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Trading By The Book - Part II CHAPTER 3 Selecting a Market

There are various ways to select a Market for trading. Trading can be long term, intermediate termrshort term, or Intraday.

At this point I want to define what I mean by long term. Intermediate term, and short term trading.

Long term trading is done from a chart that is one magnitude greater than the chart that Im going to trade from. In the case of daily trading, long term means the weekly price chart.

Intermediate term trading is done from the chart that I am studying the most. In the case of daily trading, intermediate means the daily price chart.

Short term trading is done from a chart that is one magnitude lesser than the chart that Im going to trade from. In the case of trading from day to day, it is the very last Vnce bar on my daily chart because that bar represents the most current trading range

that 1 have at my disposal. That last bar shows me the previous days intraday open,

high, low, and close.

There is no law that says that these definitions are absolute or that anyone else woutd even define long, intermediate, or short term trades the same way. These are my definitions, given so that 1 can communicate my methods.

j exiiject my trades to last from a few minutes intraday, to two days to about two weeks on the daily chart. Sometimes a trade will last longer.: That can be either very good or very bad, depending on why the trade is taking longer.

The bottom line to my trading and in my selection of a market is that I want to succeed. Success in the markets is measured in money and in happiness in doing things I like, t am interested in both enjoying myself and making profits.

Does that sound obvious? Its not! I have found that there are many traders who trade for the thrill. It is a known fact that there are many who trade not wanting to win. There are traders who enjoy punishing themselves in the market. There are also the outright gamblers who are just out for a good time, win or lose. There are all kinds of people trading in the markets, but I am in there to make the most profit that I can.

The desire to make profits greatly influences my selection of markets. I hate to lose! I want as close to a sure thing as I can get, therefore I am very patient and very conservative in selecting my trades.

I dont have the physical makeup for blindly following any system, although I believe in being systematic. I want to use reason and logic in determining the trades I will make. That is why this manual is about methods of trading, not a system of trading.

1 will now describe some consistent patterns of selecting a market that I have found to be of value to me for any time interval of trading. This is not to say that there are not others equally as good. These are the ones I usually will trade.

Trading By The Booi< - Part 11 A breal<out from a range, which I covered in Part I.

A breakout from a 1-2-3 high or low, which I will cover in this part of the manual, along with a variable outgrowth of 1-2-3s which t call a "hook."

An entry into an established trend, which 1 will cover in Part III of the manual, along with my weekly oscillator.

In Part IV of the manual, I show how 1 can trade combining a daiiy oscillator with my weekly oscillator.

In Part V of the manual, I will cover trading within a trading range.

No matter whether the trade is perceived as long, intermediate, or short term, I try to use methods that have the highest percentage of probability of success. Not only that, but I try to trade situations that occur quite frequently, so that there are almost always markets in which to trade.

I wilt be more specific about these market patterns as they are covered, but first there are some more things that need explaining about my methods.

When I trade a market there are two things that are essential to my entering a


1. I must be ready.

2. The market must be ready.

Only when both of these are satisfied, wilt I enter a market.

I Must Be Ready.

Here is an analogy, t cant ride a wave if Im up on the beach, i have to be in the water to catch the wave that I want to ride. The same is true of trading, I have to be in the water. That means I have to have an account, with sufficient margin in it to enter th trade. That is part of being ready. I have to decide which wave I want to ride, and I have to decide which market I want to enter. That, too, is part of being ready.

I have to decide just when or at what point Im going to get on that wave. Likewise, in a market, I must have decided at which point I wilt climb on for the ride.

Finally, once I am in and surfing, 1 cannot jump out of that wave in hopes of catching a bigger wave that might be right behind. If I do, I will probably get knocked my head, lose the wave I was in, and probably the wave behind, because I am not reali\ ready.

It is the same in the market. I must stick with the trade Im in, and ride tt out to the end, or I may miss the best part of its action and miss the bigger one behind as well the one I was not really ready for. Theres an old folk saying that goes, "Dance with thf one that brung yuhl" I remember that when Im trading.

The IVlarket Has to Be Ready

When is a market ready? When it is behaving in a way that is comfortable for me to climb aboard. It is ready when I can perceive that now is the time for me to get on, start paddling, enter that wave, and go for a ride. It is ready when it is doing the things that I expected it to do. tt is ready when its behavior is predictable enough for me to feel safe entering it.

tf a market is extremely volatile, making large unpredictable swings and moves, I may not feet comfortable entering that market, so I DONTI

If a market is flat and not giving me the kind of action that I would expect or want for a trade, I stay out. I only enter a market when I AM READY and THE MARKET IS READY!

Here is another analogy. Many times a surfer wilt let many waves go by looking for the one big one that will yield the longest ride. A lot of fun-type small waves go by. But the surfer will ignore those, intermediate, strong waves will go by, but the surfer will ignore those. The surfer is looking for the big wave, the one that wili carry alt the way up past the water mark.

So, when the smaller waves come along, even though they may be ready, the surfer is not ready. When the good intermediate waves come and are ready to ride, the surfer is still not ready. He wants the big action, the big wave.

This is what it is like to trade long term. If and when 1 trade long term, Im looking for the big action, bypassing the lesser action.

That doesnt mean that the surfer only rides the long waves. Moods change. On another day at another time its fun to ride the smail or the intermediate waves. Sometimes there are not enough big waves to ride, so the surfer might want to master the skiil of riding the smaller waves.

When I trade, I do the same thing. Big wave, intermediate wave, or small wave, all are interesting - as long as they are profitable.

When I ride the small waves I have to get in and out of the surf a lot. I pay a price in energy expended and wear and tear on my body. When I trade the short term trend of the market I have to get in and out of the market a lot. That gets expensive, because I have a commission and face possible slippage every time I do it. The short term trader has a much higher overhead than the longer term trader, but he does get more action.

I have a friend who is a short term trader. He is a day trader. Once I asked him why he day trades. His answer was that he couldnt stand leaving all that money on the table. In other words he couldnt stand watching all of those small waves go by and not taking a ride. Is that OK? Sure, everyone has to trade within his own personality, using his own judgments, based on his own perceptions. If he doesnt he will not be readyl He wili iose.

A long term trader may leave 50% of the intraday market move on the table, but that is more than offset by the sizable gains from the daily trend, and the fewer commissions that he pays and the less slippage that he experiences, I have read that long term traders make more money than short term traders overall.

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