there are some who wperform such service for under $30. You should have no problemfinding brokers who will watch your trades for you in a commissionrange of $30-$35.
 
You never want to be filled on a gap opening beyond yourentry price.
Can you grasp the logic of what I'm trying to show you here?
We have no way of knowing whether a move toward abreakout is real or not. If it is engineered, the market will moveforward to the point of taking out the stops and perhaps a few ticksmore. Then the market will reverse, with no follow through in thedirection of the breakout. As long as we have left enough roombetween our entry point and the point of the Rh to at least covercosts, we will do no worse than breakeven. Usually, we will alsohave a profit to show for the trade, however small.
98
 
If we take an amount equal to immediate costs, then we willhave doubled our money relative to our immediate costs. It willhappen this way at least 75% of the time.
If the move proves to be real (not engineered), then the marketwill give us a huge reward relative to our costs. Remember,immediate costs are our only real investment in the trade if it goes
our way.
How often are breakouts for real? This has varied over theyears and within particular years. It has a lot to do withaphenomenon I have come to call the Trading Cycle.
Trading Cycle
If you can picture a pendulum swinging from side to side, thenyou can picture the Trading Cycle.
When the pendulum is all the way to one side, most traders aretrading retracements. When this is happening in the markets, manymore breakouts will be real than not. Why? Because the marketswill quickly adjust to the way most people are trading. The floor wbe fading the retracement traders.
 
When about half the traders are trading retracements and theother half breakouts, the pendulum will be at dead center.
When the majority of traders are trading breakouts, the :pendulum will have swung to the opposite side, and the floor will befading breakout traders. There will be more false breakouts thanwhen the pendulum is at the opposite extreme.
If your management is appropriate, as it will be using theTrader's Trick, you will not get caught with the majority who enterthe trade exclusively at the breakout point, thereby bunching theirstops for an easy target for the vultures on the floor.
When a move is genuine, based upon the underlyingfundamentals, large amounts of money will be made by those who
have correctly managed the trade.
99What about the stop? Where do you place the protectivestop? And where do you place objective stops?
As much as I'd like to go into that here, it will be the subject ofa later chapter. At that point | will really expound on stop placementand treat the entire subject of stops. It will be a very long chapter.
Right now, | want you to fully understand that by taking entryinto a market at the correct point, we can neutralize the action bythe floor and the large commercials. We can be right and earnsomething for our efforts should the breakout prove to be false.
Some breakouts must always be correct. The fundamentalsinsure that. When they happen we will be happy, rich traders.
With proper money management, we can earn something forour efforts even if the breakout proves to be false.
100
 
Chapter 9
Continuing Our Analysis
CL G DAILY 2308
12 aTHIS IS make a 4Prices make a ilydouble top aithen q t - ———-—-Rhretreat. i Many professionalJ traders vould go
hs t short as soon asHr 1 they felt the double# top vas in place.
    
  
 
CL G DAILY 2265 Rh14 theyit Ie ITEjiIU the rrader’s trick
vould enable us tojot get in early,
 
 
CL G DAILy 2204,
2330 13M,
Pyle
{ The double top
al represents a lourisk entry for a
itl short, However;
 
 
ve vill wait foran Rh type entry.
23232:
 
"oer!cL G DAILY 20rh |2358wie LO a Hh beaave Ip2258gare al if prices take
 
out the hook ve can3170 yd choose to add to our
position, We could haveaise hi put on part of it at the2110 trader’s Trick
  
23|
NOU |
 
Some comments about the above graphs might clear up a few
questions.
Notice on Chart 12 that we were able to connect the point ofthe Ross hook to a correction (the congestion area) and then to the
double top. That left us with a 1-2-3 low and a hook. A breakoutof the double top (Rh) would set us up for a new Ross hook onceprices took out the double resistance area and then corrected.
101
correction low created by the price bar that pulled away from the |CL ¢ DAILY = 23. cL G DAILY 2204
      
235@12 2330 13THIS IS IMPORTANT}, aa10Prices nake a ig 2ase Higdoubie top ang fl asve |225¢eMany siteisell 2230 if! ies oetraders vould go 2216 I risk entry for ashort as soonas 2498 an { short. However,they felt the double 2170 if 1 ve vill vait fortop was in place. aise ht an Rh type entry,
2110
   
scL G DAILY 2222Rh
  
CL G DAILY 2265Rh 235@
14400 oh hy REISWane Alayhy 2238 mTal! 2230
The trader’s trick 2210 a OP the hook ve can
bef vould enable us to 2190 Jef choose to add to ourhr get in early. 2150 fr position, We could haveat aise put on part of it at the
2110 trader’s Trick| spi egyytttinn Ft
    
abe baptlon
Chart 13. A more advanced trader might wish to go short asprices moved away from the double top. This is a low risk trade,because a stop can temporarily be placed above the high. Notice |said temporarily. The double top could be a terrible place to have astop, should the insiders engineer a move up to run the stops theyknow are there.
Chart 14. The more conservative trade is to use the Trader'sTrick Entry, figuring that prices will at least test the low as pricesmove down. The Trader's Trick Entry in this case was just belowthe small congestion area. All or part of the position can be put onat the Trader's Trick Entry point. It's simply a matter of choice. Ifyou want to know what my choice is, it is to place the entireposition on at the TTE (Trader's Trick Entry). For those who haveread Trading by the Minute, the small congestion area is a matchingcongestion to the two bar congestion on the left side of the hook.The breakout of that small congestion is significant.
102
23358233023102298227822582230221821982178215821302118
2358233023182298227822502238221821982170215021302110
 
CL CG DAILY 2368 assecl © DAILY 2204 Rh
 
Rh32 Is mt ihe ie LS oh MyPrices make a hay ase { | ifdouble top ai aa7e | f 7 pyy ae ji] The double topieeeat. i Many aes 2230 i] represents a lovi traders vould go 2aie J risk entry for a
short. However,ve vill wait for
short as soon as 2198 it ift an Rh type entry.
yd they felt the double 278ht top was in place, eke
Wo",
 
‘ee tgaCL G DAILY 228oh saat G DAILY 220th14 itr hh za is it fu me i (iyi 2230 ie takeSU" the trader’s trick a210 i fs prices 2 ve can
2198
| fe vould enable us to 2178 yd choose to add to our
      
get in early. position, We could haveaioe hi put on part of it at thea 2110 trader’s Trick‘gh yagi ld Ly epee lien
Chart 15. If we hadn't put on the entire position at the TTE,then the hook is an excellent place to join the crowd who will beselling there. The market has excellent momentum going into the
hook.
103
2358233023182298227822382238221821982178215821382118
2358233823182298227822582238221821982170215821382110  
‘16 “th ih 7 “h ih | zn| (Yur hearaon | fos [FSie" i:Shae bay ea18 fh | BEAD th ael Biltrae mel Bemtae) 4 Et‘eee. Seen ysitd The market is talking! ase al listening? azrs
   
igh bag ec ld s'bce
Chart 16. We see that prices are plunging. However, weshould not be jumping in front of the market each bar, because bythe time prices took out the Ross hook, the market had already beenmoving down for three consecutive bars.
Chart 17. An important event takes place, an intradaycorrection. This makes it OK to jump in front of the market. Thefact that the market opened, traded above the previous bar's high,and then took out the previous day's low, signifies at least one moregood day to be short. Jump in front of the hook created by theintraday correction. In fact, if watching intraday, use the TTE asprices take out the previous day's low.
Chart 18. Note the gap open beyond the previous bar's low.Then notice the price action for the remainder of the day.Professional traders will go long on a gap open like that, some ofthem as soon as possible after the open, and others when pricestrade through the open to the upside.
104
 
CL G DAILY 2213 2344
CLG DAILY 2196 42
 
    
16 eh ataaee nt cores 2aaae mt Rh ¥ton aaal ossshd :ae gay " i
18k Hh za ih Hy :
AM = iies eee Sesh comrecsiae I aa0oiL Cree tion, |itl The nacket is talking? ne tl Tistening? |
 
   
igthag! lee s'bee
When you see a gap open like that in a strongly trendingmarket, take profits. If you've got your guts under control, takeprofits and reverse. Most of the time you will be glad you did. Infact, many professionals, if they think the market is beginning tocongest, will double up on a gap opening, and trade twice as manycontracts against the trend as they would with the trend.
   
Chart 19. When a market that is correcting opens in the upperpart of the previous bar's range, and then trades above the previousbar's high, chances are you haven't seen an end to the correction.
105            
 
‘a L. ih S24 h thi i | = if i+{Jaround the area. aize + .aay ities22h Hh B23, fhi Ma 2200 i! Ieee Bat lig oecetst1) aren sass {[Mirond Oe
below the new Rh.ld
Chart 20. We have congestion by alternation,
I. 2184 freass a sell order
  
Chart 21. A 3x3 MAC would be passing through thecongestion area. You will recall that the 3 x 3 is a filter for RRh’s, itis also a filter here for the same reasons — we are in a definedcongestion.
  
Chart 22. The gap opening below the previous bar's range hasbrought in a double load of orders from the floor. Prices move up ona reversal day. Remember, when the floor feels a market iscongesting or correcting, they will double their orders on openingsthat gap beyond the previous day's trading range. This doub! ing canserve as a filter for our trades, we can expect the floor to try to fillthe gap. Day traders can use this to trade with the floor.
Chart 23. Another gap, this time above the high of theprevious day, has brought in another double load of orders, this timeto short the market. This is a correction day and so we can connectsome segment lines.
106
2352asa629282304a2eeaa72z22562240aaaa2200219221762160
a3a4232823122296220022642248223222162200ais4aise21s2
 
 
24 it ii | Wy
| prices hit ouril an stop below i
ibelow the low.
     
‘oct ewCL G DATLY 2085
26fy
i Hy
Ua
JiThe correction comesintraday creating an
hy
Daytraders may have beenable to scalp a few ticks ofprofit here.
intraday hook situation. h,
   
HOU
Chart 24. There are many problems with getting filled on agap opening below our sell stop. Therefore if at all possible, we donot enter orders until we see where the open occurs. Brokers canbe instructed in that manner. In the chart above,
our sell stop.
Chart 25. We protect profits by moving our stop + tick above
CLG DAILY 21232358
we 25h, | lhme |
we tetaie close, We must do
2198 all we can to protect2170 profits. There is apt2159 to be further correction
213@ 0” the next bar.2118
CLG DAILY = 21212400
ae 22me
2250 fh I2220
Hy
thWat |
2198 The correction gives
2168 us another Rh.2138216828782848
gine uty iit teu
 
the high of a bar that closes so close to the high.
 
 
 
 
prices opened on
2358233823182298227822582238221821982178215821382118
2408237823482318228822582228219821682138210820782048
Chart 26. Day traders may have been able to scalp a few ticks
of profit here by selling under the low of the previous day.
107Remember, even here we can use the Trader's Trick for an
CLG DAILY 2131 CLG DAILY 2897
 
   
    
    
        
Charts 28 and 29. We want to put on our entire position. Butwe have only two opportunities. It's best to put on 2/3 of thePosition at the higher of the two entry points and only 1/3 at thehook, if we are given the choice. Once prices start back down, wetry for 2/3 immediately. If we still cannot get our position on, thenwe will have to place the entire Position on at the hook. Chart 29differs from Chart 22 in that the 3 x 3 MAC was still in containmentof the trend. By containment, | mean the 3 x 3 MAC was above thehighs of the price bars.
Charts 30 and 31. As we take profits out of the market, wecome to a point where we have accumulated sufficient profits that ifwe wish to risk those profits, we can begin to keep the stop furtheraway from the price action.
2460 2490 entry.28 , " ease 2 i oes CL G DAILY 2134 saaott © BAILY 2097 aaaat ial aia a 2 s23 2} 2250 2258 Hy (Ty 2310 ta J 231+ tT | IfAs prices correct i 2228 The Jou is nissed hl 2220 A Iya | 2280 it Uy | 228ve try to sell a | 2158 because of the gap i 2198 hy | 2250 47 | 2250breakout of the low | | 2168 opening, We then try td | { 2160 fs prices correct Hl | 2228 The Jou is nissed Hf | 2e2eof the correcting bar, ik sell 219 51) 4 breakout of the iy 2138 vetryto sella | y 2198 because of the gap | {| atele sell next lou, as well as the (jl ‘esen 2180 breakout of the low 2168 Opening, We then try td 216Ah cove Rh, Rie Setl core of the correcting bar. iV sell ese sell a breakout of the I aeis wt Ih. wit 2) ere next lov, as well as the ie sell 2070CL G DAILY 2044 CLG DAILY 2068 2040 204038 2376 3 2378 Wh ey tte aa23fa iy ole fit iy aoe CL G DAILY 2044 2379°k © DAILY «2068 andft i WH 2200 {t' | | ut 228a 38 2340 23407 t | 2250’ t | 2ese fy thy 2st0 tt iy 2318il 2220 Because of the ' | 2220 rid Ur I 22e0 {I Ma { 2zeaee 2198 | { 2198 2256 2258Our position is i reversal bar | j i iFilled at both entr | i aise Le tighten stops," aise il 2220 Because of the noepoints 3 iy 2130 Ye don’t vant a win i 2130 . | i 2190 yeversal bar | i 2198‘ 2102 to turn into a loss. 2168 Our position is | eisy Ye tighten stops, "fy 21662076 r 2a78 filled at both entry 1 i 213@ Yo don't vant a win i i 2130_— ton mit I) Bi om oss, |,I 2ade 2a4eNou DEC Dec | 2aie 2e1e |EC oct Nou DEC
If we don't want to take additional risk, then it's best to trail a50% stop as the market moves down, and pull stops even tighter onreversal bars, or any indication that something is amiss.
 
108 109CLG DAILY = =2832 2370" G DAILY 2081 2355
      
 
  
2 210 F he th 93 2: cL ¢ DAILY 1958 aagatt © DAILY 1994 asceHy Hy 3 asial! | 2295 f thy, 2320 th,i Uy 2280 UY tu \ 2265 “sr 36 aaa “yh! | I? poeih 2258 All traders i i 2235 7 f 2248 i t] 22493 2285ot ey soe can min a tek i 4 sel a! “agives daytraders an 2160 get filled as. li! an keeping our 2420 5211 stop below ih 1 axzaie eurity to 90 ‘y! 2190 a get filled as | ih { zis trailing stop a wl eae te Rh and the next ly 20002048short. { 2070 2855 further avay. 2000 corrertion bar, | 2088.2048 - 2825‘2 st we {sen 28«oer NOU DEC oct Nov 1890 Ri 1868CL G DAILY = 1941 aaa0ce © DAILY = 1946 2388 ot arty 200s CL G DAILY 19742340 2360 2368Any th 34 eg en it i{ Ulpte ‘ 4 2260 Upet | " 2268 ily | 38 280 that! : 39 a0The narket "Il 2228 the doun- ‘| a2za 2240 2240refepeey, ekeaiaw |B thy = ney hy “=to the downsides fy, toe intact é ou are art oie8 hy 4 siz9 open probably hy 4 at20ly 2860 nore risk, you can lag hi 2068 i eae cary polit, Ii zeae| 229 tour stop furtier back, [| 388 fy om Th yaa1948 lk 1948 | ie 1968 | { k 19681900 1900 i [sil 1920 f 1920,, 1880 1888i i oct'''Nou DEC ti
 
The charts above should be self-explanatory.Chart 39. The gap open, since it missed our entry order,
would cause us to try to fill 2/3 of our position on a breakout of thelow of the gap bar.
110 1