6 at noon, a crossover that puts us long at about $3.66. For the purposes of our example, we are using the Kase DevStop© exit technique. Moving now to the 45-minute chart, we see that approximately two days later at 12:45 P.M., the moving averages cross at approximately $3.70. The trade moves up, then, to the 45-minute chart. If not stopped out, we monitor the daily chart, where, on November 14 we have an upward crossover at $3.90. Now we move to manage this trade on the daily chart. Later, on November 29, we are stopped out at approximately $3.81. Thus, by using very simple techniques of a moving average crossover and risk management, the trade made approximately $0.15, less slippage and commissions. Had we been trading on the daily only, this would have resulted in a loss of just under 9 points. So we have turned a losing trade into a winning trade through this technique.

Higher Time Frame Screens

When screening in a higher time frame, it stands to reason that it is best to confine our trading in the direction of the major trend. This is a technique which, to the best of the authors knowledge, was introduced by Dr. Alexander Elder, called the "Triple Screen Trading Method." We have taken this method a few steps further.

Simply put, moving averages, as we have seen, lag and therefore are not the best type of instrument to use as a screening tool. Thus, we would normally move to a momentum indicator such as the stochastic. The stochastic, however, still has the problem of lagging to some degree. For example, if we are trading a daily chart and screening with the weekly, we will only get our confirmation on the stochastic once a week on Fridays.

We have overcome these problems by redefining the upper time frame to end at every bar. For example, an hourly bar on a 15-minute chart would end every 15 minutes; that is, we have a moving hourly window.

FIGURE 12.13 wh7 (WHEAT FUTURES) SHOWN IN 15-MINUTE, 45-MINUTE, AND DAILY CHARTS.

We further simplify the process by designing a number of rules to give us "permission to go long" or "permission to go short."2 For example, when the %K stochastic indicator is below the %D in the neutral area between nominally 15 percent and 85 percent, we have permission to go short. The 15-minute chart in Figure 12.14 shows a whipsaw trade. The period when we have permission to go short is shown as a dotted histogram, and the period where we have permission to go long is shown as a solid histogram.

We can see that from January 9 through January 14 we only have permission to go short on our longer time frame filter. Therefore, the whipsaw reversal that takes place on January 10 is avoided and we continue only in the short direction. This technique is very helpful for avoiding those whipsaws associated with wave 2 and 4 corrections or the b portion of a clean ABC correction.

figure 12.14 a 15-minute wheat chart with permission regions determined by rules using 75-minute stochastics. produced using TradeStation, a registered trademark of omega Research inc. Used by permission.

Conclusion

This chapter describes how to improve trading strategies by diversifying in time, understanding the relationship between time and risk, modifying our approach from time to volume, scaling up, and screening techniques.

Endnotes

1. The DevStop© methods are described in detail in my book, Trading with the Odds, Irwin Professional Publishers, 1996 as well as in the following articles I have written for Futures magazine: "Walking Through a Trade," June 1996, "Multi-Dimensional Trading," May 1996, "Putting the Odds on Your Side," April, 1996, and "New High-Probability Indicators-Metals," Nymex Metals in the News, Spring, 1996.

2. All the mathematics and rules for this method, the Kase Permission Stochastic© and the Kase Permission Screen© are provided in complete detail in Trading with the Odds.