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If we look at a market and realize that it is in a trading range between the all time high and the all tirp Jpyv, then we can also realize that within this overall trading range there exist many lesser trading ranges. These lesser trading ranges occur over time at virtually every level of price activity that a market has.
But these trading ranges dont exist in a vacuum. Normally they are connected. The formations that connect them are called trends. A market, over time, has an anatomical structure. What we see are trading ranges, connected by trending formations. Trending formations, in turn, are made up of shorter trading ranges, gaps, large magnitude moves, and progressively ascending or descending price bars.
Excuse me if all this seems overly simple, but we have to start somewhere, and what Im attempting to do is to lay out a basic foundation for what is to follow.
What Im showing here is that a market can be dissected - divided up into its component anatomical parts. There are ways to trade each of these component parts. There are ways to trade from trading ranges. There are ways to trade progressively ascehding or descending trend formations". There are ways to trade from small PQSstion areas. There are ways to trade trend reversals, breakouts, retracements, and corrections.
This book is about how to trade the various situations that occur in the market place. The things that I show in this book may be valid in any time frame, but the emphasis will be toward daily and weekly charts.
In the preceding chapter on Gold trading, 1 showed a typical futures market. It had some extended trading ranges, and some smaller cone£timireas.which .lj:alUedfles. It had short uptrends and longer uptrends, and short downtrends and longer downtrends connecting the various sideways actions which are ranges, ledges and congestion areas. Some of the sideways areas were narrow in magnitude, others were wide.
What Ive tried to show in the Gold trading is that the most relaxed, most profitable, and highest probability-for-success trades come during extended moves from one congestion area to another.
, ft The purpose of three-way testing the trades is to avoid having to trade in I congestion, and to avoid trading trends which are short term. The most money made on ; a single trade is when a market runs. The most money that is made when a market runs i is when a market runs long term.
By running the trade through three tests, if you paid attention carefully, I eliminated most of the unprofitable trading that could have been done. The three tests eliminated whipsaws and most of the short runs that often get you stopped out with little or no profit, and many times with a loss.
Why is this true? Even though the weekly oscillator is seemingly coincident or leading in nature, it is still much slower than the daily oscillator in registering what is happening in the market. It is measuring a longer time period.
Consequently, when the daily oscillator has already changed direction and turned, reflecting daily price action, the weekly oscillator may be fiat or pointing the opposite way. It will take the weekly oscillator five days, current-to-date, of new information, in order for it to change. The opposition of the two oscillators keeps me out of the market until there is agreement. In essence, that would constitute two segments on the weekly oscillator - or ten days current-to-date of progressive price action in a trending direction.
If Jhe trending actipt.a s shq weekly oscillator, manages to last for ten
days current-to-Hate, then vvhen th oscillator becomes overbought or oversold, in opposition to the weekly oscillator,, representing a correction, there is an excellent chance that the trend will cpntinue. That is because a market set in motion, one that is really going to run, will have the momentum necessary to carry it back into the direction of the trend of the weekly oscillator.
Three-way testing will miss some trades, even some excellent trades, but the ones it gives are good and of high probability for success. Should the trade prove to be incorrect, it reflects that something fundamental is changing in the market, and it would be better to be out of there. If thats the case, then any losses will be small relative to profits.
Because market fundamentals do change, the three-way filtered trades may at times last only one or two days. One or two days Is not my objective, but sometimes it is reality. That is why, in this method, stops must be kept close to the market action. If the trade is wrong, ! want to be out of it as soon as possible.
Statistics have proven conclusively that if my stop is situated in such a way that 1 would take a loss, then reversing wili more often tiian not result in either substantially cutting my losses, and, quite often, reversing will result in a profit.
At this point, Ive completed showing the basics of market anatomy. The basics are the underlying foundation of what will be revealed in Parts V and VI.
In this part of the manual, Ive traded Gold as if it were the only game in town and as if 1 only had two oscillators to work with. In Part V) of the manual, Ill show how I trade several markets at one time, combining all of the techniques that were possible to use, including most of those just ahead in Part V.
Sn part V, I wiil set forth a concept for trading short congestions (ledges) in a trending market. Nothing more than the human eye is needed to trade this method. In fact, learning how to trade ledges can bring fantastic success to anyone who takes the time to study what I will show. Although difficult to master, its one of the best ways to successfully nibble away at a trending market. You will definitely get your piece of the action, and with low risk.
Trading By The Boole - Part V INTRODUCTION
This part of the manual will cover several more areas of my trading. Ive divided each aspect into chapters. The chapters are:
Trading one-two-three breakouts from within "range-trading" areas.
Trading from a ledge.
Trading within a trading range.
None of the techniques I will now show would have made much sense without the prior methodology. Part V of the manual relies on the previous four parts.
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