Trading By Tlie Book - Part iV

Review of Three-Way Testing

IVSy strategy will be that when the oscillator segment is pointing up, but the daily oscillator falls, it will give me a signal to oet ready to enter a buy order. When the weekly oscillator segment is pointing down, but the daily oscillator rises, it will give me a signal to get readv to enter a sell order. In other words, every wave that goes against the major trend alerts me to an oppprtunity to getgboard that trend if it continues.

A segment of the weekly oscillator is up or down when it moves .01 or more in

value.

if the daily oscillator has already been ob/os when the signal comes from the weekly oscillator segment, I will immediately enter the trade provided that the daily oscillator has not already gone ob/os at the other extreme, that is, in the direction of the trend.

The short term trend is the third and deciding factor in entering a trade. By examining the breakout of the latest intraday trading range, 1 can get help in making a timely entry into the market, tn this case, Im using intraday action to point out logical entry points.

The weekly oscillator shows me the direction of the flow of prices - the major trend. The daily oscillator alerts me to the wave that is moving counter to the flow of prices - the intermediate trend. Now the intraday breakout highlights a logical entry point and shields me from the risk of entering the trade too soon.

My orders are placed strictly at the breakout points - either high or low. Initial stops are placed as protective stops, or even reversing stops, and when going long are placed one or two ticks below the low of the day, or the low of the previous day, according to amount of risk I am willing to take. When going short, protective or even reversing stops are placed one or two ticks above the high of the day or high of the previous day according to the amount of risk I am willing to take.

As a rule, these stops will not be hit because Im trading in the direction of the major trend. If they are hit, it reflects a fundamental change in the market and I wil! want to try to make a profit from the new direction, or at least recoup some of my losses. I dont want to give the trade much room to work itself out. It has to succeed quickly or I want out, either with a reduced loss or a profit.

Taking profits. 1 move my protective stop to breakeven as soon as possible, tf the trend continues to move in my favor, I move my stop progressively to the number 3 (llll points (Part II of the manual). What Im doing then is waiting for a retracement to take place, and then when the trend continues, I place my stop in proximity to where the retracement ended and the trend began to continue. I can aiso add to my position at the continuation of the major trend.

2262

2185 2107

2029 .

1B75.....

1797 1720

25 DO StOC 5""3

Figure 4 Shows the continuous daiiy Crude Oil chart. The additional trades using the rules for the refinement are the ones marked 1-3. Ive shown the rules that applied to these trades.

Rule #1, If the weekly segment is pointing up, and the daily oscillator is in oversold territory and is pointing up, or is coming out of the oversold area, I place a buy stop order just above the previous days high. I simultaneously place a protective sell stop 1 tick below yesterdays low.

Rule #2, If the weekly segment is pointing down, and the daily oscillator Is In overbought territory and still pointing up, or is flat, I start placing day orders to sell just below the previous days low. I simultaneously place a protective buy stop 1 tick above yesterdays high.

Rule #3, If the weekly segment is pointing down, and the daily oscillator is in overbought territory and is pointing down, or is coming out of the overbought area, I place a sell stop order just below the previous days low, I simultaneously place a protective buy stop 1 tick above yesterdays high.

CHAPTER 3

Three Test Method In Action

Now that Ive shown the basic rules for my three-test method, I will demonstrate it in action.

Notice how closely it approximates 1-2-3 breakouts. In most cases, other than the refinement mentioned in the previous chapter, the result I will get amounts to my getting a jump on the breakout of a 1-2-3. This "head start" will, in effect, place more profit dollars in my trading account. --"-

In this demonstration, I will be trading strictly from the weekly and daily oscillators. In the last Part of the manual, I will blend all of the techniques together in order to show how it is that I actually trade.

For this demonstration, i have picked a little over a year of trading Comex Gold. Beneath the price bars on the chart, Ive shown the status of the weekly oscillator for each week throughout the year.

Where I show-, it means the oscillator for that segmentts} was flat. Where I

show \, it means the oscillator for that segment(s) was pointing down, and where I show /, it means the oscillator for that segment(s) was pointing up.

Beyond that, I have given the status of the weekly oscillator on the day pertinent to the trade.

Remember that the prices have been adjusted for purposes of creating a continuous chart. However, the price bars are the same relative to one another, and of the same magnitude from high to iow as they were when they occurred.

These trades are for real, the way I traded them, win or lose.

Throughout these charts, there appears "STOC 5 3 1". The "1" is what I do to tell the computer to eliminate showing %K as a separate line. Because of that, %K and %D will always have the same value as you see them on the charts.

In my trading I tend to use 70% as overbought and 30% as oversold. There is no magic in those numbers, often 1 fudge and go in slightly ahead of those numbers.