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77

At this point you may be saying, "Amazing isnt it? Now why, oh why, did I never see that before? There were 75 winning trades shown, 1 breakeven, and only 6 losing trades."

On the other hand, you may be saying "Just what in the worid is this nut doing? How can I make money doing that?"

Sometimes I miss a few of these, they are not always easily seen. They take looking at several times to spot them on your charts. In fact, it may be even better to trade these "ledges" without a chart. Just use the newspaper prices as I wil! show later.

Ill put some rules around this concept that will make it come alive and make more sense than just the pictures. Its the way 1 handle the many, many small congestions that I suspect make up the 85% congestions Ive read and heard about.

Rule 1: I look for a correction or congestion that is at least three bars in length, but no more than 10 bars in length. i« ; A

Rule 2: The congestion is characterized by a "squaring off" of highs and/or lows, the flatter the better. Perfect squares are best.

Rule 3: I trade the potential breakout in either direction. Opinion CANNOT be allowed to enter the picture. I do NOT know which way the breakout will occur! For every trade shown there was an opposite trade entered at the other side of the ledge. That order automatically acted as my catastrophic stop. Whenever possible within my margin account and according to what I am willing to risk, once I am filled, the opposite sidfi order is doubled to create a reyexsing stop.

Rule 4: I anticipate that I will be in the trade for only as long as it takes to place two bars on the chart - that is usually two da;j. If the congestion area is re-entered, it nullifies this rule. " "

Rule 5; I ca!! in the order each day. The buy stop goes 1-3 ticks above the high of the congestion and the initial sell stop goes 1-3 ticks below the low of the congestion. Whichever way the breakout occurs, the other open order stop becomes my initial protective stop. , - >

Rule 6: I expect to trade;the breakout that is in the direction of the current leg, but it often doesnt happen that/way. I place my order 1 tick above or below the breakout point. The order for a03irnier:leg-trend breakpyt Is placed aHeast 3,ticks or below the breakout point. If thetVade isantsy Im not sure of just where to

place the order, then I tend to place my order 3 or more ticks above or below regardless of the trend. There is no magic in 1, 2, or 3 ticks. You trade where you are comfortable.

Rule 7: As soon as two bars on the chart are out of the congestion, I move my stop to one tick above the high of the second bar if the breakout is to the downside, and one tick below the second bar if the breakout is to the upside.



Rule 8: Ido mgve my stop to one ticl< above or below any bar after the second bar, thaftn iUelfTs an inside bar. By an inside bar, I mean one having a tower high and a higher iow than the previous bar.

Rule 9: If the maricet brealcs out in one direction, and I enter the trade and am ther stopped out, I immediately reverse my position and trade the breatcout in the new direction. This is done only when my account balance can afford a possible double hit.

Rule 10: I can go back only as far as the first teg of the previous market swing to find a matching high or low.

0 i

. v.. /

yi! I \ <-These are swings-> \ /

V / \ /

/ \ yh \/

j / \

/ <-These are the legs of the swing -> \

/\ /\ \ /\ /

1 can go back only as / \ / \ % \ I /\ \ I /

far as these legs ----->/ \ / \----->\ / \ /

No matter how short the leg / \/ \ \/ \/

is. (It may be only one bar long at times).

NOW, THE MOST IMPORTANT technique of this kind of trading: I must have the courage to take a hit, keep my wits, and then reverse positions. The reversal is contrary to human nature, so it must be practiced over and over until it becomes automatic, if it looks as if Im going to get hit, I must cail my broker and double my stop order so that I am automatically reversed and going with the market in its new direction.

The above rules are as cLose as Ive ever come to trading a mechanical system. I dont always follow the rules exactly because 1 try to use judgment in my trading. At times I wish 1 had followed the rules, and at times Im glad I didnt.

What I have done here is to allow the market to tell me what it is going to do. in £ sense, this technique is a "straddle". Its probably not a straddle in the sense of the wor as used in the stock market or as used in option trading.

The straddle I use becomes possible because the market decides to move sideway; for a number of bars on the chart, thereby making it possible for me to straddle the pricei with my buy and sell orders at natural support and resistance points.



The philosophy behind the trade is that I want to get, and will be satisfied with, my piece of the action. I dont expect to get all of the actioni Greed will have to play second-fiddle to the success I achieve by getting my part of most major moves.

Once I am in the trade, and if it continues in the direction of the breakout, { can then trade it as I would any other breakout. For this reason, I often trade two or more contracts - one to make a quick two/three day scalp of the market, and the other to stay in the trade should it continue in my direction. I can trail a stop at each prior retracement, as I would with any continuing trade, and I can add to my position on retracements.

To a certain extent, it is arbitrary as to the choice of where to mark the boundaries of this type of situation. The most conservative choice is to wait until at least two non-consecutive highs, or two non-consecutive lows, are equal. Then mark off the range of the congestion.

Personally, I mark these off as soon as I can draw a line with a ruler across two highs, two lows, a high and a low, or a low and a high, just so long as they match.

The dollar win/dollar loss record for this type of trading is very good. Usually the losses are small and the wins are small to very large. Most of the time losses can be reversed and turned into winners. Most of the time you can make "lemonade" from these "lemons,"

1 try to choose markets that are making tots of little sideways "shelves." i try to choose markets that are trending.

Once there are more than ten bars in the ledge, I stop trying to trade the ledges. I wait for the market to start trending again.

Why does this technique work so well? The reason is that it takes advantage of natural support and resistance points. A breakout of a natural support or resistance point will usually carry good momentum. There should be enough explosive force to give a profitable short term trade. Flemerpber these trades are usually 2-3 days. Anything beyond that is pure luck. . .

It will take a lot of study to decipher exactly what it is Ive done on these charts. The effort will be extremely worthwhile. It was very difficult for me to get used to trading ledges, because most of the time there are no clear cut signals from any other technical tools that I use. There doesnt seem to be any way to filter these trades - no way to get any kind of confirmation. You just have to see them and jump on them. Practice them until you get the hang of it.

In order to help you see what Im doing with this technique, lets look more closely at the Eurodollar and Swiss Franc charts.



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