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17

Here is the graphic demonsitaiion of those test results; PortlohoOne:

Portfolio Two:

Soybeans, Qeuische Mark, Crude Oil, r-Boods, Sugar. (Indicated by small dash line.)

New York Composite, Coffee, Cotton. (Indicated by large dash tine.)

Combined Portfolios;- (Indicated by solid line.)

- 6,000

Mar. Apr. May

June

July Aug. Sept. Oct.

Nov.

The worst drawdown of Portfolio One was $6,000.00, the worst drawdown of Portfolio Two was $5,000.00, whereas the worst drawdown of the Combined Portfolio was $ 10,000.00. The largest gain in Portfolio One was $10,( 0. Portfolio Twos biggest gain was $9,000.00. Meanwhile, the Combined Portfolio achieved a biggesigain of $15,000.00. There was only one flat (neutral) month in Portfolio One, in Portfolio Two there were no flat months; whereas when the two portfolios were combined, there were three flat months.

To sum it up, diversification did not reduce the size of the potential drawdown, but it did reduce the frequency of the losing months as well as the frequency of the winning months, thus effectively increasing the number of flat months. CTverall profits were higher. This type of performance has been typical of.Symmetry Wave portfolio behavior as well.

The main reason that diversification did not and does not behave with every trading system exactly as the "laws of mathematics" would seem to dictate, is due to the fact that often all markels enter into a sideways . » or reverse their trend within the same short time frame, Ih is causing all or many markets to lose (temporarily) at the same lime. Since diversifying among many markets does not ieducc the size of the drawdowns, more capital is needed far each additional nwket that is Iraded in a portfolio.

Futures magazine, in their August 1991 issue, wrote an article titled "Specialized Traders Co Against the Grain of Diversification." The specialized traders, in other words, those traders that concentrate on specific markets such as currencies or petroleum products, have outperfr)rmed the traders who diversify among many markets. In a separate instance, a well-established managed futures fund, on their diversified account, had an annual return of about 22% and a largest drawdown of about 28%, whereas their currency program had an annual return of about 37% and a worst drawdown of about 19%.

The reason for the better success of specialized tradingis mainly due to the fact that it is easier to find a trading system that works for a specific type of market. Each markets behavior is different. Crude Oil, Eurodollars, and Deutsche Marks are strong trending markets; therefore, trend-oriented trading systems work well with ihese markels. Live cattle, wheat, and sugar, on the other hand, are choppier and experience more sideways markets; therefore, a trading system designed lo take advantage of a strong trend will not do as well in these markets.

My last word on diversification is a quote from Albert Einstein, which helps understand why many systems have somewhai contrary experiences with diversification (at least as it applies to drawdowns) in real-time tnding:

"As far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain, they da not refer to reality."



METHOD SUMMARY

I ollowing is a brief sunniiarizatioii of wha! t believe lo be the hc-sl way Io use the Symmetry Wave Trading Method:

1. Only trade with the major trend (see Chapter 4).

2. Calculate the size of the previous retracement wave you wish to trade fron\ (see Chapter V.

3. When the market i el races 907o of the previous wave you are trading from, enter the market.

4. Consider using a protective stop of two times the 10-day ATR (see Chapter 7).

5. Consider using a profit target of three times the 10-day ATR (see Chapter 7).

6. When a trade is ahead by 3/4 of the 10-day ATR, move the protective stop to about a $.50 profit to compensate for commissions and slippage (see Chapter 7).

7. Execute quickly (I put all my orders in before the markets rjpen),

8. Keep on trading after a drawdown period in order to recover losses and earn a profit.

9. Dont put on too many positions in relation lo your trading account size.

SECTION 3

Related Symmetry Wave Topics



CHAPTER EIGHT

Stocks

Since both the stock and futures markets are influenced by human nature, as well as world

and economic events, their patterns of behavior are somewhat repetitive. Symmetry Wave will i identify and capture a specific repetitive pattern equally well in both types of markets. The first

pattern in each type of market is the retracement wave 2, with the repetitive patterns being

retracement waves 4, 6, and possibly wave 8 (see Chapter Three).

A misconception the public holds is that the futures markets are more volatile than stock markets. Inreality,thestockn«rkethasbecomemore volatile inrecentyears. The reason futures appear to be more volatile is that they are highly leveraged. Stock markets can only be leveraged i up to 50%, whereas futures are leveraged up lo 95%. If the volatility of stocks was compared

to commodities without any leverage, then stocks are more volatile. You wont see a bushel of

corn go from $3.00 to $1.00, but in stocks you will see a market rapidly drop from $1 2.00 lo $2.00.

Symmetry Wave provides a window of opportunity to enter the markels at an ideal support or resistance range. You may choose to enter the markets when the Symmetry Wave is reached, or wait for some indicator, price pattern, or significant news item to confirm your entry into the markets.

I In this chapter I give examples of different Symmetry Wave counts and entries on weekly

stock charts. The same rules are used here for the Slock charts as were used for the futures charts t in Chapters three through seven. Youll notice not all waves are counted. The reason being I

stayed with the bigger Syjnmetry Wave count as much as possible. Only for i llustraiion purposes dol, on occasion, count the smal ler Symmetry Waves. Another reason for not counting a wave is when a relracement wave does not have a matching symmetrical retracement wave. In these instances it is not necessary to mark the wave. You then wait forthe next set of Symmetry Waves

I to develop, or wail until a previous wave is matched symmetrically. Remember, the count for

I a symmetrical wave stops if there is not a matching retracement wave. See illustrations 8 5 and 1 6-6,

V The following pages contain a number of Charts; The idea here is to illustrate, as much as

J possible, the proper Symmetry Wave count so your eyes get trained to see groups of symmetncal *, sets of waves. Ii is important to count all of the symrelrical waves wilhin the same group. Thai * is to say, it is all right tioi (o count a certain set of Symmeiry Waves if you do not wish to trade offofthatset/butonceacounthasstaitedforacertain magnitude ofwaves, all the waves-of the

same magnitude that fall in that set must he nccfJtinted for.



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