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38 moment one of the stocks it is prcammed for trades, the symbol, volume, and price are immediately displayed on tape. The unit acts as your personal watchdog. Remember, the techniques you have learned tell you in advance what to do the moment the stock price behaves a certain way. The personal ticker tells you instantly when this happens. SUMMING UP SELECTION AND TRACKING • Any issue can be analyzed and traded upon using the pricc-nratk>n model as long as data on past performance is available. This means that specifk issue selection can take place in any of the traditional ways. • However, for profit optimization, percent time mvested must be maximized. This can be best achieved by maintaining a stable of issues on which analysis is complete, and in which action signals are constantly offered. • Such a stable can be maintained through ample, but regular, scans of the charts of many stocks. Modem charting services suitable for this purpose are availatde. • Cyclic readability, volatility, and imminence of action agnals are the most important criteria to be used in scanning. However, any criteria that are logically based on the price-motion model may be used for this purpose. • The chart services themselves provide general tracking capability. However, graphical cyclic analysis usually requires hand-drawn charts. • Services are available which permit rapid extraction of data for the purpose of constructing charts to be used for analysis. • Brokerage displays provide a means of fine tracking for mid-band action signals, or when trading on short duration cycles. • Trans-Lux Personal Ticker is the ideal instrument for fine tracking.
chapter eight Trading by Logic Instead of by Guess • The Tools at Your Command • The Anatomy of a Trade • Determining the "State of tfie Market" • Selecting the Issue • The Next Step Is Analysis • Forming the Valid Downtrend Line • Computing Potential and Risk • A Model Transaction • A Trading Experiment • Prediction of the Averages • The Resulte of Industry Group Predictions • Specific Issues Involved • Conclusions The preceding chapters have provided the elements of a probabilistic system of profit maximization, based on a logical price-motion model. It is time now to pull these elements together and see how well such a system can be expected to work m actual practice. THE TOOLS AT YOUR COMMAND What is available to you is a set of general and a set of specific tools. The nature of the price-motion model is such that these can be tailored to a wide range of investment objectives. Such objectives are, in turn, based on the amount of capital to
be managed, market conditions, and the time and effort available for selection, analysis, and price-tracking. The general tools at your disposal include the following: • Understanding of the existence and nature of cyclicality in stock prices-and the iinpticatk}ns for improved transaction timing. • Understanding of the impact of improved timing on profit maximization. The essence of improved timing is reduction of trading risk, permitting shortened Uades and profit-compounding. The yield on invested capital is ultra sensitive to these factors. • Shortened trading interrals and the need for maximization of time invested demand rapid and efficient issue selection and analysis. The "scan" and "stable" concepts of Chapter Five meet the issue selection requirements-while the graphical and computational methods of Chapters Four, Five, and Six satisfy the analysis needs. The specific tools available are aU techniques for converting the concepts of the price-motion model into objective action signals. These include: • Sufficient understanding of the cyclic model to permit envelope analysis. • Sufficient understanding of the mechanics of formation of chart patterns to permit their resolution by means of cyclic analysis. • The identification and resolution of triangles. • The identification and resolution of valid trend lines. • The meaning and use of the concepts of edge- and mid-band timing. • The concepts of cycHc<faannel-based "cut-loss" or "profit-preservation" trailing sell levels. • Understanding and use of non-real time envelopes. • The function, significance, and use of half- and full-span moving averages. • Understanding of the interplay between moving average characteristics and the elements of the cyclic model, so that such averages can be used to Interpret cyclic phenomena. • The nature and use of inverse nroving averages. THE ANATOMY OF A TIIADE The date is 1 November 1968. Were ready to put " new-fotmd knowledge to work. How do we go about it? The first question to be answered is: "Should we be looking for opportunities to buy or to sell siiort?" To answer, we must form a judgment of the cyclic status of the market as a whole. The very first thing to do is to apply cyclic analysis to the averages! DETERMINING THE "STATE OF THE MARKET" Returning to Figure 11-7, we find were 24 naionths along on the nominal 4.5-year component of the cyclic model. We also see from Figure II-8 that in recent years this cycle has averaged 52 months in duration. Were almost half-way along-and top-out is approaching. This means we cannot expect buoyancy from this very large ampUtude
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