If Traders spent ns mucfi time examining themselves as they spend on examining the crossover of two or three moving averages, they would make a great deal rnore in the rrjarkets than they now do.

To me, \\u\ freigiit of folly is taking a moving average, dctrendirig it to create an oscillator, arid then trading a combination of the oscitlaior and ifie movirtg average that was just detrended.

[lKC<4»t very liiiiiUid and appropnrJte use, tfie ti-f;fmi(;:tl tools I find bcng used in the markets are for tliG most part worthless.

In Trading [jy the BooJs- I said sometfiing to this effect:

Woufd you carve a doll out of wood and then bow down before it In worship? What is the difference between doing that, and taking an oscilEator of your own or sornaone elses manufacture and tfien entering a trade because the oscillator says to do so? Who is to say that the oscilEator should be set at five bars, or ten bars, or twenty bars? If we each set it dif(erent!y, ve will get diJfcrent results and tfierefore different trading decisions.

Lets face it, tfiere is no such thing as oversold, and there is no sucli tfiing as overbought- As I write this book, the Canadian dollar has been overbought for ciose to tfiree years and it is still going u[). Silver has been going down for about the samie length of time. Whos to say when and where it wIN stop

I have a friend, a very well capitalized, big-time trader. When silver was at around $6.40 in Movember of 198S, he said, "Man. silver is making a b(dtom here. Im looking for $12 silver inside of a year. Ail die fundamentals say tSiat it has to go up. All my tccfinicals sny that i;s oversold, going to scale it in [ly tjuying every tuiu? d makes a new low." That was back in 1388. He has steadily bougfit silver because it is so "absolutely oversold." He has rolled over muliidn contracts repeatedly, and is now 5900,000 in tiie hole. Wfien I talked to liim recently he said, "Man, if youve got enougfi money, you can always be rigfit,"

yues.s tfiat maybe fie does fiave enough money. Rallies in silver dont do liim lEiucii good because fies in too deep- Sure, one of these days silver Will quit being oversold and chmb to 512, Maybe by then he wdl be able to break even - tliat is if silver doesnt break hmi first. Hmm - I wonder how well heil sleep tomgfd. Silver just made another new low. Its now wel under $4.

It puts me in mind J the people who sold the British Pound this year at Ihe SI.60 level tiecause it was cverboutht. f\low its flirting witii $2,00, A lot of peofile got "British Pounded."

Hey, Im no exception. I was crazy enough to buy &18 crude oil puts when crude went to $28 because il was woy cverbougfd. At $35 it was sifrely overbought. Didnt all the oscillators say soi Novj ds at 540 and my Puts wifl profjably expire wortiiless. I vonder if its overbougfn yet?

le closest thing anynne can fiope to get tliai is nearest ifie truth is what is seen on a simple price cfiart, unless, of course, we are like the oEd-timers who could sec in thejr minds eye wfat was going on in the markets ust tiy r(]ading tfie tape or watching the clacker board.

"here are stilt some of those blessed souls around, still making their money in the markets, still enic;yirig wfiat they do. We coutd all learn a profounri In.son nr two from tluirn,

Tape reading soenis to bo going die way of all the good tilings. Its becoming a lost art. These old pros can successfully dayirade frorrs a clacker board. It riiakes mc ashamed to fiave lo sit in front of an expensive computer, witfi an outrageously priced data feed, paying even nore outrageously priced exchange lees, and not be able to do an ounce better than those Vjho httve gone before me did and still do just by reading the numbers. No fundamentals here, no technicals, no cycles, no seasonafs, no astral ptienomena, no osciilatorsn rio moving averages, no paratiolics, no channels, no speed lines, no heads and shoulders, no pitcfdorks, no Fibonacci, no Elliot Waves, no fractals, no cliaos theory, no any of these things. Just profits, based on truth - the truifi that is revealed in the movement of prices.

My best advice to anyone who wants to trade is to work on and [earn fiow to uiHleistand simple price movement. Learn to read it and learn to

interpret vliat

s saying.

ne probsnm witfi most teclui:cal studies is that Ificy smooth away the mirujte details that are exactly what I am looking for in rny trading, I know, I

know, sorneone will tell me thEd I dont want to have to react to every fluctuation of liiG nirket,

ittle

But what are tl-.ose guys down un tfic floor doing? 1 react to all the detail. They dont have any fancy studies in front of thorn, they jirst know wiiore prices aie - and tfiey win - and most rstfiers dont!

The floor traders have to pay attention to detail. Tliey have to watch the prices on tfie screen. They have to decide and react to what is lappening, and niost ol tfiern arc taking home the bread, If they dont, they will scon not hf] floor traders. The floor traders make money v.atching prices. The old geezers wlio watch tfie clacker boards [there stdl arc a few around - clacker boards I mean - no, i mean tiotfi! miake money watching prices, and

Joe Fancypanis. wdh a best friend.

so()hlsticared electronic equipment, is losmg his

Witii that in rnind. lets look at sorne additional refino.ments.

15

Scarcli Out [lie Best

One of the most important things \ anyone who trades can fearn to do is 1:0 identify the best trades.

These can differ frorri one person to another because we eacii tend to see trades differently- VVfiat looks Itke congestion to one looks more fike volatility to another, and so forth.

But all can learn 10 recognize what fiappcns in the market Ifiat results tn successful trades

Having identified the one or Ivo methods and techniques that consistently work, it is imperative to reJirie them so they result in tfie fiighest probability of winning possible witfiin the individuals own frame of reference, his/her own mind-set, and his/her own comfort lee:.

Not everyone trades the sane. That it why it is patently ridicufous to worry about how ntany people will btiy and/or use this book. Stops will not be bunched because each fias a dilforcnt level of risk tolerarice, different size margin accounts, artd feels comfortable with differing rKjmtjers of contracts. Each wilt trade in different markets to a certain extent because individua perceptions of what is tradable will differ.

The best I can do for anyone is to show exactly v-hat I am comfortable with, then let them adapt tfiai to their own comfort level.

Tfie trick here is to identify success and then stick tn it like glue. When it works, dont fix it. t dont experiment with something that is making money. I stay with tlie very best trades I can find. There is no neec a market. 1 am slow to get in and quick get out.

to lase

If Im not absolutely sure of a trade, 1 stay out, II it iJoesnt devctop exactly to my liking, I slay out. I wait for those trades to come lhat exactly match my specifications, I let all otfiers go by. I may not Irarle totlay, so what? The market may go on to make sr>mehody a fortune - no big deal. I discipline myself to know rny trade, and ttien take only ifiose trades, I do not let greed get tfie best of me.

What dos a good trade look [ike? Let me show what it looks like to me. It wont be exactly wfiat someone else might like, but it wifl be similar.

CL HiMUTE

This uas tlie Iiiyb of the previous

I. I

qi. i

fnf [ an iuterested in tlie boxyj squ.ared off

/

next day prices opened doun stD}H*i"3 exactly [it tlie leuel of tlie flat area of tlie prior dag. coEipJe of identicftl clciies aftd a bigli for conplt;Led the squared ared.

This of fbU tpps teok place just before the higli of tlie drty near the close.

notice t}iat it also flat botteit.

li;V*l*

IhiJi

Ih.ii

1 II i:>

"ill.

ij.

3 m w \z \ t 11 t2 1 J iG 11 12 1

dill \\\.

g 10 \?.

On the crude oil chart sf.own above, 1 am interested in taking a trade based upon a breakout of trie congestion that occurred closest to the higfi the day. Prices had congested diere tirudly prioi to the high, and htid tiien failen back to tho congestion area just before the cfose.

35B0 35&0

520 500

31 eo

31 GO

31 zo

3100

33fi0 33-10 33Z0 3300

3260 3240 3220 3200 ICO

0 3120

The next morning, prices operied lower, and by a ciuster of closes at e same level as the grpufj of flat h-ighs from the day before, [jIus the fiigh o orie bar at that level, there is a definite squared off tioxy shape lo tfie finces as they congested in the same area.

Accouhng to my plan set torth in the earlier chapters, 1 vant to trade a breakout nf V-m congestion that took place closest to yesterdays higii. I dordi v/ant to wait tor the high iisell to be taken otd, if at all possibiij.

Why? J warn to airoatjy be in the rnarknt when and if yesterdays hiyh is taken out. Why do I want lo already be in ttie market Ihnn? Tlinrc are two reasons:

1. If the congestion is taken out to the upside, tfiere is a higfi probability that prices will go op and test yesterdays high, i can make a small profit if tfnat happens. It also wili have given me a head start in case prices go on and take out yesterdays high and move even fiigtior.

2. If prices do take out yesterdays high, that is precisely where a whole bunch of buy orders will come \i\\o the market. There will be a Eot of buy stops sittif>g in the market at that point. The momentum befiind thai buying will drive prices up even more, and so 1 have an excellent chance of cashing in ort such an event.

A close look at the chart will show G?<actly what happened.

Staying in tfse Water

The whole idea behind my trading is that I dont mind taking a small loss, or everi just making expenses, if I can be in the rnarkct when it runs.

Usually, 1 will not he stopped out for a loss cqt-ial to my entire risk.. When markets take out congestion areas, they usually have enoLtgli momt}(jlum to insure I will at least make expen.es. At that point, I will have pulled rny stops to breakeven and will not LJe hurt if prices come back down, If the buying or selling that Comes into the market at the actual breakout is sufficient to carry prices a ba higher, f wifl cash my second contract-set.

If prices have sufficient momentum for the market to run, my third coruract-set will see me catching my portion of the run.

Do I expect to it all, right to tfie most profitable point of the day? No, All I want IS a piece of the action. 5 11 I wi!l get more, sometimes

less, but at least my livelihood,

get sooiething, A whole bunch of those pieces earn me

There are many times I will be stopped out wttti tittle or nothing for (he risk 1 have taken, only to sec the market then run tfe way I had hoped for. Will 1 chase ihat market? \1 ! If it doesnt happen my way, 1 forget that trade. The trade must he my trade. It must happen my way, according to my plan. Of I dont vant aIy part of it regardless of what subsequently fiappens. No "but if"s"r rie "if onlys". My way or no way!

show another trade now.

DH 5 mhtlTE

liluiiy

iili!iil

loDkhigat the tuo boxy srcs that are at natcliiny leoels. The first is cTiarctclerizeA by nurLlg flat tupsj uiLli little sftiiaring off of the bottotns. The seconds at appro><-inately the sane price levelis characterized, by flat hotto;n. If prices uere to take out

ibrtt area tomorrou/ they would Inust surely test the liigii.

III-,

l[lUJhllJ</«Niidfl

67&Q h7bi 67ErO 6256 6752 6748 674 67G 67 6732 7? 672-1 672Q 6716 6712 6700 6701 G7G0 6b% 6632 668a 66B4 6680 6676 6672 6668

12 1 7 10 11 12 1 7 8 9 iO 11 12 1 7 5 10 11 12 1 6

If prices fake out the congestions to tlie upside in the area 1 have boxec off, there is a high probability tliat [)rii:es v/ill test the hirjf).

What I would like to see on Ihe next trading Joy would be an open that is a bit lower, followed by some niom rading at the boved level,

breakout v./ould have m.e in t le market, wi h enougli room between the breakout and the high to at least cover costs. If prices continue upward, might a profit, and if Ifie market runs. I will rnake rriy take-h,ome jiay.

If it doesnt fiappen the way ! anticipate, I will let the trade go by.