FigyreIV-7. The First Valid Downtrend Line • 80

Figure rV. The Second Valid Downtrend Line • 81

Figure IV-9. The Buy Signal - and Profits in the Pocket! • 82

Figure IV-IO. Triangle Resolution - and a Mid-Channel Buy Signal • 83

Figure V-1. A Triangle Resolution "Hold" Signal • 88

Figure V-2. Valid Uptrend Lines - and a "Sell" Signal • 91

Figure V-3. Non-Real-Time Envelopes 94

Figure Vl-1, Using the Half-Span Average to Predict • 100

Figure VI-2. A Half-Span Average "Sell" and "SeU Short" Signal • 102

Figure VI-3. The Next Prediction • 103

Figure VI-4. A Half-Span Average "Cover Short" and "Buy" Signal • 104

Figure VI-5. A Half-Span Average "Hold Long" Signal 105

Figure VI-6. The Resulting "Sell" and "Sell Short" Signal 106

Figure VI-7. A Half-Span Average "Hold Short" Signal • 107

Figure VI-8. The Inverse Half-Span Average IJO

Figure VIIM. Analyzing the Dow • 126

Figure Vin-2. "Setting Up" Screw and Bolt • 128

Figure VHI-3, The Weekly Prediction Plot 129

Figure VIIM. The Daily Prediction Plot • 130

Figure VIIl-5. 49.7% Profit in 57 Days • 133

Figure VIII-6. Predicting Short-Term Moves in the Dow • 136

Figure Vin-7. The Techniques at Work on Group Averages • 137

Figure VIII-8. Another Group-Move Prediction 137

Figure Vni-9. Analysis of Buy-Sell Recommendations -139

Figure IX-I. How Prices Fluctuate • 142

Figure IX-2. How History Does Not Influence the Market! 148

Figure IX-3. Which Came First; The Dow "Chicken" or the GNP "Egg"? 150

Figure IX-4. History, the Market, and Cyclicality • 152

Figure XI-1. A Typical. Digital-Filter Response Curve • 179

Figure XI-2. How to Control "Error" in a Digital Filter • 180

Figure AI-I. 44 Years of Market Cyclicality • 189

Figure AI-2. Setting Up Overlapping Band-Pass Filters • 192

Figure AI-3. Typical "Comb" Filter Results • 193

Figure A14. The incredible Frequency-Separation Effect! • 194

Figure AI-5. The "Line" Frequency Phenomena 195

Figure AI-6. Smoothing Filtered Outputs - 197

Figure AI-7. Best Estimate of Linepacing • 198

Figure AI-8. Low-Frequency Portion: Spectral Model • 199

Figure AIM. The Law of Conmionality; Generalized • 202

Figure AIIl-1. Why the Trading Interval Must Be Short • 205

Figure AfV-l. How a Moving Average Works • 209

Figure AP/-2. How An Inverse Moving Average Works • 210

chapter one

Maximize Your Profits

• Where the Magic Is

• To Trade or to Invest

• The Most Dollars in the Least Time

• How the Trading Interval Affects Profits

• Adding Magic By Compounding

• Maintaining lOWi investment

• Four Steps to Riches

WHERE THE MAGIC IS

"Stock Prices Fluctuate"

This statement may describe the only stock price characteristic on which any two students of the market will unequivocaliy agree!

Its a mighty important truism, however-for on it rests a solid fact: More money can be made faster from these price fluctuations than in nearly any other way known to man-provided you own a crystal ball which tells you when the fluctuations will occur.

There is another truism which even tells one how to turn on the Golden Stream: "Buy low and sell high."-Or does it? How low is "low." and how high is "high"? Phrased differently: when is "low" and when is "high"?

It can be seen from the preponderance of "whens" in these all-important questions that the faucet handle is labeled "Timmg."

Very Real Magic Lies in Transaction Timing!

But-given timing capability-a whole new concept of profit maximization becomes possible, in which two other factors are nearly as potent We shall be dealing in this chapter with the concepts of short-term yield and profit compounding, leaving the major problem of timing for the rest of the book.

AU well and good in theory-but how to go about it?

TO TRADE OR TO INVEST

The existence of exchanges and the resulting "liquidity" permit the phenomenon of price fluctuation. In the days of the Hudsons Bay Company-when there were no exchanges-stock price motion as we know it could not exist. Today, stock prices fluctuate by 10s and 1 OOs of percent in value while dividend yields are measured in single digits.

Given zero ability to anticipate price turns, risk is primarily concerned with the cancellation of dividend benefits by capital loss. In such a case, long-term investment is the least-ridc course of action, and freedom to select time of liquidation is limited.

Given 100% perfect ability to time transactions, trading risk becomes zero-and investing can no longer be contemplated.- Such timing is, of course, unachievable, but our goal in what follows approaches 90%. Under these conditions, the first tenet of a profit-optimization philosophy is:

We are in the market to trade-leaving dividends to help offset margin interest.

THE MOST DOLLARS IN THE LEAST TIME

The next question is: "How much is a lot?" Suppose we discuss a friend who bought 100 shares of stock at $20 and sold it at $40. He doubled his money, made $2000 on a $2000 investment. Not bad. But suppose also we found out that he was 20 when he bought it and 40 when he sold it. His yield was 5% per year, and he might as well have put his S2000 in the local bank! ~

Another friend bought a stock at 20 and sold it at 40 after holding it only one year. He made 100% per year on liis invested capital. Better? But suppose also we found out that he couldnt find another stock that he liked during the next 19 years. He also made 5% per year over the 20-year period-and also should have stuck with the local bank.

To maximize profits an additional principle is needed:

We must measure success in investing in terms of profit per urut time over the entire time of investment activity.

To maximize this we must maximize percent per year return on each trade and approach 100% time usage of our funds as closely as possible.

We have now established the broad basis for a profit-maximization philosophy. We know that we must:

1. Trade-not invest.

2. Maximize percent per year yield on each trade.

3. Seek 100% time investment of capital.