38260 37959 35840

34639 33429 32219 31000

29730

28530 27379

Long at close which is just peeping out over the expansion line.

Currently long here based on technique 1 Fart II of narnial.

-Akost stopped out on this lou, Kissed by one tick.

Because of the long duration of the trading range, I took the .236 expansion as stated earlier.

D--0526 0--31625 H=31325 L=31225 C=31250

Figure 35 Ive shown what happened to the Wheat contract over subsequent weeks. It entered another congestion phase. Practice for yourself how you would have traded this congestion phase. I didnt. I stayed out, other than to daytrade.

Range Higb = 31224 Lou = 27925 (Full Line)

Outer High = 32902 Lou = Z714& (Dotted Line) UC

Inner High = 30742 Lou = 28406 MidOut Hi = 31705 Lo = 27443 (Dashed)

Trading By The Book - Part I CHAPTER 5 Comments

After the run-up. Wheat entered a wildly congestive phase prior to the beginning of what I feet will be a test of the 420.00 area. I am as of this writing in that market attempting to take profits from the climb to the anticipated 420.00 area, I am in there based on a technique that wil! be shown in Part ll of this manual.

I want to point out here that I am very careful to avoid trading in wildly emotional congestive markets such as are seen at the tops of grain markets when they are greatly affected by weather. These are dangerous markets, and trading them is not in accordance with prudence and wisdom. When a market is making price moves such as seen at the top of the wheat market in a drought year, stand aside.

Final Comments on Trading the Breakout from Congestion.

This is the first part of a multi-part manual. Read it and practice it dozens of times, maybe even hundreds. Prove to yourself that this is a sound way to trade the breakout of a range. Im convinced that it ist It constitutes a method, but only for that one situation. If you try to beat the method, you will lose. Yet thats the first thing that human nature will cause you to do. Resist that temptation. If a method works DONT FIX IT! When you have lost a few hundred or a few thousand dollars by trying to make it just the slightest tad bit better, you will have blown it. Remember that I told you so. Do you have that kind of self-discipline? You will soon find out. Go ahead and start trading the markets using this trading technique. It worksl Even if you only have time to pick out one or two markets and follow them, do that. Enter the prices every day and then study your charts. Try to spend some time every day going over any charts that you can obtain and practice spotting congestion areas and trading the breakouts as I show in the manual. There will be losers and false breakouts, there is no such thing as a perfect method. Get used to the idea of taking losses, but never learn to "love" them.

When I owne;fi a paint contracting company years ago, we knew that sooner or later we would spill a bucket of paint. It might be a quart can, which is equivalent to a small loss in the market, or it might be a five gallon pail, which is equivalent to a big loss in the market. In any event, knowing that sooner or later we wouid spill the paint, we were prepared for such an eventuality. When it happened, which it inevitably did, we had the equipment, etc., to deal with it.

The same is true for trading; sooner or later you will take a hit. Small or large, it will happen and you have to be prepared. That is the purpose for stops. A painter uses drop cloths so that the paint will spill onto the drop cloth. That is his "stop". He also has plenty of rags and the right solvents just in case the paint flows over the drop cloth and onto someones brand new rug.

Your drop cloth is your stop-loss, your rags and solvents are your margin account, or your option premium which defines your loss should it spill over past your stop.

I have had a market move to within one point of my stop and close there. The next day, guess what? It gapped up past my stop and wasted my account for an extra $1,000 per contract loss. It can and will happen to anyone, so I am prepared. One of the best traders I know had a SI5,000 profit in the bag when he stepped out to use the bathroom. When he,came back, he was looking at a $30,000 loss. This is not a business for the faint of heart. Be a good scout, be prepared. Inure yourself to losses by paper trading, or trading the mini contracts at the Chicago Board of Trade or the Mid America. Youve got to learn not to panic when the going gets tough. You have to think your way out of bad situations. The best way to avoid them is to have the right tools that keep you out of those bad situations. Those tools are what Im trying to give you here. The main one is wisdom,

I can easily make what for many would be a years pay just trading the breakout of congestion, but I have to wait for the markets to come to me. I must be very, VERY patient, i do not jump the gun, i do not get in too soon. On the other hand, I do not chase a trade. If I miss it, I miss it! So what? Another one will come along soon enough.

Anticipating Congestion

Is there a way to anticipate congestion areas? There certainly is!

Congestion areas can always be expected at Fibonacci retracement levels and previous support and resistance levels even if they dont match up with Fibonacci numbers. Theres nothing magic about Fibonacci ratios. This will be explained in a subsequent part of the manual. Always anticipate that congestion may occur after a gap or a large magnitude, one bar move. Not that It will always occur, but that it MAY occur. The lengthiest congestions, more often than not, will occur after just such a move by price.