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The matching congestion areas are also an excellent way to enter a market. The upward bias of the rising bottoms gives a pretty good clue as to which way prices are going to break out. The chart above gives me an opportunity to offer another concept - hedging a position.

Hedging

open.

On the day shown by tlie arrow, the close was sharpfy lower than the

I was long June crude oil and hedged my position by selling an equal number of Jufy crude oil Gor>tracts m the cEose.

If prices were to gap down on the next days npen, I would have a chance to make back on tlie July what I would lose on tiie June. Tfiat Vvould preserve tfie profits I had made to that date.

The hedge works like this: Lorig June crude at 19Jil per contract. The close was 2048. I had 97 points per contract of profit in the June.

If prices were to gap down on the open, because crude oil trades in London overnigln. I would be able to preserve most of my profits.

As of the close, fVlay crude had tfie strongest contract, June was next strongest, and July was tfie weakest.

My reasoning was if prices moved down. I would make more on the weak July than I lost on tfie stronger June. If prices should turn and move up, I would make riiore un tfie stronger June than I lost on ttie weaker Jtjiy. Afl in all, It beat placing a stop in a market that was hovering above a gap.

If I were to place the stop just below the low, and it got token out there. 1 would have been Okay and would have salvaged 913 or 96 points. Then I would have been out of the market and tiave had to rfenter at a higher evek But if prices would have gapped past my stop, I stood to lose a healthy lortion of what Id already rtiade. So wtiat 1 did was to fiedgo my ovjn position in the market. This enabled rne to give crude oil every chance to resume its upward trend

Protective Stops

Stop placement is where we separate the kids from the adults. Stop placement is the sole responsibility of you as the manager of your trading busJress. It is one buck you cannot pass. You are the end <jf the comes to placing stops.

ie when It

Let me stiow you why you, and only you. can decide where to place the stop. There are several considerations;

The size of your margin account has the greatest effect on stop placement. Whr:n you look at a trade and see wiierc ttie stop should go, or wfiere you would like it to go, you tfien have to look at ttie size of your margin account and determine whether or not you can even consider the trade.

Your comfort level. Although you may tiave sufficient margin to place the stop where you woufd like to, and although ttie stOf) is logical for ttie trade, you may not feel comfortable witfi the stop being so far away (or even so close), and so you will decide not to take the trade wdh ttie stop far away, or move the stop back li it appears too close,

Volatility. You must take into account market volatility when placing your protective stop. If a market that normally ticks live points at a time suddenly begins to tick twenty points at a time, you must certainly take ttiai into corisideration. You may find out ttiat you tiave to place your slop too far away for the size of your bank or your comfort leve

Wficn you use rnentaJ stops, there are iwo other considoraiioos which you rtiusi: ponder when placing your protective stop. They are; Your speed in placing ttae order, and ttie speed at which your broker can place the order. Leis look at each.

The speed at which you can place the order. This deperids upon how fast you thonk on your leet. There are three factors here: Perception, decision, and action. How long does it take you to perceive thai NOW is the time to pick up the pfione and place your stop in the market?

Then, once you make the perception, how long does it take you to decide to do something about what you have perceived? Are you quick to decide upon your perceptions? Finally, are you quick to act once you have made a decision?

Some of us are very quick in ail three areas. Some of us are too slow to utilize mental stops. Only you can tell from the experiences you are having in the market whether or not you are quick enough to use mental stops.

Other factors that can enter in are based upon your trading environment. Whether you trade Bt home or at the office, if you are subject to interfuphons, you dare not use mental stops.

Thr> speed at which your broker can place the order depends upon his organizational setup.

If you tiave a broker wtio is a "chatty Cfiarlie", watch out. Even [hough he may not be chatty with you, he may fool around with getting your order in while chats witfi one of his other clients.

If your broker is one who trades a lot, he may be taking care of his own before fie gets around to taking care of yours.

Other considerations are: Whether or not you are able to call direcdy to the trade desk on the floor, and better yet, whether you can cal directly to someone stationed next to the pih

If you arc using mental stops, you should time your orders. Find nut how long it takes from tho time you roach for the phone until you hear that you are filled. Test tfiis procedure in several rriarkets on several occasions.

Then you may want to use my "tick-in-half" rule. For every 1/2 minute your order takes - from the time you reach for the phone until you get your fiii - add one tick lo your mental slop. If this is satisfactory slippage, then its okay lor you to use mental slops. Time these as flash fills since your mental stop.s should be market orders.

Tho numl>er of trades you already have on in other markets can fiave an effect upon wfiere you place your stop, If you are already pretty wefl margined LJf). you may not bo ahfe to firiancialiy, or comfortably, afford to put on another trade with the protective stop in the pface you feel right in having it. In that event, its best to pass this trade, or liquidate another trade so that you can comfortafjfy enter the one you are contemplating. Remember if you overtrade, put on too many trades, you will get into troubfe and fiave to ptace your stops too ctcse.

There are other considerations that may be mvolved in special situations which affect where you will ptace your protective stop, and whether or not you want to lake the trade when you see where that stop will

The main point is. if you cant place tha protecive stop where it should be. dont enter the trade.

I think that from the previous discussion, you should be able to see that protective stop placement takes a good deal of planning and thought. Its part of what you do S5% of the lime you arc a iradef.

Why? The markets trenti only 15% of the time. You should ho trading only 15% of the tir-ne in any of the markets that you trade. The other 85% of the time you should be planning, organizing, delegating, directing, and controlling. That is what a good manager does. Inherent in owning anc operating your trading business is proper management. When I spend Ihe proper amount of time preparing to trade, administering and managing the trade, 1 dont have time to sit and watch a screen all day, I dont have time to overtrade busy keeping track of what is going on. Im filling out order sheets, Im almost constantly on the phone directing my broker, Im listening to the playback of my tape recorded orders. Im one lively dude, and I look as if someone speeded up the film. Im busy, busy, busy. Im thinking ahead - what if, what if, what if? "What if prices take out that lovj? What will I do then?" "What if this is a reverse hook, what then?" "This looks like congestion, what do 1 do next?" I plan, I anticipate, I call in orders, f cancel orders. I move stops. I bug my broker for filfs. I check to see if fm making enough points. 1 manage my trading business,

Fibonacci Fallacy

In my leaching, I have often mentioned the use of Fibonacci techniques and concepts. You should know by now I utilize thorn in only two ways: I use them to make projections of whrue ifie markei might go so 1 can set profit objectives, I rostricl this to one situation only: The breakout of a Fibonacci envelope pfaced around a trading range (Part I, Trading by the Book) - which

is an expansion concept; and to determine where I might expect support or resistance in a market - which is a retracement concept.

I place absofuteiy no credence in any sort of "magic" involving Fibonacci numbers and ratios. I would NEVER, EVER, consider trading retracements to them with one exception - trapping prices between a Fibonacci ratio and a 4/1 offset moving average when i want to enter an established trend (Part fb Trading by the Bookh

I might lock (or a bounce al a Fibonacci relracement, bul I would never trade it solely because it was a bounce from such a retracement. It has to he coupled with something else, in this case the 4/1 moving average. I would never, under any circumstances, set an entry order at a Fibonacci ratio level other than by mere coincidence,

To me. with the exceptions mentioned above, the use of Fibonacci ratios is restricted to the level of telling rne whether or not a market is acting normally.

Now I want to explain e>tactly why Fibonacci trading is wrong - a false god - a deceiver that will allow a trader to win sometimes, only to suck that same trader in and strip him of his wealth at other times. When a trader trades the "golden ratios*, he is doomed to continually give back what he has worked so hard to gain. Im going to call this section:

Capital Preservation

In Tradifin Is a Business, I taught a number of the things Im going to say next.

To operate one*s trading as a btsiness, sufficient capital with which to trade must be available. This capital will give control over the trading Opportunities that present themselves. The more capital available for trading, the rnore opportunities there will be to make lhat capital go to work. In that way the trader can guide his career as a business like trader.

When trading, liiere are a number of ways to control risk. Stop placement is one of them. There is. however, only one way to preserve capital - trades must be planned. A trader must learn to think them through, so that he can ascertain where in the trade the risk exists. The risk to capital lies sonnewhere within the life of the contemplated trade.

In my book Trading Is a Business. 1 talked extensively about how so many traders have a wrong perception of the market. I also lit into traders for having a wrong anticipation of what a trade will bring. Typically, traders are always stepping up to the plate to try to hit a home run, instead of being satisfied with getting on base, which is the equivalent of taking home steady profits. The market, and only the market, can hand a trader home runs.

I also tried to show in Trading fs a Business, that most traders are intelligent, well-educated professionals or retirees with years of fife experiences from which to draw, and yet they go on losing money in the markets.

It is the very high level of intefligence traders possess that attracts them to highly mathematical concepts for trading markets. There is nothing mathematical about merkets. and therefore trading them that way dooms one 10 falfure. Yes, / know that so many of ihe ads say that maifzets arc cycficaf, astro/og/Cdf, mathemdticai, symmeiricat, geometncDl, and aff fiinds of other "icafs"t but don Y you tet/eve thorn!

Fibonacci trading is matliematical, and therefore appeals to tlie figfily intellectual trader. In reality, as can be seen, it turns out to be another false god.

Suppose the Crude Oil market is seen by a trader to trend upward, begin to falter, and then head down toward a Fibonacci support level. The first commonly accepted support level is composed of a .382 retracement of tfie previous move. A resting order to buy is placed at that retracement leve

Lets imagine that theres a $15,000 margin account involved, and that tfie margin for Crudo Oil is $1500 per contract. Now the trader, enters a trade long for one contract. The trader anticipates a "magic" Fibonacci bounce. Nothing happens. The trader decides to hold overnight.

Now imagine the trader also has placed a resting order to buy one more contract at the .500 retracement level. Fifty percent is the so called "golden ratio." The trader and most of the other worsliipers of this idol witi have resting orders at the "golden ratio," and so there should be adequate support, sufficient to cause a bounce.

Of course, the floor traders, who also know about the "golden ratio," are there to help them till their golden orders.

As stated, with the traders and others entry into the niarkct at that point, there may even be somewhat of a bounce, and the market may rally for a few ticks. However, if the fundamentals that are driving tfie rnarket down remain in place, the rally will not last long, and so the market will rocross the "golden ratio", and head south toward the next magic number. At lhat point, traders will be waiting with eager anticipation for the expected bounce at The .618 retracement. If they dont get it, rnay their "god" ftetp them

Mow lets took at wtiat would have happened to the traders account. With the first contract, he had to put up $1,500 lo conirol the trade. At the "golden ratio", he had to cough up another $1,500 in niargin. But he also had to risi< the amount of money that he is losing by the mark-to-rnarket distance between the .382 retracement and the .500 retracement. Lets assume sucti distance w<j5 worth an additional S2.000. Vhen he enters the trade at the "golden ratio", it requires $5,000 to control tfie trade

At the .618 retracement, the market fias moved down another 52,000 He has an order to buy anotfmr contract, thereby adding $1,500 needed to control the trade. In addition, tie has $4,000 of baggage to carry from the first contract, and an additional $2.000 to carry frorri tho second contract. This mark-io-market baggage consists of the losses tie now has in ttie trade.

It is now taking $10,500 to control this trade. He is rapidly running out of margin. He has no more room left to buy. The next retracement is at .750. To carry the trade tfiere, he will need a brgger margin account, ff the market goes against him, down to the .750 Fibonacci nuniber and he has to liquidate there, he will end up with a margin call, Muff said? Ttie whole thing is stiown on the next page: