3. By using smaller protective stops, some profitable trades arc missed. 1 lierefore, the net profit is less,

4. The larger protective stops have the same drawdown as tiie smatlrr stops

5. By using larger stops, there will be more winning trades.

PROFIT TARGETS

My experience with setting profit targets has led to conclusions similar to those reached with stops. Bigger, but not too big, is better. Even though bigger profit targets are reached less often, they produce greater net profits. Though this is true in general, Ive found it particularly to be the case with Symmetry Wave trading. Here arc typical results when altering the target

level.

Clearly, the smaller profit target generates a smaller net profit, even though there are more winners. When a $250 profit target was used (not shown) in order to increase tlie number of winning trades, the net profit fell down even further to $11,500.

On the other hand, going for too large a profit target (for example, $3,000 in Soybeans or $6,000 in T-Bonds) will reduce the numiser of winners as well as total profit. This whole basic concept of a Profit Curve to select the ideal target level is illustrated in a simple manner below. Please realize the same concept applies to the choice of stops, although not shown here.

Profit Curve

Illustration 7-1

This illustration demonstrates how different profit targets from $500 to $10,000 will generate different net profits. The scale on the left is the net profit amount and the numbers in the arc represent the amount of the profit target per trade. The smaller arrd bigger profit targets resulted in the leastamount of profit, whereas the mid-range profittargets produced the most profit in the

long run.

A $500 profit target resulted in about a $30,000 net profit, whereas a $2,000 profit target resulted in twice as much profit. In contrast, going for loo big a profit target (i.e. - $10,0(0) resulted in the least amount of profit.

So, as stated earlier, there is no one universal ideal profit target. While smaller profit targets generate more winning trades, bigger profit targets generate more profit. However, do avoid the extremes. Too small or too big a profit target will not generate adequate profit.

USING AVERAGE TRUE RANGE FOR STOPS AND TARGETS

AT R gives us the current volatility of each market and becomes a benchmark from which the protective stop and profit target can be calculated. Of course, as with dollar artiounts, a profit target of "one times the ATK" will be reached more often than a profit target of "three times the ATR;" however, the larger profit target will yield a greater net profit. Based on ten years of research, my suggestion is to use a minimum of about "one and one-half ATR" as a protective Slop and as a profit target.

I prefer using ATR because it links the size of both my stops and targets to recent activity in the markets. For real time trading, it is not wise to use arbitrarily selected "dollar figure" amounts because each market has its unique contract size and degree of volatility. For exarttpie, the ATR in Bonds might be $800, while the ATR for Corn is $1 75. This means that if you choose to use "one ATR" for tfie protective stop and "twice the ATR" for the profit target, then the protective stop for Treasury Bonds would be $800 and the protective stop for corn would be $175. The profit target would be $1,600 for Treasury Bonijs and $350 for com. Each parameter level selected is tiien in step with current conditions in the particular market being traded.

Following are some recent test results based on seven months of Symmetry Wave trading on eleven markets. The test used ATR levels and again shows how it is easier to earn money with reasonably bigger targets and stop levels.

(11 note that this same principle of using the ATR applies to ock market trading also.)

further illustrate how different-sized protective stops and profit targets affect the net results, a Corn chart (Illustration 7-2) and the following combination of pa;;imeters will be used;

First Paratrieter Second Parameter Third Parameter

The rules for trading are as rollows:

tVpLectiveStog 1.0 x ATR 2.0 x ATR 2,0 x ATR

Profit Target 1.5 x ATR 2.0 x ATR 4.0 x ATR

1. Only the retracements that are at least one ATR and greater will be used. Kelraceincnts that are smaller than one ATR are ignored,

2. Protective stops will not be moved to neutral after price moves in our favor (something 1 often do in my trading).

3. Protective stops and profit targets WtW be as indicated.

4. Entry price is 90% of the previous reciprocal Symmetry Wave.

5. To calculate the ATR the most recent 10 days are used. As price fluctuates, ,\TR expands and contracts based on current voiaiitity.

6. Since Corn is not very volatile, two contracts are traded.

CORN

No ti-Mfe btxlusc tfjcfc nuwbcr ti and 4 3¹ at imilr priri, vtti trade nambct 8 nut cawcil a proiii yet.

As can be seen here again, choosing too small of a protective stop and profit target is not the way to go. By using a bigger protective strip, the number of losing trades was reduced, and by

trading for bigger profits, tlie net earnings double or triple. However, yout decision on stop and target parameters should not be guided by profits alone, but also by your personality. For some people, it is easier to take quir ker profits, while others are more comfortable slaying in a while longer and targeting bigger profits. 1, personally, never use less than a "one and one-half ATR" piofil target. Below that level, profits are often too small to conifjonsate for commissions, slippage and errors. My recommeixlation to you would be to consider following that same rule of thumb.

And always keep in mind that sequence of entry is very important, Fmer the market the first lime you set your trading signal. The best trades usually do not give you a second chance, Also, if you wait to act on your signal, you often find yourself missing out on a chunk of prof it that could have been locked in by establishing a break-even slop at the time of the initial signal.

MONEY MANAGEMENT TOPICS

Pyramiding

Pyramiding can be used for adding more positions in the same market without increasing the risk of losing. If you feel a market is in a very strong trend and instead of diversifying into other markets you wish to add more : 5111 5 in the same market (without exposing your account to unnecessary risk), then pyramiding is a viable solution. This is true provided, that is, that you only add positions in the same amount that you started with and in such a way that if the maricet goes against you, you will not lose more than the equivalent of your first protective stop. For example, if your protective stop is $500, and the market moves $500 in your favor, you could add another position and move the protective stop for the first trade up to break-even. Then, if the market goes against you, you will be risking only $500.

If you start with one contract, and the market moves in your favor, and then you add two more contracts (and as the market moves in your favor you add a greater amotjnt of contracts) you will expose your account to a substantial risk of losing a large sum of money shou Id even a small price fluctuation go against your positions.

BREAK-EVEN STOPS

Moving the protective stop to break-even when a trade is ahead is a good strategy for reducing the number of losing trades and the drawdown; however, the winning trades are also reduced. Therefore, in general, the net profit remains about the same as if you had nof used a break-even stop. Following are typical differing results obtained by using break-even stops and refusing break-even stops.

greater confidence is created. On the other hand, using break4;ven stops could require monitoiing of the market throughout the trading day, creating mote stress. Personally, even though I have notfound it to be advantageous to use break-even stops with other trading systems, it is beneficial to use break-even stops with Symmetry Wave. I use break-even stops with Symmetry Wave by waiting for the market to move about three-fourths ATR in my favor from the entry price; then I move the protective stop to the break-even price. This strategy ofnnovir\g the protective stop to the break even price does reduce the drawdown.

TRADING DIFFERENT TIME FRAMES

Whether you are trading daily bar charts, five-niinute bars or weekly charts, the .same guidcl ines for protective stops and profit targets apply. Use the recent 10-bar ATR to determine the current volatility and to calculate the protective stop and profit target.

However, a Iso never ruie out good old-fashioned experience in helping you select protective stops and profit targets. For example, I founda 100 point move in the S&P 500 (when using five-minute bar charts) to be superior to other targets, and I adjusted my trading accordingly.

DIVERSIFICATION

The idea underiying the concept of diversification is that if several markets are traded, then the size of the portfolios drawdown will be reduced. The reasoning here is that if four or five positions are losing money, then at least two or three positions should be making ntoney, thereby effectively reducing the potential drawdown. Also implied in the concept of diversification is the idea that since the potential drawdown is reduced, more markets can be traded with the same amount of money.

A number of years ago, I did a small "diversification test." 11 a portfolio of five markets, and a portfolio of three different markets, monitored them for a period of months, then graphed the results. It was interesting to see the inescapable conclusion 1 had already drawn depicted visually. Diversification did not reduce the potential drawdown but it did increase the drawdown (as well as the profits). The fluctuation between profits and losses became more volatile despite diversifying among unrelated markets.

Without Break-Even Stops

30 winning trades . . 20 losing trades

50 total trades

With Break-Even Stops

25 winning trades

12 losing trades

13 break-even

50 total trades

With break even stops, the accuracy is higher due to feyver losses, but the net prof it remairis about the same. Also, with break-even stops in place, the ratio of winners to losers improves and