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82 (Wy~ either wouid be one unit up or down based on the square root. The riUe also states that a price may move to a level that is a multiple of its square root. A similar 1 can be found greatly expanded in the works of Gaim (Chapter 14). NOFRIS CONGESTION-PHASE SYSTEM Maricets apend the greater part of their time in nontrending motions, moving up and down within a range determined by near-stable equilibrium of supply and demand. Most trend FacL hiEwntiues on sy.-tems contained eKamples f multiple-fund manaeenient f Varied nrk Refers to the Jescription i Fibonacci ratios. followers complain about the poor performance that results from maikets that fail to move continuously in one direction. However, their sjstems are designed to conserve capital by taking repeated small losses during these periods to capture the big move. Eugene Nofris sjstem, presented by Jeanette Nofri Steinberg, is used during the long period of congeation, reluming steadj but small profits. Nofris sjstem does not concem itself with the sustained directional move; therefore, the user of the Congeation-Phase System can wait to be certain of a well-defined congeation area before beginning a trading sequence. The basis of the sjstem is a 3rd-dsy reversal. If prices are within a congeation range and have closed in the same direction for 2 consecutive dsjs, take the opposite position on the close of dsy 2, anticipating a reversal. If this is correct, take the profits on the close of trading the next (3rd) dsy. Nofri claims a probability of success using this technique, and the Theory of Runs siports that figure, if there is a 50°o chance of amove either up or down on dsy 1, there is a 25" chance of the same move on the next dsy, and 12 l/2>o chance on dsy 3. Considering both commissions and variation in the distribution, an assumption of is reasonaUe. Because the basis of the Congestion-Phase Sjstem is an unlikely run within a sidewajs price period, the substitution of a 4-dsy run instead of the current 3-dsy run should increase the profitability and reliability of the individual trades while reducing the number of opportunities. The Congestion-Phase Sjstem is only applied to markets within a trading range apecifically defined by Nofri. Users are cautioned not to be too aiLxious to frade in a newly formed range until adequate time has elapsed or a test of the siqjport and resistance has failed. The top of the congeation area is defined as a high, which is immediately followed by 2 consecutive dsjs of lower closing prices, the bottom of the congeation area is a low price followed by 2 higher dsjs. A new high or low price cancels the congestion area. Any 2 consecutive dsjs with prices closing almosi unchanged (for exanple, J- 2 tids) are considered as 1 dsy for the purposes of the sjstem. These ranges occur frequently and can be found by charting prices using the last 10 dsjs. In cases in which the top or bottom has been formed following a major breakout or price run, a waiting period of 10 additional dsys is suggested to ensure the continuance of the congestion area and limit the risk during more volatile periods. Remember, sjstems that frade onlj within ranges offer many opportunities that should be exercised with patience. A congeation area is not formed until both a top and bottom can be identified. Penetration of a previous top and formation of a new top redefines the range without altering the bottom point; the opposite case can occur for neW bottoms, if a false breakout occurs lasting 2 or 3 dsjs, safety suggests awaiting period of 7 dsys. Logical stops are also possible, the most obvious places being the top and bottom of the current congestion area, but closer stops could be formulated based on price volatility. The Congestion-Phase Sjstem can stand alone as a short-term trading method or can be used to complemeni any longer tedmique. \Nben trjing to improve entrj or exit fills, the sjstem qualifies as a timing device but only within the congestion areas defined by the riUes. It is not intended to be used in all situations. The converse of the sjstem sajs that an entry signal given outside of a congestion area should be taken immediately because longer periods of prolonged movement in one direction are most likely. But in a trading range, the Congeation-Phase Sjstem may tum a moving average tedmique from a loser to awinner. OUTSIDE DAYS WITH AN OUTSIDE CLOSE There are numerous chart pattems that can be profitable if they are properly identified and fraded consistently. Unfortunately, any one pattem may not appear very often and fraders
may become impatient waiting for ttie opportunities. For others who may feei that overall trading success is a combination of small victories, the outside day with an outside ciose is one such successful pattem. An outside day has the high and low outside the range of the previous day; that is, the higli is higher and the low is lower. An outside ciose is one in which the closing price is higher or lower than the prior days high or low, respectively. This is considered an attempt to move in one direction followed by a strong push in the other direction, if the close was in the direction opposite to a recent price move, this is called a key reversal day;" however, because the previous price direction is not distinguished, it is not necessarily a reversal but may be a renewal of the trend direction. A brief shidy by Arnold showed that this pattem proved profitaUe for a small sample of currencies, metals, and financials using the following riUes: 1. Buy on the ciose of an outside day if the ciose is above the prior high; sell if the ciose is below the prior low. 2. If bujing, place a stop-iossjust below the low of the outside day; if selling, place the stop just above the high. 3. Close out the position on the close 3 days after entrj. After studjing exits on dajs 1 through 5 following the trade entry, Arnold concluded that this formation predicts reasonably consistent price movements for the next 3 dajs. ACTION AND REACTION The human element in the market is not responsible for the ultimate rise and fall of prices, but for the way in which prices find their proper level. Each move is a series of overreadions and adjustments. Many stock and commodity analysts have shidied this phenomenon and base entire sjstems and trading riUes on their observations Elliotts Wave Principle is the clearest and most weii-known of the theories founded entirely on this notion. Tubbs Stock Maiket Correspondence Course is the first to define the magnitude of these reactions in the Law of Proportion; and, in 1975 the Trident Sjstem was based on both the patterns and the size of the action and readion. Rdracement of a major bull campaign is the most familiar of the maiket reactions and the one to which almost every theory applies. It is virtually unanimous that a 100°o retracement, back to the beginning of the move, encounters the most important support level. The 100°o figure itself has been discussed in terms of unity, referring to its behavioral significance. The next most accepted retracement level is 50° o, strongly supported by Gann and commonly discussed by experienced speculators. The other significant levels varj according to different theories: Schabacker accepts an adjustment of Yi or 1/2, considering anjthing larger to be atrend reversal. Angas anticipates 25>o reactions for intermediate trends. Dunnigan and Tubbs look at the larger 1/2. 2/3. or 1/4 acusbnent Gann takes inversepowersof 2 as behavioraliy significant: V2,1/4,1/8,---- Elliott bases his projections on the Fibonacci ratio and its complement (.618 and .382). Predicting advances into new ground is also based on prior moves. Gann believed in multiples of the lowest historic price as well as even numbers; prices wouid find natural resistance at $2, $3, -.., at intermediate levels of $2.50, $3.50,. - -, or at two to three times the base price level. Elliott looked at moves of 1.618°o based on aFibonacci ratio. Fibonacci Ratios Along with the most common 1, 1/2, 1/3, and 1/4, retracement values, Fibonacci ratios are considered of equal importance. Fibonacci ratios are found by dividing one number in the Fibonacci summation series
1,1, 2, 3, 5, 8,13, 21, 34, 55, 89,14 ... by the preceding or following value. The series is formed beginning with the values 1 1, and adding the last two numbers in the series together to get the nest value. The numbers in the series, especially those up to the value 21, are often found in natures sjinmetrj; however, the most important aspect of the Fibonacci sequence is the ratio of one value to the next. Called the Golden Ratio, this value FNIFN,, approaches 1.618 as N gets laie. Oddly, the inverse FN, ilFN= 0.618, which is a feature that has drawn attention. The Golden Ratio has a long history The great pjTamid of Giza, the Mexican pjTamids, many Greek structures, and worlds of art have been constructed in the proportions of the Golden Ratio. These and some fiwllier examines are given in Chapter 14 where they are also shown in context with trading sjstems. At this time it is important to recognize that many analjsts who consider human behavior as the primarj reason for the size of a price move and their reU-acements, use the Fibonacci ratio .618 or its reciprocal 1 - .618 = -382, as very likely targets. Elliott is the most well-known advocate, andapplicationsof his Wave Theory are filled with these ratios. Rdracement riUes have not been proved scientifically, but they are accepted by most traders, in general terms, the retracement theories, or revelation methods, can be categorized as either proportional retracements or time-distance goals. Proportional retracement states that prices will retum to a level that is cleariy related, by proportion or ratio, to the length of the prior price move. The larger the move, the clearer the rdracement. The percentages and ratios expected to be successful are those that are most obvious: 100° o, 50° o, 33" o, and so on, in acklition to the Fibonacci ratio 1.618 and its inverse 0.618. The time-distance rule is popularized in the wori of Gaim (also found in Chapter 14). Ganns rehacement objectives can best be thought of as forming an arc of a circle, with the center at the price peak. The goal is satisfied when prices touch any point on the circle. Tubbs" Law of Proportion The tedmical part of Tubbs course in stock maiket trading is intense chart interpretation. The Law of Proportion presented in Lesson 9 is awell-defined adion-and-reaction law. In cases where the nearby highs or lows of a swing were not broken. Tubbs claims four out of five successful predictions with his principle. The law states: Aggregates and individual stocks tend to run on half two-thirds, three-fourths of previous moves. First in relation to the next preceding move which was made. Then in relation to the move preceding that. Applied to silver, an initial move from $4 to $6 would react 1/2 to $5, 2/3 to $4.67, or 1/4 to $4.50. Tubbs does allow for traditional price support as a major obstacle to the measured price rehacement, and so unity (a 100°o rehacement) may be added to the three proportions. Figure 12-5 shows si4)sequent reactions to the silver move just described; the second reversal could be any of three magnitudes (or bad; to major support at $4.00), ending at $4.50, a 3/4 reversal. Reversals 3, 4, and 5 are shown with their possible objectives. The last reversal, 5, becomes so small that the major support levels (horizontal broken lines) are considered as having primarj significance, along with proportions of moves 1 and 2. Major siport at $4.00 coincides with "o of move 1 and "o of move 2. This would normally be sufficient to nominate that point as the most likely to succeed. Tubbs indicates that FIGURE 12-5 TubbsLaw of Proportion.
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