Alexander Elder - Entries & E... o 16 Trading Rooms (SM File)

~Wi1ey Trading
. II
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A,UTHOR Of THE INTERNATLONA
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CO,M I TO MYT D !G QIOM
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in ",(k~n, c<>unuks. (allow tlitterc.n,
.....k""... ancl Idl: d1ffutr'lt mctbodl.. but ~" shan:
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sc-nol '''';''-MOfl importantl" ,""" lkdia.1an

aI>no.Il tin .....nc.
while _
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oi lhci. wirullrlp a~ d ... inlll~ ncheme.... of In
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ad...,n:IlJ"" na<h.
Why would. pcuon who i. "'''linll fur ~ UVInQ Wll
.!><IUI hi. oc her m"'hod hu.e.tI 0' II'lnd(n&
ou, pfnli'l In sHencel Winne .. know 1'1111 w.,n
>UCM in l"'tl~ lkloa "'" dc:po:ot;~e.... orlen",,:1 ....111 mone,.oo<l tta\1ne

tJ;,
oi flair.
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fodd.IM IOU a dMtoo, you ... Wit
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fU<urn. Md
C>dI ,nder lfl 'hll boolr .,.....
""'ions.
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dtal sppc:Us.o ..... at ha.he it

buyInc btnlmvu.
l>"h, '" .rolllro. for <lull
.,<xI<J l'l'll<Iy.o CCp6ll<lo: from eotl5Olit1>...... ><roes.
crntr.tl'"
People ""come JuceCiJ',,1 wh"" 'hey 'ncllS on

wh" 'hc.y Iov<: .0 do. In ""'din!; th'" book.)'<I1I wi.U
probahlJ come 'CR>$<' ,ndin. veNdc. yl>llllle"."
cOO\CCP, 'hll IppcaJS.O y<>1I. On"e you find i. slOy
"'~" i' anti mjIM:. ,h., 'n:, foe ill rich dcpu,l'.
TIw:rc I~ ....:lIlY<: diffen:"".,. t>rnveen .Bdc.. a.

""rial.. ""P:i of <k.-d<>pm<:n. Bqlnlle.. look I<:lr
'Jps. while in.etlMdisl"
I;ttp ukt,. .bo",
. . . . .Qt'" ......... bpc, iLliC"d lDduI ......, 10 wadi
otl>c.. INIke <kcisionlI and "'phm .hem T'nIdel"l
In 'Ills ........ ...uI shstc ~ ..."..,h of Infonnuion ..;n,
you
hotno: bC'ndrdr up'o l'O".
,r.>tJc"
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T~,.,. C2ft ~
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gootIlhlnlJ-frt:edom (rom a bou,'1le .bili.y

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...""h....".. $ri.U. wl>cn thoc chips In: dow",;' is IIQt
money ,ha, dc.erml"" 1,,, qu~I"y of ynll' lifo:.
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ENTRIES
& Ex TS
SITS TO SIXTEEN TRADING ROOM
@
WILEY
John Wiley & Sons, Inc.
Copyriglll .' .lOOt, h ' Dr. Alexmukr Ellie. All riShl r '~I'rvcd.
Published by lohn Wile)' & Son., Inc llobol CIl, N~'w leI': C "
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or Ci,lpilnllcttcrl>, Readers. however. hould COnla I th appropriate comp nil'S for more umpl'h:
informillion p!lim.lillC Irndcl11, rks and rc istr.llion,
For generat inlormOliun uo our oLher p duelS nnd
ollr eu lomer Cure I)cpdIlment within Ih 1 niled
31 (317) 57_-3993 1r
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8 0 7 ,2-197-1, oUl~id Ihe Ulliled
"ViI y. 1.
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SIOles
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llder, Alcxancicr, I <lEnlries & exil : \.j it to si",lecn tmding r oms I A!i:x:11ldc,' Ida.
p. em. - (Wiky 1 r ding serie )
Indudc bibliographical r rerenees.
I R -I.: 9711-0-471-b71l05 1 ( lulh)
I. B
I: 0-171-67805- (t1 III)

1..,10 ks. .l. Fulun:).
I. Tille: I:nln and exi s. II. Tille. III. Seric .
HG.j~19.E"'h 2006
I. Lnveslmc:nl all.. lyi~.
.\J~.6>1'10911-dc2l
_0(1 0292019
Prinl rI in Ihe Un.iLed Int
10 9 B 7 6 5 4 3
of America
~
11/ lIIemory o[ Eddie Chillg,

Illy best [rielld Patricia's kid brother.
who
all
wel/f to a bllsilless
Septelllber 11. 2001,
111/;.'et;lIg at
tIle Wor1rll'rnde Center
nlld vanished FOII'I o/lr lives.
CONTENTS
IfllroduCllon
Chapter 1
Sher"; Ha,hU
"
A lQgical Way of lu<>king It Thinll"
Chapter 2
Prn! Schut1.man
My Cumpul'"
un Do the lhd;ng for Me
Chapter 3
Andrea Perola Si",,,I. eh..l., d .... r and Um:!ullc",d

Chapler 4
Sohail Rabban; Th. Discipline of Loss Contml
"
Chapt.r 5
RoyT.st. Jr.
~vdopins
a Comillenl Approach
Chapter Ii
lamos (Mib) McMahon
A Suc=ful Engi""". Has.
Di:>adV8nla~
100
Chapter 7
Gerald Ap~1
Looking for Favorabl. I'mhahilitio:$
Chapter 8
Michad Brenk. Tn Kup Repeoting Wllat I Did RighI
Chapter 9
""rry Loworn A Squuu Play
'"
'"
'"
,ll
vU:l
Cont~l1l5
Chapter 10
Dr. Dilln~ Buffalin
Dancing Like Fred

and ill High
Astair~,
Only Going Rackwards
H~'Cls
"6
Chapler 11
David Weis
Price-Volume Behavior [s Steeped in Reality
i92
Chapter 12
William Doane
The Rigger tbe Found;llion, the Taller the Building
208
Ch'lph:r [3
Peter T'ltarnikov
We Analyze Peuple Who Anal}7.c Markets
224
Chapter 14
Damir Makhmudov
Technical Signals in the Fundamental Cuntext
240
Chaplt::r 15
Pascal \"Villain
Effectiv~
Volume
Chapter 16
Martin Knapp
Du It Right the Next Time Around
'"
276
Conclusion
Your Trading Room
307
Bibliography
Reading Lists
321
Aekno\...1edgmcnts
About the Author
'"
Index
333
331
ENTRIES & ExITS
NTRODUCTION
~u arc "boullo meet 16 pl'ivatc traders. Some trade for a living. while other arc still
.1 :L a semiprofessional level, clawing their way to the upper rung. These men and
women live in different countries. lrade different m;lrkel ,and u e differenL methods, but
all share sev 'ral Lmil. -most importanl1y their dedicution to trading. They arc utterly seriOllS about their work. while most amateurs. who supply the bulk of their winnings arc
chasing the excitement of an adrenaline rush.
Th I copl you are about Lo meet havt:' generously agreed to describe their methods
and show Lht:'ir ac.:tllul Lrutlt:'s. Why would they do that? Why would a person who knows
11m." to trade talk to anyone insteod of keeping his or her mouth shut and grinding out
pr fit in sil nc ?
The secret of trodln ifi Ihat there is no secreL There is no magic formula you an buy
or .~tcl1l and plug i11l0 your computer to automatic:illy make money. Success is based on
di cipliJ1e, hard work, and a bit of flair. These traders know that their success will not be
diminished b th SlI ce of others, which L~ why they are willing to s.how you whallhey
uu. AI u, mony have Irnveled 11 hllrd rolld and feel kind toward beginners.
Trading i all imm Il ely rich field, and no one can become nn c..'\."Pcrt in all aspects of
it,just like a do tor cannot be an expert in ver field of medicine. Many beginners spread
Il,emse!ve painfully thin belwt' n inv ling lind day-tnlding, between .tocks. futures, and
options. Yuu're ;lboul I se~ 111:1\ a1mo tall uca ful pl?oplc find one area that appeals to
Ihem and pe ialite iJ) it.
Peopl become succe sful when tbey foeu on what they love to do. In reading thi
I 0 It y u will probably come aero sa tfading vehide y 1I like or a concepl 111:11 appe-.ili to
you. One you find it, . l:Iy \litJl iI and min Ih:ll ar a foc it ridl depo il . [ wrote this book
to help you bre'lk ou a isolation.lcam rom others. pick up ideas that suit your tylc. and
return to your tradin room a better, more contident trod r.
I ME
RA
Eight years prior to writing thi b ok I went on II Caribb an vac.,ti n and by the end of
the week fell thoroughly bor d. The hlu~ sky. the' Drill he h, and the rich food became:l
litt! repeLiLi e aner a fe\ d y . I realized that my f voril va alian \\'3 01 \\'orking trip during \ hich I ould alternate work with ightsccing. I thought dlerc must be others with
Enlries & Exits

,~lmilar lastes, and tho: following winter .Khedul~ my fil3t Traders' Camp, Eighteen trJdcn
signt'd on. and wl' went to the Domini"m Republic for a w~k, We nlll on the beach e\'ery
morning, had clas.~es from YAM In I I'M and again from 5 to 6:30 PM, spellt sevn';ll houl'5
amund the pool after lunch, and partied C!\'ery night. The group lo\t'd the classes, lhe
resort, nnd the l"Ompany. They told Iheir friends abuutllllr Camp, and people stllrlt'd calling and asking 10 join, !'rom then on we rJn Tntdcrs' Camps sl:vcrailimes a year un islands
in the CarihhCilll,l'acific, and ~Iediterrancan.
After working and playing together for a week, many campers bO:=lJle fril'ncls anrl
kept in tOllch. I stnrled having monthly campers' nlet'tinl;S ill my apartment in N.w York.
/vlany carnpt'rs relurned to suhscqucnt Camps for refresher COUT$t'S, After w"ldling their
progress over lhe yeal'5, I knew who I wanterllo interview fur this bonk, They included
Shl'rri Haskell, Sohail R;lbbanl, Ray Testa, Mih McMahun, Michael Brenke, Kerr)'
Lovvl,lrll, and Diane BuIT:din, I w'luld hnl'C interviewed scveral marc, bUl WI: muM not
m6h our schedules_
I always invited at leasl onc gUl'.S1 in.~tructor 10 eva)' Camp to offer a grealer di\'ersily
of views, I lilught in th.. morning>, and they laught in the afternoons. Four pt'l,lple in this
bouk-Fred Sd\lltl'.m:lIl, Gerald Appel. David Weis, and /'I'latHn Knapp-taught in two or
Illore Camps. I kept ilWiling m('m back beCilu.~e traders luved their leS$llJlS. As soon as I
began workins on this book, I knc:w I wanted to illlerviell' them.
I hall been hearing of Hill Doane for several years and invited him fllr an illlervil"v
to expand outside the camper circle. I ran into Peter Tatarnikov in Moscow and was
impressed by lhc maturity and depth of lhis very young man; we conducted an interview
in his kClll"l"ly locktd office:1 felY days before I new back to New York.
MALE OR FEMALE?
Almosl l'I'I'f)' llIJ1lfil'lioll wrih'r falT.!l this dllemma-lI'hldl pronollll 10 usc. lie? Shl'? lie IIr she?
Malc trJders OUUIUlllbcr WOOlnt, althotl,~h tilt' r.llto ts r.Jpldty hmlmlng nwn: IJ;llanl't'l!. 35
mon' aud mort women cume inlo the nmrkl'ts, I nud thnl lhl' IIC~nlaj,'t' of sU(CI'SSful tradl'rsls
higllCr amung 1\'UTIIClI. TIll'}' lend to ht' Irss arnlgalll, alld mll!lanCl' is a deadly slul" lrmUng,1'le
male t"I-lhatwuudcrfultrJit Illal has been brtnglng us wall:, rialS, 3wl bloods!wft slll!"c Illlle
Imllll'mortal-tcntJs Hlllfl heavlly caught Ull intfading. Agily sludles hi.~ charts, decides to bu}',
and now hlssclr-l.'Slt't'mls IlIvolvl~l-ht, has hI Ill' r1gJIU If the markel goes hIs way, he waILS 10 br
JlnIl'en cI'rn mllTl' righl-hil!)(er 15 ~ellcr. If l.he milrktll.'Ol'5 against hIm. Ite is tough cnough III
slamllhe ]1<IllI, and walls for lhe markel to re\'CfX and prul'(' him ri>lhl-lI'ltlie II grfillb dOl"n
hIs account.
WOlll!'n lrmlrfS, on 1IIl' ollll'f halll!. are mudl more likely to ask a slmpll' question: 1I'1h'Il''s
If,r. lIIlrllq7111l'y Iikl' tll lake IlrnmS and al'{lld 1055<."5 i"Slt'ad ur trying to prul1.' lbeIllSCh"l'li righ I,
Women ~n:: ilion:: likcJ}' Co bend \Vlth the wind ami gu wilh tltc nUlV, 1';llch IIl'orl, and hflp nrr a
lillie earlier. booking profits, When I11'1l1r.JllcrN Iltal kt.'filing rcmrds Is a lloj,,'t'iy Imponanl aSpctl
uf Slltu'SS, Wt,lIllCll arc mor!.' likely 10 kl'l'p thl'lll lhan mcn. If)'ou 3rt' looking 1O hlrt a lrader, all
01 hl'r r"nun; bl'il1g 1"111.11, I'd I'OOIl1lIll!.'lId looking for 3 wOlllan.
SUI!. IlICrt' art' lllallY more male Ulan femak tr.Jlkrx. 'I1le English lallJo/u:lge Ii~illg whal it is,
"IIC" nOIY5 bcttl'T Ilwn "h~ or sh~" ur ~I'el1 ]umlllllg hcl\\'t't'll the lWll pmnoun. Tll make rtadlng
rasicr, I'll usc tltt' 1l1:lsl1lllm' pmnullu Ihmughoullhls book. llrust you understand Ihal no dis
1l'SJll-'C1 i inlelldl'd towa n! \I'nmcu lrddcrs. I wan till makc Ihls book (',lsier to rcad for rveryblkly,
of any geuder, ;lIlyll'h~rc III Ilte world.
AdalUrll rmlll Cmllr 111M My l'r.lillllJf RlJI)/11
lnnt><luaion
""""",1,,,,<1<,,
Afle, "",ding my boob.

appr'<)ll<Md nl< ...ilh ''''Y thouBhtful quo
,ion>.nd ~ me lboi. wu,k. whi(h w n'rtmdy $<'riound in<ltu<,i,.,. I eniot'ed
iI. . ppin~ ide'" wlrh
and ill ,h< pro<<s> "f wriling ltd. book. inviltd lhem
be:
in......i""'O-"ndr"" I'n'olo frum 1"ly. o.,ni, ~bl:hrnoulllvfrom LaNia I.....iBntd up fo,
our Comp I.u.,}.nd P=I \\'il1.in from IItIGJum.
Fin.lI), ,h...., ... ~
wi,h whl>m I .. plr:>1"<d lh. p<Wibni,y of.n in'e.okw. bu, i, ~ rnolefioli<ed. Th"'" Wft. '1>'0 amp<'1 who m.d. massi"" amounll of
rno""y, movtd "Il,ho.. la:< ],aV<Il~.n<,! did no, w.n' 'he .i,ihiliry of .n in'.....i...... ThoI'<
wm: also 0 f..... 1"'Ol'1. wi,h whom I diKu....J a pus;ible i",erview-,hoy ,.lk<d good 1.lk
bu' <oulo:I no' pm.ill< dorum.n",iun uf ,10.., Hades.
I .ioiltd """'. of ,h_ .r.l<l<rs. while oth... 0..... 10 New Yorl; '0 mCfl wilh mo. and.
f..... <:Ime t<l s mo in Sicily .nd Anul..d.m wh.n I " ...In! in FAm>I". Thcs< days. wi.h
readil, ...U.bl. l,,"mci ano. ''''d.. "ffKe i. wh.,..,..., he "'In pUI down .1.plOp.
,I""".
'0
..,,,,,ral,,,,dn.
,0
HOW THIS BOOK IS ORGANIZED

A' tho ..." of <lKh <hoP!" 111 inltOdlK< )'Ou to r.>d<r and ,rlIl"'" abuu! hi> or h<r ,-*.
ground.nd rn<thod. f.xh p",aon will .mwym, IWn 1r.Kl<s..nd I will a>mmonl un bodl.nlri<s
:ulIl oilS. I wiD condOOc .rn ""1"'" h, diorulPnS on impumul thrn.. 01" topic arWns frOOI
tho. inlC'Viow. In odditiun. I in.iltd """" ~ 10 writ< prrsonal ...."""", orr... OU' in'...
view. Scm. dos<rib<tllhcir pnlOIIO.I d< .. lopI'lm'. whil. nthtrs ..nl """" l<clInicd .. nWb.
Th. """y inll> ..:h .... <k wlil be: >hown nn .h. riKh.~nd
willo d""1< looking
._,1, h<>w lhe, did when II", ,no.I" mad. his ," h., ....ision '0 go long or sho,. Do nu'
ru,h 'u tu,n
IhOl I"'~udy lhe <h.", 10 dKid. ,,,,,... hcr Ih.. t.. d< Is likel, 1" b<.
win""f Of .1oo<f. R<virw ,h< lfad...'. rom"","" on hi. Of her <ha". Nk )'UUf.<l( wh<th..
yo<> .S.... 0( di"Q.I" wilh lflol lrade," .......nins- OrK' you... ",ad. yo.., di,ion, lurn
II.. ""8" 10 ... how I.... ,raJ< co"", ""'. llcvicw the .. it <hul' and rud my commt"l< nn
both.ht ""''1.nd .,il. p""..,.j to lhe son<,! lrade .nd ~~I I... p""'....
ScV<r-.oI.rad... w:uutd 10 ,how ....... lhei, 1...J.. I'Mlk<.l a month or IWI) ofi.,. ,he .xi~
I kt them do il. bUI did tI01 ttKllUr:lgt " ..II "Ioind.<ighl <h"15." ...11 of u' ..... <mort .fi.... Iht
r"l. wi,h l><>y .nd ..1I.ig,..), pbinly vwblt in lh< ",iddle of Ih. ""ut. n.. rlnsor ..... S" '0
Ih. fi&fll cdg. ""'-" ,100 mu,kit. il bomn.. Sin IV< h.... lu m.1<.- "'" .I,,<ls'O'1> lhor"<.
I wamod lhe "".m in this book 10 look IS <100< !"",bl< I" Ih. ,~lllIinll-Tho middle of
.....,. "".rt looks C'Uj'. hUI .... h.... 10 do oU' jub ;II 1M fiWu rd&<.
I w.nl you
focuo on lhe wtI,k of 1.. <1<.. I v"ilod. bUI .irK' I romm.nl "n ....r'
.;nglo l<>do. I wan, '0 make m, 'ppfO;Kh d.a, 10 you. I will ""sin Ihi, book by "rr",i"8'
""'1" brffi' ourli", of "' "'.Ihod.
11 alway. illod.. mo I" pkk "I' a ,,,,,hniClI book witboul a b;l>Iiosf~phy ny aulhor "f
,,,"" book "''''lb. , g."i"s wllo doosn't OW< Ih.nkJ 10 ,nybody. You will
nlll
bm
IWI) hibliogrophjq in this book. Fi(II. Ih... i liiI nf books m.n,i"""" d",ing II.. i""f'
vi....... St<und. I uk<.! .... 'Y lradcr '0 ~i.. mo II..i, rota>mm<nd<d ...ldinB lil.-Ih<,.11
did. and ....m. odd<d romm.,," 10 III.., pi<la.
Whilim, I"',ticil"'nll. I ......I ..,"'" of lhooi, .-m.il> .".1 i"c1uded Ih."" .long
wilh nlY ."....,.... in tht Q&A bo<rl Ih"'''Sh",,1 II.;. book.'
""g<.
r;w.,
'0
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' lor.lIt ..... pI...- .. """".... ,"" I

""""'" "..._"'" ..,.lIoob.l.m <ht
..,. oIlIot. Mr _ _ -'1" -...m;.,..
ol_Iont.Iot .... t.o< """".......,.., _
_ oil!lo.m lor
r...t. 01 ....... '
qo<><iooo frooI ~ or 1"'''';'''0'' lo
rri<_ _
..... oaoI"""t<pIJ
r'_ _ " '. ""'"'" i I _ I .... Aod"'" 1);,10"._ .......
"""
-.It
"
Entries & Exits

We ~re emharkiEll') on a journey together. It took me more than ~ year to CR'ate this
book, and the people interviewed spent years rising to Their current 11.'\'1'1. Slow down and
do not rush-take your time, keep notes while-: you read, and study the ch;lrls. 111e more
you put into this project, lhe more you'll get out of it.
WARNING: OBJECTS IN THE MIRROR

ARE FARTHER AWAY THAN
THEY APPEAR
Mo~t
of us like to b1'3g ilUuUl our suCCrlSt$ and hide our failures. Traders in this book
have brukell the mold-Ihey l~iJ1 show you losing as well as winning trades. YOll are abuut
to sce rcaltradcs, made with real money. Still, there arc several Cllvents you should keep
in mind.
It is human natur.: to so::lect especially attractive winners and rdativd)' innocent losers when showing one's trades. I would think that most winning lrad~'~ are not quite B$
great as what you S' here. aDd many losing tr;L<I~ arC" lut wur~_ Succes.~ is allvays aliltle
farther away than it seems, while the risk of failure is 3 liltle closer than I'll.' imagine. '10
p31'3phr.l.!ie Ihe warning car companies enSlave on side-view mirror$-{)bjecls in the mirror are farther away than they appeM.
You'll meet sever:ll traders whu are already famous, but most are unknown to the public. I have known almost everyone interviewed here for several years and fo:-d sure thai
some of tho:-m will rise to prominence ns money m~nag~rs or an~lysts. At th" S3n~ lime, iT
would be unlikely for all 16 to remain su,,~ssful. Markels are harsh, and some pcopkinevitably fdi1. Please keep in mind th~t this book docs nOI offer an unlimited Hfdim"
endorsement of any inrerviel~o:-e.
Yet another word of cmuion i~ aOOut my (lwn cumments. They express my opinion
aboul each lrdd..., ils pluses and minuses, i1$ strengths ilnd \~l.'ak.nC'SS('s. At the same time
you have to keep in mind that all of these comments were \~ritten alter the fact-alter each
tmde wns :I[ro:-ady closed. All of us nrc smarl after the fact. Being smart abuut the future is
much harder. Hindsighl uffers a t"rrific advantage.
[I is easy 10 s...... g<Jrn:ltrad~>s in the middle of the chart, but the closer you gel to the
right edge, the marc confusing the markNs are. There is a big ctifference bet\vcen exploring a battlefield after a fight and making disions amidst what the great military historiall
John KeeWlll calls "the fog uf war.n This is why the lcl'Cl of clarity you see in these commenls would be difficult to achieve in the middlo:- of a trade.
To achic,,!.' clarity in your own thinking, you must kc:c::p good trmling ree,mls. Make
all entry in your diary altcr pUllins on t::Icl. l1'3de. paSle up the cham, mark up their sign:lls, and write dOll'lI your reaSOllS for going long or short. After cxitinS a trado:- paste up
all updato:d cbart, mark up its signals, write down your reasons for c.~iting, lind llnlllyze the
pluses and minuses of lhat trade. When )'our Ulvn diary gets tu bc as Ihick :IS lhisl.>ook,
you'll be \"ell on )'Our way towards becoming a successful trader.
ON THE MENU
In Ittelll years I've developed a friendly working relationship with The people who own
and run lntershow, tho:-Iargo:-st conference <:urnpauy for lmders and investors in the United
["I"xll'Clio"
S!,Ics. Thef oft.., i".il(' m. 10 T.. ct... F.llpou< ond M"'lOf Sh",,,, to (Ondu" d.oy-Io"~
int<nUv< worbh<>9S.
S(>tol<i,,~ or lhri, "",f.=ccs A1loWI rr>< 10 m.... hund....u of ,,,,d<ro, m.nf nf whom
""'" Iok<n my r1..... rtl'""llly. r nnlice ~iv<: dilTc,","'" in ",h.t trade.. al ...,iou.I.Y
,ksh<>p" Sevenl dDll (ICOple ,il .houl.
de, rn shoulder ond lisl.n to the ",me r.lk, bUI .>eh Inn ra (aptu", >U",et],i"g differenL
lIcginn<" sc"",,,blc for 1>01 Ii"". wriring down .ny ,ymoollb.1 COm" up. W. oft..,
find a f.w good IiPI' th. pmblnn is Ihll oftn. whil. rl>csc .ip> will play the,,,"'I.... "UI.
md thcn wh"J Inler"""';'" lrad... II$k .boul indi<:o,..,. 1"'",,,,<I<n.nd .nn< ,heir lied"
I" coPf my nu",,,",'" fmm lhe KTttrt. They oppn, ....piciuu. Whell [t.lI them there ore
no m03ic nu",bcllind
Ih....cl .. llingo 0 1I0t Ill.t import.nt, E.\yerienccd mId...
oil hock ond w.teb. lIking I few ,,("co. They kllqlr.liing m< the OO'l"'rt of
d ... ;, __
ini' p,nf<S<ionolrr:oMr m.kt dt'Ci.<iON in ....1time in lfunl of. Ii"" .,,, ,.nd ""pl.in
how he nlOkn them.
Aft.......rinS tItoor com",en,. I ",.'n tured my pr'C$<lltoti<>ru-1c>s lett"ring. mo
Jl&,1ring. Thi.< .pp......h h Cirri! oV<'r inro my wriring. INt<:ld of Ilu.in~ you. I want
to litO'" you h"", pm(e"ionou go .bo"l m.king dec;'i"n.. Tr.w... in this book Jl&,1",.
_;ddt a( ,n("""':llion; WMI you 1.1&< h<>,,>< is .nti"ly up to you.
"'ot
MY METHOD
Sin.. you will be ~ni "'f wmmenU on every ,,,,de In ,his book. I IIRd In nudin. my
""''' .pp."",,, In the m.rk... Thi. is an ext",melf b.icf ' ......... icw
I do ""r w.nt
to "'J'<:II my pl'ffiaw books. To le".n more :dklUl my YM On rr:lding p;l)'<bology .nd
tcdmicll an.lpi.. plr......ad Tmdi,'8 for n LM,,~. for In In-d<:'plh I'ffievr of my r,><Iing
Ihni'lun. money m.n.gemem rules. 3nd rrolrd-kccpin& pt1lcticcs. ['leo.. n:ad Qlme
;,II~ My T""U"S /WoIII, 11><.. is very liule a",rI.p hrtwccn th. two boob; if you'", going
l<> .... d both, stort wi,h rhe firsl. hut if you... &OillS In ....d only on., ,nd ,he !KOnd.
I belK... tn", .ucsafull,.oding" b.loed on three M'-Mind. M.thodnd """"'f.
Mind;, Y"u. I",ding psy<halogy; Melhod i.< how you ~ ...Ir" m>rkct< ."d "to"" l...ding
dcciIions: Money is rilk .onno!. An ironwu.kcT dk"IIOld "lOlIe retl;\mro thil formul. rhe
tIlrn: B...... Bolis. Bnin, ."d lI.mkmll. 11>< J M', ... lib the l'iS of. Ihree_1q;gcd 11001: If
.ny Oil< i. mwing.
",ill end up an the finor.
Bqinnins uodon., npillIy those ",fh ,denti!k <If .nsin..rini bxkg,,,u,,dl. lend rO
underosti"torc lho
of psy<holngf. It a!woys ...rp.i... them rh.1llhe mothodl
t1lq' ,.. led.., ...11 un p'po. (,il when lhey ,rort trading reo] money (1ft Cltopte, I'. Th"",
wlI<1'urYi", com. to "",Ii.. tltol when the level of crnol''''' ZOOS up. Ih.leveI or inl<lligell'c
lI"'" down-nd rhis docsn', apply only 10 tr.ding. I could I,u.. yo" fo, hou<1 an lhe
need to be cool,colm, .nd collec'ed. bUll"'" .re lil&<ly 10 ro.-g.1 ."'ryth'ng within five min_
ulC'< of lining in
nf. Ii"" SC...<II, ",itl, PTic.. licking up.ud down in fmnl of you,
e~ The 001 w.y to ..m.I" coltn.nd p''''''''' dIsclplin. i. 10 Uej'll':J"d """r<h. Write
down you, pl.n fo, lhe d.y oheod, pu, il nnllo I'" kcy\>uor<J, .nd f"l1"", i~ Dol nol ch.nge
)'Ou, pion during troding hou...
""""we
'1'<''''''
''''porta"""
(m",
THE 2% RULE
Ilrginntrs .et cosily aedt>'d by tcch"icli indicll",... bu' "".nsful I..d.... know 'hot
marte)' m.n"II""'e,,1 il "'Iu.lly irnpn'tu~ Thelwo poll... nf ri.k conlrol or. the 2,..M
the 6% Rnl... TIle 2,. Rule
thot you ""'y "...,. riok mo... Ihon 2'11t a(yon, .."'u'"
,to".
..In & Ir.~.'

equity n :myjl'lS!c ~~dc. People o(lI~ mi:S:lJ[ldersumdlhis rille :ml W'Ond~r w]'1:l p Jrson
wilt.. ~ 00.000 llCCllUnt m;3y (Jnly huy 200 : "'0 l' 0 OJ .~tnck. You m:Jy buy lo~ more,
UI you Ol
net allowed to risk m.ore t ~, $2,OrlO; Jryou lOW your n.ry pri sio 1~'\I.eI.
,md pc'rmil e ri~\(> it, is ctIsy W t l l L1le he maximum number of sb:ne-s tl m~f bury 0'1'
sell short. 1,.!.'I'S $:lY you'r~ 'buying 1I $12 ,nod: WIll 1I S10 stop. stnce you'r~ ri, king $2 pc:r
sh.,re >1nd ymJr m:l;Ximum p.:nrniucd risk is '.000, yuu milY !Juy up to I ,000 ~hll:res, 01,1
can bur;) souU.er osiuol'l i
~ i h. 11 III never gOOY~1r the 1% Bm.il.
1
ryo .
whUe :
ortl'll,
1
Wh ~bou{
0,1(
po
Eh:USUi
~ng ~di
o*~
ad lo:
1lJ
RUl
h 6% Rut(" tirni .hl! r1L~k 'It your :l,('OU~ r as III whole by Mi'ltin,!l you m"ly never x a
6% or your iliCCOl:l oqulY LO he ri& r 'nss. For eX<l1'l ple. i r you t.radc ~ oS 00,000
aCCO unt and .is . 1.QO On ItV~ ry (rdc fOd' ma.y nO[ hal,l'C mOre t ~ I\J 6 Ope-rl tradC'5 OJ t any
g~~n 1im{'. Suppose you )G~ fIl,linq Oi'llWO Ir d s-no\V you :I're 0[; ermiued to ~a e
more I OJ fou 0rl'n ~ritdf.5, ou.'Yl: .. Ir ad,.}u I 2% and ~ [we only '1% o:pc '. 'risk YOlil"b
fu Ile ..~I of Ine mnn h. Thisulc: aUows you: 10 hravt mDI'C tr:Jd Ii whe:n you'. on 01 co I,
bUl S,o.w5 you down \'Ih you OIte st3rlin to ose n.lonCj'.
A goo l.a Ie b4lgin.~ wi h ~ U1 ollie y m<llil-'\scm nt ql:l~I'jOi:l" Dae,s iluJ lJi Rul allow m;:
'." IrJUI~? JJil 11m c euougJl nvmlnblc risk hJ my /iCCOUIII? ~ 1h aflswf i~ ~"". you t::IT) 0'"0,1I~ II $lock u ing your mel hod. Thl!l1, iii you fi dan atlraCr1Ve rf:),j:Ji~. )UI~f dn c: puHing
il on. rctu no mo:n~f mlJ!Il g~llle I and ilSk: DtllM 0 I the J 0 Nule, 11'lill' mmw S'UU't:S Pall}'
11m) or ~cll sJII11'l?
O'Vt
::1(1r(;- ,
6~o
bit G_
UelWee!n dlcs.c: Iwu money mna.&COlenl quc."S'rions lies thl!' vasl field of m.lrket llnl! I . ~~.
1'1 cst: lRlcrvicw's will ~x l)S! yo tU:j v:r:ity of Ilillytk melhods.... Y OWfI :l~P"" lis.
tn -
ba don t e TTl' Sa en I:r 'ding systcm thllt I clevet()~d in

19lUJ . OIrld COntililll 10
improve 0 Ellis d:lIY. Since- v,ery lI'n;]rk~t .Cijl~ e' nillyud II s~~r~l 11Im:frnmcs. - ip'l~
Scr n insisu til'll you beSil'l by defi~ifl8 your yorit.<: limemme. Once you knu"" t...h;u
h is, do not look <It il. You mu Lflrst go to lhe tirn IT;lm~ One order mOll;nhudt Mg c~.
l1~ak. y'O'!1I str;,re8cc d~6.!1.iun lhe e. nd rehim to yuur (~worire limere me oniy lO trI~Ju~ .11
Hli' 1deed" ion-w l~!fe ~o buy Of ~e11 gpillg ;11 H1 dimc:r.ion given by the: longer tim:~
(rame. Sine my 1il\llIri tLme:rr'lIlle l~ntJ$. to be tb d:.- Yo ] U~t ~vocldy c' <llrtS tel m;lkl: my
mau'giG d
j ons. find rel1un Ie dOl ~ ies to i mplemen I Ihem. The """'C.ddy .~ nd d.:lily Clarls
arc my Anl 'Iwo c:rct'n. Th~ lhlro scrt(' 1'1 is he entry me.l hod, ((If wh ich}'O I an Ust ei ther
.m intmd:J)' c:haro.r. i ply pl,acc, ~ 5 :Iodine Oml!'f uJn ~ dotily <'Ita l.
Fund JlI cnwb drhtc long-t.~rm t:ol1umJc Irel'ld~ nd'l '. 10 know sumethinG
ul
Inem, bu In ulk 0 my wo,rk i~ \n ~(hnklll a.n:\ly~i$.1 l nd lUi y :!\~y rrom c:hl5.Skaill
chartin!} be<:.1.osii: i. i 100 Slllhjec iv i l pr,efeT 10 USIl comp",efiz~d in,dki1lol'.
III ch0D5ing lechllical [Ools r bcliev~ [h~t le$S lS" Jf10jrl!.jI,l' !1S"0 rll'tlll other n J or
ife. Many pr0s,ra,s .for Itrnntt.lllllnDlysi$ h \Ie lCO or mor'it ~ndia[o.f$. All :IJo1 I , III jlJssle
or
:1 COllC
wich t[:
nl.
vlIlr.low
tip
.w
indi:C1t
others
indus
the s me th", bits o d- t:l--oren, MS.l>w, do,se, \loume, and. ror rutu-'S'. o:penirHcrst.
My Ille (l("fiye b1JI'~ tD~. tlip"limits
numb it or mdklllo . lO Ihe numb~r o( bulet
i
ce:nll.liy-old anny rifk. You \IIi'l SCOt' my (avorIte live on Lhe (hOI.
two nloving ll\llfr~
:J8C'S. Il envelope, MACD l"jll u with MAC H' logr.llm. :md II he FOrGe I . dei.:~ tet uS ak
a '~I<: ,ook at r4lch
h incli lors s:wlI.u tI ~sem IhO'i cnmMnc: 1""0 ohhtrn
he I mpu lse: S)'lllel~
or
nne)'
MOVING AVERAGES
~
1""" I mnn,u1 of v>luo .. ltl, mom.,,' of ,.. J~. ~ """'ins ....,,,"1:" IMA I..ncr
''''''8''
... ownS' <O<1S1'm"' of ""Iu< In i.. lim. w,nd"... If prKe il ",.;><h"t, m<",ing
i< <ompul;1O "h'''''ll,..,h, II pi
11'"0 impon'
10 'n<l<,.. i..... II> ""PC:
id.nli~" til< Ji,.."itln of ch.nll< in ,II, public', mooJ. " ,i,lng """,i"S 'Yi'l'lIl:C 't'ftc<1
grt>",;"g oplim;"n, lbullil/ll, wh,l r,!Iing Mil t.nKlS yowl,,; po.. im;,,,, (born;"").
"""ll....' I",po".'" ml< of ,he M... i. difien:nli"ing
wlu, 1callv.lu~ ,,,,,,,,,"
on<! "S""" f",,' 'hmrr" ".ld... If)'(lll buy ne.t 1M movinS """"'S"_l"'0'" "",Lng ..Iu.
"~r,,m "'lin buY' wrll .b<> r.... M<Wing ,vc'~1I" i. if! dr, 13ring-"I',," > (oo!, I'm
o"".p.,;ng, but 1 hO!'< In ",e<l. ~"".r fool down ,II. ro.d." Th....... ""1 (r<.v (""I>
in th. fin.nCo; ",oruHnd poroon who ~ p.:s buying .btw< valu. i, nul Ilk.ly ", win in
,h. IonS ,on, H. m'Y!:'" lucky "net in , whil. bu, buyin! ",., ..Iu. 'la much more
""i<k,
-S"
\><,,,.=
~n,ibl. ""lOS)'.
I lik. ",inS "..n pon.",i,lmoi"s ...,,.S<o (EMA.) on my eh..",

on' ",,,..ins. I""SO" . M'Io., h"".,.t..",. conJ<n1u, of .,ID. 1 e.II,h.
bo'W1I
"rh. .I". lOne:
TIlt..
~"""Ilyp<'< of n"",i,, ....".s... bu, I .lw.Y1 we pon.n'i.1 on<s. EM ....
.ct ","'. ~n",i.. '"~ ineon'ing p.ie." .nd IcOSlCnli,i< '0 old p,i,. I only,,,. EMA. ,'"
my ell.u... I,huug], .........1 people 'n'.........,l fo' ,hi. book ....., p<,(e<llr .,,,,,,fou.bl.
wit/lll",plc MAL
,"'m
,f<.
"Il:
ENVELOPES OR CHANNELS
On. nf ,h. "''Y few ,";.ntifi",lIy \""",n focl1 .1>0", ,'''' ",,,k'll iI 'hal p,it....",iU"
bo nd beln.. .Iu. "JD could "r ,ha' lNrk." ar. m.""-d<t'r...,i.... _'ilin~ 1<><> hixh
'nJ I1l1ing t"" I",. only to .wing wek.
Th. .,c ...... ,01 tyJ><. of tt..nnd., .nd mr f, .....il< i' ",.isht en",lopr-cho l;nO$
.b=.nd brio.. ,h. E~t , ho'h "".... Iltl L<> it ... ...,Ud..... " .h.n""l fi"lik 800<1 'h,rr .
""",ing ,h. bndr of p.i , ,';1lI only 'he mGOI ""erne pri.._,h~ nk .,od ,h. """11"i,k;nl OU,. AmateDrs kl '0 buy b... k.,.II . l"" rrof",,,,,,,.l. ,.nd ,,, 1001< fOI burint
OIIrO,mnili.. nr
kl".. ,h'MeI linlId 'ho;",inS OPPOlluniriel n.., ,lit upl'"
'h,nnd Ii"",
Stln,. ".dot" lik< ,,, uoc: ".nd..d dei.rion ,h,nncll. oft.n ..lloJ ""lIi,,5'" wnd.<.
which up.nd.nd
in :lp<>1U<'0 "",*<1 voI.. ility. They Of< ooly ulCful ro,o~ion1
".d ! boo..... ..,l.till'r i>'. k'r (.Clne in op,ion pri,ins. If you ".d. "0<4 fu'ur<.. o'
foro., j'O<l or. bo' 'e' ol( ,.,11, "rJiGhl <n lopeL
,h.
'''nlr'',
MACD LINES AND MACD-HISTOGRAM

!>lo,';ng A.t"'t;< Con\"O,~.,,Ojllt'rt:<'l'< {MACO,I, ,n inrli<.. n, inwnttcl by Ger.ld
AJlp<1 (o...P'CT 7l. 111 [.<l line "P"""'" tM .horHocn, .,on....."u. of '...r.... and ,I,. ,I"",
lin. ,h.lnng.,...", conn.u. Wll... rho r.,,, li".,~ .MY(' Ih. ,10", lin. i,.I\oWl Ih..
h.II, ... do",in.n'.nd ",h.n ,he (>01 Ii"" i< 1><1"", 'Ile: .10'" line, lb. b........ in eh,,!,,
MACDHi<l<>gr.>m m"",,,m ,h. J>O"'<r of bulb .nd bel ... br !l.cking ,h. <Iif...."""
bo""""n ,Itt n.., MllCO lin... Wh.n \Iooi' $\'rd inc,.,
il ,I""., ,Jr.r ,h. don"n.n'
n"Ft... SrouP;1 bomins "ron~-il I,. JlC>Od """ 10 ,
in II.., di'((clion.
gon"o ben....n 1""0' .n<ll>ollo""', r>f hVC:OHi"oSr>m .nd price m.y be til< 1IIonS<>1
lisn.b On lh.,;.. lln,I~_<;"
0,,.,-
..",
(
",
Ih.,
'.
..
nr
".n
II
r .
""
I ,,"
"'"
,~
l",n
,.n
10 Entrit'S & Exits

MACDLines and MACD-HisIU/Snll11 arc deriVl from tlm~e expommti:ll moving
averages of closing prices. G(rald Appel used 12-d~y, 26-day. and 9-day MAs. Those seltings-12, 26, and 9-have migrated inlo rrading so(tlval"\: and have become dcr:lIllt sellings
in many packages. In writing my books, I used those sellings to illustrate this indic~tor.
What sellings should yuu use~ Well, if you want to use the same on(s as everyone elst:,
U~ 12,26, and 9, because Ihe crowd is basically lOlly and uses the default values. You GIn
a[so choose settings that arc 8 lillIe faster or a lillie slower. It depends on whether you want
to receive your signals a liUle ahead or a lillIe behind the crowd. Think about it and experiment Wilh the values, or use the defaults.
FORCE INDEX
Everylxxiy watches PrlCC5, bUI it is volume that moves them. Volume rentJ; Ihe intensity
of traders' commitment, the heat of their exuberance. and the depth of their fear. Instead
of lonking at a plain plot of volume, I lLo;e Furce Index, which links volume with price
chang(~. On ont' h:lJld, dil'crgenct'S [)t'tween Force Index and prices tell m( when a trend
is becoming Iveak and ready to reverse. On the other hand, new highs or lows of Force
Index tell me thatlhe trend in force is strong and likely to continue.
Priur to the compuler age I U$('d III calculate Force Index by hand lind still remember
how excited I felt by its signals. which no other trader had. I ~lso rWlembcr my inll~r
struggle whether to Tel'eallhis indicator in my fir-a book. My (ri~nd Lou Taylor, 10 whom
Trtldil1g!lJr (I Lilillg is dedicated, encounged me to write about iI, and I am gr.lle(u[ for his
advice. The indiGltor continues to work just fille since J published that wllk.
THE IMPULSE SYSTEM

TiIis system identifies bullish and bearish phases in any mark~t and timefntme by combining twu indicaturs. The slope of the moving av~rage identifies the inertia of Ih( market,
while the slope of MACD.Histogrom identifies the push of the bulls or bears. The Impulse
.ystem gives a buy signal when 1.I01h Ihe EMA nnd MACD-Hislognlll rise, and a sell signalwhen both decline. Th~ two indicators get in gear during e'>]Jt'cially bullish or bearish
periods. lust as importantly, tile tmpulse ~ho\Ys when bulls or bears start slipping, and a
trend start. growing weaker.
One of my campen, a brilliallt programmer named John Bruns, programmed th~
Impu[se sy.tem (or sel'eral J>OpuJar wftw.m: packages, coloring each bar in accoroance
with the Impulse system. \o\'hen the EMA and MACD-Hi.Iogram rise 01 the sam~ lim~, Ihe
market is in gear to the upside and the bar is grC('n. When bolh fall. bears are in conlrol
and the bar is red. When lhe two indicators point in opposite directions, the bar is blue.
ImpUlse
system
Stape
C_
U,
U,
R"
Dow"
Dow"
Clue
Dow"
BI~
or EMA
Up
Slope 01
MACO-Histogram
Do....n
Up
Trading
men8lC
I ona or stand aside; no stlUlhlll:
Short or stand aside; no bUytni
Either lonll or stlort
Either long or short
Introduction
1'1 fir$t I tried using lhl! ImpulliC system as an automatic tl"Jding method, but discovered that it worked besl 3S a censorship s)'stem. When the Impulse is gr~el1, ynu may buy
or stand aside but absoluldy no shorlinR is permitted. Wllen the Impulse is red, you may
go shorl or stand asiJe but buying is prohibited. I wait for the Impulse syStem to go "off
green" before shorting and off r~d" before buying.

Some pmgrJms do not nllow users to change the color of their bars on the basis of
conditional formauing, hUI you can still identify grccn or red Impul~ b)' noticing the
slope of the EMA and i\'lACD-HistOllram. Coloring the bars is a convenience, nnd I am so
used to it that I apply the Impulse 10 <llllllr cham.
11
Name:
Lives:
Previous profession:
Trades:
How long:
Trading account:
Software:
Traders' Camp:
Sherri Haskell
Sausalito, CA
Fundraiser for technology companies
Stocks and futures
Since 1985, full time as of 1999
Medium ($250k-$lm)
www.stockcharts.com.TC2005.eSignal
St. Maarten, January 2003
CHAPTER 1
SHERRI HASKELL
A LOGICAL WAY OF LOOKING
wri~ing thi.~ ch3ptl"r~f1~sl
AT THINGS
jll~t
met with S.herri. twice while

in Z003 when 1 wn5
planning 10 wnle thIs book, 311d again 11 year later. Shefn kept excdlenl records-ill 2()04
she could pull out the trades we had discussed 11 year earlier as easily 35 the trades frolll the
previous week. "11lt:se hvO intcrvj{'ws, held 12 months apart, offer 11 glimpse into how 11
serious trader's approach GIn chilO!!:" within a year.
In October 2003 I flew to 11 conference in San Francisco one day early in Clrder 10 visit
Sherri. who lives ill SaUSalito. I look a shuttle from the airport, crossed the Golden Gall'
llridg.., and gOI off on thl." other side u(,h" bay. The ;,ir smcllecll,Jf eucalyptllS trees. ::;herri
was waiting for me in her spurty Lexus two-scaler. When we arrived al her hillside house, a
Mercedes convertible was parked in the driveway-Sherri liked her cars small and nimble,
much like herself.
We had a campers' mt:eling lh~l night, 'md th~ following moming Sherri pkked n'!'.
up at the hotd aud brought me back to her truding room. Wall-to-wall windows overlookc-d lhe expanse or the bay and the hills on the other side. A lab!c underneath the windows that ran the length of the room was crammed with computers, screens, and other
gear. An exercise bike and a weight-lifting rack stuud against the back wall. Shuri'. fat cal,
whom she did not have the heart to put on a diet, kept wandering ill amI out through the
open windows, onto her trading desk, and back into the garden.
Shcrri complained tu me about what she called her poor performance. "[ am up 90%
thi~ year," she said. "But lhe year is nut over yet; I'll push tu do betler."1 laughed and said,
"Layoff a bit, rel:L,,~your results arc f3ntastic, vvay outside of the envelope. You're at the
upper edge of the top one percent of traders." Sherri did nol think so. ~J'm not good enough
beCluse I sec stocks that gu up 400% and [ only m;,.ke ':10%," she .~aid. AI the end of thi.~ ye;,.r
I want to I.., up 200%:'
She told me th;,.t pushing for more had different meanings for men and women. Sherri
always felt compelled tn push extra hard to succeed in a male world. She had done I'ery
well in twu traditionally male areas ofhusi"es.o;--rn~dj",,1 e(luipmenl si,]es "nd f""d r"ising for startups. Now she was just a~ determined to do well in lrading.
I asked Sherri to tell me about hcr trading and show me rwo rCCCll! tradcs--one winning and "nother losing. Sit" upened a hard-bound notebook, ils pages !i.JlI of scribbles. "[
trade a couple of different ways"-----"(lll" w:tY\s rollowing breakouts. [ lroll al nighl, looking
for consolidating stocks \~ith U11USU31 volum~. Something th.1t hasn't muved very Illuch
but has big "olumc~llmt tdls me momentum i3 build ins and it may bust out."
13
Shmi', no!tbook h:ld four rol"m"", and I rnd ~r~lli"..... Sn",~ ~r"'bols.
I::W"l' .nd SN1C, ""'" highligllln! ill )'tllow,
Symbol
.=
,,~
""
SNIC
CDIIIIIIO.'
S~.Zo
Looks OK 001 AOX IUlned_n

RI"lly IlgM-<:1ur 10 16.5
RSI < 70, MACO~irln getti"ll rudy
Hko tlt;hl "nl"
1~.23
14.94
11.09
14.62
~uch
OS
''''
15.6i
11.87
1l.32
17.74
l jo, down idaI ....... y ....".inll-dle)'dJuw m:o,kinp moon lho .. octe looks
wonderful and 1 pUI,h~ ,n'o my <Si~n.l.krJ .,... ~m. WlJ<n ... "ek is 1"1.
low, il "'''olly hi.. my "'''k within 0 doy. l hoY< "" probl,nllindillJ: 'to<ks 0'
ulld"'IO"diJl~ teehnkol. My probl~m is d",iding who,o to oo.ld 10 poohiono
and wh~~ '0 "'''<>pl.l.m
~nintl,h'l.
E",,'Y ni~llll go. 0'.." ,II my poIitiollf-this morning 1 ""'0'1' I), on mon
<1>.,.1 """" ooou, S.bu! e'o'l'lI th., is '00 nlany. l ""i,~, n<>leon oach position
"''C11' nigh! and th~n lhe "h," i","&~ "'Y' in my mind. 00 1do not nd lu
loolt ., m.rt~ in! ..d>.y. bu, ~imply walch p,ice k"l<.
I do my initi.l revi... ill Stoekcll3'lS Dr TClOOO. th~" 'rack nlY Ii.. u.;ng
<Signal in 'c.1 lime. Endof.dOT S'ockch"',.re the ",iell to ~ad_1 dD
no' wan, to> p.y ,xt.. fur intraday ~.llime, 'nd 20minUl0 del.yed qUlltes
're Iud..... I pill Ihe """001, nf Ihellock> Ih>! l ..I"",n! in S1ud:Il.m illt<>
<Sign.l. whi<h leIS mo koow when .,.",bol hit! nlY price. II .. n<!, nIf on .Im
by ph..,.... On ~n,"i1, '" I ""1'_111' window, whim is whOl l prefer becouse I om
in 'he Qfficc m'.ll of the time,
.,in ...
She'n w,i't$ hcr<tIf MItt in 'Sir.nol ",,,,hing tMln t" eaclllickcr. All n"tC$ ore .... 1<'11
,n<! 'he elt.nl "uloid ""'tt onee , week. IVlIcn Shern likes .Ilock .100 .<he marks il wi,h
, 'I.,nd when .<h, d.... not likdl..... wdtt$ W.tch! nat ,0> it. When lhe ""II" is mOitly
<I.... tho ma,ke! i. bl,lIi",. I'J'h.,n ii', m(\$11y 'WaICh; it is n",re bearish. Before I enter a
1m\(, J check ,bat "<>ek', ""Iumc-if i,1511rong.1 CCJ.lf I, b SO'IO a~ theoormal daily
Icvel. it is a JIll( buy: olh,rwi.. t lhink lhe mu" ho' no Iloying J'U'I""'"
1S
Chapter 1 Sherri Haskell
SHERRI'S ENTRY
1800
~()O
HI.CIO
1
00
'1.00
1 .00
';7 00
j
1.00
lll.00
.,
~ ,Ii I~ :dI' III ~ n-IIIi JII
0II
... I ' "
Upper pane:
Middle pane:
Lower pane:
Candlestick chart (daily) and three exponenlial moving averages-IO. 28, and 50 days
Bar chart of volume (ilrcen = risinil price day, pLJrple = dropping price day); grey line14-day TSV (time-segmented volume); bille line-a lO-day simple moving average of
volume
MACD Lines and MAGD-Hislogram
ASKJ
My initial buy was on 8/12103;-1t $16.21. At th~t tim~ several indic;-Itors were giving similar signals, confU"Jl1ing each olher. The [{51 hall jusl crossed above 50, lhe price was moving up on strong volume, 1vlACD-Histogram ;.llld both MACD Lines were rising, rassing
;]bove the zero. Stochastic was turning up from below 20. How nice! The indicators were
screaming to buy, and I happened to be listening.
Enlrie. & E.~t
TRADE 1
RRI'S EXIT
noo
00
:.w 00
1'10ll
1,11+
Ull
BlOO
-'l'
1/00
I 00
I:J.OO
1'100
130()
Boughl
II
."Ift II a
'0
uh .'
In
r added to my long position on 91-/03. The srock had b n moving lip nicely, then (h:velp d n lateral consolidation. After four trading cia ., it bmk out of its consolidatiun on
eltrr~mely trons volume. RSI Wil$ advancing. MA D wastron
nd to hostic was (onlillllil\~ II) climb. The mnsl impOrlJ:lnl factor was rhl' breakout from the consolidlltian p. t
1~I'n 011 such lrong volume, while all the indicttor suppnrre my 0 tion.
I ~old 011 9/22/03 at 20.74. The stock Imd been moving up for i1 coupl of weeks. but
th volume wos graduaJl)' diminisbing. and that got my attention. On 91 L9 he price traced
a do';;. a e. fish candlt:'tick pattern. That set off an ah'lml, cspeciaUy since fhe doji wns on
a much higher volume.! thought the price was lopping 0\11. While Ihe price IVIlS gain' up,
MACD-llistogram starled lilling off. The combinalion of all these CaetOl' was my eu t
gel OUl, sa ins my profit [ exited the next day at $20.74, Ju I
IACD lines crossed on their way down Gnd Mi\ '0Hi to ram crossed below zero. It was lime to bail 0111. Iy
liming of the e.-it was fortunate, ;lS the stock has cOlllinuccl
I tumble sine that day.
(]
Chapter 1 Sherr! Ha l<eLl
TRADE 1-ENTRY COMMENT

WJlc~er Ilolld
up #1, file
kiNe not .seen

for II 10 fJ t/IHe, I begIn by
"
It .stock I
cOIHprc5.SIWJ iN wcel<ly
clfart ulfNl #1 ewtfre hlsrory flrJ If'I1'() (1 jIngle
scree". rlfls allow.! I+fc to
tell wkct11cr tkttt Jtock Is
cheap or expc~u(Vc rdtTrlVc:
to It:.! /lfct/l+le hf$fory.
..
The hi lory Qf A KJ r veal- lhat the ,tod' ha b n sold to the grateful publi in an
[PO al approximately 70 (spLil-adjuslt:d) and ran up above 190 in n tinal dizzying vertical
rally in 1999, From there it crashed and thell 'roum! down lo a low of 75 nlS in ~OOl.
Any lock tl,al falls more than 9 \I from its pelll', lik A KJ, has every right to die. BUI this
puppy decided to Ii e.
KJ lay qui~lly on th b trom in 2001 lind 2002, just tf)dng 10
breathe, and in 2003 it lifted its he-Jd and started etting up, Iimbing into double digit.
At the right edge of the we kly chart, both movin avcrnges un~ trending higher, confirming the bullish trend and a1lo' ing liS to buy.
(Iold Slll'rrl about a c/lent who h:ld COli ullrtl wilh me a few year.; earlier. He had been lr:Idlng
sluck Index futures :Iud :ICIer II long strcldl or very poor pcrlomlam:c slarlri! making mOil y. At
(hat point he ,( U](' gnal of "1.000 proOI per day. One day he enl.ercd a long IJm'lUon Just right
and SOOIl was up t ,()Ii . lie derided 10 llOld until that trade neued him a mund 2,000 nnd
look II Oil might, ollerrldlng his Ie hnical rules. Tbald3}r happened to have been lb top of lb'
1999 hull milrkl'lI oun his gain shrunk to 51,000, Ulen down I.ll zero. Ill' continued to bold.
d 'lermlned to re. h hi 'n 'W S2,OOO goal, while his trade went neg;((jve. Trying 10 re up it. he
doubled hi" pn ilion and lhcn douhled again. ny th time he threw In Ule lowd and clo cd oul
that tmde. hI. ilL: ouul hall hccn rcducctl fmm almost 100.000 to J 4.0 O. He tbcn
h d 10 go 10 hI. falher and ask for money, opening n whole new alII or WOOl I
-AE
THE MOST
EXPENSIVE $50
18
Entries & ExilS
Wk.:" 11k: w~~1</y clwm
,(lie
II buy 1(1)"11/, 1111", tD 11fc:

dl1//I~$. T'Ilc:rc I accrdc 1'0
'}o lOll') or 51'lfl1d 4!./de,

dCPCl1dl1l1 DI1111c IOtdJ4qe
of 11fc: dlfrty cJtam. Ol1e
11Iil1'} I wW l1eYer do 15 1)0
5lfort if #It: weekly clwm
tel/lile;O buy. ,~I/t "or
fTlfde 1f'}4ilUt 'Me IiI~J5"',c
tJf #1<: ~~I</y IIOtpul1e
Jy5;elo1.
The extreme b~r attht right edse of Ii'll.' daily chart is green-Ii'll' Impu[~e systcm is
giving a bullish ~ignal. TIlis occurs woen bolh MACD-Histograrn and lhe EMil. :lIT mndinll higher. This means lhat market inerlia, renected in the slope of EMA, is on the side of
the bulls, and those bulls are becumi"8 ewn slrongl.'r, as reflected in lhe ri.~ing slupe of
M....CD-I lislngrnm. An even beller buy signal occurred a dily f!:Irlier, when the colur of the
daily bar had changed from rcd to blue. When the hars stop being red, they indicale that
the bears arc starting to lose their power 'lI1d [hI;,' bulls arc about 10 lake conlrol.
This chart is bullish, but il is n/llthe best-looking daily Chnrt. There nrc a few trlJublesome sign~, including the bearish divergence of M....CD-HisUlIST:1II1 that occurrcd jlJst
[w,fore the di!Cline near the cnd of the chart, which gave an extru powerful sell signal.
Declines that follow bearish divergence!! knd to persist. A fresh multi-monlh record low
of MACD~Histogrnmulso pnints to the strength of bcars.
Trnding for my own account, I probably wOlild ha~ skipped l],i_~ trade; at the same
tim.: J would not havc argued with Sherri had she told mt she was going to take it. Stilt, a
serious trader like Sherri never ;lsks anybody before making n lrade. I am mentiuning
this only to show that rlilT",,,nl people trade diffe~ntly. This is cerlninly n "l"'g;lr trade
From Lh.: puint uf view of Ihe Impulse system.
Chapler I Sherri Haskell
TRADE 1- XIT C MMENT

Notice how r'rfc ffrJ:r pul/-
bac/< fit me: e:l1i fJf JiugUJt

hat.'{ rc1'kr~d prices TO tl1cfr
value XOJle, t1f1d d few itty$;
larer rircy n:rurhei fD /<.ill
mat rcd Ir'he. NtIJ f(JjT
IMVivr~
(lVcrl19c rcprcJelftJ
111e upper border of value:.

It {s a ""edJure of Sherr(,s;
$;!<f1/ tI1at' .she wdl (16/(; to
add fO lier /OVlqJ OVl #tat'
J/lqltt pullback.
Sherri cought il beoutiful Impulse tt dc~ capturing an eruption from the bottom of a sharp
decline, added on a .Iighl puJlbil k Dnd jumped off as the trcnd began 10 weaken. This
trade felt iffy for the fir It' 0 wee' .3 prices remained stuck below 20 and the daily bars
alternated betw cngr n nnd blue. Then a breakout. conlirmed by new peoks of MACDHistogram a.nd !"m > Index. con6rmcd that the bulls were becoming stronger.
In early S pr miler, III bulls became e.spedall trong. On eprember 4, 5, and 9, tbey
drove prices to the upper channel line. Thus conlacts, ,j h the upper cbannel line confirmed lhe tr 'ngtb of the bulls, but aftcnvards, ven LhraJly continued, prices could
not come up I thal line. That was a sign that th bulls were starting to run oul of sle:lm.
Jo.1ACD-HislOgram started sloping down and orce Ind x dw a broad and ominall bearish divergence, illustrating the weakness of th bulls. AI thilt point, prices continued t risc
simply UI of inertia.
It is II refleclion of herri's e.xperiel1c il il trader tbat wben price slarted pulling back
into the w~et zone bet\ een the moving averages she sold instead of buying. am i nal.
different action! Sherri did not t h th b ttOI11 of the mtJvc, nor did he n il its op.
Instead~ she accompl ished the goal of every serious trader-she took a mas 'ive chunk oul
of the middle of OJ big IllOV
20
Entries & Exit
ACCOUNTABILITY
hcrri was the unl)' tnllier I interviewed twicl' for lhis hnnk. \' hen the folks nllnlersbow firsl
:J'ked Ill!' 10 s[lt~lk III Sail l,rane/sfIl. I lonk Uw opportunity I ScllCdulc 3n Inl '(v-jew lVitlt
Sherrl who lived just "cross the hJ)'. WIteH Ihe)' invited mt' In rl'l urn II year lakr, lilllcd ami
351ml h 'Hi to 'dlt'll II It' n mOlltltl}'lr:Jders' mel'lillg In roinddt' wllh my \'i5It. It relt lInly lI:1t
Ufaltu 'eh 'e1ule ,mother /llt rvl w anrl sec what l",tl IUlugcd dUring lhnt year.
'111 olle Ihing ill:!! abolnldy IIld nul dIan 'e \ lls Shrrrfs sh, fli fU{'lIs 011 pcrfonnancc
liod results, She I 'dclennilled III suc ed In c,'erytbiIl~ 'he dn~ .. :llld cX(l'clllt:lj' Cliops aboul
hl'f trallin~, Ont' 01 tlte best rcnrctioru or her focus on results i Ihe Quallt) ot her m:ord .
Sherrl cau leU rOll willi lotlll prcdsinn wheJJ she traded all '(m:k or fUlu", .lIld w!ly she
traded II, how it lool((;d 1111 t'lIlr)' how llioolli:d al the e.nl. illl: n' 'ull Ilr Ihl' trudc, , nd Iltt' 1l'S'
son -she Iril rut'tl.

Kerpin r lloorl notes Imro((l1('('s an I'ssClIUallc, rnlng loop Inlo i1 LraclL'r'. performallce.
Wilcoe er yOll put on 8 mule, yOll Ita,' h '0 goals. The firslls lu mak,' 1111111(' : th S [oDd is 10
bccomc a belier Iralllr. You Jl1ay or rna)' nol mu:h yuur 0 t 10011 Ul ;IllY ~I\'enlrnd,', bUlyou
must always readl tile ccond, You Citn 1t'lWI ('rom your winnlll~ Lnldcs as well iI. lrom rOUT
losing one ,lfyou rail l) re,ll"h Ihnl goal, lhe lrade bas been w;lslcd,
tark!:t . change, ;uuJ ~ood Lraders cllange wllh Ihl'Jll. Aillic tiJl1C of our lirsll.nlrn'lt'\\' in
Ortober 7.001 the sloc!uu:Jrkcl had been risJnlllll a PI" '1L lraighlllne fur IUllch ofUle year.
:berri's aCC(JII 11 I Wil fuUy culTunilll't1lo slocks. often goln r un margin, Tht' fullllwing canvas
"cry !lnIeI for slock lrndcrs. ;IS Ihl' ll1ark ,( "'.. es -e-nflall}' Oat. \ ilh no susl.1.Inablc lmde', fakIng 1111 hlllh bulls alltJ ueaJ's. WllCll t sow SIll'rri I.n OrluIJl:r. I l'j]mcd UliJt 'bl' llid lIol stick
nrnUlId l lake lhc punIshment the nrtlY mosl people did. She did m.lepCIldCll1 r!'.'iCardl. discOl'ered Umt man r futuIe . IV ore stiITI Ing 10 r.l1I ' from mn Itlycar hases. :llId shWed her nil 'n
tlOD 10 lit 'C Ilmrkels:. SIIc slullIL'c1. Jld traded ttli'm SIl srriuusly th lby Ul' lime we md il yell
laler. he Wil. . rl1l.ll fig Iter daU spread 'hrr 0 scvc.ro! friends.
There W:I. /lother notable dmn}!t' tluring Ull' year belw 11 ourmec.Ung-,I OIl1d sec bow
Sherrl's charts bad b"C'lIIJ1l' eleaJleT and less 111t1cred. Bcgllll1l fig alii] lJllmncdlate Imell'f
almu '1 al\\.)' . II too man r lools-paTU IJ 'l'lIll. r UICY a", JUs [ ICilntlng and partly uccall, I' or
a willmon f,11JIasy thaI more touls !c;lIl tu bell r .ma.lysis. Acrompll"ht'll tmdcrs lend 10 II C
jusl a small nlllllbcrofao, 1}1ir jt' 'hniques. dJstlUed by l'XTlericm:e.
.I look [onvarulo TIl. ned "isit to n Fr.rndst:O, 1111 llhl'r lookal Shl.'rrl's la est triJd~, .11111
anoUIl~r visil wilh Ill'f I , dcrs' group. (1 rh, P' lIl'xl lime I wU.l gel ClIough {'Oil .)(,' III gn 011 a
JlUrs 'back ride wlUl lIerl
-,1
Ch~plcr
I Sherd H35kdl
21
Em SHERRI'S ENTRY
',n
IJ()
~Il
00
'Iii UO
,,",,00
,,] 00
t.l-_t:.-
1000
I!"._
o
~
. ,_----
:111 00
, ru,~.".~. ,.
~--
:11,00
'"
1',1,11, , '"I, ,,,,.,II." 1", .I,ll, ... I,!.o., ,II,."., ., '10 .... -'
II
II
..
,.
'I
III
GRMN
I bought GRMN on 6/19/03 at $'1'1,'19 lind it turned into une uf those lessons 1 set for
bdng a link lou confident. r hnd been lalking to anolht-r c.lIllp... r ltOOUI GRMN-we both
liked the stock and had made decent money on II. Tony pcnuaded me thaI this was a
good lime to buy back in-the s[Ot:k was in " lateral consolidation, but it would surely
hr~k QUIto the upsidto.
The stock got hill'arlkr in the \~cck butlookcd like il was gClling ready 10 (I':bound;
MACD~Histosram WliS turning up. II lookcd like wc'd get a jump on Ihe (311y aml
opted to dll thaI instead of bPing JYJ.lienl and w;liting for a confirmation. This went
against m)' better judgment; had I been more pruuenl, I wuuld have se("n RSI bdol''!
its centerline and nut muving up. MACD Jines headed down, and Slochnstic bduw
SO ~nd railing.
Those were cleM signals tu sit un my hands. The day J Mught that slack il closed
~Iow its SO-doy moving average for the firsttillle in over six llH)nths.
I, .
.,
22
Entries & Exits
I&B
SHERRI'S EXIT
:,n lIll
~H
lHI
~f,
nQ
'!'l 00
'i~
II
on
EiEI(JI1
JH Oil
:lh Illl
I ,.,
'"
,1111 1111111110111.11111 1.1110 .. 1111.1111,110111111 11111 ,.
--- --
[ sold on 6/23/03, two lr.Jding days latcr, at $4.1.36. That day tile price dropped on I'er)
high volume. RSI fell beluw 3V, MACD-I-lis!ogram droppro, confirming a growing bearish momentum, and Stochastic was (ailing as welL I got out as r.1s1 IU I could, kickiof
myself for a sloppy trade.
Tony sucked me in, bUll rJIl and he stayed and got really burned. I kept SlIying ro him
"Don't try 10 be cure, dun'! try to be in fron. of the lrade.~
Chapter I Sherri H;ukt;lI
23
I~;;'~:./
+~
,li
tJf 111c
wcelVy c$llt'" ~f/JIW 114
,ft #Ie: r(qht cg<:
."
~?!I<F'~
-
......
AIii'\:
/
f4/1ch (litO ffs "'liIfllc ZOhC:, If

potc:htf4/ buyrl1q ifnI. Jtill,
/ "Iouli Itot ;radc ft froWi
11ft: /ol1q side ufrffllts
IMCD--/HstDqrltlOt stoppcd
icelllllng, In uptick "IDIAd
CDIlnfWi #flff #1c: tiec:/f11C
WdJ ever a!1d if "oufd be
safe to qo loltq. Ole faet
#I6t if is still Ifb(IVe zero
dhd flfllihq (ndic6fcs tIfIrt
t1fcrc (s pkl1ty tJf rooWl Oil
#Ie dO"lll5fdc:.
GRMN had spn11 2001 ~nd much of 2002 in a flat trading ran8e.l>elwo:en approJlimatcl}'
$16 and $24, before breaking out. ror s~vl'ral months following the Imakoul, il had a
beautiful steady uptrend.

The .~tuck'$ character began to change in MllY 2003, and lhat chans!' provided an
importllnt w;lrnillg fllr the hulls. Prior to that month, the \"eekly bars were nent and
onlerly, averaging about $3 in height. In I\hy 2003 spl"Culators SlaTted pouring in hoi and
hl;':ll')" as reflected by extraordinarily tall weekly bars. which Tl':Iched up 10 $7 per week,
both on the W"JY up and on the way down. This sharp illc~ase in the height of the \>'cckly
bar.~ often mllrks the final hyslerkl1l Singes of an upmov.:. Such 10111 bars often preclt
reversals, and 1 prefcr to usc thcm for t;lking profits rather thon entcring frcsh positions.
One or till" kr.r dlrfrreuces bd IVttll IVlnnt~ ~nd 10000rJi Is holV they handle trades UI~t XU ~J!allist
Ihem. Noh(lIiy wins In r\'l.'I'}' tradl'-cI'l.'rybnd)' ha., 10 t~ke illoss l'Vtl'}' oner In:l while. Winners
IiIkc their lossl'll very lJuleklr, while losers keell hoplllg and 1I'0itlllJ! for II trend to tum and ball
thcm 011 L TIlc)' k~"l' nmltng 1.'J("I1st'S and cxplanatlOlls for II'lly a stock shuu Id til m jusl about
IIUlV, whlie It contlnurs to go ag.lll1st thl'ltI, !!rimfing lIll1vn tllclr cqulty and saplling Iheir
morale, 'nlcre is a s..lylng on the noor-Mlr~'nu hOJll:", )'Oll'rc a dope.M80th Sherr1 and her friend
Wrnt -fishing fur a boltom Jnd failed. They made tlie salllC luls!a kr, hut thelt' Il'll a hul:e lIlf
rl'renct in holl' they handklill ball Irallc. Shcni ran quldtly and got 0\\',1Y 11'11 h iI small toss; htr
frlcml kel,l holding alld hOlllng Ilillillie took the fllll measure of till.' dl'l:ltne,
-,1
M
HOW TO HANDLE
A LOSING TRADE
24
Entries &
Exit~
.......
T~ dilily chtJrt IIf iAAN

ShOWl iI strOll' bearlsk
dlllt:r,ellce bc1'Wc:eJl1'ke
~"Y ilM JUlie peal<.1. III
JUlie priCes rDle t(}" Jrcw
HI,k wklle U,fClJ-ftfsto,raloi
rose to" 1Illlek IDwcr peilk,
skMIfl1' #lIr below #Ie
surfilce #tc blllls were
bec01ll1119 weil/<.t:r. 1A4~s
rul1 011 a two-p.ny SylUIM,
.wi wkell #Ie blllll bccolO1e
WCl1k, #Ie: offlcr piJrty Is
relief( to t./<.t: cOl1trol.
-..
~
At the righl ~J8e of Ihe d:l.iJy chart MACD-Histogram is f:l.lling to a new low_ Th.
r"cmd dl't'p bottom shows th:ll the hears are exceptionally slrong and the correspondin!
bottom in price islikcoly In be rCI~Sled or exccrded. Force lrul"x is also giving a bC:lrisl
message. Its n"w record lo,~, lacking any sign of" hulli~h divergence, fully confirms II..
short-l~rm downtrend.
Prices at the right edge ilrc near lhe lower channel lin". This m"ans il is too latc to sci
shorl, even though a new low in MACDHistogram shows Ibat (urther bearish action i
likely ahead. r would much rather be shorting ncar the upper channel line than at this lUI'
level. GRMN looks dangerous 10 me allhis st3ge, 3nd I would stand ilside 3t Ihis lime.
TRADE 2-EXIT COMMENT

The mCS5:lge of the daily indicalol"li. ,.,.hich w('re making fresh new lows and calling for 100~e
prices aheact, turned uul tu be right. Prices llImbled to a n~w low. At the right cdgo:- o( tll
o:-h;lfI Ih~y fell helow tho:-ir lower o:-hannd line, proving once 3gain that ,hannd boundaric
do not serve as hard limits. Channds indicate where a rever.~al is likely to occur but do no
Guarantee it will in faet occur there.
With prico $0 ,,-eak and the bears 50 strong, slH)uld we look iOlo shorting GRMN~ M
lale greal (rit:lld I.ou Taylor taught me a uscfultechnique-inslcad of trying 10 solve every sin
gle puzzle that life pre5('nts 10 you, go back to the general principle and decide on Illat basis.
In principle, Il1OSlt.-a<lescan bo:' divided inlo two broad IImups-....J.luc trndcsand srcal~
fool theory trades. In a \':l.lue trade I",C short a stock ne:lr its upp('r chanod line 3nd CO\"CT nea
the muving average or nC'"J.r its lower ehannellinl'. ShortinG below th{' lower channel line is
greater (oollheory troclc--you know you're shorting at a low price but hope to meet a grentc
fool ,,,1'10 will take this lr;ttl~ "IT your hands at 3n even 100ver prke, giving you a profit. Ther
are very few fools in Ihe fUlancial market$-which is why this tatlic usu311y fails.
=
Chapter I Sherri Haskell
2S
TIle lIelll rccor 10lIl5 Df

14-.iCD-lti5toqr4101 "lid Fo~
'l1de~ tJt#1e rignt" ed,e Df
1i1e chart illaietJtc yet
fflP1" #Ie corrcJpolliill' prICe 10111 15 ul1likely to
a'' '11
be fill.l. fhcy JhOlll fflt1't11le

bearJ t1re e)(freI01C!y 5rr0I1',
aha C'lel! if 'ri1cn: (5 a te/ll
w
pomy rIlly, they >lire likely

to pu.J.h pr(UJ, aOllll1 to II
1Dwcr' 101./ #r It le45t rcte5t

fflc eUrr'Cl1t OI\C. How ft1r
b>llCK do lIIC IO#K Wore
clI!lfltg 111/111/ II ruord low
or" 11(,11 11 record jjl,kt
-.ibout luff f11e chlpllter
5treCI1.
/css~ LivermOT<:, a llN:al market spK'utator of the early twentieth cenlury. unce said,
is .1 Lime to go long, ~ lime [0 gu shurt, and a lime [0 go fishing." Looking at the
~There
right edge of GRMN, 1would
h31'(
T(;J.chl for my fishing rOO if I ownoo one.
RETURN INTERVIEW
In September 2004 [ returned to 5all Franci.~co and luok" ferry'l) Saus.diIO. Sherri mel me
althe dock and we loomed up lhe hill in her sports car. NUl much had changed in the
house with illi intoxicnling Willer view. Sherri's favorite cal had gutten lhinner-Sherri had
filially put her on a diet. The Ira,terN' gruup Sherri had been running since the previous
year Iyas still going strong. JUSt like the year lrefore, Sherri wa.~ gelling ready for another
horseback trek in I:uropl::

[ was bored to tears in stocks and during this ye;lr have largely switdl.,d tn
trading futures. I had 10 change my slyle quilt a hi! in order to look for
opporlunilil:~ and confirm them. I am my own tea.:her lind shul"nl, Ihere lire
nut many menlors in this department.
The first munth ltrnded futures Ilhnught I was a genius. I had opened a
$10,000 <lccount and inlhrcc weeks il grew \0 $25,000. After lhat I no longer
PUI SlOps on my positions because the)' could cause lIle 10 miss something.
Then, one d<ly, something happened to the U.S. dollar overnight, while I was
holding metais futures. That's when [ lellflll'l.llhe hard way to use SlOpS.
Now my activity level is low~r, my 11Jll'rOilch more deliberale and refined.
I allow myself to hold only two fmures positions-when I s1arled I would til'
dealinl: with 10 posilions III once. In (utures that would be too tread,,,rpus
because in some way :tll IlUsiliullS llrc relaled-you can have an avalanche
come down on your h("Jd.
,
26
EntTie, & c:its

I use" I W,lDt to trnd . a ir Lh;lt were rny j b.l wnted to be acliv but
now r wan 1 trades 10 mme I I 1 I still do nol have a much p:1l i~llcc u. i
required. her are ctup tho I ar perfect. but 'au hay Lo w;lit for them t
<:orne tog ther. Y< u mu t l1b~t:n' CVl:J')1 day but nOI wide every da)'. 'Udl
deliberate rnding m:lkt!s more money. The more etiv )'0\1 arc, the more
Ihing.~ can go \ ron
I love audlc ti 1 ha rl b au. e Ih really teU you a SIal' '. I u'c fewer
indi ators and keep a h un:l cparalc t:l.b
th. l my screen is nol IUllered.l
prefer MA D to e e1' thing I e and h;w il 11 my screen at all lime bur
loa ion;llIy check other indi .1Iurs. I draw 11' ndlin~ all the time-I um n
vcry visu. I person and ~ pallem better than most tmders. Before making a
mov .1 . lwa '. draw the trcndline ..
Ever Ylmin I do my commodilie. homework-I am constant! 'chnngin and refining my method:. I rcc nlly t.uted s ndin
night! e-mail t
few friend.-i1 help keep me on my t c . I only revi will 5e market that
offer possibl lrad S or the next da)" pili the U.. dollar-I think it is central
to 011 futlll"es. To r view each .lntl ~ver)' market would b too dis racling. I can
d my entire list in n huur. omehmc cv n half an hour. depending 011 my
~ch cluJ.
I prefer commodi ies bul will trade a lock if J sec what looks like a perfect erop. In rec nt month I have radcd just h. ndfuJ of stock. II' 'I ck
accOUnt i now onl). 50% iuve I d. \ hik a year, gu it IV uld have been 100%
(11' even I n Illorgin. TotfUst this mark t ;\g,lin I would n cd to cc a sustained
rally on high v lum .
I.
I tlluk a IIJdure of Shcrrl's monllo , fc 'loolled wllll dlnens of cards and note. he \ .Iwd me
do not want pcuplc Iu Sl't' III)', ccount numbers and passwordsl bUI lei 1M COpj' one of'
tlle Dotl" hI' has laped til her OIonHor.11 Ilslcd qUl'stions Sfll'rri :Isle hersclf lJdorc every trade:
ON SHRRI'S
MONITOR
off_WI
Ones all. d
Illl'
Tl1Ide less
Iioid longer
U' rnlllllllUl'll
II\LL of llicsc crilcrirl?
dellh fill'
love I I Inlolll (don't h('sltatl')

Cut loss!: III the earlIest po 'slhl 1II0lllCIlt
-liE
After working or several hour. herri annonn ed!ih wa. hungry am.I we drove to
su hi restauranl on U l[uiel Sausalito lfi e . j asked aboul
horo I had seen pinned t,
u ulletin board in her trnding room-a lender man with
trong ngul'lr fn in m
open-cockpit airpl. ne. II \ ill o[Sherri' father:
H IVa a. ue c. ful doctor but m:ld mu' I ltIore investing. n trading. He

lart d charting by hand when he \ a 50. I \ m; _0 then. He wa v r' nC:ldemic,
ah y nldying, rendin '. 'oin to cminor. nd he took me along. At s minar h I1ml lili. very humble personn. But h \Va brilliant. illw:ay. xplorlng;
h d Vl!lDp >d . y tems, had ofrware written [or him.
po
,n
Chapler I Sherr! Haskell

He was an inll:lleclu~1 but he \Vas also a wh~ler-dealer who took risks
and lived big. He invested in other things-diamollds, inventions. Hl" made a
couple million im'esling in this electrical invention that made light bulbs bSI
longer. He look dlances, look risks. When he hought himself i\ big boat 10 or
15 yors bcforC' hI:' died, he named it TIl<: Spcw/all1l: I like people like him-
prop1.. who can step Olll of the box.

He passed :,.....:ly leavinga substantial estate even though he'd grown up poor.
His own father had been killed in an accident when m)' ("ther wns an eiElhtrear-old boy nncllhere was no insurance. His mother did not speak English.
Hc used to be very tuned inln world events-----.this or that happening is

going to end up this way or that. He hud a feel ror macrueconomics--I \vould
like IU be more like Ihal.1 used to sit wilh him in his offict."-h~ trie..lto teach
me and I"anted me tn trade with him full lime. BUll n{'Cdl'd a steady illl:ome
and he never offered 10 support me for, $;Iy, si~ 111<1I11h5 while I was getting the
hang of trading.
I wish he were Hound nolV and I could show him I'lhall do. Wheo I look
at markets, J oftI'll ask myself, kWimt would he 5ilY!~ He had a vcr)' logic31 \V;I.y
of looking lit thinGS, not makiog wild choices.
We sat on the restaurant terrace in the softllllht of an early evening. EveryolK' knew
Sherri; the OIVner came up 10 5:J}' hello and S!'vcral p:tsSl'fsby wllved la her. ShC' talked about
hC'r lango lessons and mentioned she was buying a Iru<:k 10 tow her hurst trailer.
~Wait a .soroJnrJ,~ [53id. ~lsn'l the horse supposed to tow you around?~ Sherd laughed~NOI anymore. You should St'~ Sorn~ or those new trailers. They have padding. windows,
mirrors, running lights, and air <:onditioning."
We dW\'e back, and just as wc finished our work, Sherri said that [ I"as running lale
far the last ferry. We hoprW into her lexus. She backC'd out of the drivcway and sped
down thc narrow moulllainside street, going backwards mster fhan most people GO forward. ~Neighbor~ hate when [ da lhalt she grinned.
ONE YEAR LATER
.
II'J[,
'\,
.__ i_~
Bought
I..
. <"
./
L. _
JI
.'
"
1111.
'"
"
27
28
Entries & Exits

Sherri shuwed me IWO recent trudes, one which she h~d closed th~t morning and another
that w~s still nmning. Mj bought coffee on a pullb.3ck on September 8 lind 1 just gol nul
today [Sept~mber 231l>"c~usc I saw this bearish ~ngulfing patt~rn on candlestick chans."
.. , "U",
"
"""',
. . . ,, .. , u
Sherri also showed me a slill op"n tr.lde in TlOO, one of the holles! stocks of the
year. -I s~ pictures more cle;lrly than most pcople-suppoft and resistance, trelldlines.
chann~ls. As long as the downtrend Jines stay broken and the uptrend lines keep going up,
it is okay to Slay ill. Also, this stock is still within ilS channel, making it okay 10 hold.M
Sherd showed m~ a spreadsheet wilh a summary of her
analysis of commodities, which
F... Stp\ 7
~
she
sends to 11 fev,' friends every
US 000.l _dONl . . . . .
night. I notjad u Weekly trend
b'J _ . tk.l <!-"Y1Hl "' . . . _ . .
column nest to the Daily. While
!:lSI y.... .lr she looked only at the
daily charts, this year she also
analyzed the wet"klies. I wondered whether in another year's
time Sherri would put weekly
analysis ahead oflhe daily, focusing on long~r-t~rm tremk
I noticed three important
Ifchanges in Sherri's work during
the year that had elapsed be
tween Ollr interviews; Her charlS
grew simpler ami less cluttered;
she became much more selr<tive in her lrading. not mnning
so many trades al once: and sh.:
swrll'<II>;I)'ing attention to weekl)'
charls and not JUSt daily ones.
'"
.....
~,
,..
tv
tt
OJ
Ill~ 11,
,sri net
hl'l\
pln
1\,1
ter lherri HOI kell
29
Name:
Lives:
Trades:
How long:
Trading account:
Software:
Traders' Camps:
Fred Schutzman
New City, NY
Technical analyst
Futures
Since 1986
Large (> $lm)
TradeStation and Microsoft Excel
Taught in the January 1999 and
January 2005 Caribbean Camps
CHAPTER 2
o
TZMAN
RED SCH
My
COMPUTER CAN
DING FOR
Do
ME
met \ ilh Fred in an office nbove the trading Ooor of a commodity exchange 'u t a
fe~ block. a\ 3y fTOm Ground Zero. The room in which we talked was named fter
nnis Foa, a floor trader killed on 9/11. Buck)', Fred's partner in their bedge fund, 'oined
u I Ii tening, monitoring quotes on tbe terminal, and throwing in un occasional rem k.
Fred u.ed to work for me part-time in the lale 1980s, hdping produce a dnily advi 'ory
ervice for currency traders. He left to become a partner in a l\Iolley mun;lgemenl firm
but only after he trained his own replacement. We havc remained fl'iends, :lI1d I have a k d
Fred to review the manu aip! of all my previous tradillS books, ferreting out technical
errors. Fred has tau ht in t vo ofmy Camps; his deuicaliun und friendliness mod him very
popular with campers.
In the early 19BOs I W'oIS studying to be an nctuary, a stnristician who m astir s

risks for insunmce companies. Whil in chool. ) bee me fascinilted by Lhe
markets, discovered technical analysis, and ubscribcd to a Zweig newsletter.
One of my college proft'o sor ugge.'ited I look for nn internship on Wall treet.
I could never get tbrough 0 Zweig. s ) t the memb r hip list (lhe M'I'A
(Market Ted1l1iciaJl5' Iv. 0 i tion and tarted allin . An . nalysl muned Gail
Dudak look me in tlS lin int rn nd I \\lorked for her c\'eryThursday.
Six 1110nLh hIler he nl 111 In John i urphy who wa \ orking at the
CRa (Commodity Re. carch Bureau). Few people knew o( John Ihen, before
his first book had come out.' John wa teaching a CaUl' can lecb.nical analysis
;ll the N Vol York In titut 0 Finan e, nd her a while he asked me to assist
him. Then h he 'flme an on-air nn.. ly I for C BC. The TV studio was in ew
Jersey and or the following scm ler he was unuble to come back into
M mnllttan in tim ~ r hi la . He told III 10 tca h the .first ba.1fofea h class,
no h would arriv for the second half. At the end of the semester he told me
to mke Over his c1:lss.
ITIlJIia,' IIl1nlysis of 1111' Flllllr(, Mllrkets. 191:16. I Ihat time considered the definiliw book on IcdmiCilI analysis.
32
Entries & ExilS

In 1990 lt~ught my first course and there were IWO lloor trad"'rs from lh",
Cu[ce, Sugar ami Cocoa Exchangl'-Fredu)' anll Ilud:y. TI1"y w"r~ succ"ssful
on Ihe Floor, but wanted to prC:I':lre t"em~llIes for e!etlronic Il"'Jding. At the
end of thatscmestcr they said, "We wam 10 hire you 8Ii our private technicnl
analyst,"
We set up 11 mon"y maoagem"nt parln"ohip, with Fr~ddy amJ Bud.')' 00
the Onor nnd me wurking in an upstairs office with the charts and doing compliance. Theil two things happocnro at om::e--coffl'C gol I'ery busy lItU.! 'lur
biggest client had personal problems a",1 pullet! Ullt his "s~i:lS, I went tn work
for various firms as a t~lllli(,JI analyst and learned programming, In 1996
Hucky and I got funded and reopened the business, Today we're trading
the methods we first applied in the early '90s, only then we did it suujectil'eJy,
Now w",'re fully computerized amI halle improved our exit slr:Jt/.'gics and
money OlOln.1gemcnl. Briarwood Capital has had a positive performance l'very
year, and in 2001 wc started to auract client money, TodOlY Wf' are managing
$19 million.
Sy:ut"m traning wurks fur us ~,ause it takes the emotion out of trading. I
am not good al making livc decisions, I am more of a reSo"archer, a sci~ntist.
I can lalk to lhe (OmP\lt~r and it COIn dll the trading for me. Befure we had
complIlers, I wa~ a researcher and cuuld nut lnde without Bucky or Freddy
on Ih.. nuur. Nnw, if wc can program concepts, I Can continue as an analyst
311d thc CIllllpllter willtmde unemotionally, I am noing the analysis, and th..
computer tmdcs off my inpms. It pulls the trigger if the cunditions exist.
Systcm tmding i~ not for everronc--.1 lot of pcople do nOt like handing
the ]l(}wer nver to 3 computer. They \~ant to retain responsibility for the dl"Cisions. Sometimes the sl'Stem gives you a Irane I wonlcl not takc as a discretionary trader-and that is tlSUiIJly a winner, If I am wrilil1g cooe, 1 see a lot
of lmdt's that look like stupid trades and I wish I could overrid/.' !h/.'m, butlhen
my real perfonll:lnCe would not eqnal the system performance,
To test a system, we apply it tll 50 markel., anns.s 20 years of data and
come up with TOughly 4,000 tr:"Il'S u_~ing the same parameters in all markelS,
Pork beJli~, CIlffe.., currencieS-lhc samc in all markcts. The Dcauty of back-
iI ~wrd,
WE COME UP WITH
FTl'/1 011111111:11/1'11: Mus! pt'llple tl'St a 101 Dr s)"Su'ms, much Ukl' throwIng I00 darts iii
CONCEPTS FIRST
'["he)' n nd a s}'slem thai has worlied In th~ past aud Otll illl i7.I' it. TI'l'}' ('1Il1 "I' \\'11 h :1 ~ystell1 tim
IlKlks g(l(llllll1 paper bUl l1n'cr IlloJh'crs tile same lIl'rfonna"Cl.' 1:011111 [utllihe rUlun.'--\\'hal tilt')'
ha\'\'Is i111:IS1 stilllstll'0I1 nuke.
I \\'ould ,"ll}' 'J'),," or lK'ol'le who baditcst systems grill wrong ami wm~ IIp \\'lth millltS
that cannot IK' replicated II111'aI1l(('. We Wille up wilh l'UlIl'CIJls first. If nur 5J'stl.'1ll 1I'0rks, il is
!x'('3usr It Is II'rlJ grol1ndrd In markl'! hehavlllr. Our syslellls 3rt' dollll1 what they 311' supposed
10) ,II)---I\'lllk~ting llK"ir II'SI r!'Sulls 111 IlI'c trndl ng. 11lcn' hal'l.'n't bt.'Cll any surpriSC'S so far. 111al
is our 1:11'Jlcst SI/1'u!lt!l--\\'C did the b.lcklt's!inl! ami knoll' II'hJlllll'Xllt~:t In thl' rutUlt', WI.' are
not going to tell pcopll' \I'/.' \l'lIJ hilVI' lZr. rlrnll'duwos ~nd ha\'e '111% tilt' l,xl IllIHltll,
po
Ch:ljlter 2 Fred Schutzman

It"Sling 011 thOUs.:lnds of trades is th", we kilo'" when wc art likely to mnkc
1l1ooey. You can ne~r ()e totally certain but with ollr methods IV\.' arc as certain:ls anyone can be. Our S)~lcms 3fC often baliC:.1 on sy~lems thai we've heen
trading successfully un a diocTclionary hasis fllr years.
1 cannot tt"pl'"Jt it enough-my job as a system trndcr is to follo\~ Ihe system. The only way I (an n..ali~c hypothetical [l'l;ults un .1 gu-forwnrd lJasis is by
following the system. I am a c1lTk, I am" monhr. My jn!! is hI think ancr hours
bUI not when the markets ,1ft' open.
Discipline
:lIla
consistency arc the two keys
10 SIICCC:;I;.
The cumputer is
consiSlClll-it never misses a d;,y ur uvenid"s a sil;llal. A computer applies our

nl('thodS objectively: il has Ill) bullish or bearish biaS. \VhCIl I gel pigheaded
and gct :t bias, I think [ can outperform lhe (ompulcr. While I might 00 thaI
nn onl' llr IWO trades, I cannOI outpo:rform lho: cumpUkr n" cunsiSlenll' and
discipline. Therc i~ nOlhing like diversifkalion: 'Ib succeed in the long run you
n..ed to Ink.. nlany lnl\k., and the law of probability is in thl." computer's
favor. [f we Ivant thc bCSI oulcome possible, lTilding ml"(:hani(ally Glnlll)l ~
beal~ll. We opera Ie like a (:t~in(), and Ihe law oflargc num~rs wQrks for us.
We look for lrades with a gum.1 risk/rcward [',Itio and a dcrcnt payoff. We
aren't looking fnr u runaway bull market with no pl;r,ce forcloH' stops. We .. val~
uato: every tmd.-, and our s)'.~tcm :tuempts to get the be.sl payoff per dollar of
ri~k. Risking $5 to make $7 is not good for us. The tmdl'S I like 1x'5t on the
chart often fHlvc 100 larRc 11 risk and you arc not being compensaled uppropriatl:'!y for il.
Fml s;1ll/: It. fcl\' or our Idras nme from tile booklet Sp('cl/l~ltlo" as R fl//,' lin lJy lllcksnn G.
Walls. Ill' 'v:l! thl." pmidl."nlof tbe Nell' York Cultull Exrtmuj,'t' l11nrr Ihan nllr II IIl1d red ycars a,\,'o,
from 1878 IU 1080. Ill' wrole abuut psychnlnltv. dlsdlllillc. ;1lul risk I1wnil~lIIICI1I.
1':lkc a IlKlk at his ~t.Jws Absolute." Just as rclcval1ll11da}' as Ihc}' wcre 100 rcars ~~o;
I. NC\1'r O\'l."r1r.1dc. To lake an inteR'S! lar~cr !Jlall justint'll by Ill" I,llii 1:1 I Is 10 lllvi I{' dls.1.~lcr.
2. Ne"rr double lip. Nnw l11111]llelcly amI at uncc rc\'crsc :Illosllioll.
J. Ilun (I"ldly ur nnl at aiL Itull llrumptly allhe nrst sign uf dall~t'r, bullr )'un (all to du
this. hold nil or c10sc oUI p~n of a posilioll.
,\. lV1Im ,Imll'(ftll, mll/r"C IIII! ,lrlll1lllll lrf ill/ercs/. Sell dull' II tn ~ sll'Cllin1/ IKlint.
Withoui risk managcmcnt, you c:tnnot hang on to lhe money. We dn nnl

Cilre about bdnS right on c\'cry Inve. /I.'loney Il1,masemcrll is even more
import anI to us Ihan the traving system. Someone could gi\'e us the 0Cs1 syslem in Ihe world but if its riSkJrc..I....Jrd Til1io wasn't good, we ,...ouldn'llake il.
Our percentage.' of\\'illllil1ll trades is about 40%, and so Wl' shoot fur i1llc;lst '1
2: I rcturn, but ideally we'd like ): I. We are lrying to 8el Ihe best risk-adjusted
rClurns-il is morc g.lme thenry than lechnic-,II analysis. We want 10 bcat our
cUnlpt.'lilUrs nn a risk-adjusled ba.sis.
lJcing a erA komnlOdily lradinS advisor-a hedge fund manager)
makes)'Ou lrad.- differently lhan a private lrader. We need 10 mah uur Ir.lCk
record as allractive as pnsslhle, Oelter than our cumpetilors: 111 recenl years
SOME GOOD TRADING

IDEAS ARE AS OLD
AS THE HillS
33
34
Enlri~_~ & Exits
we have improved our exit slrategil's and risk mnnnsement, reduced ollr
urawuuwns. Less risk means mure return. As a subjective technical analyst [
may like a markel, but as a eTA' may pass it up because you risk giving back
too much and a dmwdown would be bad for our track record.
The attraction uf Ix:ing <I erA is the mum:y. Typical compensation for
eTAs is 2f20. If someone gives us a million, we'll get 2% uf th;!l mOlley as a
management fee, plus an incentive fl.'l' of 20% of the profit. Most people, if
they had 10 million of their own mum:)', would nol want the headache uf
being a CTA-dealing with a [ot of administration, compliance, ,lIld accounting. The way we trade, I would not be comfortable with an account smaller
than 10 million.
When I first invited Fred to pnrticipnte in this project, he wonderC'd whether Iwoul
feel comfnrlnble publishing an inteTl'iew with iI system trnder, since he knew 1 wns a di.'
ndiun.lry trader. I tuld him that was precisdy my puint-Iwanted [(] introduce my read
ers to nlJ types of traders. Fred warnC'd me that he wouldn't be able to show me the mai
s}'stem hewas trading. It look him and his partner Buck)' owr 10 years to develop that s}'.'
tern, it was their bread and bUller. and they would nm di!iClo.~e il. What Fred could shm
me was one of severnl systems he had recently developcd, tested, and tmdcci. I told him th~
was a fair solution.
W" hep looking for long-tcrm trcnd-following s)stems hased on our
ideas. When w,' develop" System, we first backtest it using a computer, then
test it wilh our own mon"y in our R&U (research and development) account;
onl)' 1I,,,n will we use it In trade clients' money. Once a system ;s;n place, we
absolutely follow iL~ signals, but whilr we test it, we allow oUl'selve!i [0 override
its signals and experiment with its parameters.
~ FRED'S ENTRY
These are tilt: three entry rules ill this system:
l. Define the major trend and trade only in its diret"tion. II"Te we use an 89-dny SMA
(simple moving avemge). We abo like exponentinl /\'IA.~ hut initially simpler is beller.
2. Plnce Bollinger band!i one stnndard deviatioo above and one standard devialion hcloll
the MAo wutch for u breakout in the direction of the MA (a green line on the chart),
3. Place lines ext"nding forward from each 34-day high and a 34-day low; watch for
breakOllt in the direction oflhe MA (a red linc on the chnr!).
'Ib enter a trade. all three signals huve to occur, but nut n~essariJy al the
SlIme lime: The muving uvcmgc hus to turn in the direction of the trude and
prices hnve to penetrate both the Bullinger band and the 34-day line, in the same
direction. For #2 and #3 the Ialest signal simply has to be in our fnvor and not
agaillsl us.
This chart uscs cush dura becuuse the trnde spuns sevcral contract roll
overs. At the right edge of the chart we see all three .~ignals in place: The MA
has turned up and prices hmke uut of both channels-we go Inng.

Ch~pler
2 Fred Schutzman
35
.KOD
,UOO
.9200
.9000
.8800
.8600
.'400
.8100
11.01500
0.60500
O.OOSOO
01
U/IJI!I
p~nf'
lower pane:
Daily bar ch3rl. Blue line-89-di1y SMA. Green IInes-llolllnger bands, one 5ta~r4
dcvi31inn aoove.nd billow Ihe MA. Red IIne5 extend forward Irom c3C1l 34day high
/l1ll! 3~-day low.
MACD Lines and MACI).Hisloeram, both 1226-9.
EURO
This is a channel !",e:"kout system-it identifies a Irend lind enters a [rode when Ih~ VOblilily increases in the dirfftion of that trend. Most people do not like this type of system
~11~drawdowns lend to be large. We found thal by using two channels lYe can tighten the
parameters for both. By using both a Bollinger band and a Donchian channel, ,\It' try 1o lame
the volatility beast. A f)onchi:ln channd is built by pushing hori7.onlallines forward frollllhe
high~l high and the JOh'cst low of a set number of d~r-;. Here we Uk ~ )<I-day Donchian
ch~nnel. NQle that the upper and llx ll,JWer boundaries of this channel can change indc
penrtently frOln each Qlht"r.
36
Entries & Ex:its
Iii!i.'!!'IEIII FR ED'S EXIT

This ~yslcm ha.~ twu uil mlc:s--cithcT iUl MACD divergence (we prcfa to identify ther
visually, even though we have written .::ode to rccogrli~.e them) or when prices move again)
The [,nd and dose 011 the opposite side of their 119-day MA.
Thi~ ~)'$lcm backtestcd wdl; it was prQfilabll- bUI the dl'Jwdowns IYcr~' too high. VIrejected it because WI,' could nol reduce the risk. If "'" could have eutlhe risk, I would not b
showing )'OU this !i)'slcm today.
II
1.0900
tmoo
1.0000
.9600
.9200
....,
[n July 2002 MACD-Histogrunl showc<l a divergence. but MACD lines did no

divert\c.
In 5t'pll:mber prices did nol dose below their 1\-1A. They did violulC the MA il
October, and much as we hah: 10 override signals. w... were testing the ~ystem. All of ou
olhn syStems said hold. We said the market l"lU dosing l>I:lulY lh~ MA not hec:\lIse it wa
guing down, but beeau~ it was goins tlat. We put OUT stop below Ihe S<:plcmbcr IOW-lln(
it ended uv holding.
January tu March 5huws a great divergence. Hoth MACD Lines an'
/<.IACD-Histogram divergencl:S look longer (0 develop, which m"kc.
them more meaningful.
When Ihe eurn closed helnw its MA we sold il.
Chapler 2 Fred Schutzman
37

,,=
1
,-
rrr:MII"ICj 4 f t IlI1tDrIDw{y
tricky br:u1l5r: pt:Dplr: el1n
#lr:1il 41tNk 111,I1r:r or
_/fttlr: /DAA:r DIl #lr: 56101r:
r::Julrr, r:pt:lldfIl9 Dllfflr:lr
bin, J11/1, Ift#lr: ri9Mr:/iIJr:
r4"
Df #Ie cJulrr, pr1~ "re

CDIilIIllJ up 41J1111l5f ti'.r:
DltIlftnl1llf 1(1f(; 6t 411,.,r:
,,",ell bDrlf EJ.I,f5 "re furnr", up_ 51911 #14r 411

upJ/lIk bre"kD/If (5 lIkely.
.... "
.. ..
/luy low, sell high. The curo
\"a5
,_ .....
.-, ........
definitely low in Avril 2002. The new European currenC)'.
recently launched on par \"ith the U.S. dol1u, promptly sank belo'" 85 tenls. nIlS weekly
chart shows that amidst mll~s Il'dsimism the curo found support in lhe mid-80 cent range.
The 2003 bottom of MACD.Hislocram was shallower than in 2oo:!. indiCltiog that tK-ars
were becoming weaker. At dle right edge of the weekly ch~n both the 26-wcck and the 13wuk EMA! arc turning up, along wilh MACD.Hislogram, showins thaI bulls are ill oon
trol-the Impulse system is llashing a buy signal. The red line (I)-week I::h1A) is still below
the yellow lim: (26-wt:t:k E.~A) and ready to cross abo"e it; such crossovers tend to occur
during the most dynamic st~gcs of rullic~,
Wr 1I1:lke some of the must ImpOItml {lioi~ III our lll'es for partly rat.lon~1 ~lld partly irr.llilJllal
rr,lSOIlS. Fell' of liS dralll' 10 bl'l.Umr ~ syslrl11~t1C or ~ dlscl'l't1on~1}' lT~dt'r purdy em the basis of
till mlleR. We dlOtJ!>C whalUllull'S us to avoid whal wc fl."ar 1II0St. Asystemalic lrader, SUcll ~s Fn'll,
Is hothl'n:d b)' the Incessant noise of the markels; ht, IIst'S;'I ml11llUter to pcrfonn ~nalysis and tu
urcutc lrodrs Iflthonl haVing to IHuher with mns~lI( altenllonlo UtC markrls and l'nclh'liS dl'islml,maklnl/. Adlsrrrtional')' troiller, .~uch 3S m}'sclf, liM'S bclnl/ln dmrl/l' lIud drrads golnllinio a
trade that he dlsllkrs merely on thl' command of the Systt'III, 80lh llPWo.1rhC havc tltelr merits
~nd demerits; you h~vc to choose }'Our plt3~'Ire and }'uur poison.
-AF.
YOUR TRADING STYLE
38
Entries & Exits
l....
c
.--
Pric~s "br~alhe" nn the way up, inhaling anu ~xhaling. Since the uptrend beg;Jn h
February, powerful peaks A, C, and E (not yet completed) show thaI healthy bulls are gel
ling a full chest of air. Weak bottoms n nnd 0 sho,,, that ,,'hen the market "exhales- bt'ar
have hardly any power. Vigorous peaks and .~hallnlY hotlnms of MAClJ-llistogram ron
firm the health of the uptrend.
A s}'stem trader often find. himself on the opposile side of the market from the dis
cretionary tmder. At Ihe righl edge of the dail)' chart, alllhe ke)' indicators al'l! up----botl
EMA>, MAClJLinc:s. ami MACD.HiwlSralll. Still. whil~ Fre<.l was buying his ullsid.
breakout, [ would hal'e stood aside. Buying so high above value-so far from the EMAwould not sil well with me. After seeing a bu)' signal, [ \\'Quld be inclined to place a buy orde
ill the vicinity of the EMA, adjust it every d11Y. ami try to g~t long on ~ pullb.lck to value.
The risk witl. Il.is lactic is Ihat you may miss.:l ruo.:lway uptrend wllich keel'S risinj!
with no meaningful pullbacks. That is a risk lam willing to take. lam in no hurry to gc
into any individuallrade.1 fed that trades arc like city buscs-there is always another on,
jusl a r~w bllXks away.
Futures
When change of contract occurs, in many cases the new contract will Rap up or down from the previous one. How do you
use technical analysis in such cases?
-Trader
In analyzing rutures, I always look at two data series-weekly
and daily. For my weekly charts, I use continuous contracts,
which take the kinks out of contract rollover. For my daily
studies I use the front month. When that month changes, I
switch to the new month, but go back several months In my
analysis to get the proper indicator flow.
-AE
Chapler 2 Fr~d Schulzman
39

At tkc rj,ht" edqc rtf the
clltrrr, IoIAa-LlIIe~ err.:
l7d&I, tr double top. r/f{j
pdffcrl1 ;/f01'/$ HIott #1<:
lOtdrkt I~ ~eflou~ly we,POlI,1ft 411/11 "'tmU YOII tD

ferkc proffr;.
"Prices a~ connect<:d to \"Jlucs with a mile long rubb~r band," one of my diems once
said. If we agree thai a long-tnm MA is a renc.:tion of value, we ~an measure the normal
length of that rubber band by c;llculaling the distance from the hi~h of the highest bar to
the EMA. On this weekly e1lart orlhe euro the ~rubhl-r hand" could stretch 10 nine centsthat is how far prices got away from the .26-w~k EMA in July 2002. In March 1003 prices
rose Si!vell ccnts above value, almost lhe full length of the rubhl-r band. before snapping
back and tuking out the previous week's low. Such sharp snaph;Jckli r:lrely end before hitting lhe value 1-One.
Currcncies arc among the mosilrendinll m:lrkelS. A wcll-dcsisncd system. while subject to whipS<1\vs in tl':lcling ranges, shuuld lock onto the longlerm lrends in currencies..
Fred's sYSlem, which caught a breakout from a base and slayed lOll!! for almosl a year,
riding a major bull move, illu5trates Ihis point.
A factor that kills many amateurs in cum:ncies, bdides poor money management,
is lhe facllhllt ~urrem:ies lrade almosl 24 hours a day. Thcy can move violenlly ugainst
you while you sleep. If you tnde currency fulures, you need 10 set "I' your account in
such a Iva)' thaI a stop from futures IS automaticull)' executed ill the cash markets jf curr(ncie~ move w"hile futures ar~ closed. A trader I"ho gelS into currency futurc,,", with"ut
this SClUp is like u man who decides In protcct his property by pUlling up u fence 011 only
0111' side.
10
El1tri~'S &
Exits
SUPERIOR RISKAOJUSTED RETURNS
rtlnilrt,~I: Soml' erAs hal'e had large drJwdcm'I1.~-30, 40. or l'I'l'I\ 50%, Our I:lrl,'t-'!il
drawdmvn lflll$ f:rr i~ lOA 7%. We differentiate oursclvrs hy .~lIJ1'l'r1or r1skadJuSlt11 returns,
ctJlllp;lrcd 10 other IYllCI11:11h' tr.lllrr~, If:1II allvisor adllcves 30~ relurn willi a 30'l' dmw
dUlVII, lhcn our 15% return with a 10'" dmll'dmvll is SO'l' 1JI'1t1'r,
When lilt l11ar~c1S aIr j{ood, prupk lay, ~Iook al so and so 11'llInllllJ:" 30",;,,~ bUI they fOl'llet
thai he Jusllrrst30'!:.1 AerA llWy havl' a hiS1l1t'r relurn than 1I't" do JUlIua II)' hut what risk art' )'011
bklng In ~el lhal return? When CI'cryonc Is carnin)!]O 1ll '10", II't may get only 1S'll.. Then In
a df:lll'doWll, IlIIrl'UlIll'.... ilurs have 40 to 50% drall'doll'lIs, II'cl/I't \0", YOII hare.o give lhem
54010 make s'm. You lliw us 5 \0 10 tllakr SIS.
frrd
Moving Average Turns

Is it better to pick a stock whose weekly moving average has
just ticked up or a stock whose weekly MA has been consis- Trader
tently moving higher for the past few months?
The answer depends on your trading style. If you like to pick
reversals, look for stocks whose EMA has just changed dirf(;~
tion, If you like to trade swings within an established channel,
look for stocks with an established trend,
-A
IT IS A PASSION
FOR US
RI/I'ky (1'alll Dcllarro. Jr.J Is /I flm" {r;ulrr IJ/I ti!ffu, SIIK"r. "!III CIKIJ.:l fcllallgr rc.W:", ,,"J fn:J's
pilrlllrr III Drillnl"''''' Cltllllill Mllllagt'IIII'III; lie /dilmilis tIl/filii IIII' irllm'I,'1I' Itllllillfrll' "I fl'w
WIIIIIJeIlIS:
Amedlanlcal systenl wllh ~ rull's ;llld ]1"JIII'r risk mallal(emClllaJllIlV~ US 1U remain ,'mn
liol1ally stable whCll plael ng bel after btl afler hel. llnw III:IIIY individuals call be wrong .1' limes
in 3 row and slllI plaCl' !lIe nexi 1:lc17 Very, "I'I}' fcw.
The must !i."nlsryi Ill! fl'C'liul( [ IIl1w is loslug moncy for Ihe right rl.'"JSlIIIS. WlwlI ~lJIIIOSt' money
for the right reasons,you will he 'I wry sll('l'l.,,~fultr.Jdcrin ule long: IllJl berBllS(' you will h.. !~ki Ill!
smallc'r IOSSI'S which 11111 enable yOIl III be around fllr Ihe IIi)! .rrnd!i. When the systelll Sol)'! 10 gr.
oUI-ge. null 11I1I"e nCI'l:r hc~nt all)'lll1t' Sily, MI blew ou lof Ihc Ir.IL!lnl! gamr' lIy 100kin!: smalllo$Sl:S.M
tfwe trade wilh prolll'rrisk l1\.lnJt,'cJlIl'lIl. WI' know 11'1' wlU make mllnC)' In the 101l1l run.
freddy and [ hal'c spcnt hillions ofhuurs un lhl~ plul11e.1t Is a p;tSSloll fnr 11._1"1' 1I'00Ut [Jur
C'qoily r"rve lu be as slIlooth as possIble. You ha"r lei h:l\"e a passion for lhls 10 be SU~fI'SSrlll.
Mldlar.l JOTdallllot'li nul l,~J 10 the }(ym to h.mg 11111 and havc a good linn'. No llI;lllcr II'hal frcdd}'
and 1m doIng, a. SUI1I~ pnillt during the day we think OrUtlS---IJll lht IIl'"Jrlt. ill iI sh.lI1', ~IIY'
wll~r~, YUll hal'... til do whalyuu Im'c IIn:tJuSl: IIlIly tlll'lI (;In yuu fall alld l,'t'l ull al1l1 gu ronl':l11l
ngaiu. l'l~rc arc pcoplt" more lalented lhan Mldlad 10rdall,huI t1Il'y nCI'rr made If. Wt make
thousallils or tradrs 10 Improve, he nl~k~s thousands of shols. I h;Il'c Illd many tiJlented peoplc
.vlm cuuld ruJlI'In:Ic:s amllnd mr-alld I m;rkc 1110re monC)' Ir:ldlng ulau Ulty lin.
,D
IiiS!ID FRED'S ENTRY

66,00
6~.OO
62.00
1)[1.00
58.00
56.00
SUll
1.50
~
,,,111111111, ' '111111111 1-1

",.
Jo.
J.
COTTON
It is hard to show a colorful losing lI'Jde when }'Ou ~re a system trader. With most losing
lradc~ we are out very quickly. We gel in, 11){it: 0.2%. amI we're gone. Such Irndcs do not
d3m3g~ our track record. I w;ml to show you u loss thaI WlIS one of the worsl-pricl!S
moved so faSllhat uur slop did nOI have lime 10 catch up \~hh them.
Our entry into this Inde was ddayt-d bCC:IU5e fil'll we: gOl11 sigmd (rum the Rollinger
hands and the Donmi:1ll channel, bUI hat! tn wail for the ",IA In IUrn up. When il finally
did, we wenl long much higher above the MA than we normally like and bought (el"er
contracts.
A discretionary tfOlder looking al this chart could say this is:I slIcky c:nlry-the price
is hitting overhead resistance :lIld oscillators are overoought. He could say lhat the odds
are against this Ir.tde be..:ause we got in so latc. In our experience. those arc the kinds or
Iradl'S lhat really get goin&!
111l1l" . ,,111111
..
0.50
-O.!iO
42
Entries & Exits
I:m.l!!ID FRED'S EXIT

85.00
80.00
n.110
10.00
60.00
55.00
4.00
,..
"'",P'
~
,~Illlr
,.
'"
.,
'.
..... ,,,,11111, '1 11111111'11111
2.00
0.00
0"
We have II long-term system designed to capture big profits. A trailin.l\ slap moves slowl
:mtl sleadily. but this market moved so rapidly up and down that the stop did not have th
time 10 C"~tdl up. A lr.lde like this dlles nol hurl nur pnck~lbook-welost lillie moneybut it hurts our II<I(:k recnrd.
This tr;l.de is;l. system lruder's worst nightmare. It included the end of the mOllth: \\I
bCl'oked paper profits io October, then showed a loss in November-it hurts 10 stAn
lIIonth with a drawdmvn. /I. smalilms is okay, but a big run-up And a big run-down wi
hurt your track record by making it morc \'olatile.
Our rule is 10 ail if the price closes across the MA ;l.gainst our position. We Iry In exi
un c1o.'iC rather than wait untillhe ne.:n clay's open. \'ou have to be careful when you giv
an MOe (markel un dose) order. Some markels hav" 3D-second dosing periods, other
even longer. A dosing period in coffee is two minutes-plaee:1I1 MOC (m:lrht on close
order to get OUI early and the market will have another minute and 59 seconds to rUi
>Ilo\ainsl you. We Iry to finesse our exits. We have a computer algorithm to decide Ivhere th
close has 10 he to lIive us a s.gn:ll.
It is a good systo:m, producing nice prtJfit~; it is 01 lr.Jdabl
system, but taming the drawdoll'n is h3rd. We want to produc
not iust prufits but the bcst risk-3djusted retunu. We easily hal'
2U 10 25 systemslhat do well on the profit lin{", but we look fo
s)'slems to minimize risk OInd those 3re the onl'S we keep tr~(li'lf
'p
Chuplcr 2 fred Schutzmun
13

/tOW/Oil'
(5
11k: rubbu
baHi III emoltr," JUlie

:1.1'0:1. It Will
'.r cellts frOffl
#1c I1f,,, to tile E"M,f. BD#t

{II
.4prlf alii July :1.003 It
w/u of .rceItfJ. ~tt1le
rl,1tt
eige of #Ie ckart It Is
Iffreddy JCVCIl cents-tfre
DVt:rcrtcllded rubber o,,"d
/fltJl<cs
dJfe.
lOll: ~11}ff
to stlJl1d
.-
"
,"
At the Tight edge of the screen the buy signals arc ill. Both EMAs arc rising. MACDHistollfllm poinu up-but the excitement is way too much for me. 1do not chase run3way
trains and I do not chase runaway trends either.
[t
is too laic for me 10 jump in. I under-
stand that a system troder docs not hal'c such latitude. When he gelS a signal. he has 10 buy
to remain faithfultn his system.
-..<.
"'
,
0=
.....
~,
.',-,1<
....0
..
-,
'/11<' to buy "car value,

ilild cmoll /f1" #t: ri'Jlft
c~ rtf fflc dflily clwt I.!
way above villue. tt Is fly("" blOt/it up /If fife til/II
cmDll drelJ III fdlflOIl!
pkirro of ~ri/yt1 MDllrOl:. I
IfI"Y IWt !Jwrt cuttollltere
bcCdltll: all fflr; flldiCdtOfJ
pOilff liP, bur I ",ollid llor
buy it dfker bcCdldl: 11Ir:rl:
U lID placl: for a rl:a!olltJbfy
cIO!l: !top. I apprr:&fdtl:
fwfl ii!&iplil1l: ill takill9
all hi! JYltl:ll1'! !f'IUlIJ alii
II/.[ fortttudl: III Jllololl11,
#Ill tradl:-butffl/J, typl:
of tradl: ll1{1~ 1Ml: ,lad to
bl: a di!&retioJfdry trdiu.
44
Entries & Exits

" I<q rcverul DCClm __hell
prrces. ,tip tlbWe 111e IU~
of 1'ke prev(OUs. btlr, ruck
# tn:__ kt,ll, #lell 'fUm liolll"
tllIIi C/os.e S.ll4fPIy be/ow #Ie
/l1ftI of ~ prev(ous. btlf.
11ft; 5~5 I bretl"- (II #Ie
pre40Mlilltlitt bullis.1l s.elttiMlellt. rite pctl"- (; #Ie /4s.1"
'4s.p qf #Ie bufls., dfrcr
lktcll fftc burs. 1"11<c I1kf
Illet pus.1l ffle /Oltlri<cr
ltIuclllt1M:r.
.J\...
-,
Trnd~ th~t
::u<.
art' difficuh f.om the start tend 10 retl1~in difficult to the finish. At first, COli,
vindicated Froo's trend-followinS syslem. After he went long, cotlon kept goins highcr ar
hiKh~r, with ocnsionalshallow pulJb3t"ks to the' red line, the n-day EM1\.
111i5 looks like a rml<lamcntally driven llIar""'!. A sudden disnlption in supply mu
have goo5Cd up coUon. Some disruptions dC\'dop slolvly, aIIowiJlg a technical trJder to re
osnize emersins bullish patterns. Other disruptions strike suddenly, and lhe market gal
up and keeps on running. A mirror image of this occurs in down trends. New supplies m,
come in slow waves, crealing a distrilJulion paUt'rn, so thal a technician ca.n recognize bea
ish dil'crgences and prepare for a downtrend ahead. At olher times there is a sudden suI)
of supply or a collapse ofdemand. The market ap~r5 to hit its head on the ceiling, re\'w
and go into a !TeelalL That is exactly what happened to cotton during this trade.
It is a credit to Fred's system that it handles sllch a difficulL market wilh so Jill
damage- to the account. Afte-r being forced to get long high above value and gelling callg:
in a major downside rever5lll, his syst~m escaped with minimal financial damage. If
system loses SO lillie in such a difficuh, highly volatile market, its own"r should survi", a,
succeed in Lhl' IOI1~ rU11.
Chapter 1. Fred Schuwnlln
SYSTEMATIC OR DISCRETIONARY
Tr.ldins is a vast lid-d. Th~rt~ are IiO many markets and methods that it's impossible to know
everythinS- Just like a doctor cannot be an expert in surgery, psychiatry, and obstetrics at
the same time. 3 tr.ldcr C3nnot be 1111 e:xpert in fumlal11cnlal analysis, lechnic-.il analysis,
insidcr1' reports, and daYlrading. Successful people in any field usually specialize in a
fairly narrow area, while having a good general grasp of the rest of the field. YOII must
knOI" where your knowledge is w,'ak and be humble: e:nuugh to ~l~y uut of thO$C' areas.
1-1011 people choose: their Iield.~ i~ "flell a myslery. We had a lrader in one of our
Camps who was a pfOClolosist by truining. Ikfore early.onsct arlhritis put an end to his
surgical C"Jmr and drove him to the markeb, he spent his worldnl: days with his hands in
)'Uu know what. Go figurt'.
System traders like Fred and discretionary traders like myself often sCt'm to be at
opposite ends nf Ihe field. Fred spends hours each day tcsting s~tems. He trodes over 1.0
futures m;lrkets using his (avoritl" me\;hankal sysl"m, but has lilt Ie intndt ill th~ lIulcorne
of any individual trade. He kee:ps meticuluus records on system tesling but no trader's
diary. A diSCretionary Irader pores over his charts, Ihen makes his dl'Cision and watches the
scr~cn in order to squce~c the trigger fur an enlry or exit.
Wh~n yOIl look closer. you see: thallhe: IWo fields overlap ill SUll1~ illlportalltways.
A sophisticaled syslem Inder begins his rCSC'llreh with ideas Ihat come from discretionary
Irading. As Fred pointed out, it is silly to use a computer to massage the data, looking for
repeatingpanernSi that ,,,ould meao trading the: pOlSt. Fred's systems are: derive:d from
whal works on the floor. Bucky, a second'generation floor trader with vaSI e:x~rience in
intuitiv(' tmding, serves as the main idea generntor. However, good discretionary trading is
more syslematic than il ~ms upon first glance. I kave a visual.o;et of wellestahlished palterns; in scanning charts and indic:nnl'll [ filter markc:t data through Ihose ~ystemalic Sl1ip~LS.
The decision til get into systematic or discretionary truding depends more on an individual's temperamCfI! than on any objective nurnbcrs. l My impression is that system
traders do better as a group, ,,,hill' the best traders overall tend to he discretionary.
Whate:ver path)'Uu c1lUolle:, ynull1u.~tleurn lIS much ~ possible and grow ioto an expert in
Ihat area. Altke same time you need to have a reasonably good working knowledge of the
other sid(' of the field. Much of this book deals with di5cretlonary tmding that should also
be useful for syst('m traders.
CAPITAL MANAGEMENT
Fred's intervkw raises the: issue of managing money for other people. The rewards of ('Ven
a moderately successful capital management business can be staggeringly high, f"Or exam
pie, if a hedge: fund manager raises $l()(l million, he will earn S2 million a year JUSI ror
:11 ~ill:lt!i<ln.1ry lrd,te' m,y ,ntici!',!.: the .;&11,1_ "r hi> IrMling $y>l""'. 03>
11, I hea, ""111"."01. rnolll lhe
rcod." of c~"''' j"ld My T,,,,'i,,x fI"",,, lhd! 1,,,,,le of Ih.c I.....Hn& "".m!,b in ,h.c
mapr... 110 ""r ."iclly
fottow Ih.c Tript. 5<",en 'y"""'. I -""'uld h:o,... 1"" more !qinn...'I'pC cump!<. 'nl<> Ih:olboolt; I<ITIW of my
ac;lu.1 tid..!"" ........ '~V~ll(e..! OMi, in ,,'hidll ~ighllr imicil"lN lh. signoll. JOO>ething WI di~iotury
Il1Idcr. Icn~ In ,h~
45
46
F.ntriri Exits
bdnl:\ II nke tluy lind pUlling .\.Omoone else's money into play. Th~n, if h~ m~nages to
sa)', J 5% annu;ll profit, or 5 15 million. he will get 20% of thaI a~ his in~cntivc fcc,
earning another 53 million. 5100 million is a middling ~ilc: for a fund; at the time o( our
interview Fred ;lmillucky had aboul 520 million in their fund and growing. r:~d and I
have a mutual friend with S2 billion under management. earning more in a year than most
succcssful people e~rn in a lifetime.
At the lIllme time. the headache quotient in this field is pretty high, as Fred pointed
OUi. Dealing with clients ~nd rcgutnlors is a major job. Very e~rly in my trading ~,Irecr I
stumbled 0010 alcs50n that tIlrnerl me ofT money management. I had a very dose fricnd-I'hil who is mentiom:,1 un the first page o( Trill/iug for d Lil'illg. Impressed b)' m)' earl)'
tndetll and heing a hit of:l glImbler. he opened a sm~1I account and gave me power of allur_
ncr. Within a (C\v months I genC'r::ued a high douhle-digit return for him (I llid 1I0t ke.:p
gooo rn:ords in those dll)'s so I elm't suy (or sure hmv much it was). Atlhe end o( that exercise I was IWllonger till speakins terms with Phil; it rook us a year to reestablish our friendship. What happened was lhal Phil, excited ahom that \'enturt, lOok 10 calling me almost
dail)', ~ond-gucssing my tTlIlJes !llid nccllsionally pUlling 011 a trade himself. I fell stressed
enuugh without his meddling and got :lngry at him. I( successful trading led to such
ll.'5ults, I wondered what losses would have done. I learned to keep my trading strictly private; the only accounts I run toetu)' un: 1lI)' uWl1l'lus MlmllllccOuntS for my kids who know
bflter than to stress Du<.ldy.
I( you luve markets and arC' commincd to rtSC'drch and lrading, how can you trade fot
a living with only a tiny account? Profits from a 520,000 or 550,000 hunkroll an:: not
enough to live on. People with small11CC{lUl1l.~ are Icmpled to take wild risks. and it is only
~ l]ucstinn o( time before an undercapitalized truder who takCli biS risks blows himself OHt.
Relax, shirl gears, lake a deep breath. Instead of shooting for the stars, chuo.o;c a different
target-start trading (or a lrack record. You will n~d it to lSet into cllpital monagement
and m:lke money lhatway.
There are huge pools of capital sloshing Ihrough Ihe financial system, looking for
competenl managers. Start growing )'Our small capital and keep meticulo\ls re~~rd.~.lt may
take )'011 two rears to start gelling money 10 manage, hut yuu un: in this race for the IOllg
rlln. aren't )'Oil! Wltllt 1ll,)St .:.allital owners want is steady returns with shallow drnwduwns.
If you follow this 11.1tll. in:l fel" yC;1rs you may be joining the likes o( Fred, Buck)', :lnd their
peers in the trading community.
geller~te,
II ' per _ Fred
ch
it!i con i111nniou.
b ' tzman
Name:
Lives:
Trades:
How long:
Trading account:
Software:
Andrea Perolo
Zeminiana di Massanzago, Italy
Asia manager for a tour operator
U.S. futures
Since 2001
Small $250k)
www.tfc-charts.w2d.com and
www.futuresource.com
CHAPTER 3
ANDREA PERala
SIMPLE CHARTS,
CLEAR AND UNCLUTTERED
a~
II October 2004 [ flew to Sicily, about far 50uth 35 one muld go in Europe, to extend
my summer by an eXIra Iveck.! was based in O'llr.J1 Euro~ thut month; it was sray.
(old, :lnd rainy. with people already bundled up aGainst the coming winler. Under the
sunny Sicilian sky. you could slillswim lind drh'c to the vinc)'llrds in a convertible, allu buy
the freshcsllocal proolKc and cheese from frit:mlly IOGlIs.
Wt stayed in a plaCl.' with a rcasomlbly fast pholle line, and my friend, a c:omputrT
~ptrl, rigged a wirdcss network for our computers. The U.S. siock market was starling
10 reverse iB almost two-rear-Dill uptrend, and I'll' were busy dosing oullong positions
and putting oul shorts. We Iyorked all day, and OIl night across Ihe valley, we could see
an angry red gash 011 the slope: of MI. Etna, where all ~rulltiun was going on and the lava
1.,.,1S nowiog.
Andrea-a man's l1am~ in It;l]y-\V3S a trader who lived near Venice. Several months
earlier he had c-mailed some very sensible questions to me about commodities. I had replied
anu <lSked him to send me a fel'- screenshots of his recent truUelI and esplnin why he had
dcddctlto buy and .~ll. I liked his approach and, knowing I would be in Sicily, invited
Andrea La fiy duwn fur a couple of d;lys (0 talk aoom trading and Dc interviewed for this
buok. Andl'ta ,,,role b;lCk:
Are you really sure 10 include me in your book? Please, wilsidcr that I alll
a full lime trader for jusL tllrl~e ilml half years, that] haw: dis(ov(rcd absolutely nOlhing, that I just studied many books and took what I considered
the hest of many well known ledllliques. As you have s~en, my m~lhod is
vcry simple: Check thc lVeekly. disc:ovcr a trend, analyu the daily 10 discover a goocl riskJreward r;llio. manage it with solid money management.
Nothing else!
Lilst but nalleasl, if yoo saw my Mtrading room" you would laugh. I have
JUSt One computer and one manilaI', wilh no real-time quolcs (I dOll'1 need
them for my trading). 1 use only internet-based (harts, totally free. If you still
think I am worthy to be induded in your book ;lrter you rtad Ihi$ 13$1 reply,]
will be honoured to reach you in Sicily and to t~lk with Ylllt about t",ding, ;lnu
about my trader's life. IIUI if you change your idea, (ertainly I will understand.
49
II
50
Entri~s &
Exits
w~ h~d
to schedule our meeting so IhJI Andrea, who is divorced, would nul miss a
Tuesday. which he alw<l)'s sjl(nds with his si.,,ycar.old son. On Wcdne.~tlay evening [ met
hilll on a street corner in til" vi1l3ge where we were slaying. AmlrcilwilS tall and ddiberate; he spoke Yery good English but npologized for nOI heing perfect. We Wilmet! through
hairpin turns up 10 Taormina. walk..d through the mcdicvnl funified lown, and settled on
lhe tern..:c of a rCSl3unml for dinner.
AI unil'crsity I gOI a degree in economics. then did my civil service. In
Italy back then, you had to serve a year in thc Brmy or give II YCllr to the civil
$ervice. I preferred that to the army and worked with rctardtd children.
II
Afterwards. ~'ausc 110vcd to travel, I wenl 10 work for II large travel firm and
in less than four years became their Asia managcr. I gal married, had a child,
boughl a biS hOllSe, and worked hard to make payments.
There W;lS a huge bull market in hOlly in Lhe 19905, and everyon~ got
involved. My f,lIher lalk..t1to me about stocks, and cvcn my gntndfulher, who
always bouGht oonds, invested in a stock fund for the firsl time in his life.
There was a stock called Tiscali: 1I wenl fmm 6 Lu 120. Therl.' \\'0.5 a tr.Jding
chanlpiunship in Iialy, and Ih.. eventual winncr took a 15,000 euro account
up aool'e 400,OOO in jnlil a few months. I bought a callcovercd warrant for
Telecom halia. held il to the cxpimtinn wilhuut a stOp, and it wenl out
wonhless-l cnded up losing 4,OOIl on my first tmde. That'li whcn I h<:gan
to study.
I trade commodities in Lhe United States hecause Ihe liquidity is so much
beller. There is one bank in Italy th'lllakes U. S. futures orders. I do nut want
10 hal'e an electronic order enlry-lhe mouse is too fast; it is e;lsy to occamc
impulsive. If you trade daily charts, you do not need live data; having it is dangerous because it can ..asily prompt you lu jump.
When Ihe futures markets starl opening after 8 AM EasLern lim.. in the
lJniled States, il is already 2 1'~1 in Italy. I analyzt" the markets from 9:30 to
noon, then (<III my hrok..r at hmchtimc to ph"e llrder~ for the day ahead. In
the afternoons J rend, swim, do other Sllflrti\-J dn not look al the mark..15
while they <Ire open. My sixyear-old son comes to stay \\'ilh me on Tuesdays
and Thursdays after school ends at 3;30 PM. We have dinn..r together and Ihen
I t"ilkc him back La hili mother ot nine.
railing fur me is not an optinn-I must succeed in trading or die. I do noL
need very much money-lift' in Europe is cheaper than in tltt' United States.
2,SOO a month is cnouKh for me. I have an 80,OOO ;,ccounl, so I have to
generate 30,OOO :1 year return. I lVant Lo Ile free: I can never go back to
having a jon, and I walll [0 travel amumJ Lhe world. I try to gu to Asia twice
a year. Also, trading for me ili ahoUl Illore than money. There ili rIO other wsk
that is so difficult-it is a challenge] ha\'l! within myself.
I Slarl my analysili Ivith the weekly charts, drawing LrcndlirlC$, support ami
r..sistanc... looking for major I~ntls and consolidation patterns. I also check
the CDT-Commitments of Tmders Index (see box. page 56). I will not trade
against an extremely hullish or bclIrish position "f commercial hedgers, and I
especially like Ihose trades wherc I go in the same dircction as the commercinls.I llel the.~ numbers from Steve Briese at ll~\'w.llrlllislircl'icmlJel and ] like
how h.. ahV:.lYs explains lhe COT concepts.
Chapkr 3 Andrea Perolo

I start reading Ihe lIullish RCI'kw from the last page, Nhere he KiI'cs the
positions of Ihe commercials-in my opinion he .~I\l1L,ld hiwl." c,IIit'd that index
a COT osdJJator. It sholVs the bullishncss or bearishncss of thc commercials
rdative to their histllriCll norm. At 100 percent. the commercials arc totally
bullish, they have huge ol.'llong pmitiom;. a,\d a stronll upsidc rcversal can
happcn quite quickly. ""''hen COT is below 10. or. even bellcr. 5. hedgers are
totally .~hml. In searching for a short entry 1 !K'come more aggressive if COT
is belolV 5. I like trading with the commerciab anu will not take a position or
be especially carefultr.J.ding against an extreme nelplJsition of Ihe commercials. \'v'heat is currently at IOo-please do not try 10 short it. look for an
...ntry to buy. Corn is now 117. very IICM:' major buy signal.
I also rely on seasonals which I get from Moure Research Center,
\'~I''''.lI/rci.rolll. They arml)?.!.' the last 15 ye:lrs or mon,' of every single c(Jolmct
of every commodity and mme Ull I.,.ilh the rOadl1l<lp of what it is likely lu do
in tltc monlh ahead, based on historical seasol\i,[I,,,llerns. For example, I am
IOllg sugar now and I can S'.looking at their charts, what sugar is likely to do
this month. based on its 15- :lnd 5-p,,'''.lr pattern history. I see the COT index
and seasonals as a kind of fundament:.1 r:lther than technical nnalysis-they
provide it complrtcly differelll perspocCliVl.' on commodities.
E.,ch of my trild"s starts with a weekly analysis. th... n I check the COT
inde.~ and the nI'l posilions or lit... commen.:ials, and then scasonllls. Whel1 the
weekly trend and Ihe seasonal treml puiot in the same direction, you have
wonderfully slronl: uptrends or downtrcnds with \'ery shallow retractments.
To have weeklies. COT, and .se'lsonals all pointing in Ihe same dire<:tion,
which happens perhaps two or three lime.~ per market ~r ),ear. means rOll
havc binl:0.
1 track l:rains. the soy comple:l:, tropicals, and scvcrllimeats, such as ]in"
cattle and espedally lean hogs. Hogs have perfect pallerns, their retracements alwuys end al the previous rally highs-their chans belong in a chari
uook. I also always unall'ze the U.S, dollar; when it goe.~ down, it has a bullish impaCI nn all commodities, hut especially gold and silver.
You knuw, these are very simple charts. clear and uncluttered. /I'ly best
100is are trendlines,:l very simple concept. I drollv diagonal trcndlincs und
also horil.ontal support and resistance lines. And I use Fib';macci numbers
for measuring retracementS of price and time. When there is a trenu, I antidrate whc-re the rctl'.lccmcnl.~ COliid Slop by using the three main number538.2%. 50% and 61.11% of the previuus rillly or decline. My twO addilional
num~r:s are 13.6% for shallow retracem"nts in very strong trends and
i8.6%---lhat is Ihe last line of defense, and iflhe morkel violatcs illlx:sin to
think it is no longer a relrm:ement. but a rel'ersal.
Another way I use Fibonacci is 10 validate breaknuts from trading rangcs.
To filter out fillse breakouts )'Ou can use 23.6% of the hdght of till' r~nl:e. If the
market goes beyond lhat level. you have a real breakout.
,,,ill
I asked Andrea why he thought Fibonacci numbcrs worked, and his only answer was
that he could see those levels on the charts aU the time. We l1Ietlo look at his trades the nl':l:t
mominll, and in Ihe evening had our last dinner in a littJe~osteria,~ a Ioc-.JJ tal-em Andrea had
chosen. The owner :il:llt glas.~ after glass of llrnpp;1 to our table; I smoked 3 cigar and Andrea
rolled Itisown cigarcllcs, lamping their ends wilh lhe c:lrpiece of his glasses. After we finished
Ollr gr.lppa, he drove me back 10 the villa on the back of his s<:oot...r. We stood al che front
gall.' t:llkinll about tr.lvd books. then sltook hands, and Andrea left.
5J
Entries & Exits
52
IliimImL...;A;...:.N:..:.=D..:..;Rc=E.:..:A:...;:'S:...=EN:.::..:..TR:..:.Y-'--
Upptl pint: IliI thart (weekJvj

Lower p.l1It: Volume
CORN
[ do not look at th~ monthlies often, bUI I do ke~p them in mind, especially when I see a
chart lik... this one, with a four-ye~r uptrend. The uptrend started in the middle or 2()(){)
and eorn had touched it five tim ... s, quite a good number.
This weekly chart cnds ill lhe second week of August 2004. Mtn the great rally or
2003, corn came down to a major support, both at irs trendJine and at Ihe horizontal support line. You am also see the double bottom or Octobt,-r 200J-AugUSI 2004. I use bar
charts on the weekly nnd candlesticks on the daily charlS.
Clmpter J Andreu f'cro!o
Andrea ~skcd me ~boul some famous U.S. market personalllll'!l whose book.~ lie had mrd.ln 1"liI
[Ilg tu fnrrlllil IrJders. Ill1e\'er ~"l"""SCS In ama"l,C m!' hull' slmvly h~d news Ir.JI'cls m'crsc:J"l. Abrluol
chaweters llcilcrall)' kllllll'J1 to lK' rmuds In lhe UlIll~'t.I Slall's sHIi main laIn tllelr high status
ull1onl( forelgocrs. TIle heav)duty markcters and lhe so'Cllled wh1l1ers or JiU~'i1 nllll~"Sls who
p~[d Ihclr pCllal lies l!l1111 al!u lu setllc nil with Ihe U.S. aUlhoritles art' slll! vIewed II'llh ;11\'(' rnJlli
acruSS ttll' IKc~n. Andrea allpean"tlll:llnl'll wllcnl'l'er he askrd me ahOllt yet another of his U.s.
herots. and [ ga\'~' hIm "lhe !.nil" sklnn)'" on him or her. [ fdl SlIT/)' Hlld ~pulogl:te.~1 (ur
ripping hI5IClll~~ orr tile walls.
-AE
53
GURUS
... ,..
.........llllllll. _
~ ..."."
,III
llllh. 11II1II111'..111I11l1l
'JIl1jl' .. 'IIIIlI".. Ullllllll"'''" 11
Upper pane: Candlestick chart (daily)

Middll pan, MACOOsclliaIOf (12.261
lower panl' VClIume
On the daily charts, Illerc had been u major MACD divergence building up for
months. RSI, \~hich is not shown herc, had an even greater divergence. r used a
s.imple tcchniqul" thaI Victor Sperandeo laught in his Tmdl."f Vic-a simple trendImc, then n break, followed by a pullback into a douhle ooUom. After a double bot
lnm was <:stablished, I went long at the swing high of 224.25.
: .'11I1III
54
Entries & Exits
Iii!lmm
ANDREA'S EXIT
Ev~n though th~re WilS a hreakout, my target of SO% dislallce to the stop \Y:1li never
reached. I was SIOPpro OUI of the whole position, on 3 gap down. Aller OJ. long tradillg
range, breakouts orten (Orne with 0 gap.
III
II
.................. ,,'1
'''
~IUII,,IlIIJIIlIlI''..111l1111J 1',tllllh ,I 'Ill Il "'IlIlIIlII"""1I" '11l1111I11111Il"'~'.,
An EntryTcchnique for Reducing Risk

I search (or jl position that I can hold, jlnd may have to attempt entry many limic'S hefore
finding the right one. One bad consequence is that you cno have two or three stop-Ios$('s in
a row. How can you minimize that?
My solution is 10 take profilli on half of my position
at n point between hnlf and two-thirds of the disl:lllct' to the stop-loss. Ideally it would ha\'C
been equal to stnpJoss,bUI even at a hnJf you CI.II risk by 75%. I found
this technique at the end of Tmdillg ill lire Zulle by Mark Dolls/aS.
S;.y you enter four contraCl$, amI your stop-loss is S600 each, 50
Ihnl the totnl risk is $2,400. Once you have $300 gain. if you take thaI
profit on two of your contracts. you'll have only S600 of risk left on
the rcmainilltlt''''o. You cut 50% of your position, but your risk is
now only 25%-lhis is fantast;c. And the best result for me is lht
impro...emcm In the .~tate of mind-I fed trnlllJllillo.
po
Chapter 3 Andr('o Perala
SS
J think I hal'~ found a wondcrfullcchniquc 10 enler positions because you may

need .several alltmpl$ IlllSd Ihem right and your stops will be hit Silvera! times. [f you
usc breakout techniques, 9 times oul of 10 you'll have' this work for you, bUlnul always.
The secret is that aftc....vards you do nOl have [0 Irail the relllaininl! position 10 break
eVen toO soon. uu have mon: discretion. YOti can leavc the remaining I,milion in place
:Ind nol lraillhe slOP very fasl.

The mali! striking fcnture of this ,hart is lhe severe ocar market ncar its right edS". Corn
has crashed by more than a third from its March 2004 p... ak. The decline was so vicious
that illeft several gaps bctwctn w('ckly bars-an unusual occurrencC'. Corn pr[cC'S slid
in rcspon.sc: [0 perfect growing lYel'lher in llie Midwest ~nd one of the be~t cr0l"~ in U.S.
history. Markets arc driven by supply and d~mand---and heR' the supply de~l'Iy ol'~r
I.-helmed the demand.
..
,n
I'11
I,ll I,
",
'I
i"..
...
Itlil ,"
II
'"
../"'--
/'
'
_,----,~,~,_~;"II"II"dll" 'I"'~IWII
5i' I..
1;;... .... .. " _ ... ",
100. t;: ,_
'" _...
\i~ ',.. '"
..".
I""
'.:.,
The Impul.se iYStem h;,d locked onto the trend ;lnd tmeed OUI the hulk of the bear
ffiijrket in a series of red bars. Three wks ago the Impulse had turned from red to blue,
pcnnining tradcr~ to 1:\0 long. Still,l do not feel any hurry tl) jump into corn. \"/hen prices
fall by such a huge percentage from their peak, they act like ~ man who falls from a great
height. He is not lik~ly to gel up and run anytime soon; he is going to lie on the ground
for a while, ju.~t trying to breathe. At the right edge of the chari, corn is historically cheap,
and il is nOl going 10 stay IhM cheap forever. Still, it is likely 10 take a while before it gelS
readr to rally again.
Prfet; barj r~ecrCfDfJ

be~lNior. NMice tfle very
.!lwrt wr:ekly bar, ti1e
fuurT1l frou.t 11fc rl91ff"
edge. tr lJ mil wi, .!howl~,
11t6r be41lltT'e III c!farge.
Jtfll, ftj n1'relMe jkDrllten
cOl<1pared to tne prcvfofA.!
bjlrj Il1dfetTteJ. ffl6tfflc
dOlMll1j1lft" 'jroup ItI!j rul1
olrt' of .!te<fltt. Wkellwer you
jee If IMlfjor u.t<frket ",we
foll~ by /I jhorr bar,
rtf.! a pretty,DOtifjl,11
rlItTt #Ie dOIMI,,/lJlt mltd
Ij el1dl~.
II
S6
Entries & Exits

The Jaily chart confirms thal il is ,I bit early I I be n buy r of om. On LIl one hand
it doc look like a bottom 5 being formed, with the rute of the dec[jne lapering off. Thl
lIct thaI in Augu t corn fell lower than in luly, then r versed and dU'c:d above rh break
oUI kvd is bulli h. The 2-day Pon;e Index is trH iog n bulli h divergence and mllkin II nc\
multimonth high 01 Lhe right edge of the han. hll. those features alone arc prelly thiI
reeds on which 10 hang a long lrAde after a vici liS bear market.
AJer/ous warl1(l1q to .stand

(1.S{dc dl1d wait COUleS froWl
Mt!CTJ-ltflro9r4Ul. It had
'traced d broad boffo""

froU! ]aJ1C to >faqusf iZl1d
111c/1 rallied above 4.cro. To
qiVe IX strol1q buy J{!JI1al, It
I1ced.s to return bc:/oltJ I.eI'D
al1d bbttOlf.1 out t1t a Wlore
Jh4l1oltJ level, crctftil11 (/
full-fledqed bal/uk dNerqel1oc. Its kctgkt at the
rfqhtcdge of ffle chart is
/lAorc Il1dlCdtiVc t>f (/ top
1ko11 of d botroltl.
COMMITMENTS
OF TRADERS
'''''''''''' ........ ,...... ,11111. "11111111 11 .... '11111111'" ,,' ~111 hl~IIIIlI"'''"II1IIII'" .. " ,....... ,11111" 1
.,
The COmnJOility I'll t ures "'r,llltng Corrunissi un collects reports from brokers 011 Ihe plJsi tions of
traders ami rdrm;es liu:ir summaries tu UI public. rcvcllJing UIC pol>itiolls of Uucc groupsII dgcrs., big traders. and smnll t'muers. ned 'ers Identify Ihc'm.'>clvcli 10 urokers b lIsr Ulal
cnUlles lhem 10 S" Clil) ad\'antages. such fl5 10wc( margin les. mg Lraders arc idcnllncd bJ
holdin!( a number of ('Olllracis 3b VI: "rcportillg requirements" l'1 by t]lf govcnnllcJlL. Whoe\'cr
is llol a Ill'dilcr or a IJI (tr:Jdce is a sma II Lraace.
In Ihe old days. b1' trndcrs used to be Ule .!>1THlrt 1II0ney. Today. Lhe markets are biggl'r. lhe
I' porting requirements lTIudl higber. and lll~ Irat]l'rs a likely to he cOlllrnodil}' fUIIlIs. most of
U1ClIl not mnrh sl1Iarler UlllJl Ule nmofUtcmilltradcr. The smart mOn/'}' l[]d~IY Is tn hedgcrs,
snch as agribusln 'SSes. mining, nu oil cl1Inpanlrs.mel fuud Jlroducers.
UndcrstandLnr tIle POSi{iUIlS of hcdgers isn't OJ!: C:1SY as II. cms.l;or rxamph'. OJ COT rcport
may show timl in it rrl10Jin market hcdgcrs huld 70% of shorts. i\ beginner wllrt Ihinks ULI i'
bearish m.y br cnmplclcl off iJle m. rk without knowLng thalllonllillly hedg rs hold 90 uf
sllur s in 111 Illlor'kct, mnkJ.JIg tl]f 70% stuner wildly bullish. Savvy COT analysts COlDpim~ mr
It'll I positions to hlstorirnl nonlls and look or si tnatinns wh 'I" hedg r . or Ute snlit rt mnney, a.nd
small traders. man}' or whum arc gamblcCli lind losers, nrc dead sct ngalJll,1 carll nih r. Jr Olll'
gronp l' ]ll~a"il)' horl while Ule otllec heavily long, wWch one would jlou like 10 jOin? r )'IlU
full] Ihill in ;1 ccrl11n marketlht' mart money I overwhelming' UII nUl' sid. whUc the maU
spc are mobbing the oIJtl'r. it is Unle lO usc tcdmknl analysis In I ok for entrIes on lb' side 0
the hedgers.
Abridged From emile illio y Tmrlil/g Room
Chapter 3 Andren P r I
The decline. that triggered Andrea' tl P look corn to n new low. A n \If low of Ute Force
Index hows that bears arc trong and price :II' Iik Iy t dip even lower. Al the same time,
sevenll pOlenliall)' buill 'h 'lgn' ore dcvcJ pins. MACD-Hislogr.JIll, thl)ugh de lining, i
nowata much more halluw level than in lUll -on uptick from here wouJd complete
a bullish divergence. I I CD L.ill S are d~ lining, but their upturn is even more likely to
create a Imlli h dh'crgence. Corn cems to be en ged in what J used to call the "Austrian
national pori' (in refert'nce to rnold the Terminator's campaign fi)r goy rnll[ uf
alifomia}-It I copin for a bottom.
Andrea' u co tops ut him into the comforlnble pO.'iition of watching corn from
Ihe sidcljne.~. Earlier he h d m ntioned th t he often anempu . evernl entries before establishing position in a major trend. 'I hi i 3 much bettcr tance than liM uf milll)' umilleurs whu continue to it on their 10. 1:.. :. Ih lo'se grow, thetr contidencc dilllil1isllt:s
until th~)' evelltu Ily II t th 1m . ndr a. on Ihe contrary, admitted his mistake early
and pres rvtd both hi capital nd hi pencc of mind, re-ddy to lr.ldc again when. b tf r
'ignal comes in.
58
Entries & Exits
Iiim!IB ANDREA'S ENTRY
., .t, '"
"" ,.. ,
,",.. ..
,,1111 ,,,,,,,nil, 'II
nIll'"
SILVER
looking at the weekly (hOlrt, J mink mat the downmove in April indicllted II trend rCI'Cfsal. A nl"W trl"nd is ~ginning, lind [ wanl to tradl" the duwnmovl! in the direction of
the new major trend. Oscillators confirmed my view llS MACD showed a nc\~ multiyear low. Al the right edge, the retru(cmcnt up is typical-it is exactly 50'*' uf Ihe
preceding downmove. [ think ~i1ver is in a bear market, and only if it gues al....ve 11.31 l~iIl
I be proven wrong.

Ch~pler
A/IIJn'" f'lllll/llrl/rn/: I'roplr $3y dlvtllcnccs an: amaul:' the best tradlill1lcKlls. I definitely do not
J Andre~ Perola
59
DIVERG ENCES
acrelll tJl~i as a grHe,..1 nile; Onl' lR't'tlS iu oc mQIT Spl"Clfk. I fuulId lhallf tile maIn lrl'llfJ is up
and you look to 1'lllCf on a rctrnccmcllt, bullish dil-ergellCJ'S :111' good. But dh'crgcllct.'S agilinsll.he
main trend till no! wor~.
EI'cr)' day I ~'t: Siroill/ cn:lllls with major dil'l'rgclll't."S that last fur Ilmlltlls. lJU! UII'. utnd rollIinutS alld rullS 3m1Y. I Idcull ry l11:lJnr rt'1'cl'llJls lISil1g double or triple lops anll buttoms. 11lcre Is
a kind of myth aboll I dIvergences. 'Illey work In ranl,'tS and III ll'1r:KcmcJlls, lIUllilll i1l/alnsl the
maIn Il'l'fId.
I 'ij
, I
I'II"~
..
..
it,.r
..1111
.,
-I,.. II III
_. ...
on
1111"
kl'
II I
~I
,.
t' )tiI'. .
."
~.
..
~--,;;----:r---'
111,1 ,
1
,'"',II
. . . Ilfl III
1"I~ -
....... ,,,
_. -1"'"."
....,,,........ '111111 11111'
:.,_"
.;.
'
,"'11'
:1 ... I:
"
,"""",
H:
...
--
ilifl'~
-,:;;;..----j;i"_;;;---4-;;"".~"_.h_'.'r..~;;.".; ---,.,',~"'.;-- ."1ir.,,;;;'~'., "~_.'~~~,'....

~'~1~~ "",I",1I111lll1L.i
The daily d13rl amfirmed the \"rrkly downtrend, with a sharp break and:l slow pullback.
We call sec a triangle on this chart, bordered by an uptrend and ;\ downtrend. I shorted
silver after it broke ilS uptrend and then pullt'<! hack ul' II' the downtrend thllt dcfincd its
long-term triangle.
60
Entries' El~its
Iiir!!IB
-
ANDREA'S EXIT
. , .....
'.'5
,.6
7~
7
I ... ... .......
... .... ... . ......
..
8,16
o~
..
6.25
d.ro
...........
..
..
."
!
":"
,." I I I '
..
...
~ "t
... 1-
111'1 II 11111 11
'
_. __
111.I.nllt .
..
e --_
- "
..
" .
!., ~ ...'" .. _'011. ..

~
l,u.,
. oon as J ;1m in a lrnde, I stnrt u'in trailing stops. based on the
w~~kly
highs. I plllce
my slop at the high of the previous week. Even ifllike the trend. I'll cover my short at the
previous week's h.igh. Thi i why I got oUt of this tr.ld . Looking forwl1I'd. if silver hnd broI'en the low of its conge " jon al the ri hi edge, I would hove shorted it n.gain.
f
Chapler 3 Andrea Perolo

This weekly chart of silver shows il PllTl1hoJic rise into the April 2004 lOp. 111011 unsustainable rise was follO\l'cd hy a crash. OhSCTH Ihe sequcnce of five red weekly bars, the
last of them quite short: It is similar [0 what I'll' discussed when we lookw. al Andrea's
corn lr,ldc. A very short bar following a Illassil'c move often indicates lhal a reverS<l] is
coming. [ have nOI lri~d ICl11U:lllliry the eX;lcl Talio of tall to short bars-this is something
I ha\~ learned 10 recognize a[ter ycars of looking at charls and trading.
JII
II ,II'
I
II
I
111 1
I'
I"
I'
n
"
,
"
I
I J II
1"
."
II
1
I1111
~I
,~
.~
,~
,"
,"
"",,"-'~~"~"III~IIIIW'-'C.'"
SEi
'" ,.. ....
c" ... ::.. "" \..
I;
,,,
(0
so.. ... .... -.;, \;. "..,
'... '...
Whl.'l1 the ImpulS!! had changed frum recl HI bille, ,lrtH the crash, it removed the
prohibition against buying. An uptrend beGan lind welllOll fur ~veral months. picking
up cnough stram IU turn the Impulse green. Tlwt uptrend ran out of !lrl:t:1l paint in
lhr two rightll1usl b:ITS. When lhe lmpulst stops being sreen, it removcs II prohibition
against shorting. At lhe right eUlle oflhe chart the weekly MACD.I-lisIOgram is d~1in
ing, the fast El\tA is visibly slowing down its rise-bulls are becoming weaker. hears are
coming in. Silver has been rising without a reaction for severlll months lind is overdue
for a spill-this chart suggests shnrtinl!'
6]
62
Enlri" & Exits
The daily chart show! llml the rally that cmcrgC'd from the ~'Iny bottom was I'l'l"'.
slronll. A~ silver ralli..d, its MACD-Hislogmm reachrd a new l'ord Ifeak ill May anr
remained aDow 'ZCfO through July. a sign uf strength. Th.. reaction in mid.July look thi
indicator Ixlow lcro. When sill'"r rallied to a new rovery high in August, MACD
HislO1\rdlTl ,,<"<'red out al a much 101\-cr l~'el th:m in July. completing a bl'",uish divl.'rgcn,e
The we-ekly Impulse wos still grecn i1llhat time, allowing no shorting.
III
"
-~
~ ...
,,",,,....,',,"'II!R 11111111'.'
II
II
,,111
II
~~
"........,...~~
nlll"',.. ,.,',
.,
- ,....
.
,
'
There \"'l~ n second rally in August, reaching 1\ new recovery high, bUI MACD
Histogram rose to u puny high. It complf'led ~ triple ue;lrish div~rgence, showinlllhu
thc-rc WllS very lillIe powe-r ~hind lhf' rally. That sl:,ond rally in August took silve-r noov.
the psycholollic~lly imporl~nl ~round nUl1lbf'r" of $710'1.. It could sIllY in th~1 devllte,
territory for only one tlay. Silver's decline below thf' If'vd of Ihe first AugUSI "illy ha'
e.... posed the second Augusl rally as a fal~e hrf'akoul to a new high. Rcmenlber-bu
new lows and sell new highs. A new high ofMACD-Hislogr>tm in May helped idenlif
a strong bR'akout thaI slarted a IlC\~ uptrend; a divf'rgence in August hf'lpl'd idl"ntify
f..lsf' breakout and a readiness for a reve-rsa1.

It is l"mmionally hllrcl (0 luke profits whl"n pritf's lire flying in your f;l'or. "Mort
more, mOTe seems to be the cry oflhe day. It is 10 Andreu's creditthut he had lhe dis
cipline to follO\~ his plan and lake profits 01\ half of his position just one trading da
after shorting silver.
R
,b
'~'=="~IIIIIII1II''''''''''''''''~'"''''''''''''~;;:C~'
..........
.
"-
. ~,A'"~h~_t
VVVV
Covering one-half of the po.~ilinn one da)' after shorting had worked out belief than
aitins on a ~lop. Planned Uils almost always work OUI b.~ller ,h"n e.xils on Slops. The new
low in MACD.Hislogr:un in September shows thai bears arc becoming slrclIlger :ll1d suggl!Sts that silver is likely to fall c:v('o lower. [Jut Andre:! is disciplined: He would not allow a
short 10 take OUllhe previous wC'ck's high and l/;ets oul on Ih"l SlOp. This strict disdplinl~
the sellin8 of un absolute Icvt"l beyond which ooe will not hold a lraJe-is the hallmark "f
a professional trader.
II",
I11"111111
I
__~...c:--\
h_ ._
,...",,,,,.,,"',,.. '111111~111I1"
",I'I
It I
1III
I
'
l"I'I'~
1", /'1'''''''
,I
'4;""'I~"M\toiI'
I ....
,,~,
III
--
11lI,11"',
.."" lIl1ln~,,~
~ /
/~~~
0111IN',.."".-
~ .-
:-'lle
==
--
This daily charI sho\~s ~ nicc progression of the Impulse system. As Andrea \~nt
shun, there Ivere IWO wide red bH5, confirming the ease of the downmo\'e, followed by
lhrte narrow red bars. shllwing that the dnwnmnve hit support. The red Impulse changed
to blue and finally, at the right edge, to green. which is where Andrea cowr"J his .~horl.
64
E:nuies & Exits
CLASSICAL CHARTING VERSUS

COMPUTERIZED ANALYSIS
Charts reflect cmwd behavior. TIIt~ high of C'llch bar marks the point of the bulls' m~xi
mum power while the low reflects the bears' maximum power. Serie" nfhar~ coalesce irue
patterns whose highs and lows look like a Sl:llrred b~tllelidd in the never-ending suuggll
between buyers and sellers.
Human beings change very slowly, if at all, which is why similar behavior pattern:
recur year after year. Crowds :m' more crude <lmll'rimitive than the individuals who Com.
prise 'hem, and their behavior patterns arc easier to identify. Whenever a chaT! patterr
ilppears confusing, ask )'oursdf what it tell, you about the crowd of tr-~dC'rs ,vl",.'ie hehav.
ior i, reflects.
Andrta relies mostly on classical charting for his tflldinG. He is not a pure chartist_
he also uses Commitments of Traders and seasonals, and an occasional indic,tnr-bu! thl
bulk of his tcchnical research can be done with a pencil and a ruler. 'l1'ls works for him ir
part because of his personality. Andrea is very 1:0001,calm, alld delibcntc as he lays his rulel
on a chart.
There :Ire sn Illuny w'Jys (a fudge a chart. Do you dT:lw a trend line Ihruugh II,.. eXlreml
points or through the edges ofcongestion areas? Do you consider intraday penctrations 01
only the breaks on a dosing basis! If the two bottoms arc ~t somewhat differentlevt"ls, d(
you dr:Jw your support line across Ihe lower or the higher bottom! I occasionally joke witt
friends, Silying Ihat classical charting does not work for me because I have a t<rribt... trcmOl
in my finGers. When I put a rokr on a chart, my fingers tremble up when I fccl bollish 31K
down when I ~m iX"arish.
This is why I prefer to put the ruler and ~ncil aside and torn to compoteri~ed indi
CalOrs. TIle Impulse system on the weekly lind daily charu helps me idwtify the dominanl
market croup; nl'\'>' peaks and bollOJ11S of MACD.Histogram identify strengths or weak
nes.'Ies; their divergences call'ltlClllion to likely TevC1"sal points; envelopes provide nbjccti\'c
profillargets.
Theft' is no right way or wrong w"y-4,"th da~ical charting and computerized analy.
sis arc valid method~ nf market analysts. You nccd 10 choose what makes senS(' and work:
for )'Qu. Thi~ decision is going to be based on your telllpl.'rnmCnt. Andrea feds drawn Ie
the simplicity and clarity orbar charts and trendlines; 1prefe.r to ope.rale within the bcnigr
censorship of the Impulse system and the objectivity of the indicators. You have to chOOSI
what appeals to you.
Sucl:e.",~fultr."jers maintain an open mind, without becoming fanatics or l'xtrell1i~
about their methods. Andrea is primarily a chartist. but he values such data as crn
indcxcs and has no problem throwing a MACD-Osciilalor un his chart. I am a compull:r
izcd analyst but use such classical methods as drawinS sopport and resistance lines in mJ
search for [.Ise breakouts.
Your charts reflect the behavior of bulls and beal1i. You I:3n profit by cald,ing even:
portion of thcir moves--or you Clln get Irumpled by them. It matlers little what spt'Cifi'
methods you use to detect their 'lPllrtlach. You nred to idenlify the iX"ast, place your bet
:lnd take it orr in time.
Chapter J Andrea Perolo
,,~ C-IIMfil froWi If~drc",

THE PROMISE OF INDEPENDENT LIVlNG
My story is similar to that of many others. I had chascn a job
bC'atu5e of my interest in travel and WllS totally committed to the
firm. I worked hard lind Ic:arm:d ;1 lot, ami felt thll! lhe firm's inlereslS w~r", my own, hUl as tillie went on it slarted 10 fecllike jail. Afler
four years I gave up and decided to start something by myself.
Trading atlracled me with its promise of independent living and complete pcrsomd
~-dom. I startC'<! with a small sum of mon~y amI uml~r~stim"tl:(1 or did nol ~riollsly
consider three aspt:Cts of this business: learning takes a lonl: lime, experience plays a large
role. and born w5ttons of money.
At first I becamc: interested in covnc:d w,lrr,mls but soon dropped them after rc:dh.ing they were manipulated by market makers. Then I tried futures on th~ Italian stock
index, uut rcalb.eu they were too heavy both for my bank account and my lel'd of experience:; in n<ldition, their volume was very thin.
My gains kept turning into loS5t:s, Ivhile at the same time my family life was coming
apart. I was getting uivorced amJ had to provide for myself, my wife, and my son. I was fecling insecure about my trnding and kept searching for advisors, trading s}'slems, EJlioll
WQ\'es, and so on. 1 kept looking for a s}'stem, hut the results were ~lways lhe .\ilme-Ins.'it's
larger thon profil~.
Fimll1y, I learned my Jesson: I had to become autonomous and independent and rely
on my~df and my own analysis. The high cosl of e:o:pe:rience wa.~ my enu}' fee" into the
minority lhat succeeds in earning a living flllm trading. I re~1ized lhal une of my mistaka
was tmding .~tnck futures I~ith fivc-minutc ,harts. I used to think that the slop-los.s could
be: minimal and that high volalility would offer hundrrcls of entry points. I C:lmr ta set" thaI
this lllight work for someone else but nat for me. !'ew activities are as rleclrifying and
emotionally dcmamling <1S <lay-Imdiug. '111is reali1.ation was anolher lurning point on the
road 10 my own W:lY of trading.
[ tnJde commoditi('S using I~kly and daily ch:lrts. I go over my charls in the morning, examining them over and OVl."r. It helps a lot to close the charts and take a break,
reopening thcm bier. I always look for 0I'I'Uflunitit:S. but !itlllldimt':$ tllcy ~"l to jump at
me from the screen. I do notlry to calch turning points; I Jet the trend establish itself and
fcclSOltisficd wilh a piece of it.
Simple tools work best for me, and trade management and money m~nagemenl arc:
wential. A plain technical system brings good results if(umbim:d with strict rules o[t/OlUI:
and monry management.lf)'Ou like using oscillators,choose OIK or two afte:r studying and
testing them on paper for a rather long time. Keep your eyes first on the bar and then on
the O5CiJlatur hec1lttse ilS mOI'ement gels fuel from the price. Draw a fel" trendlines to
define the trend lind iti strcngth and Iongl:lity. If I Ivtrc: allowed to choose only one tool
of technic:ll analysis, I I"Quld choose the trcndline. Price pallerns and trcndlines arc
enough to grasp the exact points where one should rnter and rxit a trade.
When your l\oCcoont starts to increase, kc:p humble an,l figllt the feeling of <trrng:utce:.
Whenever)'Ou get a slrung opinioo about lhe lI1::arket. shut down the computer and lake a
long walk. Your opinion is not helpful; it can inllucnce your judgment \~hen you look at
the chart Trade )'OUr ch:lrl, never )'Our opinion.
Tu sum up my experience:
R
Ttlide using a minimal part of )'Our capital (money management).

Follow )'Our plQn-you must have one, without an}' exceptions (Irade management).
Take only the trades that Afe in compliance with )'Our technical signals.
65
Name:
Lives:
Trades:
How long:
Trading account:
Software:
Traders' Camps:
Sohail Rabbani
Derbyshire, United Kingdom
Medical researcher and business owner
Mostly futures, some options and stocks
Since 1986
Medium ($250k-$lm)
aCharts
Costa Rica 2001,
Advanced Camp in New York 2001
CHAPTER 4
SOHAIL RABBANI
THE DISCIPLINE OF
Loss
CONTROL
like receiving e-mailsfrommycampers[(.lliog me of their

Thi mcss3gc c::arne in early 2004 from a repeat camper.
(Oming~ and going~.
... 1 have pUI an cnd to short-term IrJuing. As fur longer-tenll inve!itrncnls,

I've completely cashed oul of my equity holdings and invested in tangibles,
including gold and land. Moreover, it is an old paltern repealed. In September
1987. a month before nl3Ck Mond3y, thmugh pure goot/luck. J cashed uul of
stocks and bought a retail business. After that I didn't place a single trade until
1991. Then in June 1998 I again cashed out, fully convinced 111M the market
\"ould crash. The next 18 months were sheer agony as I faded the market and
kept gelling knocked in the !leild. Fortunately the dl.'\Ciplinc orloss I;"ontrol has
prl'Vellted my mmpktc wiprout. Thcn 2000 to 2002 wcrc quilc rcwarding as
I \vas in sync with tbe trend. [n fact, 2002 was nl}' best year ever. My shon-term
trading account! returned an unbelievable 163% ... Then di.~asler struck.
[n early 2003 I h;,d:1 heart atl:lck :lnd bypass surgery. Following thaI I went
mad ~tld proceeded to give back my winnings from thc previous ycar before
putting a moratorium on short-term trading.
Tlte e-mail went Otl IU describe ill colorful detail all the things men do in a fully blol"n
mid-life crisis and continued:
I Slopped keeping my trading journal. Slopped doing meticulous re:search,
stopped reviewing records, and started playing oplions like a drunk plays darts
in a bar. r was simply insane. I started doing ultra-shorHerm shool-fronl-lbehip style trading and generatcd lots of commissions for my broker hut my
nCl;OUl1l equity l;urve ~te<ldill' declined. By early fall [ bad exceeded my maxi
mum ["ss limit, so I stopped cold turkey. By then my insanity was also getling
lamed.
I think II one-year s.,bbillical from stock trdding is the minimum penance.
Interestingly, I only me:ssed up in my Sioek trJding. In my futures trading
I didn't do anything nalY. I do not trade futurcs short-term, but hold
positions for long periods lind roll ol'er at expiration. All I had were some
positions in sold nnd euro fUlures. Those were the life savers th;'l prevented
67
68
Entries & Exits
my pcrformall'" from looking like an absolllte disaster. I've dcddl"\1 to 51,IY

lr~ding for at
least one rear. Nunetheless, my slu.ly of the market continues. as do my .~Ilh
scriplions tu various publications and dam services.
away from the slIx:k rnarket and particuhrrly from short-term
I hal"l' read this e-maHto several gTOupS uf Clll1lpl'rS. and it has :II\\"JYs gcncnllcd a live!)
discussion 011 whether this trader was likely to succeed or fail in the long Hill. We kept iT
IOIlCh, :IIlU when Sohail helml [hm I would be spending a \... ~k in Si,ily. he volunteercc
[" ny do"'o from Londun for a couple of days and bring his trading records. Severa
wl.'t:'ks later he arrived in a viJlnllc in the foothills of Ml. Ema. We had dinner together lUI(
the following morning he cam~ 10 the vilb for ~n inlerview.
Sohail has a master's degll'C in epidemiulngy. and with his hackground in science 1'1,
rdaxcs doing quadratic ~Iluations Ihe IV"JY other people do playing solitaire.
III
I
II
In l,)116 I was doing .~t:ltistical research at the University of Alabama but

Started bC'Coming fascinated with financial nlHkets. 1 had two friends lLl
Drt'~elll11rnham (a major brokerage home th<ll w~m out of business in the
1911()s following linand:,] SL"1lndals), and une of them invited me ttl join their
training course.
I quickly r~alized thntheilll; a broker was Ihe wmst way to learn to be a
trader; it wllS all about snles. MI' friend put 111~ into the back office where [
could track the flow of onkl'$. 1 felt things were moraUr qllcslionabk-wc
were doing front running, t'l'en though al the time I did not know thM t!.'rm.
"Ve were pl:lcillg our own orders ahead of discretionary accounts and funnel
ing part of the profit.' into dummy ~lccountS. 1 bowed OUl, made a few good
trades. and on October 5, 1987, by pure chance complelely C3.'ihed oul and
returned from Los Angeles to Ahlb:1I11a. On October 19 th~ market crashed, all
hell broke loose. and my knl'Cs Irembled when I realized that I had =ped. 1
got so scared thai I did not do a singlltril,le until 1991.1 invcstcd with a friend
in a business and ~cnerated a small stream of income.
In 1991 t Started dabbling a lillIe, in 1994 I became a Jittk more aclive.
:1I1d from 1995 10 1998, as the market went rip' maring, I made moner. The
more 1 read and untl"rstood economics, Ihe more it seemed to me that it was
an absolute bubhl" which conld nol go on. Cash burn rale was an insanitl'
which I could not buy. 1cOllld nUL understand hoI\' companies thatwcre making no money were worth more Ihan indllstri:tl giants. In 1998 1started shorting, fading the opll"t'llt1, and gt"lIin~ burned, but I took ~mall losses and
survived. Occasionally 1 would catch a downlcg and [lmke some money, but
most of tl,e time I sat out
In 20UlI things starte<lturtling around. amJ J made money lhroul!.h 2002.
The only way to Slay in this game is not 10 lake big los.\Ol:'s. I have IwO arlicles
of faith. On<"-oo one can know the future, and so 1am v<'ry skeplical of e~ry
100!. Technicals or fundamentals give us convictions or courage about making
a move. but ullimatdy il may not \"Ork and we must ~ ready to gel ,)U! of the
wa)'. Ullimatdy, the market is about the mind of the milsses-and who can
predict themr '\w-most people in the market ilre wrung most of the tinle.
Th!.' theclry that the market knOI,rs everything and discounls ev~'rrthing
is nonsense. Thc only time we make money is when \ve art right "lle:td of
lhe market, lind if the markelw3s emdent. we \vould never make moner.
If Ii'll' mHket ,,'as alw:lrs right, was Am1lZon really worth 5300, and how tlid
Micro Strate!!.r (MSTR) go frorn S16to 53)3 ilnd then b~ck down to 42 cents?
Chapler <[ Sohail Rabbani

I lim re~lIy disillusioned with the stock lll:lrkel-it's a fool's game. The
curren! v~lues lin llKH] are unsustainable. Those \\'ho think the)' enn retire on
their buyand.hold investments hal'\: a foolish dream. The retirement legi~la
tion sends a const:mt nnw of fufl.ds into the markeLS, prices go up, but the
value of money is deterionlting. That is why [ got 0111 of the U.S. clollar and
mo\'OO 10 Europe. The reserve status of the u.s. dollar gil'es the l'<.:onnmy a
ridiculous edge, bot it is nut Sllsl:linahle, and evcntu'll1y the boltom will fall
out. [I may happen in a week, in a year, or more. The unfunded pension
liabilitia will cOl11e home ttl roost. The stock mnrkel slowl) swings between
high ;lnd low valuations, :mlltm[;IY we art:: still ncar the high edge. In 1974
price/eaming.~ ratios went down to single digits, dividend yields came up to
4--5%. The rellression to the me~n teUs me that in the forell<:t:ilble futlln: the
!rend will ~ down. Eventll~lIy there will b" greal v:llues 10 benefit future
generations, but nnw is nnt the liml' to pUI Illoney into the stock market.
I have becoillc much more interesled in cummodities. Ther urfer a better
~rena because Ihe)' ~re b;lsed on sOll1clhing t'lllgi"le. WhJe'lt em never go down
to zero or run up tn a Ihousand-Ihere is a nalurJI range and you (all trad"
in il if roo arc llI}t lua le""raged. The thing about commodities, such as gold,
currencies, :md crude oil, is that biG world trtnds imp~C1 them, maybe nnt
d~y to day, bllt over ~everal Inonlhs. COllltllOuitil'S are mol\' transparent ova
Ih" long term-just take long-term positions and don't o\-crle\'cmgc. M)' best
Ir~dcs in reccnt )'ears were in tht' ,'uro and sold, ~s Ihl.' Fed keeps pumping
liquidity into thr system as ir we wert a Weimar republic,
That's holl' I got in\'oll't"d in the markets----byaecidcm-and [love il.l've
done hish-prcs.~ore minut,.by-minute trading, but realized that Ihis activity
is fur a very robust person in his Iwentie.~ who ha.~ someonc guiding him. Now
I wanl to spend 90% or m}' time thinking and stud)'ing and I U% in fmlll uf
the monitur.
Rather than sho\" his current commodity tr~rles, Snh:!il presenlcd sCvcrallradcs he had
completed prior to his sclf-impoS<:llmnralnriu1ll on stock truding. Both trades had been
done usinll options rnlller Ih:ll1 underlying stoch, pcrh:1p,~ rdl('eting Sohail's incrrasingly
hC<tic attilude just prior 10 his self-imposed moratorium. He :urived in Sidly Wilh hi~ hrokeraGc statements but withollt a computer, and w,' used 10C1111y "v;lilahle MetaSlock to
reprodnee the ch~rts that h., would Il;1vl.: Ilufillally plotted in QCharlS.
SI1/1ailll',lS /10m
III 1./lIor,. Pilk/slllll. /,//Iltl)'j.lllli/y III/Ilnl til /I/f VI/ifni KillJttlo1ll II'/mlll~ II'IIS II
11'1)' ]O/III.,! /1/,11/.
,lilt/Ill' ,'anmill/. IIIX"'"fmm ,1/1 AIII~rI(;lIIll11itwsiIJ_ Ilr n'lIIillis'l~~: My r~ltl('r
was a rer}' cdUI';IlI,tt man, il pmlrssur nfmrllkine, an Anglophile. Whtre I grew up. peollle like
111m wcre catted Iw! or $;IIIII~lhelr rootS were local bUt their 1l1'lnll l\"dS Westent. the rnell
tnllt)' IV:IS Westem. I Iud no ",llglous SdlllOt Ing. no [ndOClrlnatlon. I 110 nut umll'fS I~ lid hllll'
1111' fundal1H'lItaltsts could lakt' Ol't'r lh:ll n'glnn. I remcmber heing lakw lu Kahul [II IllC
19:10s, and lhrn' WI'Il' hdl"S. llt~h Ichths, girls \1'0"' mtnlskln.~ Our ram II)' [eflto move away from
fundamentalism.
LONG WAY
FROM HOME
69
II
Entries & Exits
70
IIm1m
SOHAIL'S ENTRY
SPXET
No one call know the future, bula sharp dl.'cline gives "'good indication that a bounce is
coming-you push the spring nnct it is likely to rewil. On March 10,2003, '" very signif_
icant thing happened-the market went UQWll, S&P lost 21 points, Dow 172 points, bur
the volume 011 the NY5E WDS rcbtivdy low, and fully 90% of tbal was downsid~ v.,lulIIc.
Al the !hIme time, there was a spike in New Lows-Ihere were 2<18 of them against only
70 New Highs. Also on thai clay the Nikktd readIed its .Doyear 1010,', the Europ<:all markets
were drown. Whcu 1l1arkcls reach extremes, they lend to snap back. I hnd been wailing for
a run-up and was ready to catch it.
The thing lh:u prompted me to enter W;lS thaI thoullh it was a significum downside
,.".
,'..
".
".,.".
'~
,~
,b,y, lh~r~ Wl1~ lIO energy in lhe do\~nmove. II \~as a warning th~llhere was 10 be
a snap-back mlly, a femporary bonum. I made Ihe dl:1:ision to go long

~ftcr market hour.~.1 usually gel up al" AM fU do my market work
and plan trades for Ihe day ahead.
,,"
~ III
:: I
,.,.
II
1[11
Ii
-..
~
III III
,.,.
:::
~
~
,'..
,.,'..
,.
'.
'"
"
"
...
Upper
tower
THREE TRADING
RULES
p~ae,
p~ne:
Daily bar chan with Ihr~ ~enliilt movill ~~20. SO. ilnd 200 days
MACD UIIC5 iIIIll MACDHistogram C12-2G-91
SllImfi says: I am son: }'Ou've heard the Ihll't" miltn rnll'!i" fur buying oal cstillc-lmJltillll. lora
UllIl. and llll'aUon. Well. IlielC an: alsu Ihe tlllCe main rules of trading. '[11ey Jrl'-USC slops. uS('
SlO!lS. allllll~ sloJlS. lOll have 10 protl'C1 yoursctflfyou wanllo survive In lhe markels.
Ch.lplr:r" Sohail Rabbani
Financial Entropy
I have noticed an interesting phenomenon which deserves the
name "Financial Entropy." After twenty or thirty trades the cash

I had available for trading was slowly diminishing because I
ended up with an increasing number of trade positions which
were neither bad enough nor good enough to sell. They hadn't
reached my stop loss or my sell point for a modest 2 to 5%
profit. They were just going sideways. It is clear that after a
reasonable amounL of time I will just have to get rid of thi
dead wood to allow me to continue to purchase shares which
oHer greater potential. A small group of friends who also use
your techniques have also noticed the same problem. If you
have any criteria to deal with his frustrating problem, we
would be interested in hearing your views.
-Trader
Seems to me that it makes sense to put a time stop on your
trades and shoot lazy puppies after a reasonable Interval. Set
a date in advance when you're going to get rid of those wflich
do not perform!
-AE
I decided I do Ihi. Lrilde with options r:llher thon S&P futures. for me, thl:! biggest
plu wa. Lhal here was a fi..xed amount 0 mone' that could go I(l zero. 'he biggc ll1l'gnlive wilh cull i that time runs againsl you. Iso, :preads an: greater in oplion J btllthot'
the co t of doing bllsines -. I call afford 10 10. e the pLion premium. but with future I am
afraid of an th r October '87, especially if 1am not watching the market intrada .
The OpliOIl hould have two or three mon hs of life left in them, afterwards th lim
declIy become very "ere. t the tilil end of on opti n's Ij~ 1 wanl to sell iLl like to buy
options lhalare in the m n y. The deep r in the money. the more movement ou are likely
10 see in the opLion r lalive 10 the underlying-it will huve a higher delta. Still, the S .p
premiums are 0 hi h th t I would have to alloc< I ' nlU 11 mure func:L to get deeper into
Ihe money.
larch 11 wa. another clown (by-and that' when 1 entered buying slighlly in-themoney call wiLh two monlhs LO go.! put in a limit order and il \ a fillt!d-I ulIl1()st always
enter with limit orders. r also pI ccd" stop-loss five points below my t!lll rlr. You have to usc
lop because you could b \"rong ilnd il could be the taft of a new downlcg.
71
72
Entries & Exits
E!Im SOHAIL'S EXIT

'..,
,.,
..w,.
,to.
",
".,
N'
.
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.,
.,.,
'"m
II'[ ~I,
1I 1I1
,.,
~
K,
.".",,,'"
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",
".
'---
"
..",
."."."
"
II
Til" stock mark"t had a good run, more than a month I,a,l p"sseo:l, and till' option I.....S
entering a rnpld dl't('(ioT3tion phasC'. I knew I would havc to gCt out soon. Another thing
wa~ beginning 10 happen-thc dollar was showing Wl"almess and I thought that would
drag the stock market dnwn.
On Friday, April I I, the stock market was down slightly-the S&P was down thrl't
puints. thl" Dow 18 points. In doing my homework on the weekend. I nOliced Ihat the
,tdvauce/dedinl' line wa~ negative. and the VIX wa~ confu~ing: it was slightly down. With
the option well into its deteriurdtion phase, I (ould nol afford 10 wait; in r"tum I would
h"I'e rolll.-d o\ll'r. I decided to pull the lrigger and I gOI oul on Monday.
Chapler 4 Sulmi1 Rahhuni
]]

The slock market peaked out in 1999-2000 and rnteTed a vicious bear marhl. This weekly
ch~rl
sholYs S&P losing ncarly half of its valu!: within IWO ye3rs. The decline was
punctullletl by scv~'ral ~hHP rnllies. Bear market rallies tend to be explosive, fueled by
shoft-CO\'crinl; r:llher than by slower and more delilx-rate buying in the bull m"rhts_
Divuqel!Ce5 of MACll/tf5tDlJra~ aM pricc, lJiVe

perilap1 tile ltrDl1qr:..lt 51'11llJ11 ill technical /111/11'(5'1. 111
,kptc~bcr1001#1e
JI<P
tried to turll up tJftCT PC!dTiltlllq #Ie 1,001) level /l1fd

11lcl1 Ta/lyill'l. Co~parc the
hci'1ht of ~MCD-lfrltoqT"1+l
III NOVelf.!/J(;r 1001 lind -"'"rcJt
1ol):J.-1'/1f5 beari5h dfYcr'1c~ lJlNC II clcaT rnircatiOIl t1r4r t1Ic buill IllefC
fllYtllfll9 Ollt ttf 5tca~ aM
#Ie dIMrl'Yc!1d W6 about

to rC5UI+lC. Now cOlilpaYc
the &pt1U bf #Ie bottolOU
bf -",,fCD-IfistD<JrlllM ilt July
"hi ()ctob<:r 100J._#14t

bulliJk di'lcrgel1CC clearly
5kowcd #I4t #Ie &car5 "fGYc
The Christmas rally in Nove:mlxr and Qt'Ccmbcr 2003
\""5
ilccompanied by a returd
peak in MACD-HislugraUl-a sign of llullish stn:nglh. Compa~ the height of the wkly
bars in July and October 2002 with thl' bars n..:lr the right edge. The recent bars 3TO: much
shorter. which indicates that a detlinl.' 110 longer cyokt'$ such strong cmOlioos: Weak holders have already been Oushed Uul and strong holders arc siuinlllighl. 'I1,i5 behavior is
indic~til'e of ~ oollom, but unfortun~tely the Impulse system does nnt :l1I0I\' me to put on
~ long trade :'It thl" right Ige. A red bar :lcts like a censor Ih~t SOl'S: ~Go shon or sl~nd
aside. It forbids buying, bill it cannol furbiJ me from looking atlhis chart and w~iting
for the bars IOlurn from red to blue, ~Ilo\\'ins me to buy.
M
The daily chari (on the following page) ,unlirm~ Ihe lll~'SSagc of the weekly. At the
right edge I"ices He declining, hugging the lower ch~nnel. They seem un~ble tu break
QUI of it the w:'y they did ill February. Also notice tht dtpth of the February MACDHi5tugfllnl bouom and compare il fO the currtnl indicawr depth. There is nu divergence
ret bl"C:lu.'\C" Mi\CD is still declining, bnl should the histogfllOl lick up from this levtl, it will
complete:l powerful bullish divergence.
&ccolMilf'}lIfCakt:r alld a
rally '1115 COltlil1tJ. TIle fa~
1f14t the OCtober I~ "'6

a few pOi/ffJ lower pur
#1c fCllIq 011 fflc Cd!<.&. Iluy
~w IONl alld lhort IICW
kr,Ju II'Ifr;Il dfVef"JC~
IIfC prC5cnt!
r~lries 8: ExilS
74
III
Still.:ll Ihe rillin <'dg.. of the ch~rl, both the EMA and MACD-Histogram are declining, 'lild lh~ Impulse s)'st~m is red. It prohibits buying just now, but the picture is rnpidly
becoming more and mort: attractive for the bulls and d""mllds dose anenlion. While wail.
ing, can you identify an earlier m:lssive bearish divergence on this chari, topped off by a
Snlan kangaroo lail?
Jol1ltf/ ~1If ll4/1cllf rile bDtfOI6l of all C'tpIDJIvc r,f/Iy,

IIIlffl #1e IlO1pul.le .ly.l:'tCIH
tlIntl/ll9 ,rccll alld gMllg If
buy jigll4l 011'
lITter.
71fdf" rally .l"'UIl' up frDIt1
'(
ti1<:
bi1ffDlol, pCIlt:1Tiltllfg
1i1o: uppe, c/fall~1 t1l, fol{{)f,fillg
wr;d.. lt:crdld "p~1
(Ckdptef 7) tCdchd ffl4t
is .srro","
'to blowout of II
clftrlllld, it ttftdlt 'Jivd u.!
. " II (lilly
'1I0~
tJ .lccoltlll cJldhCc
to buy,
. " pricCJ pull bite/<. tD

tI1<: IItOVil1q tNcr(1gc lifter
11cc br'cd1<Dur. Tk4f'.t Ir/k4r
Jwppcncd kcrc til /.4drclt

IIIftff #Ie Jccolld rally to
tk<: upper cI1.1llltCf If'll:

ill"prfl.
Chapter 4 Sobail RabbanI
7S
In April the pi lure be arne con id rably more fa ed. hit the breakout in March \\'a
strOog and collvindng with price t. yin ah ve th chann I for several cia)", in April there
,\'lIS jusr a lone spik above 1111: channel. I kin u pi iowly Iii< a kan n[oo tail. It was
a companied b :I divergence of I tACD-Histo rom, warning 0 the weakne of tbe bulls_
At the ri ht edge of the chart. the market i r:lllying g:lin. but it r~1 vet we'.lk:
WeD-Histogram i- fcebl and Force Inde.' i tr ing a m s ive bearish divergence. The
JIllPuJ e system i. green. prohibiting horrin but it ertainly doe not forbid selling. It is
a high time to sell. taking profit on long position .
Im.!iIB SOHAIL'S ENTRY

KLAC
This trade violates every trading principle known to man. No $,10 p 'r 'on would do this.
I made this trade at the height of my personal Tisis, and it 'how what I"lppl:n when a
trader goes m<ld. When I Silt at home doing homework, con 'ulting D h r or two. I
was mentally somewhere clse. I had become sloppy, shooting frum lh hip 10
regain youth. vigor, and power, not being a professional anymure:. rt is
nor the money loss that rankJes, it is the loss of discipline.
"'u
"'
Ii
I~
II
I)
'1
D
)
11
~
lS
)j
)]
II
>I
D
ormally, must of my options trades arc multilayered. I buy c<llls and lh n ell I'ul.
I cov r part of the premium paid for the call. Here I wenl in outrighl, .elling;} naked
call becau e rhe premium seemed so hefty-I thought the tock was overpriced. all
price wer high. out nf whack with pUls. wlthhigh implied volatility. , thought there wa
:I premium 10 b taken bec;lU e some fool wanted to buy a c:lIl I compounded my mislak hy clling an in-the-money call-those :Ire good for buying but when you sell, you
are b tl r off going our of the money-selling more time value and less intrinsic vallie.
76
Entries & Exit
s KLAC kyrock r d lind my po Hion losl more and more money. I froze like ;I decr in
he::JdJights. It was not profes 'jonal behavior. ormally when I trnde I keep daily nOle. of
what is hl1ppcning-srodc indexes, ew Iljgh-N W Lol\' reading, my feelings. I stopped
doing thnt nJ1d was ju t sining 111 reo wishing and hopin ,aud not eHing the hell OUt:
'" Cflnnot be wrong; rhe market is wron." lean "hile the freight train was coming.
Every time there was :I sli hi pullb k, I'd go on p wer trip: "I <1m nol going to lake
a loss; I :lJn going to get oul nt n plu.." Anulhen lhere was a momenl of
clearing. Tl e real trader deep inside of me laid III it \ a a total
I
t
disaster and I exiled.
r
September _ was an upday n the volume
II
increased' the a daq was up on heavy vol~111
ume. The milrket started surging a nin
1[l111~1111
I /
:lJ1d I realized. that if J did not get
~1I11 I
~
II
out,l could get burt
rIll
If II
I
10
I III
II
rl~ltlrf
IV
./
.."
'j
Il
II
II
J'
11
:It
"n
>I
>J
~,
II
-:)ill
Monetarily it wos not such u huge 1.0' bUI p~'ch lugiOllly and [rubsionally il was
a very bad trade. It was a very humbling 'perienre-somelhing h:l t:iken you over, you
violate your own guideJin ,. omelhin you romi d om elf you'd ncvcr do. A lesson
in humility needs to be reinforced.
Later that year 1decided I needed 10 1:'1 '::'1 Y ar off and 'u I le,an out my sy len), be
stress-free. Maybe do som charity work. hold a ,h.iJdren's amp. whatever. My family
and J left the Uniled tale! nd went to liv in England.
CI13ptcr" Sohail Rabbani

Sohail is shorting KUC. or ralhcr, ils GJlh--doing wllnl the Impulse 5y51ell1 would prohibit U5 from doing. Th!:,,,;s gr"al emolional pleasure in drawing II line in the sand and
saying. ~This is it, the Jlmltet will not risc any higher, I'll short right here." It is a very
cxpensi\-e pleasure thai very few, if any, trado:rs (an afford.
., ,
"
.,
..
Mature tfaders have lung ago learned not to forecast but to follow signals from
lltl" markets. This chart shuws an uVlrend---both moving avcragl."$ arc rising, NlACDHistogram is rising. the uptrend is in gcar. The facts art' right hcn", on lhis charl-Ih" stock
isguing up. and no maltcr how beuish you fed, the Impulse syslcllllclls you Ihal short-
ing is forbidden.
The daily Impulse on the chart on the following pag~ is also gr=n-no shorting is
allOlVtd. The chorl shows n slow' and sl~ady Ilptr~nd. Pric~s touch their vOIlue 1.00e
~twC(.'n th~ tWO EMAs., rally 10 fhe upper channel lim', decline into the value 1.01le, rally
to lhe Upper chnnnc:lline, JlOCline til the value l.one again .. ,. Trading this pattern is like
going to a cash machine ,~here a bullish trader (you're allowed only to buy in an lIptr~nd)
can kC'ep buying at the EMA and selling at the \1pp~r ch:lOn~1 again and again.
77
78
EntriCli & E~it~
III
II
I
Notice how Fone Indtx rises to approximalely the sume peak level during each rnlly_
lhe bulls are maintaining their level of power in each rally without any tlivergence. aVenin,
this looks like a healthy uptrend. Only a trader looking for:m :ltlyenlu~ would try to pick
a lOp here.

FDIfD",r~ t11t: dip 1M ttl
1IfJ'fT''UI,,l:I.AC reqalYlt:4 ttl
l1rc~t1lIlHdr,z/llcd hlqhu.
"'tINCt: 1/ 1It:1\I tnll/< (H
"MCll-ltlJtogr,z1ol 111 u-lM-
II
,fllqlllt-ft 1'UllCmd II
qreltf f.,flcw" buill, c../IIH, fDr hfqku prlCCJ IIltc:lJ4.
ell p r
m ]1
G'
IMIT
So:nll R bb ni79
80
Entrks &: E."ils

'l1lt limt 10 prepar<, a lifeboat is b.:furr you n~ro it. If rou M(' rtading this book 011 a
rdalivdy non-strl"Ssfl,1 duy, now is lhe lime to draw up i\ lise of rul<'S. Milke it short and pin
it tlllh~ wallll~ar your lr:l.ding desk S(I that you ~:m ahvays SC'C it. leI m~ offer YllU a few
lines as a telllplate. which you may edit and expand 10 fit your own drcum~t:ll1Ces. The
purpose uf Ihis liM is 10 drJ.w danger lines, to kel"p )'011 frum stumbling into fire' zon..-s in
a ficld thai has Ill) s:&ty bHriers.
Limils:
I will slrictly 'lh.en'e ehe 2% and the 6% mUlley mallagement rules.
I will nOI add to losing posilions (unkss planned in adl'ance a. part of building
a Iarl:\e position).
I will nul I,ut 011 tl';l~ against my censorship rul~, .och as the Impulse system.
I will not allow a profit of greater than (fill in the blank) 10 tllrn into a loss-u~
a hard stop 10 protect g;,j'l.~!
I will \l~ stup.
This last point is the hard<'SI, since there arc Sl'1'eral ty!'.:s of stops:
A beginninl:\ trader mUSI usc I"hat I call Mhard stops--pl:lcing actual orders with his
(If her broker. '1111: trouble with h~rd slllps is th~t mOSt pcopk put them In obl'ious
pIaccs--bdow the I;ltest IllW or ~hOl'~ th( 1~te5t high, where profession;lls kt'l'p hitting them befor( the market rl'VCTS<.--s... If you uSC' hard slops, do nol place them ::It
oovious tevels hut dther closer 10 or f.mher lIway ftom the market.
A murc suplli;;tieatcd trader muy U:lt' SafcZl'lne SlOpS. This '''ill allow you 10 place )"flur
stops outside toe gl'lll'rallevd <If ll\:lrket noise and at prices thai are nnt commonly
known.
"Sufi .~l(lpSM -my farorite meillod-In\'olves g<'Uing out of any trode whose wklr
Impulse System goes asain~t me 15 minutcs before that market c1o$('s on Friil:ly.
HARD AND
SOFT SIGNS
Sofl sil(ns an' I'arly W:lnllll!lS ora trend ch~ngc. l1;lrd Sigll.~ Mt lhat a trend ts denntlely In funl'.
Sofl sl~lls Include dl\"ell.'t'ncC$ of MACO IJi.in~rJ.lIl orbl1.':lkouts 10 a nell' 10\1" or ~ 1I1'1\" hlgb
willI I1U ru!lolI'throu!:h. Ilanl Sll(llS lllclude the t1rnd ofa muvlng average Uilil IIwkl)' r.hart and
~ follow'lhrough ura bIT'~kl)ni, as Ilrtces acreleTille in lis dirwliun.
Experielll't'l1 trJde~ took for wfl signs fnr enlerill~ lronk's, buying bulJlsh dh'Cl'llrnrrs nr
MACD-HJstlll:r.Jlll ur shurlln!: afl1'3rt'11I1)' r;l1se upsJde bre~kUlllS. U}' the UrnI' Ihe hanl sigl1.~ ;11'':
In, It Is oUt'll too t~lt' tu t'nler a IrJlko. Ou nne hand. hml stJtn5 gl\"e a strong llll~.ag(' in r.xl! a
trollir. Fur l'x:nnlllt., Ir I gu lun\{ aner a soft sign, I may rontloul' III hohl evell ir t11~i slgll dls.lfl
f1I'an;. IlrlIvlding uther SlglLS remain, On lill' Ulltl'r hand. if a hard sign. such ~s a weckly nlU\'ing
avemgc,ls down by Ihe l'lId or th~ w~rk. I will grt not or a long trade before Ihe lI'l'('krnd. -M:
Troding is a pSl'cholugical game, as SohaU makes abundantly c1ellr, He is an ae-llI'"

traJn who III his peak moT!' than doubled hl~ nn:Ullnl in a )'ear-not with n single Jud.l'
Ilit hut hy steady short-term trading. The rulluwing l'"ar he I,'as in a drawdown. The mar
k"t had not changed-he had! 11 Is III Sohairs credit that he can S.l}'. "fortunately the dis
cipline of loss comrol h:ltl prevented nlY complete wipeout."
Discipllno: is esserllbl if you ,,'ant to $urv!l'e and win ill Ihe markets. Selling somc
rcalistk limits Oil your trading is a kl')' aspect of Jiscipline; you must decide and spell Oul
thc basic rules of risk control "",rore you plunge Into tradin\;. !-Iost import;,ntly, you nl"'od
to define )'Our maximum risk ICI'cl for any singl( trade and your accounl as a whole.
AM t:
U!1fJil fro~ Sohail~
S.'9~w..
D'
82
Enlrid & Exits

Th~
charts show 115 p;ist market ;leliun. The ,hart reader lnkc.~ a leap of faith and
lIssumes that the reeelli action will continue into the nenT future. No matll"T how suphisti.
cate<! )'Qur :m:,]ysis,lhI: f.1Ct remains Ihallhis is not a sdtl1ce. It is ultim:nety a leap of faith.
III
II
No quantitative Icchnil]ul', m:J.Ihelllalical model, W31'( theory. or ledmicJl analysis can

reliably prcdicllumnrrow's market ;Ictinn. Nor can om' trade UIL fundamcnlnls. Valuations
and li..Il1damcnlals do not have any bearing on the ntar-/CrllI price flucllmtiuns of a stock
or a cummodity. With every price prediction t~llI1iquc comcs the warning: O1l'cat emptor.
Ncar-term pri'" fluctuations l?necl lhe cacophony of collecli,-,;: pcrcl'plions and emo_
tions, such as greed. fcar. ho~, am.! f~ith. It is a live auctiun where th~ adrcnalilll: rush is
the currency of the moment. E:Jch transm;tiull represents a momen!nry consensus bctw~en
a buyer and a seller. If olle could know what all the other p~rlicipaills l"lIllIed, nne cuuld
reliably predict price action. The market is ,I pric~ disl:overy Illcchanism. A short-term
trader is t'SstlltiaUy playing a gu.:ssing game, trying 10 deciphcr what al1lh.. other suessen
are guessins.
b there any l'<lim in funrlllTllental, technical, nr sentiment analysis, or is u,ldillg like a
ranrlom mil uf the dk{'? A new trader is likl' surneone who enters a tlurk cellar for the first
time. Without any guid;ulce, he will pope around in the dark and may stumble into what
he is looking for. On thl: other hand, the trader '''ho is :IrlllCU with a good ,mal)'lic-.r1 Ill'lll
ent~rs Ihat cdl,lr with a small camlk HI;" can di:;ccrn the geneulla}'QlIt uf the room, el'cn
though thc dim !iShl dot:. 1I0t re"eal all the details. Some of what he sees may 3C1L1311r lJ(
illusions caused by th", llickering candle and the long shadows. Dt:spile these Iimilntiuns, i
trader is more likely to find his way through the cellar with a small candle than with nOlh
ing. llowel'er, if he places tOil much faith in the candlelight, Ih~ distortimls c:luscd by ttl(
nidu:ring name may k;1l1 him to misinterpret what he sees and te~d tu financial dis'lstcr.
A game of chanc~, sLlch as rouleue, is quite different fmlll a game of blllckjack, ir
which skilll11akes a ditlcrcnce. '111C outcome of the former is dctermin<'tl <!l1tircly b)' fate
\\'hil~ the outcom~ of tho:- hllt",r involves an d~lIlcnt of choice, The essential differcnc'
betWiX'1I them is that the player can manage risk whcn 5kilt is inVt)lved. Chance i5 inl11:ren
in trading the markets, but tradl'rs' choices m,lk~ Ihe difference.
Tr'luing is perhaps the muSI difficult wa)' tn make a living. A trader's life is the life 0
a rUlIill: the indep<.'ndentwarrior of fcurlal Jap~n I.,ho did not have the protection of a lieg.
lord. Uflrlcr ~ lurd's protection, his comnlde the 5fll/llfmi could j1r.1ctice his art carefree. Th,
nmill had nu such lw.:ury and had to rely on his own R'SUurces. To be a sllccl'SSfultl';ld~r
one ne"'us a sufficient financial cushion to sec om: through the lean limes. \Vithm.lt SlKll'
cushion, the indivi.lll~l \"host sok livdill<>od is tnding lives a wry precarious life, like I
barracuda in sh,'rk-infestl'd waters. Elich da}' Ihc barracud~ sels Out not knOWing whethe
illViH get dinl1~r or bccom~ dinner.
Most peopk who mllke a consistent living from the markets do so either under lh
umbrella of an institution or on th~ backs ur other people's mnney. fund managers. ana
ly~ts, markel gurus. and brokcr-d~alers all fall into one of these two c3tel:\0ril'l;. 'l1u:y tithe
sell S(lmething Of charge commissions or fel's fur servin'S 10 other market P'lrticip~nt!
Many of them art also tr:lders ill their Ol'ln ri~hl. but their hread and butter does no
depcnd exclusively Illt their tnlding.
Tr~ding is nnt iI science, and nnt a craft either, If ;U1)'lhing, it is an art, 311lllike nil
other arl, trying to (;IptUfl' its essence '''ill defy ,111 31lemptS at programming or systcnl
atizing.. Thl're arc people with an intuilive gin for the subtle art n( trading, so nimble tl
they can gracefully danct: their way thrnugh the snake pits of Ihe market without gellin
bitten. Saul)'. most 11l0rtals are not s.. gifted. Winning ur losing over time, therefore:. stricti
depeods un a disciplined appru'lCh to mone)' managt:11l<'"nl and loss (olltrol. Withollt I
if one HI'es b)' the sword, unc uks by the ~w()rd.
Chapter 4 SohaillbbbJni
An individualtr.ld~r has one greal advanlage over the instilutional one-he l1luy .~;l
back and do nOlhinj;. Thi.' abilily to wait and take no action unlil markel conditions He
suitable for your Irilding st)'1c is perhaps the most impurtam ri~k cunlrol meaSllre. Tht're
~rc market conditinos yuu Ci,n, and uthers you (';Jnnot, tmde with confidl.'nce. Vou need
10 knill" your weaknesses as Il'eli as your strengths. Holding your fire and keeping your
powder dry nre Griticn~ disciplines that uo make a life or death dillerence in a trader's
c:ll'CCf. This disdpline. more lhan an)' olher, has kept me alive in dangcmus limes. Dr.
Elder quotes a mentor ofllis who used lu say lhallhe !lest lradC'S went righl from the very
bCGinninl:. The lrnde5 lhat go underwll\<.:r should lw yuickly abandoned. One should
expect ;1~)lI1 half Ill" trad"5 I;,ken l(J cnd up as losses, but as long as lhese lo!iSCS renmin
$mall, Ihey arc tolerable.
In fi.'al estate Ihey say that only three factors (]elcrmine SUCCt:iS: 100ilion, localion, and
location.likewiS", in lrading lhere are also three faClors that delermini:' succ"ss: lo:!oS cunlrol, 1n'iS control, and loss cunlrol. Ttl prevenl ~ m~jnr loss, yOll mUSl be 'I'ilIing 10 emhrace
olinor lo~ and lot~ of them.
Wh~t is a lillIe loss ;lOd hOlv onen can one take it! Old Nick, a Illan;'ger ,11 Drexel
Burnham bilck iUlhe 198Os, usc.-d lO describe his Imders as eilher e1ephanl hunlers or rahbit hunters. The c1epham hUlller, olJ Nick uscu to ~)', mOSII)' re!Urns l.'mpty-hand!.'d and
his children oft~n go hunSr)'. The rabbit hunll.'r, he said, fel.'ds his family lhrcl' square menls
regularly. OcC".lsiona IIr, when lhe elt'phnnt hunter rna kes a kill, it is a fe;lsi rur 111.. enl irc village. BUl in the long run, il's the rabbil hunler who stands a beuer chune!.' of SU"CS5.
83
II
...C
II
Name:
Lives:
Trades:
How long:
Trading account:
Software:
Traders' Camp:
Ray Testa Jr.

Pittsburgh, PA
Business owner
Stocks
Since 2002
Medium ($250k-$lml
Charles Schwab, TC2005
Sl. Maarten 2004
CHAPTER 5
RAy
TESTA JR.
DEVELOPING A CONSISTENT ApPROACH
There wcre twn
hmlh~rs
C~fibbran
in ollr
Traders' C;lmp in Febru:lry 2004. Iby
Bryan IvcrC' in their early 30s, but both looked so much young('f Ihan their
"lies lhal I lC::Iscd thcm and called them juvenile delinquents. In (.,([, both were mature
heynnd their ye:lrs. '1111~Y \r;ll!e<! and worked in the family husinf$S; both were raising
.1 ~nd
young kids.
Their wives wanted to come [0 Sl.l\harlen with tlll:m-a Caribbean beach feels alaI
lIlore apl'e"linl! in February than a suburb of Pitlsburgh--bul both brothers left their
young wiW$ at home. This was nnt a \'acation, lhry said. They came \0 the Camp to study.
and wanled no distractions. They caned home Kvnal times (ach day, but spenl all their
free lime wilh other traders. ThaI sCllhcrn apart frolll many older tmders Nho Nere chauffeuring their wi"es while Ray and IJrytln \~erc doing their Camp homewnrk.
Campers often bring up thdr favorile slocb in dass, and Ray w-.mteu us 10 evaluate
GT. I declared it the most inlercsling uock pick of Ihe Camp. and traded it after returning
home, It hecame ont of my most profitable trades of 2004. When' began to otTer remole
access to our monthly ollnp"'rs' meelings in Manhattall, Ray immediately ~ign~ up and
I ah~ays paid ancntion to any stocks he brought up,
Ray neN to New York with his laptop amI a stack of hTokemg(' statelllcllts.1 put him
up in my gUl"$1 bedroom, and he went out for a hit of sightsl't'ing~he harl never Ixen in
the city befon::. He rnmle full ust: of my wireless Internet, repeatedly chcckillij his stocks
and sending ('-mails regan.ling his busim:ss.
I am rhe youngeSI of four children: I have a sister and Iwo brothers. W('
all work togelher; we h"w: a r.,mily business that docs conlrJcting work for
utility companies. We read. iI1SI;II], and maintain gas and eleclrk melas. My
futheT, who is 110W retired, bcgan wilh 3 local ulility compan), 3nd left to slart
the business in 1984. \-Vorking closely with him was 3 wonderful experiencc; hc
was Ihe ultimate mentor, We are all active in the market~, bUI ram Ihe mosl
interrstcd in trading.
I graduated from Ohio University in 1995. went to work, and shortl)'
:lrl~rwards opened a brokerage 3c(Ounl. Nbkillg money in Ihe market fron1
1995 tu :WOO was prelly eas),. We read ViI/lie Liue and did some momentum
invesling~~the Doj1,.'i of Ih.. Dow,""the Foolish Four"~that SOrt of thing. We
wtre buying names, never looked at charI,. 3nd didn't know 3nylhing about
thnie31 analysis. I'n/ue Lille "'as giving us pretty guud slocks-Qnalcomm.
85
86
II
II
II
En rfie. . rit
Texas InStrull1enls. It was great until the market pE'ilked nd crashed. We
got hurl Ii! c everyone else; after suf ering throll ,11 the bear nlarkeL, I d' ided
r \Vn not going 10 give LIp. ] wa. gotn' LO !cam frOnl myrnisl:1ke . H d I
1m "In then :1 era Lion of wh'll 1 know now, ] coultlllu.vc done something a
sim \e liS scUing my posilion when the 50-day movins average crossed below
the _OOday average and 1 would have been hugely betl r off.
W thought of u ing a fl.lll-. er i e broker and poke In n Fe".. of them. Mosl
used mum I funds, Well (c.an read {owil1gS/flr j I a well Ihey and rind the
be t performing funds without paying olle percent of equity. he more I
learned aboul the market, Ihe more I liked tb' idea of trading For myselr.
Thai's wh), ( attended the Trader' Camp.
VVhell you stnrl slud)/ing, you see that iL i not our of the realm r possibiJjti IhlH the mark l could go sideways for the next 20 cars. if r W 'r' a
'trietl)' buy-and-hold inve-tor, thaL means by the Lime I rcached my c;uly
fifties my savings would not have appreciated very much-unless I learned Lo
lrade and t3k advanlage of wings.
M grei.lle. t advan tages 'Ire my agc and the facl Ih,H T(DnM U to learn.
Like that trader you quoled in 7'i't1rfing for t'I Li1l;lIg-"lf 1 get half tl perce III
marter every yenr, I will be a gcniu b, the time I die." Th 'Iuck market fnscin, tcs mc; I will never lose intere.~1 in trading. I lov the opportunity to trade for
" living, I . t my own s hedule. and take conlrol of Illy future. Did you rcad
Riel. Dad, Poor Dad? There are a few wu' 10 really get ,\head-r al ~state, busin s, r paper ilSS~L. Kiyosaki ay' that in addition to)' ur regular job. you need
to edue;lle your elf and pursue opportuniri s in anI.'! of those assN cia. ses. 1
cbose paper acts. [ 1'1m not afrai of the e,.'itr. \ ark. I probably work Ilarder at
trading in my spare tim than som' people do t their r('gular fuU-time jobs.
I do it so my family wiU b financiaH (ure and I will be abl~ Lo retire carl)'.
The buH market crash left me with bitler 1a.~le. When the market larled
to rise again la t enf, il \\Ia difficult to f?1I11lhe triggcr-basica1J / ut or inexperience. The musl frustJ'-aMg thing was U1al la t ye.1r. in 2003, t:v ryonc made
money. Still, people who haven't learned their le~~on" from the bear market
\ ill not hold onto th ir gl/ins.
The h rdest thing tilis p' I year was Lo tlevel p a consistent, pproach. There
or man)l different way to de--you can buy pullb,l k or you n buy breakout.. \ hen il stock tnkcs out ils previous high. BOtll mdhc d make a lot of en~t=.
but they ,Ire completely dii.Tet'i~nt. Y u have to slo:Ltle on the nc that WClTk.~ for 'ou.
The most success I had this y ar was buyin down an I selling up. When J
look at 10 ks thaL are making n 'w highs, I do noL know wh re to get inlo
tJ1l'm. Instead ( wait for prices to pull back to value on the v\:cklies-wni fI r
th~ industry group to go blue 011 the Impulse Syslclll,lhen pick th . slock with
Lhe mosl con indng botton, n the dDlI)1 chart- triple bolh11l1 or diversenct:'. Tn year 2004 was a vcr hard year to trade. with no sustainable tr nds
;md man)' falsc starr. If you L1itl nOI enter in Lime, it \Va hard to gcL in later,
bUL if you S t in too 1.'<1 rl y, you got whip awed.
You hl1\e 10 choose not only the mel hod, but. I 0 whatsto ks you're goinB
10 monitor. A let the Camp. (ta.rLed doing regular h mework-I took stock
in asdaq 100 lIJld began 10 track onl)' tho e imlusll'Y groups thut onlilint!d
at lensl one Nasdaq 100 teek.
The list came to 51 group out of 239 in TC2005. lost of them arc highI h. and I :omelilllc wonder whether tbat i di"erst= enough. The goal is 10
1m \. cnou h without Ir:! king too man'. The added 3dvanLag of m)1 choir
i. thatir you track asuaq 1UO, you com lrade QQQQ .
Chaptcr 5 Ilay Tem Jr.
87
~ RAY'S ENTRY
1,lj11h' !,!!"
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U~per pilne: Wee~1y bar chal1 with two e~pooenliill JTIOil'ljj ~es-26 Md 13 wce~$
MTdd11 p~nl: MACD Unes and MACD-Hislogram (12269)
lower pane: TSY,13 (, near-equivalent 01 13-day EMA 01 Force Index)
''I
I"~I~
I,
,"
_41
".
39.'16
lll.12
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,~
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,~
BSX
AI the right edge of lhe wcdJy
,hilTt, ~lACD-Histogram is falling
whil~ pried are starting 10 pull back
a linle bit. I found this trade on a
d~ily ,haT! and confirmed it on the
Iveeklil':S. J ShOfted it. I would not
go against the weekly lrnpulsc
system, but it was the daily thal
had me more intrigued. Here all
the weekly, MACD lines arc turning
down. TSV h~s becn making !owt:r
peaks on the \~ay up, creating a
bearish divergcncr.
On the dnily chart I sec a he~dalld
top wilh H massive bearish divergcnce a f",w days earlier.
Priccs ar!,' swinging up ami down.
unlike lile steady uptrcnd that had
la~lcd from OClnl>t:r through early
March. That \\I1lS a !lie", uplrt'nd,
but now there is a lot of action in
lht: ~tlXk-wider swinSs. but no
progress. There is a \:ail at a peak
in carly March-another sign of a
rcverS;l1. l'SV is lower at the Inst
peak than it had been 0\ the previ.
ous one. Evt:rything is geared to the
downside.
shoulder~
1:18
Entries & Exits
Iim!!Im
RAY'S EXIT
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This W3~ on... oflhosc gre31lrades where it did not take too long to r.,.,llhe pain-just OIM
or two lroo-inS days. Two dayi ;tflCr Ihe entry, it was clear thai the markel did nOI confim
my opinion,
When I entered short, thl." \\lcckly chart wasn't l>rt:at, bUI the daily look".f interesting
The main reason I took the trnde wus the divergence in March. I e~,.ted further \\le~k,
llCliS in the stock. [ read things inlt. the chari bcc;\Use of the divergence and the head-:md
shoulders lop, I had missed lhe opportunity [0 ~hort in ...arly March and then decided tt
crC'ate un opportunity when it was not rcully there.
Chnpler5 Ray Tcsta Jr.
""
1019
~I
t1' I
I I' ,I
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II
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1jllln
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As I do a poSI-mortem un Ihis lrade, [sec that my problem wm; that I did not lrnd!.' in
the direction of the industry group. 1 realize ill hindsight thai I did llul chel,;k huw the
group haoticked up even though its Impulse system 1>'3S still blue.
This is where I've had milch SlIcel'S$ lately-watching industry groups and not jndj~
vidual stocks. r should not hUlle traded lIlSilinslllle tlr<1UI"S mum('ntum.

The W(:ckly chart shows a long amI steady bull market that took BSX from bdu\\' $10 tu
abo\l' SolO. Both EM As k~ep rising: pricO$ keep rellirnillg to the value tone be-twC'en the
two lines every few months, then pull up again. The trend is up. and it is ea~ier to Irade
in th" direction of the rising tide. $li1l, lhe ImpuJ5<." system had lurn~d blue s~\'t'ral wuks
earlier, as weekly MACD-Hislograffi began 10 d~lin~ this signal means lhal \~e arc
allll\~cd to short.
89
90
Elltrie.~ &
Exits
It IDDIu Ifk.t: the: ~",c:er J('Dt

tD ~ltDrT /$Jj( CIlIoIC
four
OIICeltl II~O, wIlell the: tllily

to II II"" 1l1~/f fltiled IIlId
~ ~tDC/o: -rutlleA froW!
qtccII to blue. T~ ~/fDw of
WQ//o:llell Wlt~ follDwed by II
~~III1DW pulfbltcK fllre-rl1e
Yltlt; {O>!C. /lJj( /vd Ji",e
tltl/feA Itbove It~ Yltlue
{D>!C. rite JtUK i~ I1l1rd to
rcltd". #Ie: rflJ/fted!fCi it
could be e/tJ1er It btDlld top
fDrWln/oll or 11 rdulo1ptro"
uf Itll upm:hd.
..
The daily charI ~huw$ a per~istent rally that had come to an end in March. You
can !iCC a bemish divergence l>~lwcen the F~l>ruary and March tops in pTke~ and
MACD-Hislugram-in early March nsx ~hOl up to a new record high above $44, IVhil~
MACD-Histogram had traced a much more shallow top Ihan it did in February. The
re;ulting decline drove llSX IO\Vards $39, over 10% bdmv its peak. A new rally hnd
from there, takillg Ihe stock up lowasrl.$44 before it rom out ofsteam, with the ImplIlSl.' system mrning blue.
em.
,'I
"
'.
...
Ch",,, 5
At tht' righl edge of lhe (hnrt, we .!ice a legitimate shClrl lr.ldl.'-bul nOI an especially
anraclivt' one. The Impulse .!iyslt'm io; hlut', ptrmilting shorting, but there i~ no current
bearish divergence of MACD-Hislogram and prices He Plett)' fd( from the upper chnnnel
line when' th.. best shorting is dont'o The trade feds like a bit of a stretch. The best
trades jump at rou from the ch~rl, grab rOil by the facc, and screlllll; "Here J am. lake me!"
That's certainly nol the case wilh BSX. The market presents sllch a wealth of opporlllnities that you are Oeller off wailing fOT the best ones r.JllH~r than stretching for the qu<-"'$-
lionable oneS.
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Roar d~rv~,~ pmi~ for his exit frum lhi~ lrad~, Th~ ~ntf)' looked fairly typical for an ~ag~r
young trader who reaches a bit too f:u to find a trad", AI the exit, however, Ray aCled with
tlt~ spd and resolve uf the pro he hopes to become-he dill not "'ast~ any time before
~dmillins his error and gelting lIut. lie reminded me ofwhal Bucky had said e1nring my
ituervi"w with I'"red Schutzman (Chapter 1): "111" most ~lisfyins fedins I have in trading
is lnsins money (ur th~ right reasons. When you Ius.. muncy (or the right reasons, you will
~ a very successful trJrler in the long run, because you will bl: taking smaller losses which
\~ill ellable yUIi to be around (or til" big trends,"
At the right edge of the chart, the 1111(11115'" system has turned llrCl:n again, MACDHistogram Is rising to a new high for the move, ami the rally in Force Index is canceling a
bearish dil'ergcnce, Everything is in gear to the upside, and fh~':re is no reason to hang
around in a short po.sitiOll. Iby is corll'ct in cutting his lo~s and pr~tvinl! ClIpital for
anuther \tade.
R', T~"
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91
92
Entries 8< E:o;:ils
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RAY'S ENTRY
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AMZN
The weekly b3rs nre coming down into ~n 3rl.':l of support. AMlN had pierced lht suppori lint earlier in 200'1, then ralliet!, bulnow is coming back dOl"n. MACD is m;lIdnl! a
small"r Ool1om on Ihc currenl d",linc, the last we",kly bu has turned blue.
MG853-lnternet
Software & Services.
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Chapler 5 Ray Testll Jr.

The induslry group is in the same situation as AMZN. It is in an uptrend: I,ri~~ 011
the weekly charts had pulled back into Ihe sweet 7.one and licked up. The Impulse SY5lem
islhe best tool for any beginner, for any holder-it mps you out uf So much trouble. espe'
cially if you're buying rebounds. Here it is go time!
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The daily ch3rt is the mOSI intel'l:sling 10 me, even though I follow Triple Screen and
always slart with lhe weekly. You have a lot more 5UW:SS if you du that. Hack at the end nf
Mardi I watched I\MZN at support but did nOltradc it. TIlis stock was Hut on lily rauar
then-J just saw it /lipping through charts. The market jum~ in late March, and [ missed
the trade but continued In watch the stock. It came down in May and hit almost the
$arne area, arounu $-10. There W"JS a big fat buttum of MACD. and because of th:ll. I wn.~
nul loa interested. [ kept it on mr radar, and ninc days later it ClIllle down to the SllIllC
area and oounced off that support again. The dailies turn('d blu(', th(' 'vl'('klics were blm"
~nd the industry gruup was hlue. The TSV had:t lillIe notch. I took this trade :ttthe level
of Support-it did not want to go hclow 40.
93
9<1-
Entries & E:ciIS
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RAY'S EXIT
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I set my o~iginal tArget AI 47.50-il was the ~rea uf the lOP of the prnious rnlly. [ sold it at
47.64, near the high of the liar b-3mc' il had reached mr large!. In hindsight, it WAS nol ~
great targcl-but 1\ reasonable one:.
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Chapter 5 Ray Tesla Jr.
95
II i not oft'n !hUI I pi I llslo' Ihllt ml1k~s 5.5 poinls in 111rt~> trading days. I[ r were
doing thi trncle loday.lw uld n L have .old while the daily MA, .Hislop,rum w:.l~ rUng.
I \'I'oulc..I bove w:lltcd until it ti ked down-simply ~ lIowing the dflHy lmpul c System.
Lately, I hav b 'en [uoHng for the chUrlS Ihnl [HIve sold down lind hllv the
mosl convincing boLtom In Lh area f upp I't-a doubl bottom,:1 ll'iplc botlom, or 11
tjny boltom wilh MACD-Histogr, m making i1 bulli h divergence.
This system was nrsl t1c.~crih('d In '/'nUllllsjilf 1/ eMuS. Its kcy prill 'I pic lslo nmlly'l! nllY mar
ket or any slock In more Uwn one lImcfram . WllillCvcr charts youlll{c IV lrl1dc, )'OU rna 1101
look 011 nlcm nolil you hllve firsllllllllyzed II rhllrl UIll' unlcr uf 1I1l1~llillldllulI.llcr lIud nUlllc YUllr
stralcglcdcl'isinn tllcrc. 11'. fOl'CX:llll(lle.yollllk 10 trade dally chnrt. .you lIlay nollnok:lllh III
lillillynu have studied the weekly charts ilnl! used them 10 milk 11 decision 10 go lOll lor short.
Onn' you have IImele a "lrnll:gic lIedsiun UJI UIl: wct'!ilics. r'llIm lu UtC tinily dlarl ' to milk' a
liidiclli dcosiun-wllerl' Iu ('liter ;lud wlwre Il'l sci a !lloJl.ln. s allli :I IIrunIIOlr~l'f.
-J\&
TRIPLE SCREEN
TRADING SYSTEM

lit #Ie right edgc flf #Ie
wr;cldy cntJrt", #Ie btJr,S Itad
.s.kortcf1ed, indicdti~!1
111tJt lower prlCCJ IIfC not
4t'trdetfng pUblIC partfc/pat!O/1 d/1d fkr; decline I!
fUhl1IH!] out ~ !tC4l+f. MtieDItf.s.~fal+f /.s. bmol+l/t1!1 out
tJt a ~ack h/qkcr Icv'dl #tal1
111 Marc f. Tkl.s. 15 HOt a true
diVCfl)e ce beeau!c #rc
Itld/etJtor ~er ero.t.!.cd
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#tc CCKterl/tle
br:ntIee tile two buttol+fj.

JueSf elCdr dM:rqetlcc.s arc
rttrdy.s.ce/1 011 tkc /AI el<1y
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The chaIL show the long slow rccovery of Amazon. onc of the Leader 0 the 1990s bull
markel, from it bear market lo\\". After crawling out of the doghouse below 10 it climbed
up all the wa)' to 60 before erioll profil-Iaking drove it do\ n LO JIO. ali e a kang.. roa
tail poking below 40 in larch 2004; it was follo\ ed by a sharp shorl-coverin raU and
another slow grinding dedine towards "'40. Compare the speed of the rally with the slowne.s of Lhe decline-this stock dearly does not \ ant to go down.
cluJrts. Still, t1fe carreat

pl1N'Cfl1 tel/j ~ #f4t bear.s.
arc p/cdl<ct fDdd'( 111d/1 #ley
were (11 IAdrclt :J.OU'i-dl1
'-tportam- faCt'or to !<ecp ttl
14' ir.d II/l1c/1 deeMi~g II/lir:t1fct
to tJo 10l1tJ Of .!hort. ~t#le
r(qllt cdqc of the Mleekly
ehart, IUoIpuue had turhcd
frDI+l fed to blue, tCl+lfNi~
d prohibfffol1 4ljd(lUt buyil'll).
96
Entril~ & bils
The pattern of ~i.J\CD-IIi.~togralllon the daily elmrl is similar 10 that on the wct'kly.
There is no cltolr diverliicnee, as MACD never cmsscd into positive territory bctw<"CJl its
bolloms in COIrly and late May, At the same lime, lhe second r.V.C.D bUllum is more shallow, telling us thnt the be~r,; are boming weaker. l11e bars huve turned from ll."d to blue,
no longer prohibiting buying.
Tltn Is IIlIery IfttTlletNe

bulliJk fIfCfOt': The /0'" 011
MIf( 10 killS'" 'fU7, willie
tlte lOki olllA/II( ~1 t'elleked
dOkll1 to 'fOSJ'-1llI0 rrckJ
IDlllet'. Yow du 11M kilVe til
be #11 fllJldertu 1010.... 11I#t
,11 1l~lrl"eut's wko rvclft /0",
bctwecII t/1use hlO dlfcS
pwttnelr ~tops# flck or
wo below #fc previous
1(1W.' "s SO oftell hIIp~ltj,
rltey Pltr.: t4k':l1 owt If1'lle
secolTd b/1ttolt1_suck f#/sc
breakouts 1r4l1Sfer sttxJ<J
frOIt1 Ole,/( kolder1 (lifo
s1rolTglvl'lds 4ITd clc4r tile
"/II( for. r.lly.
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Notice a beautiful bullish .lil'l!rgcnce of Force Index. Ii shows thlltthe beau are cumpletely out of breath, amI AMZN is fulling only oul of inertia. At the tight edge this stock
has a preponrJcr:mce of bullish signals; the only fly in the ointmenl is Ihe lack of a clear
diwrgcnu: of MACO-Histogram. MIIIlY tndes look imperfect duriu!!. an entry; the signals
hccome crystal c1l'ar only in n:trospcci. An analYSI elm l,rr,ltCl 10 wait for perfl'Ction; I
trader must put hi~ muncy on the line in un atnlosplll:re of uncertainty, prOIl'Cting hinnelf
with goorJ moncy management.
..
Chllpler 5 Ray TestQ Jr.
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Allhc right edge of the chart AMZN closed above its upper channel line. I believe that
envdopes provide Ihe beSt shorHcrm laTgets fur profit taking. As Ray louks at his trade in
retrospect, he regrets having left so much on the table-the stock lYent up several dollars
after he sold. He is both right and wrong.

Hindsight is a 20(20 vision: If I'.'C could buy tomorrow's newspaper, we'd;lll
gel
in at
the ahsolute IOI\' i111d sdl at lh... extreme high. Looking out into the uncertain future, it is
impossible to tell (or sure I"hcthcr a stock \"ill rise or falllhc follolving day. This is ,,'hy lak
ing profits above a chmlllclline is a perfectly reasonable thing.
Ray .'i:lys he shuuld hp\'c held IInlil the daily MAC:[)-Histo~ralll Imd ticked dOl~n.
HNe it ticked down surtly. but it alYl could h:lve ticked down hard. A stock Gin reverse
very sharply, \~ipin!l out the bulk of profit. If Ray wants to try a diff('rent exit technique.
[would suggest exiting the bulk of the trade with a more collliCrvative tcrhniquc at the:
channcllinc :lod holdin~ a sffi:lll fraction of his pusiliutl lu t"-it soJl1elhing mnrC :Idven
lUTOn!. If he lraded 1,000 sham, he: could lake profil 011 900 shares and hold 100 for a
differenl tylX of exit.
All of lhis has to ~ propc'rly dorumented in a Tr.1dcr's Diary. Trying somlthing!lew
once or twice and thcn forgclling aooutlhose tries is nol much diffen::nI frum gambling.
Trying repeatedly, while keeping good records and comparing two methods side by side11011' rlmr will make you a ~tler trader.
9'1
98
EnLries & Exits
TRADlNG CHANNELS
The tWQ main types of channels are straight envelopcs and standard deviation channels,
oft:en called Hullinger hands. A stroisht envelop<' nms parallel to a moving aver.tgc. while
standard deviatinn bands expand and contract in response to markeT \olatility. They arc
USl.'ful primarily for optinns traders since volatility is a prime factor in option pridng.
When the bands eKl'nnd. it is a good time to write options, and when th~y conrra". it is
beUer tn buy mem. Traders of stocks am.! flllmes arc better off with straighl envelopes,
which help identify overbought and oversold condiTions.
A wel1-dt<lwn envelope contains appro~illl:ltely 95% of prices on the screen. We want
the envelope 10 conlaio the last fOllr or five months of prices on the daily charts, so lhat
only the most extreme priccs peneLraLe above or below. The market is a manic-depressive
beast: Normalcy is within the channel, mania is :Lbove Lhe upper channl'lline, and depression below the lower line. Channels help us gau!;e the mOO<l of the market cruwd and trdd e
against it.
The public tends to follow trends. becoming increasingly bullish as prices rise.
Begirmers love 10 buy ullside breakouts. hoping for a runaway move. Ckealiinnally Lhey
tum nut lo IJ~ right, but in the long run, most breakOUb He flll:le, which is I>,hy profes.
sionals tend to Ixt against thell1. When prices slide, the crowd l~enme5 increasingly bear_
ish. When people St:l" a downside breaknut. Lhey tend to dump their holdings, and
professionals huy frum them at a discount, knowing that mosl downside breakout! are
false. Eovelopes help us identify the arcus where the crowd Decomt'S depressed or manic_
and bet against it.
Neither envelopes nor any other single indic-oItor can be used as an i1utomatic trading
tool. In a powerful uptrend, prices om ding to the upper channel linc for a long time. and
in a powerful do'>'ntrend, they "'" Slay below the lower channel line. We need to combine
envelopes \>'ith other tools ttl recognize the best trading signals--for example, an cm'dolJe
brcakoul ..ecompanied by an MACD divergence (sec a bearish divergence in AMZN in
mid.April 2OU4). These words of cmltiul1 apply firsT and foremostlo entries. takiog profits at the channel line is almost always a good idea. Ray's exiL from Al\1ZN shows that he ii
on his way to becoming a pro, as he .sells the upside breakout.
Channels aTe better tools for selling profit taq;cts than support and resislance lioes.
Professional traders look for uncommoll tools, Everyone knows about support and resi~t
ance, since marking them requires nothing mol"\' than a pencil and a ruler. Channels. on
the other h:llId, re'luik a degree of computer slll'histication and an investment in time.
They arc less ouyious on the charts.
Envelopes, like mOllY other indicators, provide both pos;tiyc lind negative signals.
When you buy inside an envelope and sell when prices hit Ihe upper Channel line. )'OU
know lhat you're ahead of the market crowd. You bought while the crowd w,u asleep :Iml
sold when it woke up-that i5 a positive sigllal. A negaliYc signal is a warnin!; not to buy
abnve the upper channel line ur to go ~hort hclolV the IOIVer dHlt1neJ line. These mes.'\ages
help prcventthe worst nfthe "Kreater fool thcory~ trades. Env.:lolll:S provide the best short
term targeTS for pmfiTtakinll and very useful wOlrnings-Ray '>'ould Ix well ml";sed to add
them 10 hi.~ charts.
..
Ch.prrrS lIayTc:sl.)r.
All c-/Marl froU1 Roy,

My TRADING PLAN CONTINUES TO EVOLVE
AJ lh< linl~ ,,( rh. ;nle"'jew I ....... focu~ng "" ohorl_'O"" 1r-.di03Th;" ~ ..... ,,~"" businffi comm,r"",ms Ind i""",.sed ""rIO,,"l
dc",..,ds On my';"'" ... nt:d pulling praoUR' ''0 ,h" oW."""h.

I d..cldftl 10 divid< my ",pilal 'Ilw II""" tw.kcl nd .'1<11,.... new
>I.r:u<gio-<lnc r":u I (ould m.",,~. m",ruanically, .OO.MllIer lhal
ICO\Ild .ppn..cl, using. lonsc. lim. frame.

My long'~ IlrJl<1:Y is Jimp~ to l;<' up<.>$U'" ,<> II>< .. ",n~ tlocks in th.
,rrong<S1 grouJ'L As I writ. ,hi< in the middle of 2005. rbulOck "'>lui is b:uic::lUy n.t fur
lilt )'<'Ir. A' ,h. 1:1"'" rime, "<any illdu,try group> .n: up 2S 10 40 !'"tt"l. "'long .. we .'"
JIOI in. bear m.rker, I'm conlen'lO hold rtock$ in le.ding Indusr,if$, Ming Ifailing >l0J'$
10 plOl"" profits. Additinn.lly. r .... options uf dl""':l ;,Kkc .1,011. to llC<!l< my punfcl;"
when nC$$;Iry. Indumy smups pnfurm "",1Il>tc.w.t 11,.1, ",",krlying fu",bmem.1J Jr,
Ik>w to .h.nF- It "' easy 10 identify tile ltrong~t grouJ'$. Th~ k~ is '0 monitor th.", and
wait fo, proper btlying oppotrllniry: I puJlhad: hi val"" on I w..,kly cha,!.

Ala $Old du,ing n"" nf nu, mon,llIy caml'ftl' OI. .,i,,1l' thOi i( yuu W'OI up ....y
morni"g
mu, accoum ...... posilioned in ,he $1m. clirtion ~ th. 26W<d; moving
a=ag<'. mu WI)I1ldn', do '00 bodly.1 d<t:idcd to odd I I....,d.I'oHQWing componen, I" my
Ir.w"llo I~cr .tudying 10:\'\',.1 <hUll .imi!>, t" this """ of ,h. 5.5rP.
I bockt..tcd tr.nd
following lflt""'. llIing
diffe,ent moving o r
'I!"'- 11.. """b, ... ,iod,
b"t thr ",t",,," we", rOt
... perio. to ,he buy-.nd
lwld 'p!'"'""h
by
1\':111 .... ,..... My 1\"l'0\ il
limple. I we (fOS$OVn
of foirly Jho,t-l.ntl npo"..."i,l m""ing a"""ll""
'" g.,.... t. "adins lig
_ 1
rul<, bolh long and .hort.
,
Although thi. stnt'gy
does nn,
tch tOp' u'
l><>I,oms, it hi
.Iaying with II"" u.nd. Em<ring.nd o:iting tr.od
1.. in cons,.nl
<f"'n in judln"n" ynu .I... ys think that you could
do"" hencr. It 1< n1<. to h....
potrilln n( )"'>u, aptw mon.god me<h:miaJiy. Wh.n the Et>IA chlnl" direction. i, keeps
fOIl oul of 'rouble .00 .beod of tl>c .notlt ....r.gn..
I SIll! de...." lubol,nt;.1 J'CI'C"n,al!" of my ""pi",I,oIOO"...,,,, 'rIding. I h..... mnd.
ifi<d ,.... ""'!hod<
Camp .1Id .,;Ickd I few of my own. Applyin, I
lOp-down 'pprouh.l fint llWy me ml'l:cu, lhen ind".try VOUI"'.nd fiIU1ly indi.id".1
1t0c4. Moo, "f my tndins picks com. from rompl.ling my .....kly Impul syit..." hu"",,
wnrll try to run my balkct of Sloek> IiI I h~ fund, kcepinlll bolonce of Ionglnd
.lIon "",ition.. My
I",ding I"',f",m."" hu improved .in(el ba"" upanded
lily IradinS ploo. By "Iili,u.g the' .dditionl/ ItntCSin. 1 h.... bKomc I more p"ienl
I~,. With "'.nlf of Clpil.llll'C'l<ly Of risk. I find il much cosier to WI;t for. perftcl5<1up
to "Ier o '1'Id.lh.n to Iry to fom: thinf;'-
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Tro""',
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99
Name:
Lives:
Trades:
How long:
Trading account:
Software:
Traders' Camps:
James (Mike) McMahon

Phoen ix, AZ
Engineering manager
Stocks
Since 2000
Small $250k)
TC2005, TradeStation, Trader's Governor
New Zealand 2002
Dominican Republic 2003;
Spike group member
CHAPTER 6
JAMES (MIKE) McMAHON

A
SUCCESSFUL ENGINEER HAS A DISADVANTAGE
met Mike in 2002
~I
our Tradns' Camillo New Ze.ll;lnd. lIe sal near the back of Ihl"
roorn, I~kinl'i nOLO'S on a laptop. J was mlvin/; my lingers in the air, e)(plainin~ the 2%
and 6% Rules of money manugement. He CIUII: up to me during a brtak: "You know, those
concepts 1('lId themselves I'Cry well \(1 pmgnll1l1lins."
The next morning he hrought a slack of floppies to <Jur c1us.'io-thut was befall' USB
dt'Vk~ became pUl'ubr. Mike announced he had created :In Excd sprradshC'e1 10 imple-
menllhe 2% and 6% Rules for (nnlmUlng risks and offered anyone in the class a free copy.
The next day he SIOOO up in chlss <lod asked for thI: floppies b;ICk. He had been working on
the program the night befuro~, upgraded it, and was offering,he new file 10 all campers, but
Ivas running out or nOl'l'ies. The group loved him.
At the ~ml of aUf CalliI' I ~u!jgc::lted 10 Mike that he write a comm~n:ial-quality program, complete with a manual. He Ivanlcd to do it in partnership wilh mc :l.nd I"C shook
hands on Ollr rica!. For tin: past thrl'c yenrs hc has he~n producing better and bcncr versions of risk ll\anag~nll:tlI software, moving forward in his quiet and dogged way. Our curr~nl Tradt'r's Governor has over 20,000 lines of compulcr code and delivers an unheard-of
level of control into the hands ur priv:ltc traders.
I enjoy working with Mike and apprCChlll: his Ihoroughnes.s, focus, and unfil'I'l'lIblc
good hunmr. We run into each other sev~raltil11es each year and always sh,lrI:' a meal.
eVen though 11ikc:l glas.s Of two of wine with dinner, whil(" Mike, a devout Baptist, never
touches the Sluff. We usually talk alxlul money management, but I became interested in his
views on tradint; lind sent him an invitation to p.1rticiplllC in this projCl:t. Mike wrote b:,.:k:
I'm extremcl)' honofM to be con)k!l:rcd for the book-althoul!,h I'm llot sure
I qualify to be a member of the group, I do not consider mysdf to be tradin!!
professionally )~l. although I am trading seriously.
I lhink the bcnefits of my cxperience are not so much in the ~rea of troding lips, tricks, and mClhn<ls but rJthcr in overcoming .I'Ome of the ob5tadc~
10 succes~ful tradintl. I ~m convinccd IhAt h~ving hct:n a highly succcssfitl
compuler engineer h~s !K'cn a di.s.1dvanlil8c Ul my trading rather than ;In
aJvanlagc. It i~ II difficultt<lsk to 'Iuil thinking like an engineer "ftcr su many
years of POSilive rcinfon:ement.
101
102
Elilrics& E"il.~
We m~t at a Traders' Expo in Las Vegas whl'rc I taughl a day-lung d:lss and Mikl' stl'Pped
into my room as a guest spc~ker to ddiver ~ crisp PowcrPoint presentation on risk control.
Cenerous as ever, he oftered tu ~~m:lil his entire presentation to the memh<,rs of the das~
L,ter thOlt night we shareu a meal, :lI1d cominlle<! our (un"nsation the following day.
[n my previous career;l.S a coml>uter engineer and manager for an nil cump:lIly
in the Middle EiL'it, I had built great confidence in my ability to do analysis and
deril'e solutions that work. Then I "pl'rnached the markets, did great allalrsis,
but the solution often did n,,1 work. One cannot fix the chaos of the markets.
Heing right is everythinll in an cnginceringjoh, hUl in the rnarkd you ncrd a
method that works more often than not in produdng winning trades.
In tr~ding it is possibl<, tu have a pro.:ess or a method lhat works ma)'~
J 01lt of 1n limes, and with good money management yuu can make: it profitahle. lust let your winners run :lnd cui your los.crs short. In almost every
other endea\'Or in life, that would l,,~ nn unthinkabh.' proposition. One thing I
did in my previous career \I".IS process control--eomputers fake mea.sureLllellls
fromthl," field and send out signals to controllernperulUre, flow, llnd pressure
at an oil refinery. [f I approached my ho!<S ~nd said, MWe'll controllhe plalltliO
that three timt"s out of tell it will work vt"ry well, but seven times it wun't workt
h~ would nut lUlVC been happy. But in trading that ll1ijSht work very well.
A heginncr trying to find the right ml'thod goes to seminars, startS1rading, but when you look at his trndes, is he winning or losing as a result of the
method? He mar lll/ply the rules and tnlde correctly solllel;mt:S, bUl nOt at
Ulher tilll<$. If thaI is Ihe case, looking at thl' results of a lrad.. is inconclusive.
The results are meaningfnl onl)' if ruu appl)' your methods rigorousl)'. If}'Oli
stretch because you're hut 10 tfade, you taintthl' quality uf yuur resuhs. The
less l"xpl"rienccd n tr:nl~r, the less defined hi5 method.
'10 definc:I 1l11"lhod takes a good numbt:r of tr.Jd~5--10 is not meaningful, 100 is good. A tradl'r often jumps to another method before he gets numbers where they shuuhl I,t,. A priv;ile trader without good e<!uC:llitlll or
discipline and pour mord-keeping does not knulV wheth~r his llIethod is
guud. Ml am making mOlley, so I know whnt's righl. In the nineties people
were making profitable trad~s fur Ihe wrong TC:lSOns. All sto.:ks went up, but if
a stock wenl down, they diu not worry about stops because the sto.cks always
returned and roared up. They \,'ere winnin.!\ even though the qualit}' of their
trading was poor. Then the- ye-ar 2000 rolled along.
All my life I've been confident I could do complex anal)'sis and develnp
working solutions. If a solutiun worked, it was correct. In Ill" market it is
differcnt. Snmc trades aTC \~inntrs but not bec""S<' analy5is is correct. Othu
trades fit the entry criteria vcr)' well hUl lurn out to be los.crs. Winning or
losing in any singlt frarl~ has nothing to do with the quality ur villbilily of lhe
slratt."grlooking ill Illy diary cntriC5 reinforced Ihis for ml,'. There w"re some
winn;njS lroldes where I deviated from mr crit"ria and whidl did nOI deserve
to be winners. There were losing lrade.~ where I did everything right, but the
markct moved against me. Trading is not about "Am I right or am I wrontlr"
but about "Did I apply my methods correctly!"
I have m"t a lot of people who are in a similar situation-very strons
technkal people, programmers, grc:1I ",,,,lrtkal persons who enter Iht chaos
of the markets and are unabll" ttlllrnduce answers. Casual investors gOl hadlr
burned in 2001-1001. Ynu'v" gOlto have some kind of strategy for Ih" duwnM
..
Ch;lpler (; James (Mike) McMilhon

side; yl'lU OUlnot be holding in Ihe nJid~1 of ~ benr market. If you followed the
simple stralegy of gelling out when a complele bar mUl'.,u below its 200-J:IY
moving average, then around Seplember 21100 you l"Ould haw sold OUI and
stayed in cash until April 2003,
When I left Sauui Arabia ill July 2000, I had my <tOlk and an IRA: I had
invested (lilly in mutual funds before.I'.:ople kepI Solying that the slock l\larket
was going Cr-.iZy and it was the lim., 10 gel invol\'oo. The idea uf Ilut having to
wurk 9 to 5 f('lt attractive: I thought I could lrade part-lime and make a lut of
mOlley-soulld,~familiar, right? A friend was involved with Wade Cook, :lIld I
Ivent 10 his conference but starl.....! getung disillusioned with his Ihing righl
aw:ty, There was that ft.'dinl!( of forced jor and the purpose was to show )'Uu
hOI" little ),ou knew. They'd teach you 30 strnlegies io three days \Inti! you s;Ji,l,
"Wow, Ihis is really comple):,1 need 10 sign up fl'lr three more workshops.~One
of the instructors handed nut a readin!: list, and I pichJ up Trlll/ilig for fl
LjY;llg, I saitl, lhis guy makes a 101 of st'llse and he is opposed to everylhinll
Wade Cook says,
And lhal's how I callie III my first rnldcrs' C,1mp, In my Cirsl caCi.'Cr 1
del'dopcd thc millll~l 11M I I\'3S going to be righl ul\\'3Ys or nlmost always, bUI
whc.'n I got inlO Ir~ding, I knew I hnd toch~nge thal.1 still h:l\'t nol complelc:l)'
mnde Ih~ breakthroush 10 reach that way of thinking, bill I am applying good
moncy manal;C'ment IInlil I get thcrC', Thai felluw in )'oue class )'cstcrday
hroughl up a qu"sliull aboullJ.cing confidenl ami you said you could nt'1'{"r be
contident, This is a pSj'choloSical change that is hard to achieve for mll!ll I'l'0pIe who (Ome ft'on! olhn ileitis.
When you propose I" people at:t conference llr t,n a messase bo.1rd, ~tet's
talk nbout our 'IrdJing demons,' nOI one person responds, no one wants tn
handle thaI. They'd rather talk of gold prices, or dh'ergcncl'li, or broker,;. I ha"':
nftcn thought that I could be:l mc'm: successful trader if I bad a robot entering and exet:lIling for me. You know, like in Isaac Asimuv's book J, RollOl, The
firsllaw i,~ that a rooot ("JOnot h.lrm:l human by its action or inaction. I could
.see myself gelling emotional during Ihe trading day and giving lh... robot
illSlruetions 10 place or cancel an order and he'd So1)', "No, I caullot allow you
to come to harm: I hal'e 10 c):ecuu,' Ihe phm,"
K
1\ felluw raiSl~1 his hand in Ill)' claSS when' i\llkl' h'll! allilcarcd as a ~l1t'Sl SIJeilkc'r. lie wanted to
knllw how III erach llic degree ofexprrtisc atll'hlch h(' rould aplIru:Ir/1 1r:llliug wilh:t gl"('olt feel,
lo~ o( ronndence, ~That is nollikl"ty hI ncr happen: 1So11". ""lCfC Is always a rl'('lIn~ U(UIIlW
Iainl}' In \\'orklug IUIIl1l' n1gr.lr)'ou fetl c('n:tln alMlUl a pmJt.'Ct ora trddl'lIW! you'n' ,\,'1'U1ng
Into,ll Is prrth3bl~' going 10 b(' a loser:
-I\f
It is a v~rr di(frrenl Ihing looking 3t th.. gltlllt.' rrom the outside or with
il, Like thaL joke-two fdlOl>'s go fishing in a
calloe and om: or lh"m throws n Slick of dynamite ol'CrOO.ml-iJuom!-all
kinds of stunned fish 00.1t to the surface. His friend says, "Arc j'OU crnlY~ This
is so illegal." And th~ first guy t,lkes another stick or JYllamilC, lights it lip,
hands it In his friend, and sal'S, "YOII gonna talk or you gonn:! fish?~
th~ experience of having bcen in
CONFIDENCE AND
UNCERTAINTY
103
104
El1lries & f.~iIS

In trolling (nr lmd~"li, I slart with TC200S where [ hnve rwo Ea~ys.::~'l$.
First, I look for stocks th~t have reachetl a new 52,week high during the past
30 trading days. They hal'e to be priced over $10 amI hav~ vulume in the top
25% of all stocks. 'lclIlny, for ellllmpk, Wt: ha\'c 613 slock5 on thi~ new high list,
and' sort them from the highesl price dmvll. I lake a quick look at everr
weekly chart and, if they're interesting, slanc~ at th~ daily. Most o( them
are up, stretching lhe rubb~r band. I am looking for shorting opportunitiafor those that arc O\'erstrdchetl and sl"rtin!lIO roll over-and nag the ones [
like fnr det'per study.
[ tend to find 1110realndiclates midlist, rather than at the top or the 001tom of the list. [ Cf(':lte and date ~ new text file and copy naSlled symbols into
it. Then I do ,he same for new 1011's-looking fur buys, lnnking at the lowest
prices. I cspurtlhfir symbols to a tal file, such as ~shorts for 11/22fl~nd put il
into 111)' TrudeSlation ("Mer. Onc(' I get the stocks into TradeStation, I go
through my regular sneens-weekly, daily, and intraday. Here [ start seriously
looking for lrades. Sometimes 1 find crossovers-potential longs all shurts
lists lind vic" Vers.1. I work with each list for a wet'k or two, and after that, r ~Iarl
throwIng old files out.
Iii!l!DI,-M:.:.=1K..:.:E=-'S=-.=E:.:. ;N:..;.T.:. .:R'-'-Y
At the riillt edie 01100

chart, the Impulse s)"tem
has stopped bell~ led alld
turned blue, pelmilling
buying. Stochasllcs are
oversold and crossing up.
MACD-Histogram has
stopped declinIng and
ticked uf'!.
I"",
,,,'"
,.
r:...
.,.
,~'.:....,::,.:.'~'"~': ,":.".C..:...O.,... ~:
...
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Wee~ly [)ar
chart with two el'.POnential m<NlnR averascs-25 and 11 weeks and

ImpulSl! system
MIddle pane, MACO UOIIS and MACD-HlstogrillT1 (l1-25-5}
luwer pane, SlflT.hastic UD-3-3 and <lo-3-3}, OVI:'Iboullht and <Nelsold hn~s at 110 and 20
to.
Ch~ptt'r
6 !i1[nes (Mikel McMahon
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Same parameters In the flrs[ tnrcc panes as weekly. ooly J!!fl!rriOflto the numbef of day$. Fomth pane 1143y RSI.
GNCMA
Thr Impulse: syslem hilS changed from rrd to blue to green. MACO-Hislogrilm is rising and has jusl
crossed ~bove zero. Stoch;lstics arc rising and have JUS1 cro~sed ahnve their oversold line. The stock
(dlto its 52-wed, low, but instead of fulluwing through on that dedine, it reversed and started 1o
riJe. Prices nre in thl.' sweet zunI.' bet.....een Ihe two moving average-so
The second day of c bullish

trend in priceS confirms lhe
buy signal of Ihn

and daily charts,
pptr
~wer
pane,
pane:
oii '". ". ... '"., '" ..

5-mmule clInd estlC c a
MACO Unl!'S aoo MACD-H,stogram (12269 lws)
wee~ly
105
106
Enrri~~ & Exits
_ _ MIKE'S EXIT
""
."
'.".
l'l"
II
..
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"
Aftl'r II trading days, it didn't look Iik~ this SIQf;k was going anywhere, MACD began 10
r~ll1 and Stochastic crosscd brlow its oversold linc.
THE BOSS WANTS

TO SEE THE NUMBERS
Mike Silj's: Yc:stettlaj' a fellull' Ilsked )11U In class II'h;11 was a common IlsychnlnSlcaltfilit illl1lJlll/
winning tladcrs. :11111 yUli ilJlS\\'fred; ~ectt'ntrirlty: [ fillure I \'t 1.'01 alllhl' head knu\\'ledJle I ured
ltJ have-nnw I need to makr a ps)'cholOl(lrJI chan$(' [rom a ClIIlSCfVa IIVl', s1 rnll(hlforn'3rd clIl(l'
ar
nN'r 10 an ccccntric. logilltl'ildcr, I IlilI'c n p;lSSlon [or U<ldillg. III l'I'rry endcal'Of Ill)' rafl1'r
I'Ye been successful In IlYCfl'UIIII 1111 ohstacles and IllCl.'ling c1lallClIllrs-tllert is l/I'l'Jt satlsfatJiull
In this. I ilkI' the flexibility of the IIfCSlyle, btlng abk tn trJde (rolll allywhcrr inl!lt' world. all)'
hOllr, bUI atUmcs I miss the sodabllily lIr the ofOcc, Trading by youl'liI'![-therr Is some landi
nl'S.'llhl're,
\\'orkllig nn Tntder's GIlI'cOlor has gh'cn lIIe ,1 trl'mendolls illlllrccla
lion for llll' vallie of (l'fllrdkreillng, PrIvate tr.Idcrs can frt'l thej' an: doing
OK and nnt [;1((' up to their real pcrfomlill1te. Ilal'inlll!lr GilVl'mnr forers
m~ to do 1I1~1 nil mailer hOI\' palnrul. I s1amd ~ pmccss ilf bnl1all)' ]lun
l.~hinl{ Illy ego by reporting In my wife. Noll' Ills like work-Mood IIr bad,
(lie boss \\'iInts: 10 S1.'l' the 1Il1inbers.
Cllaplt:r 6 James (Mike) McMahon
Milll'll'nJt/!: I'm sending JOU a booklet called TIlt' Uml,rillell L:,lI'S IUElIgltJilI'r/lIg. Whcl1 I fiJ'sl
bt!gBo 10 rcild Il.l thnughllhis \ViiS re.aJly ~rcal Shirr Ulat every cntry,!c\'cl cn 'Ineer should know.
111'/1, a founded lo leam It had been published in 19441 t sec II do'c corrclnlion b 'I ween fhl'
Illcnl.nlH of 'oung engineers;md thil! ofbcgiJming lratters who :1I'C I1x:lt dOll gclUng 311 the
ICl'hrti I toul '. dlilrl " indiCllurs, system backtesUng, slock-picking sofLwnre. iJnd so Oll. They
do 1101'('1\1 at all OIlCfJ11 d with lbc umvrittcn !ilWS uf trildilJg ilml holV (ls}rcho!o)!il:illly flllll
eJl10t.lUII311y unprepared Uley ilre ror tile markels.
TRADE 1-ENTRY COMME T
The weekly ch<lrl reveal three distinct stages in the bull move. thilt took G
lA rr III
under $3 10 :lbove $10. The First lIpleg, in 2002, wa' powerfully verll at The ond upleg,
in 2003, went lip 01 a much more shallow angle and ended \ ith a beari5h divcrgcnce of
MACD-Histogral1l. The third upleg. in 2004, was nearly flat. did Dot reach a new high, lind
ended with both moving IlVcro cs rollin over to the downside. Clearly, the early bird
caught this worm in the srock mark t.
At the righl edge f Ihe hart lhe decline had reached deep below the EMA. overextending the rubber band. MA. -Hi to ram had ticked up, tuming the Impulse system
blue and removing a prohibition again t uying.
PSYCHOLOGY
07
108
Enlries & Exits
Tr.nkrs luukiug rOt buJllsh and bearish signals u'ud III Sllulnt at the dlarts. SqUint IOllg
clluugh, and you'll rClOgnil,c bullish or b(~lri~h sigll~ls-whiche\'l'r )'UU prefer, Amuch bel
ter thing In llu, wll('u In dnubt. Is to push b~ek and look ~I the dl~t1S of a grl'<lter tllllcrr~ 1111',
[fyou rrel (1lIlruscd by the rl~i1iL"', liluk at tlie wel'klll'S tlllllakc a stldlt'gicdcdslol1. Usc tllClll
w dt'(lde II'hetlleryolI'rc a bull ora bear befure l'flunllng to IIII' dally eli;lrt and dccldlngwh~t
to do wIth )"OIIT tldllt'.
-lIE
DO NOT SQUINT
AT A CHART
-.,..
m
~ .111,. ,IIIJ~
1I11~
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The decline on Ihe d;lily dlart appears a liule slttp for huying jusl now. There was a
bearish divergence in April, lind from Ihere Ihe stock InS! nearly 25% in It:$ lh~n two
months, going clulm in a nearly slraighIEn/'. AI the right edge of the chart the Impulse h~s
tumed green, permitting buying, but Ihere is no hUllish di\'crgencc of MACD-Histogr:am,
of MACD Lines, or even of Force Index. Therc is only an uptick of Lhe histulinlll1 and m
crossing of prices abuve the fasl EfI.IA. That would not be enough 10 get me from the sitklilies ;mel into Blong positioll,
Furthemlorc, it ~m.~ a liLlie lole to be enLering this kmS Irade, Mike's Jlurclmse price
of58.10 is ncar Ihe lop tick of the day ulld doser 10 the cenler of the chonnel Ih:1r1 to its
bottom, If IlVaS going bouom-fishil1l:\' I would try to buy below value, in the vidnilyor
the lower ch:lunellinc AI this puint I would givc a puss to this trade,
..
..
.
,'..
,.
'
.
Th~
rally had 5(31100, :Ind Mike W:lS quite righllo exit his trade. I think it is importanllO
h:lvc a stop for your trades not only in (erms of price bUl also in terms of time. Jt can he :I
menlal SlOp, but yvu should km,lw thai if a sinck does not do what you expected it 10 do
wilhin a reasonable time, you'llt,." out of iL
You buy a stock CXvectilig il to gO up. If you thought you could gel it cheaper tomorrow,)'OU would not have bought illoday. A day goes by, I~n II", and three, lxll the mlly
)'Ou exp'.r::ted does nol malernlize. Evt'n if Ihal sluck <1"0$ lUll fall and go :It;aiUSI you, il is
giving you a subtk ffil:SS;Jge lhal fUlIr analysis was wrong. This is like trying to pull your car
into a tight parking spot: If you realize thai )'ou're nOl making it, SCt out of that spot and
decide whe~r (0 get in again at a better angle or drive around and look for anolher spot
This lr:Jde also brings up Ihe importance of measuring where in the daily range you
boughl or sold a slack. Thl.' idea is to Iry 10 buy in Ihl.' lowl.'r 50% of the daily bar nnd sell
within Ihe lap 50% of Ihal day's bar. This is harder than it seems beCliUse we do nOI know
until tile close whatlhe day's mnge is going 10 be. Buying in Ihe bottnm half and .~elling in
thc lop haIr is;1 ~km lhal comes widl r:xp.. ri.mce. and even Ihen, il is never flawless. In this
IrJde Mike boughl near the 101' lick or the daily bar and sold ncar the boltom lick of Ihe
elit bar. Had he b~n able to reverse this p3t!ern, the trndr would h;we been a big winner,
insll'lId of a smaliloscr. Mike has acCl'SS 10 live inlrmlily .1"1;'. I ti~ ~kills in analyzing weekly
and daily c1mn~ can be transferred to intr;,{by c],arlS---I101 to daytrade, hUI 10 fine~sc hi~
entries and exits.
] 10
Entri~~
& Exits
Iii!lmB
MIKE'S ENTRY
.~.~
..
!=
CK.
'Il,~
IllIpulse system i~ blue, ill10wins us 10 huy. Both SIQChastio ~Il' starting to turn u?bullish. MACD has nOI yet tickerl up.
Non-Impulse Exit
In a webinar yesterday you said that due to the lack of followthrough in corn, now would be a good time to sell. Did you
actually mean selling even though the Impulse System is
green?
-Trader
The Impulse system Is a censorship system that gilles me
permission to enter. When a market blows out of its channel,
it snows an overheated condition and signals me to exit, without any input Irom lhe Impulse system. In other words, I may
enter only when this system allows me to enter, but I may exit
before it tells me to do so.
-A
..
Chapler 6 [ames (Mike) McMuholl
I~,
..
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:=
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d\2VVVF _EY'V~'\;;]'r=
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MACD-Hislngram is ri.~il1g, (rus.~illH its 'l-t:ru line MACIJ Lines are giving a buy signal. The
price is in the "sweel 201le" between two EMA. RSI and bOlh Slnchastics art: rising.
The fact that prices have

closed up for the day is
a positive sign.
,
-
,
,
,!
i,
i,
,.
'm
111
112
Entrk"li & Exits
IiiB!ID
MIKE'S EXIT
fll8 ptice looks like 11 Is
movini:. bul momentum

amI MACO
~rn slarUni: \0
diverge from lhn pr1c1! il bit.
80th StOC!lilSIIC iIf1d RSI
ilre Slarling 10 lurn down.
",",N
..
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"
- -
It looks like prices ~re

going nowhere. There
hi il possible tllane!e
formation.
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Chapter 6 James (Mikel McMahon
TRADE 2-E TRY COMME T
CKR is becoming strange!" ;lnci strOll ~er, in conlrJSI 10

C A who -c ri c on the' cekly
chart kept getting weaker :lIld weake!". CKR'. I.l uplcg, ~ Olll
10 8 in 2003.la ted over
30 wed,s; the second upleg, ill 2004, from under $6 to nearly 12, (0 k ollly hal of lhal
time, as the stock w~nl up fllster. Wh!;.'n bulls be orne tT ng r a lhc to k rallies. it is a sign
Ihat the stock \"ants Lo go higher.
The bull move is being nel\tly ll'aced by ri ill' moving avera es; ever)' few months a
bout of profil-laking drives prices down into h value zan bell t:t:J1 the lwo EMAs or
even lower. The. e epi.mles llf p:mi amons tbe IV ak 5t holders allow patient cons n'utive
traders to add to lheir longs ne~r value, The late'r de line hl'1d just run its coursr a week
aKa, with i IACD-Histo rum declillill ' beluw zero. Ils uversold reading provides e..X"lra support to the bullish c:Jl1se. The chart looked better the week beforc, but cvcn hcre pri e. are
nor 'ct 100 fa [rom value.
]] 3
114
Enlr;e;: /t( ExilS
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Ilt!5:..'~""~IIIIII'" "',~I,lImlllflll,I .... ,.. ".'tlnII""I_"""'IIIII'"lllIl1t"""""""'III)1111111l1~;;;':"

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A bullish divergence of Farce Index 1~lIds suppllrtlo the bullish caus~. NOljn~ a rel~
livdy dctp FI bottom during lhe firsl slab to Ih~ Iol'.'cr ch~nnd and 11 nearly nat Fol'Ct
Irn.lu during Ihe $ond bottom. This showed us lhat thc bears were OUI of Sicam. The
markets run nn a two-party syslcm-bulls and bears. WhCll Ih~ bealS become weak, you
knolY which party is likely 10 win the nexl dection.
TIte roily chUrl confirms the ml'SSagc Oflhc weekly-the slock is in genr to lhe upside.
Noticc the bead.dl divergence Ilia I had pushcd the stack down ill April, followed by lWO
stabs tn the IOlYer channel line in Ma}'. The second bottom 1Y1l.5 below the (irst. but prietS
sta~d bt-lolY Ihatlevd (or only two Illys; when thcr rallk'd above il six days ago, rhe lrap
was shut on the b""r5. That sixth b:lr from the rillhl edge, with the daily Impulse turning
green nnd Ihe weekly still blue, would ha\'c ma~k a per(ecl elliry inlo this long lrude; Mikt
is on lOp of the game wllh lrend dircd;l,>n but a bil behind on hi! timing.
Targets in Flat Markets

It seems to me thai stocks in choppy markets, like the one we
are in, often do not move to the percentage envelope like they
have in the past. Do you use another price objective?
-Trader
I still try to take profits at the channel lines, l:xJt they have to be
recalibrated to track the last two or three months of trading.
-AE
Chapler 6 James (fl.-like) McMahon
..
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This is a very cautious exit-hut then Mike is a very cautious 1ll.1ll; and nobody has ever
BO"e broke taking profits. There are both bullish and bearish signs at the right edge. The
bigge!il negative is that prices had not advanced for the p;lst two days, drawing a shoTler
oor each day. This could mean running into resistance and the end of a .~hort-,errn
uptrend. Of course it could .dso mean a lillh! triangll!'-il continuation pallern within
all uptll'nd. Anolher warning 10 the hulls cumes from the filet Ihal prices arc approadlillg
their upper channel line. They are also starting l(J plough into thl' a~ of resistancc, cstablished during the April lOp.
At the same Lime, Rvt:ral indica.tors give hullish signals. A fC1.:ent pc'Jk nf MACD
Histogram marks Ihc buDs' return to the market. A new pellk of Forcc [ndcx, higher than
the previous one, shows that the bulls arc becoming stronger.
Mike is cautiously moving forward lhrough trcache-rous terr;lin. As he perceptively
lloled in his interview, his career as an enginte'f had trained him 10 look fOf certainty.
While 1C'~rnins to function in this new field, he is CUlling his losses short and nailing
profits before they get away from him.
..
..
~'"
115
116
Entri~s & El>its
RISK CONTROL
Tht:n: are few if any young geniuses in ll'iuling. If you stay in this !laille long enough,
acquiring txpcriencl: and maturity, you will develop an edgt. It is perfectly okay 10 make
mistakes, but nOI okay to rt"peat them. If you follow Ihis rull', you'll keep finding nl'lV mis.
takts to make, but cvcntually you're going to Slart running out of mist3hs and making
money.
El>pericnce confers II big advantagl' in lrading, but to bendit from it you nc:ed 10 sur_
vive the pcriod of early inexperience. Therc is "Illy one way to survive--by using striq
moncy manasemenl. Many tnders in this book slX'ak abnm the vital importance of risk
control. Mike IvlcMahon's unique achievemcnt is his creation of a money management
tool-a Trader's Governor.!
Every trader faces IWO primary dangers in the marktl. First, his account could be
ruintd hy a single disastrous loss; a massive loss can pmh a trader so dcrp into lhe hole
lhat he can never crawl QUI. I COlli such a single ruinous loss a shark bite. ~ct1nd, an
account can be irreparably <l3maged by a series "f piranha bites-a long Siring of losses,
none of which is disastrous but which together bleed the accnunt dry.
I have del'doped two tl1Qn~r m3nagement rulCli 10 pre\'ent such disasters. The 2'11I
au!e limits the risk on ~ny given trade to the maximum of2% of fhe ~ccounl value. For
example, if a (racier with a $100,000 ~ccounl buys a S10 stock and pulS a stop at $9, he is
risking S1 a ~hare. Since the 2% Rlll~ limits his maximum risk '0 $2,000, he is allow~ to
buy nn more lhan 1,000 shares of Ihal slock, ~nd pr~fer.Jhly fewer.
The 6% Rule limit.~ the tutal risk for the account as a I~holc. It states thatlhe tOlal risk
on all OPI'O positions, plus any 105S0 takcn during the current mUllth, may not excetd ~
of your aCCOUllt equity. Say you put on threc trades identic:IIIO lhe onl' above. Your ri.~k oa
tach of thcm may be limited lu 1%, but if all your tr,ldes lurn against Yllu al uncI', you
C'llll losc 6% of your equily. If you wanto;lto put on a fourth trade, the lI'ltI Rule w(luld
have said ~non becuuse you'd already re'lched the maximum ri~k limil for your account as
a whole.
Th(' intricacies of bolh rules arc spcU",d out in COIll.- imo }"/y 1'rIltUI/S RoolII. If )'OIl
trade a single account with just a few trades., you can probably do risk man3gl'ment in ~
simple spre~dsh~d. f..tike McMahon's 3chievement is that his Tr3der's Governor aJluW!
you to trJck and control fish for multiple accounts. multiple positions, and different risk
levels. He links all accounts to II. singlt COnlrolllancl, allowing you to monilor risks, play
various "what if" scenarios, and even measure your risk in nearly real-time, using free
20-minute delayed data. By programming his Trader's Gow:rnor, lIlikc has pcrrormed ~
massive favor for the trading cnmmunity.
'In III.: inlcrnI of full di........,"', lila,.. '" 5'1)" lh.t 1 am p:Ulllrn wilh Mike in Ihh tc"',,,,,,,~. You UII """ II><
eo...rnor m.nual un my lI'.b si,., ~""".dl1..,..(',,",,
p
Ch.pt"" Ii I.",.,. (Mi""l McM.h""
All ,-/MoO froU1 /.ilk:

UKE BALANCING YOUR CHECKBOOK
I devdupl.!"""ioo ror tl1ldin, soon
.f,.. I ..."od. Initially th.",
WU th Il""tiu" of 'lui<k and o:uy profits. .hh<>ugh I k _ 110m

.xptri....u thJl if oomclhinK $f'\U,,,I.<It<>U ~ to be t,ue, it """.lIy
w:o>n'l th., JOOd. Still.l wu <onfKknltl,.I, ""~ on my .lICc...ful

COrl'<' in cnginring on<! with $uffiri<1lt dro,1 un my
1could
1"'''.
rPSI" I",ding.
The m"kcu quickly l.ugh, me: lh.Ll!I<T....,'" ..." Muml by .k"-<:uII.ws .nd m>th.
<fI\,1liClll "'n.intk......not only did lhry nor follow tho ruin., bUllbqo coMl.nlly ch.nt!
IlI<m. Aft..- ""mpl.ting IWO Trade..' Compo. II""",... convinood th.r Ih. key
1fI."""""
.... ,~hing rnyxlf'he ,lore< M', of trading--Mind. M<lhod. nd Monry. I .. t. 8""1 for
nt)'ldf '0 lam o. mud, .. poo.<ible ;n tn. shonal .nlOuot of ti",e, bol,,,,,,,! my under01,,><1'''8 of.1I Ih=. Like the lop of "'lin",," tripod, I wool! <>eh 10 bc ,h. "me k"glh
..thor than 0 comrnno,inn of Iong.OO """,1~ ,h:>, wouldn'l >I:>nd up.
Slna Df. Eldec pl:>e<d ZC~:>I
~mJ>h 11
on flXOrd-kctl'ing. r I>.(.mo clIofl'ly invol.."j In
,Jr..1o>pin& ,h, Tr:odoc'. Otpni..". ."d 'lhod,.'. Govomoc pms""n... Rocord.~;11i fd,
lik.,lIt "''''' nciling p' of ,rodin, (or me. II d~l nu, bqin 10 comp"" '0 ,he ,hrill uf
...I<hln& Ii...
Dr pl.ylng wi,h $Orne new indica,or ,h., would unlock the 5.~lS
,nd.
of ,!Iniall .n.olysi$. h '''''' like ",mparing "'"
1"'"' clItrlbook.
.~d'emonl of
IhDI'I"nz wi,h b.loncing
My &....,.,., bcc,k,hrough in lrodin~ QII\. wMn 1 cc,li.ed ,h., rordkping, .dded

10 ,lit film: 1.1'$, e<>mpl....I,M formulo for IUOl,Ful,l"O<Ilnl\- If'M ,bm: M', d<r.ncd
wh.,llld'llc:d 10 ko.n, ,hen r<alrd-ko<oping dffln.d how I could dn i" II ..... the ~ 10
fully "",."ding .lIlh.cc leg! of ,h. lripud.
Th.c I.., ,hing I wan,ed 10 do "' ,lit .nd of 1M eradi,,! <loy Will '0 """" di.'Y ~n,'Y
loI".ach of my ,~. Ill" w""n I ...... icwc<! my T.>d..'. D~.y, I W: 'm",ed .. how ,1 lr
i< I"""'TOJ"'d ",he good, ,he bod, .nd 'M ugly" of my ps)'thGlogy. Impul,i,.., 11"0<1.. d"ring
nwkct bou "",k 01'1 nc~t '0 o,b Ic.<lel II.., _"' well pl.nncll .r,.. ,h. m.rke, clo!<-.
II becalllO ~"r dOImin. how doocll' I W3> folluwing mr "OIling method. Il'ilh ,h.
di.vy I rould .pa'd""" ,imn wh.n I II<'""UIly .n<! prcm.IU,c1r ai,rd ,rade wi,hou, on
flil oigDllI o. rcc<ivcd POO' r.1I nU' of i'"I''';''''''' ;n>l..d of ""ili"g fl" my pr.nnnl m,ry
'I'
ero_
My advice '0 n~ ":ld<-rs illO kom oil you co" :1001'1 ,h~ 'II..... Mnd do i, br dili_
IIC'ItIy kftpinggoodrOld.. Th.nkl'u ,h., I alii 0 bellO. erode. ,odoy ,h.n I
10>1 reo',
,h." I.m ,oday!
.lId nex, ruc I will be. bell..
,,,,<I,,,
w,.
117
Name:
Lives:
Trades:
How long:
Trading account:
Software:
Gerald Appel
Great Neck, NY
Psychoanalyst, group therapist
Mutual funds, ETFs, and index options
Since 1974
Large (> $lm)
Metastock, CQG, Tradestation,
Rugg & Steele mutua I fund data
Traders' Camps: Taught in two Caribbean
Camps in 2003 and Fiji in 2004
CHAPTER 7
GERALD ApPEL
LOOKING FOR FAVORABLE PROBABILITIES
mark~ts
lh~n f\~O de<:~dl"S
hCO I entered the

more
aso, CerJld Appel W<15
already all iconic Ilgure in the field. An important money manager, thccditor alld
puhlisher of SJ~I""l.I mill Fc"\'{{Jsts newsletter, and the author of s.evmll books, he bc<:amc
famous in the em of CQmput.. ri~ed technical analysis:l.S the inventor uf t-,lACD. His Moving
Avcrilgc CO/lwrgcnccDivcq;l'nce imlicillnT is now included in most software lJilckOlges.

In 1989. when my company began produdng ~me of .helirs[ videotapes for Ifaders,
I invited Appel [0 crealI' a vidro on day-trading. We mel in his pdvm.. office, dominated
by a partner's desk behind which he and his hencllradcr, a very dl."Cisi\'c woman, were trading stock indexes throughout our meetin!:. [ retumed with iI vidro crc\" on a weekend, ~Ild
what [ learned on th~t day had a lasting impact on my own trading.
In 20011 in"ited Appel to our Cari~an Camp QS a guest instructor. He prep.1red {or
it obsessi"ely, produced a h~ndout the si1.e of a book, but still ~ppeared tense during his
first session. Judy, his '''ife of o"er 40 years, his greatest ch"erle~der and ~n in-house critic,
sat in lht: back o{ the room ~I (very presentation and ga"" him feedh.xk on audience r.-actions. As the week I"ent on nnd lerry realized how well he '''as being received, he began
to enjoy himself 1110re. He returned to :lI1uther Caribbean C~mp ~nd ill 2004 flew to our
Pacific Camp in Fiji I"here he f('(eived star treatment from the group of Austr~linlls, New
Zealanders, and Allleri",ans.
After Jerry 3greed to be interviewed for this book, I took ~ lr:lin fmm M:lnh3t1an to
Great Neck, an upscale suburb ~t the edge ufthe city where Jerry has his moner managellient
office. Ahout 20 staff members worked ill a large comfortOlhle space. There were framoo articles by nlld about Ap~1 as well as photos taken by him-Jerry is an intcrnationaUy rWJgnized photographer. His pril'ate uffice had live screens on the desk, but the ruum ' '.15 filled
with African art, ~utographs of prominent people, IIn(1 i1rtif~cts from his 11llluy trllv~k
My flllhtr WilS :l card pl~rer nnd he \~as addicted to the rJcctrack-he died
brokc, with me pilying his rent. He worked as a cab drivcr unlil he was 78, bUI
blew everything all horses. lwill h:lVe no I",rt in gambling, casinos, horses--th~ mItls are against you. In the stock m;uketl find probahilities thnt :lce f:lvorable, but lhe Glsinu lind the racctrack have the odds slack~d against rou.
My mother put rour kilJ~ thruugh coJleSe-ancl after the youngest or liS
graduated, she went to college hersdf, at the ilge of 65. She was an expert typ
119
II
120
En I ries & E.-its
ist, (J legal -~cr tary, but she 10 d tudying. After getting her college degrc"
she weill to graduat school and cpt going until the day sh died:lt i3. She
would come home fTom \ ork, gel' m a hus. and go to college; 'he never complained. ht! was il terrifi dan er. lud)1 and I take d:ln iog les. ons, bu there is
a big differcn e between laking I on llnd being a dancl;r.
1 am th oldest boy iJ1 the rnmily. atld I have an Ider iter. B th my
brother' now wmk for me-on' used ro be a progranuner fo IBM, the other
a middle manager or Lever BI'O J went to BrooklYIl College, ~ fr e ciry
scbool. 11 thi day I \I ry much appr i, Ie that this country let "rOM kid like
me become \ hat he cnn be. I arned a ,late scholnr hip 10 graduate chool,
earned a degr e in social work, trained in p ychoanaJysis, practiced for around
3
ar . I taugbr, wrote ankles, publislwd, nd supervi ed. All the while J
operated tbis busin ss, but l'eptlht' two pretty parate. Ab \11 eight ye::lI' as
[ ph.. , d (lut m)' practice complel ly.
In the mid-1960 I ht: am intcn:steJ in 1 ck tmding and gol inlo the
usual cou 'e of t'vellts. First you trust )1 ur sto kbr ker, then you r~Jljz(' he
doesn't know what's up, th n you 100 [or advisory services. Lhen ou ~il1d they
dun't know what's up, Bnd nil the while yOll In II 10L of ~ ding, nd cdu lIte
yourself in tedmit:lll analysis. There w;.!:; a Il1nga7jnc back in Ihose cL,y.~ C1l1cd
ThL' Cnpitn{is/llepOl'/l!r-a tabloid, very (hlocky, but with big circuJation. nc
day they hud an article on i laJcolm Fo[b~ IJnd I thought it \ a (1 character
assassinati n, I wrote til III that their article waS the financial equivalent nf
S rell' magazine. and if U1C)1 w, nted to see h w to write llrtides, to tell me how
much they were pa},jog. They \ rule back and asked mt: 10 write for them.
I.iller J asked them, "Ho\ would you like to get a finan i~ll ditor?" and Ihl'y
appointed me. For 'I while I was writing five arti I under five names for ever
i sue. They paid me and publIshed my 11m bool . r aI'o wrote rt r lher publications. bUl reaJlyenjoy d wrilin for those guy
tilt' 'n~yer chang d word.
They did not mind me plugging a n wslctLu-so I Sl'lrt"d onc-and then
S meaDe ask d wht:ther I \ ould manage money. I started writing in '71 ,nd
g l my firsl dient in '73. He wo:. with me until he passed ,1\ ay last year, and
!lj' daughter L till with me.
We started at th wmsl time. in the midst of In '73-'71 benr III rkd, hUI
\'1(' mad
money. [ used to do a lot of cOl1vcrtiblerbitrage in tho.-e Yl::ars. 1
would go long II convertible ond and. ell horr shares in proporti 11 t it, and
whichever way Lhey moved, we made m n y. We would pick lip the inlore t
anti play the win'. owadays you do not set! l 0 many 5t ck mnrket d riv:ltives setting oul of \~hack. B fore c mpulers became availabl there were m r
imbalances in the lllllrkel', The game n w is nOl \ hn ir lIsed to be.
\ hen options carne our in 1973, premiums wert;! much higher rh.n [oJay,
and au could sell ve.ry .afe options positions. Gradual1 the advantnge Jisappard as rhe m:lfkel became much more efficiel1l Lhan it \'I, S in those cl:1 S. In
[h beginning you cOlLld bat' 0 80% return i the to k 'lnod still, but now
you llrC! Iud'")' if y It gel 1<1-18" . Historically, when option, are tir r illtrodun'd, thc),'re overprict:d.
Right now there i no 'pedal advant ge to buyer or eUers of options. and
there are I wn opposi.ng view~. ne---Iet' bU)1 them because they ;I re cheap and the
risk is sman. he other-most options ar 'n't exercised, su let' sell them and
ellhe income. 1rhink neither ide is righl I' wong. Buyer will make II lot of
money, few times .cU rs a little mllney many times. but in the end bath \\,jIJ
Chaptcr 7 Gerald Appel
12 I
lose mUlley Iu brokcral,'e houses beclIuse of expenSt'S. 1111~ markets nre wry
efficient tht~ days, and ifthcrc is an I1llv;lnl~ge, all the big houses hav... computers loluuk fur it, Everybody d...als ag3jn~1 Ih" handicap of the el:peru;c.ln a
fisin!; market)'Uu can make a ennsisttm profit by sellill),: Uptill05 hUl at a (OSt
of 1051 opporlUnity, Options arc good fllr Oat ur 310wly 611ing markels.
I was one of the earliest people 10 bq;in timing mutuaJ funds, starting in
1975, I had dOIl~ a lot of r!.'Search inlO liming models and cunduded it '\'as not
difficult to (reate a system to oUIl"'rfnrm Ihe market lind keep risk.~ low-ir you
rould avoid gelling hit by tmding cXpCllseS. Trading COSl$ and bid-alik .pfC".lIJs
were higher in 1975, Sa)')'Ou did 20 tmdes <l year wilh 1% 3verage profit-this
wuuld compound to Iwer 20% I",r )\:3r, but trading expenses \''1'luld llutwlish
Ih... adVllntages. If the costs Wi're 0.5% I"'r tr;lllt!. they would cat up ](1% per )"'".lr.
krry ml.'lIllnll(:d III:tIIW ol'l;lsiunally nnds lIsefnlldc3s In nlhl.'r lll'f'IJIr:;' llooks, aud I asked what
lIlollv3tl:d hllll 10 wrlle. "1l.'ujny srcing m)' II!clure all book J~kl~: ht' 1311ghl~1. ..JI'S ~ good 1\':1)'
10 enhall'e }"uur n'plllalloll, SOlllcllll1t':i yllll make ml1l1(')' on ~ book. Gtl }"our illt'as tllIl Inltl the
world,ltavl' a lillie lJf }'IJllr ImprlUl around. J have url'l'r Insl :lI!)'lhin!l b}" gtvht!l ldra,~ 3way.lf
Pl"tlflle find il uscful.lllllahs lilt' rrt'l good:
-,lE
In lhe mid-'70s th.. funds inlroduced free ll'lcphont' switching. They

wanlcd to keep c1iclIl mOlley in-hilUS<: when the)' went from StOl;kJi to cash, hUI
th ..y cfl.'awd a vehide for my markCl liming Illntlds, FundPack was the first to
allo\v pholle >witching-and I \vas one of th.-ir early itwl'!ilors, applying my
liming mod"ls with no CXpCtt'il!.
The funds had expenses. of cou.,;".l"'l )'UU just got a small share. I found
that the instrumcnlS that reflectctl the entin, m:trk"'t wtre more prcdict:Jhle
than a single stndt. I was timing market funds, b3SiC3lly tmdinll without
CJ[penses, Gradually this became mure I'upular, and by the mid-'9(ls funds
bt:c3me burd('ncd h)' the amount "f activity ~nd started putting up rCi;trietiuns,
The ker strategy of Ill}' firm loday is tilt' !>election of mutual fUllds, illvestinll in the best, and timing ullr investments using Illodds that ue nol as aelive
as in earlier ye~rs hUI Still adivl.'. All investor who only wanlS (ll hur 3nd
hold could do \"el1 with allY number uf mutual fund neIVslelters, such as
""[(Jfl/il/gst,Ir, Wllat we add when he collies 10 u.~ is the ;teliv~ managemenl .mrt
in order to protect his G1pital whtn the market dedinl.'S.
In devdoping SyStl.'lllS I bq:in with n menIal pictun:' of how the markel
mo\'cs, ba~ed on my trading experience of alllltlst 40 y.ars. /I'1OS1 of the time
the markel moves side\\'a)'s, bot occasionally it brl':lk~ out 3nd you can make
mllller on such event~ nnee or twice a year, The idea is ttl creat~ a timing
model that automatically ~hirl~ fmm vperatiog ill a nat markl:lto uperating in
a trending market.
We use a d~tab....se of about 35 years-it is important 10 \l,~ ns long a data
~tfC<,jm as you can. Many beginners look atlhrcc yeus, bill that is not enough.
Ideally. you creatc a model till rhe fin;1 10 yenrs and go forw3rd for Ihe next 10
)'i:ars to leSI it, then Illake adjustlllents and test on th<" next 10 y..ars. ,"uu
inevitably bt-gin hy muking rules to fit the pa)t-n(lw you\'e got to test thelll
going forward. You 0.10 it in segments, you play around wilh il.
WHY WRITE A BOOK?
122
Entril.'s & Exit5

Ninety.five peJ'Cl.'nl nf my Olvn money b with the cHents-what they get
is what [ gel. I trade relatively lillie fur my oIYn aC((llint necause [ do nOI \\I;\nl
to conllict wilh them, to bl.' in a ]K15ition where I am trading against my clients'
holdings. By and large we do the same thing for all dienu at the sallle time. M)'
own accounts simply go where the cHelliS go. W~' trml<, mutual funds on the
dose, ETI's an<I,'plions u5uJ.lly tnwurd5 the do~.
It is one thing to creJ.te a timing mudd, another 10 Jivc with it. Trddl'rs
hal'': to think of what is propcllingthem. The elmer )'nu sit to thl,' scrl,'o:n, Ihl,'
more the issues nf emotion and psydlology rome into the gaml,'. Watching thl.'
5crt.'en creates an urgl.' 10 do something and a sense of e{lOSlalltly miSSl't.l
opportunilil.'s. Actually, yuu wallt to IJ<' much morl' sdo:ctive--find a wa)' to
b3ck off until the conditions you look for lUl,' there.
What is the direction of the significant trend? Is the minor trelld in scar
with it or are )'OU trnding against the tide? What an: the trif)Rers for l,'ntry! Art.'
they in plaec! Arc Ihey confirmed by other sigllals?
A Pl.'rson shuuld hal'l,' a trac.lillg plan-almust any plan \I'ould be better
than none. 0111,' should not trade bccil\lS~ hI,' fl.'els scared tWU)', or feels br:tVl'
today, or missed a move yesterdJ.y. 'Iilke smallloS5es. I'eollie hate to he wrung
and waotto be ri~ht, so the)' c;lsh out too quickly. You need a plan uf of.'l.'ntion: This is what Ull cntry is, this is Whilt an e.,,;i! is, this is whatlells me I am
wrong and lleed 10 get uut quickly. You're not going to be right much mort'
than 50% of thl,' time, but if YOli keep your losses ~maller than yom wins, you'll
coml,' 0111 ahead uf the gaml,'.
Afl~r lerr)' showl.'d fTI<' tl~O r!."Cent trades, I starled gctting ready to le;lVI.'. His wifc \1'3.5
nOI in the office Ihat day. lerry laid m~ she normally dealt with ullthl.' personnel busint'SS,
lawyers, and company finances. HShe runs my lire," he grinned. "But un Wednesdays slit
gOl.'S by tr:,in into the city to t;,k", a foreign policy course at Nl.'W Yurk Univ.::rsity. She'll h~ve
lunch with our daughter, then go to a museulII. I will c.}rne out later for dinl1<,r und thl.'aler and we'll come home together. Judy is a fantastic wife, [ have bel.'n very fortunate. HI,'
\~aJkl.'d m", ov..r to his son's uffice to S.1Y helln. Marvin had l,'ilrncd all MD and a PhD,
becoming board-certified in anesthesiology, but til.' left medicil1e to work with h;~ fathC1.
He has become olle or th~ leading experts on cxchanl;t'-Iraded funds and is w~it;ng a boot
on ETFs.
It hegan 10 rain, and Jerry insisted on givill~ me a ridl.' to lh~ slation. We got into
his high-J,lC'rformancc IlMW, and I was surprised lhat il had :m automatic transmission."1
hlll'l.' a PorKhe at home lmd it's aJKI autulllutic-I always had Slid(shift cars but can't !lr
hothered with them anymore. Also,l reel that a stickshift would be n Hllhility in an enll.'r
geney-it \\,{JUlti slow down my response." He invited ml,' to join him on an outing tlJ~
club, we shook hands, and] mn in thl,' rain frullllhe car to the station.
H
po
Chopier 7 Gerald Appel
IimrII JERRY'S ENTRY

,,~
,,00
..."",,,,
..
,""
..
,
,,~
"
",.
<.
-1.0
-1.5
"
UPjlef pane:
lOWef pane,
"
101741
"
&2
11231
Daily bar c:tlart with a 21-day simpl!! moving llYefBge and:t 4% tradins bMds
12125 MACO Lines
or
In March 20(H there was 3 good confluence

enlry signals. Thco NASDAQ had moved
brlow its 4% bond-ilwi was an eXln:mdy oversold condilion.l\ven in a downtrend, YOli
t:ln make Ifloney buying below this band, but here I'll' had scvcral additional siglluls. I'rices
510p~
accelerating down and entered buck inlo Ihl' band. MACO had bC('n OV('TWld and
lumed up. A nicl: clean downtrend line llCro.'15 MACO peaks I"as being broken. Prin's were
lradng a downward wedge, wilh lines converging.. which wns II bullish sign. 1 bought the
dily MACD turned up and the wedge WIIS being broken to the upside---t'vt'rylhing w;u
cominlliogelher 10 $UPpOrl the buy signaL
"
123
12
Entri
&: Exits
Iiim!IIIII
JERRY'S EXIT
2150
Sl~
~11lo
1950
1800-
1 t:
The r lly was strong ~nough to cnrry to the upper bUIlDd. Sincc my view of the mnrkct illlhe
tiDle ~. basically J eutral.l was nol playing Ihi for a major mav but for II. ing fJ nl the bot-
tom b nd to the top band. I put in my sell order as the market approa hed the lOp band
...
Chi!pt~r
I sold un~ half un the first muve abuvc the band and held the Of her half in case the
rally kept going. The market turned up again bUI MACD began \0 wcaJu:.n, il$ (ast lin"
turned down. and that's when J sold the second half. As it lUrnl out, 1 got the best entry
and the best exit for thul liuie cyck
.'
."
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"
oN
"
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"V .....::----->:i~:...-..;~
..t-
.,.
""
"
"
,'t"',\<,--f',"-=-t .,....
...
MJii~:> ,,:~a."!ur;r~""I!"rz-J"J"w=rl"
TIlerI' W'oI5 an inlt:rl'Siing signal for:J. short SOlIe in April 35 MACll was turning down,
bUll did
not take it. Gcncrnlly, the odds lIf/! not in favor of short sellers be.::ause the mar-
b:l has a long.term upward bias. escept in a bear market. Being IK'utm[ ovcr.lll made me
less enthusiuMic about shorting allhis limt,
Study Time
I am an ophthalmologist, head of the department, and I have
a question-what Is the length of time I would need to master your knowledge?
-Trader
Some people catch on in a couple of years, other people never
do. It takes more time, dedication, or humility than some possess. Your tuition, mostly in lerms of losses, is likely to be as
high as 11 medical school education. In the beginning, trading
is a tremendous time-eater. Today you may be able to come to
your office for a few hours and do competent work. Remember
when you were a resident and the crazy hours you kept? How
much you needed to learn then? That's what you'll need to
replicate in your quest to become a competent trader. -AE
7 Gerald .... pro:!
125
126
Entries & Exits

1"1,
111 \
Ih'
II I
III
[hili
II
il
'
Ii
II II
1111111 II
"-
\.
"-
'I
'"
....
Pulll)ack!l
10 value
\.
IIIIII111
III
"'"
'"
r.::
.:00> . . . . . .
"
"
....... 1'--
Siocks had a great year in 2003. The vicious bear markel that drove prices down from their
1999-2U()() peaks had overshot all reasonnble targel5 and drove many slocks to ridiculously
low levels. In 2003 they started pol'ping up, like so many emply boules pushed under
water lind released. The NASDAQ kept trending higher, with each shallow dip \0 its 13
week liMA. presenting a buying opportunily.
TIre first deep reacdon against this 1I1ltreild hegan in January 2004. driving prien
below value, below Iheir 26week EMA. At the right edge of the chart there are signs that
the decline is comillllio an end: The latest weekly bar Imil dOSt."d ncar the top, leaving wool
looks like a tail poinling do,.,.n; the decline of MA.CD.Histollram is Aamning oul. Still, the
rightlllost bar is red, meaning Ihe Impulse system does not allow us 10 buy-nUl ret. JlIlt
as Jerry said, each trader Ilt:eds a pliln. He has his and I hUI'e mine; some days he is going
10 bto 3he3d, and other ,bys 1 wilL You can work on improving your plan, but you shuuld
never change it in th... middle of Ihe game.
We CQn see on the daily chan that the decline ITom the January pellk is losing steam; the
bears are becoming w~...k...r. Look at the deep bonom uf MACD-Histogram in February
and compare: it with tht: much more shallow bouom in March. The rally in early March
had lifted this indicator above its .:enterline, breaking the back of Ihe bear; the lall'St
decline is going on ont of inertia, with no power behind it. Priers haw: been hUMing the
lower channel line, an underY.llucd arm.
Chi1Il11:r 7 Ge:rald Appel
.-.
127
The ~lT4rp r<1lfy 011 #lc l/fit

iiii'( t1f #Ie:
chart ~holV~
#l.1t #Ie: ck4raet<:r t1f #Ie

..arled ka~ ckallgl:d. WI:
!.::.:: #I.::
....
,,1,
1
rill
--
-.-......
--
~~..,,""'11'
.. "IIlI"-'''''' .'lr,,,,.....ro<"'OII1IIIIJ,,,,. '1IIIII!TI""';;'I~"':':':""'II,II''''II'
-.........:"-
..
--..
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.,
...
---_.
IV~V.~
~
.-....'\
II
II... '11""'.'1111'"." .. .,,,,,......;;;,""1111111''',... ,lllIlIrr(i1""."I~.'IIIl'..,I' .. ,II~
~~
.\. ...
but wry ~y5teM tell! MC

to III<1(t lAilNI tI1c wccl<Jy
lI~pllljc
;topj
b</~
red
before 11fI'( 'fJ IfJ"!1
l'I'J"'f\",:I,H.
II
tall.::!t baT ilt ~<::V'

e:r<1l111ce:I<.J., IIIlticlt !1t00l! a
IJrut level of ColtVlCf((J/1 fit
1f!/s rally. TIJc: FoTe<. Il1dcJ
ka"s sltut up to fflltflJlfdt
IO'cl for #tc '(Ur, sl1olllfll9
1fltrt 1fIc: b/liis 6f'e crrrclftCly
strDIl'. It {s very nlflptfll'
to ;IAIflP r"Ift'tl <1ttd buy,
'''.''
Jerry ruUowcd a Vtlry good entry wilh a brilliant exit, nailing profits on long positions at
the uplICr channclline. His J>l!rformance is a Illo::asure tu walch. and rl.'mind~ me once again
of the imp3C1 his methods had on me a decade and a half ago.
Al the right edge of the charI, MACD-Histosram is about as high as it ever gets in this
markel. wilh the rnrce Indu also al ils peak level. When prices penetrate the upper channclline, everything looks pt'rfecl to amah:urs: ~Wc havt' an upsidr hrr~koUl; let's buy!"
ThaI is prL'<:isdy wh~re a professional goes thr othrr way and scl~ his longs It) some optimistic Inte-comeT.
128
Entries & Exits
I I'
"....
_
~-.~
.,- ' - ' "
., 'II" ,. ,.,,, ... "~lI'r"';t;;".-, ,T-;;........r,11I '111I1111' 'I" "JIIII'jlll"r.':"
'II~':":"
"
II'
'I 'II"""'" II ~ III
o.
'.~-
J'ilAA
~
Iv-
WI";
A ,,11.1\.
/v" 011, IA
V Uvw..;Y='~If'IVW"\JVV"
..... - -...
,,.
~
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~.;
NASDAQ hJd risen 10 3 l1~\Y high Ihc dnYliftcr Jerr}' sold the first hlllfofhis posilion.
There it stJlled, unable to risc above' the' channr! again, going nowhe~ foul. The Impulse
system has turned from green to blue, telli!1g us Ihal the must tlynamic p.art of tile mlly is
ol'er. At the right edge of the chari, lhe Forcc Inde'~ is tracing OUlli bearish divcrgeOO'
warning us lhat the bulls are losing strength,
When Jerry sold Ihe first half of his position, bolh prices and indicalon; sreml,<l ptT.
fectly aligned to the upside; as a true profession;,I, he ~,w troullie while prke.s ,~ell.' still 011
the way up. He .-.old the second half of his position aftcr!he market actcd sloppy for a feJ
days. This is ,"-here a semiprofessional trader should have recognized the rally was in trou
ble. TIle beginners are probably still asleep-I hey will sell their positions which wm
bought n~r the top only after prices fall to the hollom,
0111, of th" key dirrerenc"s b!:twun professionals and amateurs is the speed Wilh
\~hich they recognize market signals and react 10 them, A be-ginner usually waih fora
clear signal to emerge, for a breakoUl 10 fail, for an indicator to turn aruunu. By thl
time a turnaround is clearly confirmed, Lh .... new trend is alrcady underway. A prefl'S
sional sees his plillunS :lIul indicators ~t~rting to come IOBelher ~nd n"5 without waiting
for tOlal clarity. This ~bility to act in an atmosphere of uncertainty is a hnllmark of
professional trader.
Chapter 7 Gerald Appel
/rrtY SI1;IfI~d llis ,'iews: lUsloricaUy. pcclllnllvc lin IJIllcs fnlet' n llrcnlll' or mor ' 10 rrsoll'('. In Jnpan
tlll~ bubbl fIldcd ill 1989., nd Ule ounlry Just storied 10 climb out from undl!t the rubble in
2004-. IllooR the United Statrs two d(!cadcs ancr (Jill 1929 bubble. Gold h:ld Us bubble in Ule
1980s and ilstilJ hm; nol (ecovered. Whnllt'nrls fO 1In[1[1('n nftl'r:1 hllhhh' Is thllt 'ou gl'l:J deGJdl'
of relativel quicL !.Irlow-ilvcrage [l rformntu:r. Bul leecil In mind lhal nvc )fC!.1t. haY Iteml
passed sillee I:he pe:!k of2000, during which the slork markel had 11 net de Ilne. On e lhe mar
keLhit a bottom. it will have an ullwnrd sinn!, like the Olle Ihnf follo\\'('d lite bollom til 1932.
\ rimVI' allcady paid alol of dlles for Iii excesses nrtll 19905.1. c . 10 ~ b IlIg !lout f:llrl)'
\',J1ucd lodny, neither ovc.rvalued nor undcrvlllued. The S&P price/earning ratio was a at Ule
(llll; 161s the historical norm. and now Itis 19. There is room for tJl(' market (0 go up orncwltat
aod down somcwhllt, .uulhing dramafic. Iml il clin fini II lhi' d d Inll -II -lIl'r II, II i
Slnrtetl. 1do lluL S~l' a runaway market, nor do I sec a mUallse. '1l1C Bush dmlnlsLrnUon I. doing
l.vcryUllng III support the nlllrkct-alllbo5c dlnnges In t.he tax codc. reduction orlllX on dlvl
dends, and oOlcr business i:n[enUvcs. frum cbUIJping duwn fOft'Sl IQ c\'cryLhiug cIs '-it i II
very prnbusLnl$s ~ldmilljSLr:ltion. Even Ihe movement 10 Ilrhr:lUze Deial Sccurit -y U II
ima~inc tIll' cxlm demJlld for slocks uuiJI hllo Ulal, a prcdiclable and forced demand. I'eople
will haVI' til 1111 I monr)'lll to bahl1lccd mn tua! ftmds.
TRADE 2
JERRY'S ENTRY
This i a blco\< ITnde; J am nol proud of il. 1 decideLllo shOl'l Ihe markel becau. ~ il lHld
recently broken below ilS supporlleve1.1l had rallied from below the bottom band. above
Ihe movjn~ av nlS ,llnd into the area that used 10 offer support but has now turned into
re Uitance. Allhe first sign thllt clle market W;JS turning down from its resistance, I b ught
PUIS-partly 10 hedge Lh~ fund portfolio and partly as 3 lrade in its own rigbL
WHERE ARE
WE TODAY?
130
Enlries & Exit!
Iim'!!ID
JERRY'S EXIT
".
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,,~
I',
II
Illlj,LJ
'III
n.
...."
.."
."
."
<0
AI Ihe openinlS Ihe neXl day, my trade showed profit ~nd I closed out h~lf of my posilion.
I often do thaI, since illakes the pressure off the rest of the position {see also Chapter 3).
.
'
po
..
Chapler 7 Gerald Appe'l

I had a big problem-no exit plan in case the lr;,dl: \Velll wron~. This po.lilian would
llOnllal1y be stoppet! oul a~ soon as prices made a new recovery high. lots of things W1:TC
1101 in gear, unlike the other tradc. MACD \-'as aetunlly risinll-by ~horling I was fighting
~ rising MACD even though it lwked as thuugh it was weakening-the lina were narrowing-althe mum"n1 "r Ihe trade. The other trade had several factors in its favor, this
0111." only two-its chart pallcrn ;lna the resistance. As soon as Ihat resistance was penetrated. this short should have been immediately nlVe,..,d. Why didn't I do it? I \Val still
committed to a bearish uutlook and instead or seeing what was happening, I l\'a5 thinking
~bout whal should happen. The most you can ever say "boUllhe fUlllre is lhe probability
of ,.,.hat may happen. The bcsltiming models r~rely exceed iI 55% ~ucc~:;.s rate. Ynu have to
respond quickly to contain yuur losses. Yuu have to ask your~clf: "What'~ going to prove me
...rung and how will [ reSlXll1d?~
".
".
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,~
....
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,~
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,~
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, !..ill l!!P. ~W'!m
I had another ChallCe 10 L"fIVer, missed that, sat through another rally, and finallyC\lIcd
it a day-not at lhe worst place but hardly the be~t. What I had here wa~ a trade based
primarily on iI support1rc~istan(cline. Once that line wa~ hroken
and SlOpped being an operative faclor, r should have responded
much faster.
131
132
Enlries & E."iIS

,ft #tc rfglff r;gr; &f #Ie
rx;(;/<}y cltart, /;M11 /IlOVi'"
/fYr;rt,gr;5 6rr; d,,/rltlntj,
cO~flHfntj #tc f(Dtnlmll.
MlfCD-!t15f'o,r6/il klr"'5
/1(;1IY/1y bdow Itt (;.(;f/ltr;r!IJI(;
bllt 15 1ItTr;/Ilprfll'J to r6/"".
tlt",f", t1rt: l/llplliu 5y5R/Il
blllr;. rk{~ color dDe~ Ilot
proJlIb/t 115 frO/ll r;tnrcr
bU'(l'" or 5r:/II",.
Tilr; dally Chart &f fJa5daq.

I~ Jr;f/ld/f/l'J /Ilr'tr;d /Ilt:.1J"'Jr;~.
Tilr;f(; IJ a .srrOf/l') blil/l.sll
dNr;r')r;f/l(;.(; befiv(;(;f/l tnr;
IfIl')1I5t "lId ,Sr;p1"e/llber
bDtl'olMJ. Pur/II') mr; IfU')IlJf
rall'(, tne hlJtO')r"lll rOJe to
ItJ hfg/feJt IrNr;/ III /Ilotmu.
JfIJII"IfIlIJ 5rrel'lgrll. Oil 11Ie
ot11cr h4l1d, 1kr; 1l1l')1l5t
r4/1'( 1'/45 4CCO/llp41t(r;d by"
br04d bc4rlJh dl'lcrgel1cc
of thr; Force /lIdr;~,,, defllIitc JI')I1" rx;....kl1eJJ.
Th(; !/Ilpu/Jr; 5'(51(;111 1w5
Jwtteked froll1 'Jrcr;1l to
bille Itt 1kr; rl'Jlff r;d'Jr: "lid
t1rt:rr;fOf(; liD 1011,cr proJllbltJ 5hortllt'). 'stili, IIIl11l
the 1oIer;/</'( cil"rt neWill, I
flltd lI1yJr;/f J4Ulllflltg Itt
t1ie dllily clwl'f, 'Df/l1'kr; Df/lr;
kdlVi, DI1 #tc D1k<:r ltalld .'
Wfffl tke ~/tJY eJlart IIl1i1elpfulill /Il"I<IIl'J 4 Jrrltte,le
(keWolt, I WDlild be
fijC/I~d
TO Jt,,1ld "'!.Idc.
If 2003 was a s'''ect y"n for stock trad"rs, 2004 was a biner one. There wen:: many sharp
rever~l.~ througholll the year, with few sustainable trend~. The stock mark"t fe-II to a new
low prior to the presidential election. lllaking it re-asonable to expe~t thac lhe brief bull
mlHkcl of 2003 was over and a hear Illarket had hcgun. \\/hen prices rJllied b;Jck lmyards
May 100"'s in S('pt('nlb('r, we (QuId interpret tbat as the firsl pullback within a bear market
prior 10 the ne.~l dvwnkg.
'
..
.,,,,,..
1
1 11"
III
IIII'I!
I'll,,,
., ...-
...
".
. p-"
'0.
Chapt r 7 Gerald Appel
TRADE 2-EXIT ,COMMENT
'I
1
11 111 1
1111"'11'11111111111 "ll'-:-'IUlllllf1I:llt .. /IIlIII~:~: .... ~., ,~ I, .'11I1H1111I 1IJll'.. .l)t1 l1' ,j1l1l11~
~
.....J
~_
-..
_--.
...:
Here, as in the previou trod, J rry lake advantage of a price spurt in his favor and grabs
a quick profit on onc-h:Jr of his p ilion. Much of what profession, Is do deals with limiting ri.l -and taking;1 hunk of profit cndy in the game certainly h Ip set a lrade on
the right track.
I}.
,.
...
11111 11 '11" .,11111 Jljj;";...
I
,,"~:Io
111111111111111 .. 1)1111' ,111l11l.!!1I1J1111111111. ,;':1111,.

"
Thfl s.horr s.I1Du/d have been

clDled Dut' after tHe IflarI<cr rallfed t1blJ'llc trs. July
10111, lcav(119 bel-fll1o( a fallc
dOIllHJMc brcttl<out. The
I""pu/JC sylfcU1 told Ul to
cover aftcr me weel<ly

after
tkc: -short eJiltry, 011 Frfdtty,
fUOlc:o( qrecJiI JOO~
S'pf'U1bcr10,~001.J'rry
If.1Wed dJ1 opportunity tD
'II'"
."'.,
Cover wlffl tI ""in(Witt{ {Oll itl
S,pteu-tber, but wl1,n Ife

fftlfllty bit t11e bullet, ht:
o(fd tr Mtljtcrly, cOr,lcr/~q
0(t/r(I19 tI cc/(ne rttHrer
#tan tHrolllfnq IH 11It: towt:f
/'fear #ic h(gJu,
-~-.-J1'1-"rmu
f1 n beat rnemselvcs ov r th h ad for their mistakes. They may

it reassuring to kn w that even a lOp pro occasionally make Cilirly basi error. J~rry' b ri h
prejudice Icd him to -tay wilh his shOl't unde way too Ion before he cut his los eSt
t34
Eo!I,in&E>cil'
ACT EARLY OR LATE?

Th. m.,kc'1 Wo nOC Ity tn ambulh or .utpri.., ",u-il u<u;jl)' Si.... pl.nly of w~rni"l
btFor< " mn_. but iu .ign>b t<nd to bt ~ui
nd .ubll. Think nf til ign~" a boorbal
<::1,,11.. ,nakoo to II" piICht,. It. don "ot '" hi. nnsen in tl>< ~i, 10 g.1 ,n""lion, bul
mok<s .ign> vi"""" ""Iy I". troiMd <y<. Th i!V'.lo a", defini'.ly th.", amid.t tho ""is<
and tile ,h",,,inR ;n Ih. s,andlt.nds. ond J'U" I..... 10 "'am 10 fNOgniu th<m.
kn'y FnlIowo ch:l,t l'"twm ar.d indicalo, oignili but .t", II.... tr<1lKnOOu. illlui~ .. fffl
fo, th< m..ket.. tld"o"" 1'''' rwh 10 imiclle him, k<q, i" mind 11..1'" .",rttd <KIllik n....
of
li"0,,in8 In broI<rn.nd .dYi$o.... t.lUng load odYic< on<! INing """,<)'.I<rry "'rviwd
tho V of jni~.r igf'l(lfan by quickly cuning h.. tosocs. On< of ,h. key t....m. II< !racll<s
'" is that you mU>l "'''';''' in ard.r 10 5IXI:IOed. PlIrad<>>io.Uy, !trty', obborron o f - .
Ol<m> FTum ''''' <:> h;m><if in k";"R Ir.>d.... Wh."e'o'tr h. " ....
open Io0o on hi. h.nd.. l", knowo !>ow to done. hi. way out nf !rnublo with mi"inul d'm.
'S'" IF "'U I.... nO pion fO'g<uing OUI of lrouble. you h
no bu.lM:$S boing in. rrock
The limplnl way tn kocp oul of major troublo i.lO
SluI)$, You m.y 1'10<., "hud
1101'" ord.r at "p<'Cilk 1 ..,1 wilh your b",k.:,. All.moliwly. you n..y u~. "Klfl ""p"
.nd ",Ir on indical0' s;gn.b 0' ptflOn.1 judgltl<Il1 of tl>< mark<!.. A bq,nner nttds twd
"opSo-.mly JOm.""bcr 001 tn pl.c< Ih.m at the otwiou.I.Y<ls. An .'I"',i",lC<d In>dcr Ii",
icny il mo", tiUly 10 u.. ..,ft <lol)$, He I:now1thOi hi. 1..& ;" in lroohk nd il il timo to
(Ill .nd run without .."ing a lpec;fic ($('1'" 10,..1.
What bolh
md KIf! .. opl h:I... in common". cold de"rminlli<,>n h' CUt Itld ron
if. l...do son all3inSl you. Y<,>u m,ul "" abooluttl)' ...ady to cui yo,", I~ btlore 'btr cut
you,""OU"'_"'''''''' pistol into th.e>r of. bad tr.dnd pull th< tri~r.
While lerry.nd ",h., lLi~hly ""pcri......,.J lrade.. r..n<lion on I oom"""'"t inluili...
kYd,. beginning ttldo,h.. no righttu inluition. WIltn. llrsinn<t go.. ,h. r..ti"g th .
ma,krt is COing ro """" < ""t.in .... y. il ii lUtI.lly n01.n inluitiu" bul "",,,Iy In
InICk of 8"'- o,.n u'll' u, ocL 'The bcSllhing Ihlt ~ hoginn.r wilh -an intuition" OIn du ~
1;" oown ."" .... il until the f~tins 1"..... A bqj,inn~, nM to h.", .Ii.t of <Io,rty dolintd
,;sn3!J .nd. m.tching liSl of ...ooly d.r.ncd acliom. I Klm",im", wy tl> my .lu<knlS:"
beginner h.. no rlghl 10 Intulti"" unl~ b. or."" h.. Ir.. 1ed ."""""fully For 18 mOnlM.
".rd
' 'h ...
CALM, RELAXED, AND

REASONABLY CONFIDENT
t,"'.......
I..... just flnl>i,'" ....d;ng--m.ylH: for Ih. Mlh '" ....I,

Ala'
ummary of OUr mt'tring. II was liul. llrongt, KIUf,lIy. lu ...
mysclf described in I"i"t th.1 way. He ((Iuinly did g<l il ,ight.fIy
11l.n. my though .. btgan 10 w.nd., '0 wh.1 m.lea me tndc wdl wfl<n I am I..ding wdI.
lId 10 what maw mt ttad< ""dly wh.n I'm troding bodly-which don, unf0l1Un3tdy.
hlpl'C" from tlmt to lime.
I' ;" ,imil., '0 pl.yin~ golf 0' tenn;" Wl><n I I''"Y wen .od I..de wdl, I'm pl.ying and
t..ding with a <trt.in oonfidtll<O'-<I<llgrandi",ity-jUSl quiet C<lnfidontt. It i< nlet wl><'I
Chapltr 7 Gc:rald Appc:l

Isuccc:ed, but OK if I don't. I think I'm !loin\; 10 Ut right, bol the stock market iJ; often not
Ihatl,rt(liclable, and I could be right in lll)' technique nnd plnnning and still have a losing
\rade. The 501me way I cau sometimes hit a tennis or \;olf u.111 just a linl" long, with just a
lillie slice. The trick is to stay calm, relax~'d-be:inll rehxed is very big in lennis and golfand re;lsonnbl)' confident. while maintaining realistic soals (I definitely do nOI dri\'(" .100
y;,rds. alld the: harder I try, the worse it sets).
My athletic abilit)', such as it is, sometimn drops rapidly-usually when [ bccome too
CIlnf,denl. or Iry too hard. or sel ullTt:alistic goals, losing my relaxed rhythm. If as a r("suh
of this drop llusc: my confidence and try a series of corrections tll fix thinlSs, they furlher
int~'rferc with tn)' swinS, and J end up becoming lellK and pessimistic. Mauers do [Jot get
fi~ell unlil [ find the: $en.'iI' and time: to back off, go back to basics, and concentrate mor("
0/1 my aniUlcle and feelings th'lll illlything else.
Trading is similar to that. A number ofwinnl.'rs in a row. whi<.:h mllally lakes place in
a nicely lrending orcydical market. can fet:d gr~ed .md perhaps e\leu worse, those illusions
of control, omni.'\Cience, and magic tllat often dri\le traders as much liS the wish 10 support
themselves financially through lrading. Trying to trade every minor swing is like trying 10
~rvc an ace in tennis e"ery lime, often with th~ same poor re:~ult.
Similarly, a fCI" )o~scs. whatever causL'I.1them, call lead to self-doubt, fear of further
Io~. stiffne~, undo uttillli:ll. almo.t paralysis. At such times I can fccl myself entering into
lr:lding positions l~te and 100 ready to d05l: them prl.'maturely. Sometimes 011 a bold lrading day, I may duck OUt of making any decisions al all.
The solulion is Ihe sa1l1e liS in sports. I have to !xlck off, relurn to the basics, think
OlOrc abOlll l11y.~df and less aooutlhe market, Ir)' to gel back inlo a relaxed (r.lme of mind
and ba'k into the game. This is easier said than done: but definitely po:osible.
As I wrile this in carly Mar 200S, the stock market has just completed a string of aboul
ten days in which tl.e dircctinll of prices revcrsed each and c\'cry day-up, dllwn. up.
down, sometimes by a lot, sometimes by a linie. The: bull market thaI started in the fall uf
2002 seems barely alive.
PalteTllS of price movcml.'ot in the slock murkel halle dearly cbanged since the onset
of the great bear marKc:t in March 2000. For example, day-to-day lr~ndinl'!;S-the tenden')' of Ihe siock market to do tomorrow what it doc.~ wdlly-has \anished. The Nasdaq
Composite. Ihe mostlrendy of market indices. h:ls become more likely 10 reverse dirl"Clion
fmm day to day than to continue in the samc direction.
These changes have had a significant impact 011 many stock market timing models.
Time horizons for aClh'e stock traders have shortencd. Wilh price trends vadlbling daily,
online short-term trnding has come In duminate price: movement on many days. With SO
many tr.lcle:rs wl11chinglhe S:lIl1e screens, often the 53llie indicators, and using i:Omput~T$
to enter orders, tile [lace of the sto.:k market has quicke-ned. The- short-te:nn trading g:Ul1i,'
has become both more crowded and more difficuh.
COl1lf11ry to thaI, longc:rte:nn ledll1icul p.allerns appear to havc rcluincd their sisnifil'ance. Time ~yc1e:s, me"sur:\ of market momentum, moving averag~ tradinlS channels.
MACD. nsl. inlerest rdta, r.lrnings, and other influences and I'I!nCl:tions of the: stuck marki:l
f("llIain innuelltial. I have k-drncd to place greater t'mpha"is 011 the re1;\tive strength of markct SCC(01'S, portfolio diversification and b"lan,"" mutual fund and ETF selection-which is,
I trust, a more liIlphistiotw approach to wltat to buy as "'ell as when to buy ann sell.
The tim~ changl:, thc stock market changes, and im'estment slrntellies are: likely to
have to change liS a result. Traders should remain rdaxcd, 1>;\1;1I1~cli. and as objective as
possible. They should :1150 remain flexible. able 10 rccognize chanses in the investment
rnarkCls, and to respond to them. This C;\l1 be quite demanding, but it is also \'Cry stimulating. I think this keeps nle young.
My best wishes to all for good lrnding.
135
.'[
-~
Name:
Lives:
Trades:
How long:
Trading account:
Software:
Traders' Camp:
Michael Brenke
Charlotte, NC
Business owner
Stocks
Since 1995
Small $250k)
MetaStock, eSignal, Quicken
Caribbean Camp in 1998
It.._ _
CHAPTER 8
MICHAEL BRENKE
To
KEEP REPEATING WHAT
I m~t
DID R.JGHT
Michael in on" of our first Caribbean Camps, in 19?8 in the D..Jminican
Republic. We
lo~l
CllIllaCI for 5Cvernl years, but in early 2004 a rt'Ccnt C:Ullp<'t looking
for help wilh Ir.ltling softw:Jrc conntcterl with him. and a f.. w months later both men fie'"
to 11 cnm~rs' meeting in New York. r wa.~ pleased to hear lhal Michael had bcconll' a full.
time trader :;Ind invited him flJT ;'11 interview, He timed his return to NelY York 10 :Il1cnd
another campers' meeting, ,,,,d the n('~t lIlorning we sal dOlvn [olalk aboultraJing.
I was born in Greenville. n:n"~c. hm had my parents Ivaite<\ a few monllls I
would h,we heen born in Germany. 1 visit there oflen and like it then:, but
moving is nut of the question-Kimberly wanlS us to live close 10 her p;lrcnts.
My origin:i1 carter choia' w~s photography-l took pictures ror tht )'c.'nrbooks in high school. bUI eh~11 decided to do something el~. Ilhought musl
photographe.'TS were starving artisls; I wanll-d 10 !let rich quicktr and enjoy
photo!lml,hy as a hobby. That and travd are the IT.u~e fun things for me.
I never \...enl to college-thaI was my choice. I read about thc Hunts of
TC),1Is. how lhey had minimal <:ducation bue were grC'al in b\lsin<:.~s. I had all
ehese idells Oil Itow to make mone.')'. My fint plan was to gd into high-end
hUIl~ 1l:lirlting-1 could sre my~lr hiring a bi~er crew, Geuing into n:al
eseat~UI painting was 100 hard. I movrtl from Asheville, a small sleepy
town, to Charlolll~it hml a big s\..-yline, big dubs. I barlende<l-ic's ,I tlreal job
when you're 21. Ihey play musK you like.', and eVe.'rylme is happy.
Then Ilritd 10 imporl car polishing doth from Germany. It is vcry popular there. you SCC il at eyery !las stalinn, but here iI was a tough Sc.'1I. I ('njuyet!
the creative.' part of busine.~s-takil1g pictures, designing Ihe.' label-bul c..Iid
nOl know marketing. I waS doing business with a few mom-and-pop slores.
bUl did nOI have connections to gel into big stores. To get a product Ollt you
have eo go 10 Ihe major retailers. sudl ::IS Scars, but big buyers do nol buy JUSl
OIK' itC'm from a .~upp1icr. [ rec~ntJy calculaled Ihal J still have.' a I,ZOO-year supply for my (3T in a mini-warehouse.
137
138
Entric.~ &
Exits
Ile~rnf'd a valuable lesson_don't gel into a hu~iness unless you know lhe
industry. In house p~intinB I did my re-senrch and WllS profitable frum day one.
but here I broke all the rule$. Then, afler he;lring 1looutthe damage to new cars
from ;lCid rain and a ne\" paint sealant to prOleCI lhem, J st~rtl'<1 EuroShine. I
thought il was a hig million-dol13r ide;l nnd committed every last penny to iL
I ran the company fnr J J years and gradunted from distributing others' products 10 m~kin8 my own, having my own line of chemicals.
I first he~rd ahoul tr~rtinr: from a fanner girlfriend. She was studying
accounting and asked, ~Why don't you do something willi your 5avings?~ ]
hought LTV at 10, a few weeks laler liold it for 11, ami was hooked. In the mid90s I was running my business but wanted to be in (O!ltrulnf my financial
future. You do not gel thai from business because you have 30 to <\0 bus.'\e!i at
once-your big cuSlomers, suppliers, employee.'i-they all have fingers in your
future, rou depend on them. I I",mled 10 become Illy sole boss and get paid
exactly \"hall was wnrth. One day [spoke abuullroding with Kimberly, lhen
went to take outlhe Irash, and on lhe way b:lck checked the mailbOX-there
was a poslOlrd for rmrUlIgfnf II LiI'Il/g. It all callie logether wilhin the Same 10
minutes-I rt:;llil.ed the lJusiness w~s nol going to give Ille wh~t I wanted, nnd
suddenly Ihere ,,",u; chis pmlc-.ml. A Ctluple of oays laler I ordered the !>.)uk,
and when it arri'll, il was signed. [never had ~ signed book bc.ofore nnd called
a couple of friends.
I made llle ,,<Hne mi~'akes as tvuybody tlse who gelS illlO \Tading with
big dollar signs in frol1\ of my eyes. I had aboul $10.000 snved and though, I
would lurn that into a million in lWO years-t:lke 1U good slocks and wait
for Ihe righl patterns, like printing money with my compUler. And I fel! inlo
:1(Jother beginner tl""Jp--lhinking the more information [ had, Ihc beller
Imdcr I'd become. [subscrilxd to st:I't:ral ellpensiYc fundamental data scrvi(i:S,
a cllat mom, ~nd was running around wilh a Qunlrek FM Tlxelwr wilh a lillie antenna. J spt:nl tuo much on thl' informntion-almost Sl,5110 a yt'~r. as if
more toob would make me a bellt:r trader.
The m~rket has a very quick way of lening you knuw how good or bad
)'ouare.1 had Ihi~ big reali7.otion that took a long lillie Itl gt:l-ifl gOI paid for
P'lpcr-tradillg, I'd be ~ multimillionaire. IIUI \1Iith real money, it was a different slory. It was cas)' on paper, hUI in Ihe Illarkt:ts lhere was Ihis fear of losing
munt:y, pulling the trigger, and greed. My big fear w:u losing money. Mone)' I
saved from my chl'miral business creilted a l"indOl" of oppurlunily. [ hated
that business hy lhen, htU wilh every loss my window closed a lillIe.
This fear of losing money held lilt: back for a lunH tinle. You paper-lrade
live ur six times, have sood II""Jdcs, then slretch the rules and gel in-and that
lrade turns OUI a loser. You go back to paper-Irading and haveliv" or six winne'rs, then back 10 lrading re~1 muney .mil losing. II was an emotionnl roll~r
coaSler-you feel brilliant, tht:n m~ke a bad lrade and feel like such an idiot.
VOltr lllind plays Iricks, Dud you do not sec the warning signs.
Had I NlIlck 10 my own lrading rules, I would have 1ll;ltle money, but
Instead [ slruggbl fur several years. unahle to hreak OUI of the rull was in,like
in th.,t movie GI'OIIudJrQg Day.] \"as slowly he<:llrning more urganized, started
keeping a lug. Whal saved me during Ihaltime was liti<:king lU Ihe 1% Rule[:lClually reduced il to 1%, lInd after a f('I" losses to 0.5%. I was Iming less than
10% a year. I would 11m h~\'e surl'lI'"d without that rule.
..
Chapler II Michal'! BrenkI'

I did not think moch aboul psycholog)', did nOl believe it mallered. I
thoughl thaI )'011 5ee a good chart patlCrn and So. Trading did nol begin mak
ing sense 10 Ine ulllill slarted nOlicing 01)' own 1'1I11crns. Ynu (an know whal
to do---bc an expert on patterns, un designing systenlS-bul be unable to do
,~hal needs 10 be done when it eOllll'S to rCllI mollC)'. I \~ollid never have
belit.'Ved il. Take chemicalS-lhcre i5 a way to bJernJ thelll. and lhat'.~ how yoo
do it-day in. day oot. Or Carpenlry-you would nut .....)', "I know how to build
iI, but let me build it differenlly.~ If yuu do the same with tradine, the results
are aUlomatic. SOllle of Ihe guys I~ho write book:; (';mnut do iI, runnot handle
risks with lheir o"'n money. If)'Ou do not h:lv., the po;ydlOloSiclll slrength 10
Sland the risk, rOll cilnnol lrad".
1was like a hal1l~ler in a wheel and did not bi:gin 10 chan~e until I stliTted
printing every charI and marking it. Atlbe end of til" monlh I'd go hack and
mak" notes on my mislahs. After a while,l'd Sl~ a patlem--the same mislake
over and over, 1 nailed a big piece of foam mailing to lhe Willi imd put the
examples of perfccltradc5lhcre. I would see a paUern on the .;.,.:reen. then look
al my board-is it a de,ln paltern, nnltno many loug lails~ 1 made a Jist of the
most common mistukes ilml pUl lhat (heckli51 next to lhe monitor, alithclIe
lillie rules b:l.""d 011 past mistakes. If everything lined up visu:IlIY:ls wdl :LS on
the checklist, I would place my trade and lhat started to hdp.
Your advice on lht' 2% SOIV':o me. You also talked of creating 11 journal. [
slarted looking al trading morc like a businen.....- wrote a mission slatement
and a husiness platl.ln the beginning, if I wuld not find a p;allern for a while,
I'd look for another pattern, very disofg'1Ilizoo. I slarted writing notes al lhe
end of each day on thl': lr:"les I lllade or missed. Allhe end of each week. r
would write kWhat [ leanted this week,~ It \vas a huge help 10 see p;lltcrllS
in my lrading-what I was doing right and wrong-el;pecial1y after losing on
a day when I should have heen making l11olley.1 ~tarlcd looking at past lrades,
putting alilhe charts ttlgether to see whallr.Idt'S I had made and which lines
1should have madc.] always prim charts of the 5&'" in alllimeframes.1 really
credit my turnaround to lookinl;l at past lr:ld.,s, making nOles, and reviewing
them to come up with rur~ for future trades. Before lhal, [ could be going
long on Ihe dailies wilhout knuwirrg lhat a weeki}' was having:. huS" bearish
di\<cTgcllee.
Everylhingjusl slowly evolved. Lasl year [created Illy own trading manual. I gOllhe idea after hearing Kimlxrly lalk about her job. [n hl'T blink the)'
ha\"C documcms uutlining different procedures for her deparlment. Frt'tl. wilh
whom] (ilme 10 the campers' mccting, is an airline pilOl; he told me they usc
primed checklists in lhe cockpit.
I condellscd my mamml to 10 pagcs.lslartlhe d~}' by lookingallhe 5&1'.
If the market is lit :I1urnirlg poinl, ,~hich is \~here [ like 10 lrade, I Slarl SC-,IIl'
nillg stocks-first wcl.'kly, thcll daily charts. I hal'e ZUO slucks 10 reviell' and I
look to see whether thC'Y arc in sync, tllming in the SlIme diro.:lion. If I lind
something, I go to Ihe page wlt"rl' r have my rules for sl"ing trading. I h~ve
four or five pallerns and ~Yl.'ral rules, such as ~I)o nOl hold a swing trade over
an earnings announcemenl:' I go 10 Yahoo 10 dll'ck eamin~5 daleS. and if it is
within one week, I stai' uNay. Occasionally this rule bili;'!; l\1e :Ind ] miss a good
lradc. but the risk of a huge dflwn\\"~rd gap is not worth it. If cvcryThing passes
Illy ~lXond sheet, I go to the third.
139
1 4()
Entril!.~ &
Exits
Allhc 'leXI pnge I set up money mmlaJ;l."ment. The heller I'm <luing, the
closer 10 the 2% risk I raise my Sill'. If I am 00 a roll, I'll raise it to I or 1.5%,
hut afl<:r lhm: losing Ir"d<:s ill a row, I go back lu 0.5%. I never hit the G%
monlhl)' limit. At lhl." next pnge I SCI up my alerts in MelaSh'Kk. I prefer to
enler orders after the open to avoid gaps. Also, if the hourly charts show a hnge
divergence ligainsl my planned trade, that's ~ no-go.
The mhcr !,;'rl of my manual is for day-tr.lding. I lllw;,ys SIl'Y in sync Ivilll
the S&P. Everything is written out slep by step--hOl... to trJck hourly, 25minule, and 5-minule charts. Alllhe rules are spelled oul-what patterns 10
look for when til", hourly is owrsold or ollerbought, ';;lIl1e fur the 25-minule
and even the 5-minute chart.
MONEY NEVER SLEEPS
Mif/mel S;fJS: Dnrtng the l[;t},.the 11ll11Se rl"t'ls Ilulet and Isul;,tnl. It lscasy to bt.'l'01U1' distraeltd
nrhoret1. l'S1lt.'1i;llly wlirn IlIen.- h;lsn't been a trollll' rur (II'U ur Ihn'l' da)'s. You can stan lI,uchlng
TV or ~'O grab 3 bite tu e;lt and sUlhleuly yuu\'c l1IissetJ ;\ llerl"rct Jlaltem-)'our s;lIldll'lr.h fU'it )1lII
5400.1 nml all tlR'S<: lIule wl'akul'Sscs, altl'lIllon dcncllll1~y[)c, so I plug them up In ~\'flld miss.
ing ;, Ilcrrl'tlly l,'WI1 trJdc. To deal with the Illstroll'tluns UII sluw days, I creatci! an alen [n
MctaStock to remimlll1c whcull is time to ,<>l:all fur Sc!UllS,
1l,'Ot this JlIdlo.\l'3v nrc froJl1lhe lIIovlc \I~II StrcCI: '111e plllUIC r1J111s and (,ulllnn GckJ:o
says, ~Munl'Y nen'r sleeps. pal: Ihls Is your lI'akeup call. gu to work." I 31lached It til Ill)' fh'tminute S& I' marl, allliII llul's nr( at thl' .~1iIr1 uf l'I'l'r)' h;1 r, If IhI' S&P Is at a III min}! polm, I go
III work. otl,crwlsc I Ill"ull' II umll Itl,~Il'S urr a}!alu n\'e IIlI nutes later.
Even with d;ly-trading, I quickly GO through the sl'eets in Illy J1];ln!lalfirst, the list of patlerns. then the SCt:ond page I"ith the ruks, such as "Always
usc limit urders to get in and m:lrket orders to get oUI." These arc :til based on
past Ir;ldes thai went wrong. My gual is to continuously repeal what I did
right, :lnd follow JIll' Jllanuallt:-Jds 10 mure consistent Ir.luing.
No rule C;ln make you plnee the trade; you've got to hal'c the nervI' to pull
the triggcf. If a stock looks almost perfecl but somelhing is missing, ','alk away
and do nnl beat youn;elf up if illurns \Jut 10 halle been ;\ goon trane.
The last sheel in my manual is on how to elOSI' the day: Enter the tr"de
into Quicken, put it in a notebook, and write a little note to finish Ihe pro<:ess,
Once ynu lI"'t into the habit, it is nOl milch work, taking fivc minutC'S a day. I
kick myself that I did not ~Iart doing Ihis fil'C or six )'l!ars ellrli..r, I wuuld have
done much belter, discovercd mistakes earlier.
RighI now the big thing for me is to he consislent. J\'ly manual is now
complele ,,(ler a year. The goal is 10 be as wootll: liS IX'ssiblc, follow thl' mallu,,1 day by day, l!1;1ll3gC the risk, aud he wry consistent. NUl missing anything
is hard--I~hen the market stays choppy lor a few dars, your allenlioll lapses.
Theil thl' market traces a dear pilllern, but if you miss O)1e day in swing trading,
...
CI,apter II Michael Brenkc

the (nlire m"nth can be sho!. The market turns and now you have to chase the
l~nJ-1 never do thaI, it is 100 ris"'-Y.
In the morning I gel my coffC\', lum on m1 1110nitor, gCllhc manual, and
1:" through the steps. [ [reat illike il business-----arrive in the morning, llIm on
Ihe lights, C'Jl1lhe customers. [f om be il very buring rnulinc', ... sp~dally when
\'Olalil;l)' is Vl.'ry Inw, and I C;1n spend days without fililling <Lny setuJls to trade.
Doing both s,,.jng-trading and day-trading keeps me more alert, even thoush
111.11 .,..... v file somt'l;mcs dril'e5 me cra7.f.
In Jay-trading you have In Slay on your IO~5; if you're nul there within
$(Wilds. you'll miss it. I'm Il"Jding for 20-cent moves and risking 10 cents. If
I am 5 cents lalc.lballrade is not worth laking: It is nm worth risking 15 (<,nts
to rnak... 15. Some dill'S are very boring, oth~rs cxdting. When it gets luocxciting, wh~n the henrt starts pumping, something is ,~rong; do not take that
trade, slep outside for;1 bit of fresh nil', I only trade well when' do not feel
exciled, ..1:11ed, or fearful-MMk !)nuslas calls it heing 'in Ihe zonl.'.M
Bn:oming cll:dtnl is usually 11 blld sign.
You'vo:' seen 5111r Trek and know how Vulcans are-logical, no frar, no
i:..xcill'ment, stay very (001, ,er)' calm. lance joined a riay-trading mom al a
brokerage firm, The mnllngcr Jluillted out ,I guy and said. "He is our best
trader and the 1I1I1iesi persnl1ality." Of course rOil want to make manry, bm
you Im'l.' lO treat illike plaring a ,'ideo game for points. lb be successful in
tn"ling, you ha\'e to reprogram yourst"lf-gd rid "f grl.'1..od ;md fe-.Ir', heCflme
as close to a robot as possible. for 1111.' tllis has l'ICl:n the hardest p,lrt of trading: it's very hard tu detacb yourself from the money and think of it as points
in a game.
There is a non.glamorom side to trading-isolation, nn Cflwnrkers, being
CUI oR" fmm (JI'Ople. \'Qu do nut ml.'l.'l new people likc c\leryDod)' elsc, through
school or \~ork. People ,,,ho go to work, pay for dry de:lning their bllsiness
clothes, and sit in traffk rna)' enry you, but you h"Vl' tu 1II:lke:1 rtIl1~h bi&::I.'T
eR"on to gel Olll and aoout. The way you look at mOlley really changcs. You
think of ~I)ending $25,000 to buy a car, but then ask, '1 low much income will
I lose! Is that car I"orth thc los:; of income?"
I am in the housc all I\'rek; all r do is trade, sleep, and exercise. I tll'ed to
get out. I want tu get into r..",::ing-lllt't't peoplt' and do a sport that's fast and
aggressive and may help with trading to some degree. I rna)' tuke photography
c1.uscs. My next step ;s to get m)' life back on track, In have a life; mherwisc
yOll burn out no matter how much )'Ull enjuy lrmling. On Fridays I wonder,
"Bummer, what am 1 going 10 <I" (ur the next two da)'s?" But on Sundar
nishts I fed exc:iled. If I starl dreading J\'londa}'s, I'm in trouble.
Kimbcrly is waiting quietly but llervollsl)'; she is nut wmforlable willi the
risk blltlrusts me and is "1'1')' supportil'e.lr y"ur wif.. is nOl supportive, forget
it. You have )'QUI' nwn demons, and if your wife adds to that, )'OU definitely
Ilced to make sume adjllslmel1t~loplrading or the other way. The pn::.ssure
against you sabotages trading. Having another sourct' of income hdps while
you're learning to \l'ldc. The It'!ls pres.sun: yuu have.lhe murl.' likdy you are to
do well.
141
14-2
Entries 80: l~its
IIimtmIII
MICHAEL'S ENTRY
U~~e, ~Re:
SteOlld pant:
Third pane,
Founll pane:
HOIJrty candlostick chart with two sets of Bollinl1,t< bands using detault seltilll:S
t2Q.MA ...... th 2,0 standard deviation}. LiKht llr~ hourly. dar1l gr~ daily bands.
Red line-20-bar sImple movlnl: i1veraee. AU my MAs a'e simple-aft... miMJ"8
sevetallrades with EMAs, I etperimented With simple MAs and stayed with them.
MACDHlstoifam, 12-26-9
Stochastic. 83-3
Momentum, 20 bars
YHOO
I look for day-trudes by tfllcking the S&P-lirsl the hourly, then the live-minute chart. If
they sive me a signal, [ tossle throutlh my list of 26 day.truding stocks to find the one
whose pattern i~ the dosest to the 5&10' to put on a tflldc.
The hourly S&P l(J()k.s like it is al a turning point. It is oversold, with n douhle bottom
at the lower Bollinger band. Siochastic is o~rsulcl, MACD-Histugram does 110t hal'!' a
perfect positive divergence hut is still diverging a bit. Conclusion-S&P may be nt a tum
ing point.
The five-minute chart shows a double bottom into Ihe lower Bollinl:\er b;lI1d. It is not
a perfect bonom-the closings on the two lows 3re not cX"actly the snme. If the second low
is the same or lower than the first, that divergence is good. Ir it is higher, that could ~
had-Ihe win/loss ratio is ,,01 so good on those trades. I am overlooking that and lelling
it slide because the hourly looks so good.
..
.,
Chapter 8 Michael BrenkI'
143
Stochastic is also oversold

~fld making a higher low
than at thl! previous low,
MACD-Histngram looks like
What I wanllo see In a

diverr.:ellce. When lhe
amount by whidl it clrops
belllW tile
~ero
line is less
than the amount by which

It went above that line. I
consider lhal a strone divergence. Momentum confirms

this divmgencl"----You dQ
not have to squint to see
It. Aller seeing these two
cllarts, I decided tllat the
market was al a turning
point.
My day-trading list has

26 stocks, arranged atpha
m,tically_ Iloggle through
them 10 lind the on\! whr;n;e
pallern is the same as the

S&P. I trade stocks rather
than ETFs, SPY, or DIA
because they are too e~pen
sive and do not run as far
.. ~ stock~ with the ~me
patterns.
IdA(I)(1l.l1i.9,q
1JlTl1'
....... ,
.".
..
LlU 111111,,11111 .
.o.OOZ
That day th~ last s([')ck 011 lhe list was YHOa, and it almost identically matched the
l1larkct, bar by bar. On the five-minote chart prices \~cr(' hitting the 100~cr Bollinger
band, Stoch,,~tic was oversold, MACD had a nice divergence. II ("me up high and ,lid
not even drop bduw its zno line. The muml:'nlLlm continnl'd the bottom, and I entered
a limit order one cellI above the high orlhc last bar, at 34.70. My stop waS aI34.58,
144
Entries & Exits
Iim'!!1IIII
My target was al 35.20,
near the old high; Ihe
hourly MA was just above
Ihat level, a potential resistance area, The stock fluctuated after I entered and my
hearl sladcd beating, but
the stor.k took 011. Alter it
made my normal 20-cenl
run, I deviated from the
plan and sold hall. I did
this even though double
bottoms on hourly charts
lend to produce better runs
than just five-minute
double bottoms.
MICHAEL'S EXIT
]S.l22~
"
Bough1
<:fi
om
I wanted to hold Ihe other

half unlil it hit my target of
35.20. At 35, J0 it stmtlJli
stalling, the next bar could
not go above Ihe previous
bar, and Ihal's Where my
emotions got in.
...
,\IidlMI rXI'/3iIlS: I hal'\' lwn :lcc\JlIuls-:looulllin'Nluar1crs urmy money Isin swing-trading.
tile rt.'S1 in a daytrndlng acwulIl. J kCClI colll]l:lIing tllclr ]lroli la~ilHy-\\wkly PI!. fin. Ill'l P/L I
alsogr.ldc buill atrclllllts. Sily Iheft' wert'
nyC
duuble wps lumy uulvcm: ollrJdl'S. bull SJI" and
\rollkd Duly thrtt-I COlllpare IhI' llumlwf uf st'lllils lhal Ihe market prrscntC'd and Ute number
I tf;llk'd. Maybe I didn't lr.Jtlc !xmusc J gol (0 tJlC WI1lJluicr laic nr \Va.~ a 1l111~ ncn'Ous. a IIltll'
squirrdly. EadIII~llcm has a 11I11111'. Jl1llI II"JIII tu set' whetherI'm dolJlg Ute!lesl jlJb b}' GldJlng
rver}' pailI'm. Smue I1lnlllllS :trr It'rrill!l': II"Jlrll onlY:1 hair or a [hlrd ofpatlcnts. UthCI1.' are 12
pallcms IICT month. then l1Iy lr;Jdrd score should hi' 12. with lhe .~amc winlloss r.llio. Some
Il1lngs could Jlol lit' hd]lI:d-l1 dClltal llllPullltlllClI! ur the DSL was dOIl'Il. lJut thaI's \l'h~t I'd
ronsider; pt'rr~oct munth. TIll' racl lhal I malic a lIl'Ccnl prom Is not enough-I've got tn h~\'c a
pcrfrtt scurr:.
- _ .n
[ was kicking mys.elf for 110t holding the entire

position Ivhich would have made it my best trade in
lIIonths. [ felt n~n'Ous about II rcvcrs.ll, chickenI'd Olll,
and got out of the trade Cllrly at 35.n5. II felt :lll1l...~t lik.,
~ conspiracy of olher traders who w'Jited for me to get
Out-as soon as I solei, they hit my target. Had I held,
it woold hovc becn :l 51,000 liar in le~ than an hour. It
was II bittersweet trade.
..
GRADING MYSELF
145
....
" ,
Mich,,,:!l m~ke5 hi. decisions to ~lIlcr trades un the index chnrts ~mJ implements them in
individuJI siocks. I prefer to take each instrumenl individually-if the index(! give me a
signal, 111 trade ind(x (utures, and if a stock gi~ me a signal, I will lradc that stock.
Ocarly, the markets are interrt'lated, and r have 10 keep an eye nn Ulll: while trading the
other, but ultimately each decision is separate. I am nOI suggesting Ihal my apllTooch is
righl and Michael's is wmng---fnT be it (mm me 10 crilici70C the method of" ,uccr5sJul
trader! Markets are huge and complex, and serious people can appro:lch them from dif
ferent angles.
I wUl follow in Mkhad's footsteps as I revicl" this trade, looking at the indexl.'S ~fore
turning to individml stocks. I ,,,ill use Iht:' 2Sminulc nllll5-minute charts because Ihc Ruk
of Five, first articulalnl in Tnlf1iug fur II Li"illg. Slates lhat charts in multiple tirnt:fromes
should bt' rclated tu elch other by ~ fnctor of r;v~. I think thnt 60-minute lind 5-minult
chnrls ;I~ a link 100 fur apart.
On Ihe 25-minutc charI the Impulse s)'stem;s blue, allowing us to go either long 01
shurt. On the plu., .side:, prices lire in the undervalued zone below lh.. IOI...... r channel line.
They have brokt'll below the luw that occurred Il1rt'C days earlier, lInu their dNlinc appears
to have 51;,lled, reminding us to "buy new 101"5 and Sl.'11 ncw hillh5." There is a bit of a buU
ish divergence in fhe Fon:e Index. On the minus side. blJlh moving aver:tlld ar... slilltTl'lId
ing down. Overal1. this 25-minute chart of the $&1' docs not look terribly exciting, bUI it
is more of a buy than a ~Il.
The 5-minute of the S&P sholfs thai the previous day Wlil a Mtrend d;ly,M ,.,.itll prices
declining all day long in an orderly sH'p-like pattcrn. Tuday prices opened sharply hdow the
I'reviow day's low, shaking out weak holders. llcarscuuld 001 follow lhrough on IhdrS"iJlS,
lind prices had slalled. There is a c1..ar bullish divclgence not only of MACD-Hi~logram bUl
also uf MACD lines, which we sec less Url~!\. The 5-mln\ll~ chart confirms the m~'SSag~ of
po
ChapLer 8 Michael Brenke
.....
,
.....
,"'to
"" ..
1
111111
I,ll
Gap opening
tlhl
I'
"
III
the lS-minute chart-the bears arc exhausted. and in a two-party ~I~m this means that
lilt bulls are r~dy 10 gmb conlrol. The likelihood of;] rally is much greater than the risk of
~ dowmide move. If Olll! is 10 lmde this murkct, one has to look al the lung side.
..
.,.,
'11"1
1'1
'III
'I' "ll I.II

IIII ,
Mich;]r] is quite right in saying that the p.allcrn of this 5-minute chart of YIlOO
limos. pcrflIy tracks the pallern of the S&P. The stalled decline and the hulli.~h diver.
gencfi point oU( that a rally is milch murc likely than a decline. At Llle right edge, the
Impulse syslrm has just shifted from red 10 hIm,. remuving its prohibition against buying
and allOWing us to go long. This final signal lells us there ili nuthing else 10 wait for-if
YOU're bullish, now is the lime to pUl on a trade!
147
148
Entries & Exits
.,
..
-I"
'11"[
f.'i-
"I
tlllllill
----6.
/~
Jlh.lIll1frl"~.7:" ~'lIIh"
",._"
....... ..., ... " . . . "
. 'III1tIlIIlJlIIIIIIIIIIIII'
_.
,,:t ,'" " .. " .. ,,'" "
"-
'~'\~II~I~;,II'\-,!~:
,,,. llIm",,,.. "110
1"'''''1-:'
~
>---~R
"'" _
.... "'" ,,'"
~:t
~"
Michael is a very cautious tmder, steadily grinding nut small profits from his day-trades.
Someone who likes to rude larger swing.~ might havc wanted to hold his positiun a lillie
longer. At the right edge of tht' chart prices arc slarling to Ilccelerate (0 the upside, with
hars becoming longer and risinlSlll a steeper ansle. MACI)-Hislogr.lOl is also rising, confirming the rally. without J singlt' downtick, and it has not yCl become extreme. MAC!)
lint'S have just crossed above zero, still at a rdativdy low level. indicaling plenty of room
overhead. Prices are llOlVhcfC near the overvalued zone althO' upper channcllinc. There is
nothing wrong with taking pmfiLS nn half the positiun, just as Michael did. nor would
tht'rc haY(' ~en anything wrullg with holding a lillie lunger.
"
..
.",
"
'.
-=>
" .. " . ,
"';;
""'
,, "
-.. " " .. " . "'.,,~
14-9
Michael take.~ profits on the SlXond half uf his posilion in anticipatiun of future
\~cakness. mther than any current signs. The l'Jlly is c1e'lrly accelemring, supportC'd by Lhe
indicators. In the longer run, Lhis mIl" (If ascent cannot be sustained, Illn :1$ long as each
new bar is making a new high, MACD-Histl>gnm rising, and the upper challu"llilll' still
a distance away, it is tcmplinH LV hold.
.....,'
..r..
"
""
Micha..1 did whnt every profcssionallikc.~ to do-he took 1I big chunk ouL IIf Ihe middltofan uptrend. He did not try to nail its bOLtOm or iL~ LOp. This chart confirms llie valu..
of channels for setting l;lrgds-pricl'S almost readwd the upp..r channel line during the
rally. Near 'he risht I'dse of the chari, the Impuluo system has gone rcd :1g."1in, following a
broad lOp in MAC[)L1ncs. When the market closes, f... lichaelwill do his h01llewQrk and
prepalC his shoppingl;st for the next day.
Mirlllll'l s~ys: IUI'SiJ<:llal you C:1Il build a quote "1noow.llut dlrf('(Cllt stocks there, and Jusltog
glr throu~h Ihem.l lui UIC IlllwnamllV kt'y and the cb'ln WUll'S up insl:llI11y-1 can lCvlew 20
stocks In I~ than a minute, gn.',u fur daytr.llUni/. M~I,lStoc\; Is mudilletlcr [or lilting ~lorations, looki ng for stocks rollo"ing }"Our own crllrrlll, 11m! they hayc ]./rt'at technical .~ullJlort.
TIlr txploratiOIlS re~tun: in (~Sjgn~l rests an ext... S!:in per lllonlll. In my opInion. a postllon
IflIdcr Is ht11croffwltli Mct~StlJfk ~nd a Ilaytr:lder WIllI eSlgnal. I usc bmh programs.
CHOOSING SOFTWARE
150
Entries & Exits
Iim'!!ID
This daily chari of the S&P
has an addilional blue
line-a lOO-period moYinll
average. It Is a 2Q.period
movinll ave'age lor the next
higher timel,ame mwltiplled
by IIIIe-a 2().week MA
bfOUght over to the daily
~hart. The S&P Is oversold
and pullinll <ltlWn. The
weekly trend IS up, and
daily prices are at the lowe,
Bollinger band, ..... hich is
good. Other good silins are
thai there afB no bearish
divergence5 and Stochastic:
15 oversold.
MICHAEL'S ENTRY
1151.14
1152
11)0.3&
lIZ5.'~
I~I 1119.~~
11-1108.>16
IIIII I
~lTIlTrIT,...u.w.w..u...TnT
,
"11"'.
.1.8B
WlCOtlUU.C)
RSH
I look for turninlll'0ints in position trading as well as in day-trading. I like going lonll:lrl~r
the market had a pretty nasty decline. WIlen the weekly and daily charts form a base, you
llet longer runs.
I prefer catching the market at extremes. Thest: lunlS tend to produce l::ood rUM
which are nl,J1 luo choppy. There are fewer pullbacks because the markel has just rom
plelel! a large pullback and stops arc easier to manage. That's Ihe only time I usc 1M
Fibonacci rclraccmcnts. Once the market runs a little way, I'll see where the 50% retr:tl:t
menl is going to ~ and huld until there or until the daily starlS hewnling a little 10PPY'
The daily chart ufUSH seems pcrfw.looks like it Ixmomcd out II h;15 a double bottom
into me lower Bollinger band and Stochastk is oversold, making a slightly higher low !hall
at the previous bottom. MAeD-Histogram h;15 a very nice divcrgenct'.ll shows it higher high
at the latesl top and a higher low at the latest bottom. Anuther sign ofstrength is Ihat WeDHistogmm rallied hillhl:r above zero than it wellt below the zero line on the lall$t dedine.
J5 1
Chaptl.'r 8 Michal.'! Brtnkc
The
w~~kly
sh~
chart of RSH
an uptrend. the
decline has stopped at the

SO-perlod MA (llrango).
m~f""O
UlllillU'..lI_.-'.1uIlLlI"llu,~,~.~._.'''nT''''''~' uIlLl,,,II....,
'""';;;j;i~=:~~=.::;.;:;~''="=II::;';;;;:==~-="llTlT:::==."
~""9~
_~
~~~'"
Stochastic is oversold. Both

S&P and RSH s/low weekly
uptrends, with RSH being
ovelsold. Price had touched
ttle lower BOllinger band
thai week. but the reaction
ended and the bar closed
abovi! Its 5Q.period MA.
Thef! if! two stight neealiver-the latesl price lOp
is not accompanied by i
hieher MACD lop-thiS is
stightly bearish. Also. it is
nol a very good sienal when
MACDHislogram 15 so tar
beKlw ~ero.
Momenlum does
not confilm
a divergence but Stochaslic

does. Narmally. I like MACD
and Momentum 10 be in
lear: Stol;hastic is my see-
one! choice. When neither

contlrms, that means
UllOA
3Z.U06
...... --
no
lrade. I do nol payatlenlJOn

10 fundamentals In 5wmgtrading because my time
tfame ~ too short, I only
stay away illhe stock was
v~ry recently dowllgradetl
or the earnings report is
due. I JlI~ced an Ofder to
enler one tiCk aboVe the
high of the last dally ba,.
My stop was Just below the
low made one day earlier.
152
F.ntries&
E~it~
IimmD
MICHAEL'S EXIT
.J
[exiled th~d~y ~ftcr I entered. 111(' S&P ~1'1'l:d down Ih~t Jay, and e"ton th"us'> RSH did
not II;IP, it got droggro down--it opened IOlver and 1;,"'1'1 going. 1 was (.~tremcly disappointed b<'C;}UU it had ~ weekly nnd ~ daily pul1ba(kon Bollinger bands, which is norm~nf
a prefly good setup. I had no ~pprchcnsions and was alrnosl 100% sure it would turn out
to be 11 good tmde.
What t lenrncd was th:lllhc broad market definitely has to be behind you. No mnllcr
how good lhe srock lools on weekly ind daily charts, \yh~n lhe market turns it willtlkt
your stock willt it most of the lillle. That's why you aJwnys ha"e to make sure that the S&P
has lhe same basic pattern and is at 11 lurnill!l point.
Chapter 8 Michael IJr ilkc
TRADE 2- NTRY COMMENT
........-
~---
"'''''1111'' .. 11,,, ... "11"11111111..
...,
11111111"
":;11:'::-: '11l1~11II1'"1'11 Htnl7-,..-:--,lJ.!. -"

...~
\.i
II feel awl...."l1rd to look at the doily cha I of the S&P without having .ludied the weeki)'.
rightmost bar is blue. permitting liS to go either long or short. Prices had h t up a
day befoT but the bulk of signals leans 10 the bearish side. There: wa a double top in April
with::l bcarL h divergl.'l1ce of MACO.Histogram; this indicator fell to iI new Iowa few days
earlier, confimling the strength of bears and warning of Furth r trouble ah d. Both mavlngavernges are pointing down, confirming a hort-term downtrend. Force Index 1m h en
drnwing lower botloms at every minor de 'lin in recent weeks, showin that bears ar gelting stronger.
TIle
153
151
Entries & Exits

The Impulse sys;lem gives:m unequivocal Kno~ 10 buyinSI{SH. The rightmost WetkJ
bor is r"d, m"aning Ih"t hoth the fllsl EMA and Ihe MACD-Histogram or" declining; Ih~
downtrend is in 1:~~Jr. This censorship system docs nOI allow us to Trade Inng again5lth
duwntrcnd--only 10 gu shurt or sland aside.
~
Wilh the weekly Impulse being red, there is nnt much point in sTudying the daily
charts. If I w"nllO buy a slock, bill its Impulse.- turns red on the weekly chart, I usually do
not even !:lothcr looking at the d;lily. '''/hen thc weekly say~ 11" 10 going long, it is lime to
look 01 some other stock.
1"
lli l,l ' :
.I, \
III'
Itll:. t
IiiI' ::
..
-~--...~--
~p~'~!IIlIIl" .11.J111lnt, ow...Ai 11111,. -........,.. '" ...... ~111111111'~"~~""1' ':~I!l.::,,~,

_;/
.~.----.--
~,.
,.;.
- . 00
,.
Ti,e daily chort of RSH shows several bullish signs: The downthrusts have bc<:omc
weaker sincc March. MACIJ-Hislogral11 shows a bullish divergence, alld the las:t baT has
lurned bluc. Still, wilh the weekly Impulse being red, these arc no marc Ihan early I~am
ing signs; I am nol allowed 10 buy untillhe wttkly goes otT red.

Michael deserves high praise for running very fast frOm II losing trad". A~ a profwional,
he does nOI Slick around waiting to see what happens next: he cots the loss and 1lI0vcson.
A beginner con(O(I~ 1I bullish s.:enario and winds up helieving in il as if it 1\'el1:' 3 facl. An
cxperienct'd IradeT leSI$ el'ery scenario against r~1ily, and when the two dive'll'" he drop!
the scenario and goes wilh rClllity.
..
Chapter 8 Michael Brenke
..
,.,.
11111
IIIii.I
-,.
1'11Ilia;.
",,".
'THE 2% RULE SAVED ME"

Yuu can come to trading 'IS a wide-eyed amateur and srow into:l. seriou.~ prore:.siona1. This
game enn be won--bul you must survive the inevitable setbacks. You C~1l 1c~rn kwr:11
valuahle lessons from Michael's journey.
Trading CdUCUlinn i~ e.~pcnsiVt". The $3,500 per year Michael used to spend on services, including useless 5uhscril'liuns, '''as small change compared with the tuilinn he paid
in terms of Irading losses. He Tt::l.liutl early on Ihal hi~ capitnl I"as his '''indow uf ~sc:l.pe
and lhal every loss pushed on thot window, dosing it a Iiule tilShler,
Michael says th,11 what saved him during his period of groping in Ih" d:lrk was the disciplinc of the 2% Rule. TIlls Rule, first described in T'rtldi/Jg for 'I Uvil/S: and elaburated in
Qlmt iI/to fd)' TrndillG Room, Slalell lhal a lrader may nol risk more than 2% of his C"Jl'ital
on any givCTl !rade. Of course, you do nOi have 10 risk 2% un every lrade-you're welcome
to risk less. Michael. cautiou.~ and consenlali\'c. risks no more than 0.5% of his capital for
m~ny of his Irades.
Suppose you have a SIOO.ooo account. 1iw percenl of lhat comes to $2,000. Say you
~nt to buy a stuck for S15. wilh a target at $20 and a stOp at $13.50. This slop puts 51.50 at
risk for every stock lhat )'OU buy. Since your maximum pcrlltitl~d risk is $2.01l1l, it is eaSY to
c.akulalc wha! ma.'cimum number uf shares you may buy. Your actual size should be less !han
thl: th~retiClllT1ilxilltum. sinu you'U haW 10 cOver commissions and perhaps even slippage.
Following the 2% Rule protl.'Cts you from disastrous lusses, the shark bilt'S Ihat destroy
most tmding aCCOUnl5- Gree<ly !r'lders want to buy a larsc position and mukc" killing. The
l% Rule saves the trader from ~elting killed.
Another valuable lc5son we C:ln learn frum Michael is that he st:lrtcd becoming a SUl;cessrultrader only after he began keeping good records and rigorously lIn3lyzing them. The
~ Rule ensured his survival. hut his equity continued bouncing up 'l11d down until he
started rnping a Trader's Diary and learning from his mistakes.
...
155
156
Etlln.. &:
Exi,"
llack in ,h. d:I~ whrn I ..... xthdy pr.teliting p',..h;"uy,.
nt'W
/",Iitn, wuuld oa:..
...,.,.J1y <OInt in wilh ....;"us drinkingpruhltm. If!h~ ,..tim' di"'llt't'Od with thai diogn"..
oi<, I wouJd "'" .'!'.. ho, moU' oimf'lt .uG$;"n-kp dr,nking .. you did bd""", bot
writ. down ."Of)' drin!< !hoI ynu lake: md rom< t..:k wttk 10,... No I<li... okolW>lit <wid
. _ kup
be<.a.... i, ,MIt. '00 mudl fun llUl of drinking.A h pMj>It co"", bod. WO<k
b'.t wi!h ........ "'pnS tho,l ....... righl .nd thq wm' .~ody ... work on
problem. """"
tI01.nllnw 1""'1'1<'0 loom from ,hcit .. ~.nd "ar'luming lhri, Ii.... '"","d
In ' ..ding. moo, poopl. rush forw.rd w;lhoUI , ....icwinll whO! t1.. y'.., 00"", '",I!n!rl.
ing from !hoi, nper;.,""'" .nd rq><.ling'hdr miltakos. I .lW>)'IIlIY to my "udents, "I, ~
pnft<:'lly fi"" 'u ,ll.1kt milt.kes; i, is pan.nd p.r! of ,rying new Ihin~ h i. d<finil<l,o
nol nby l<l .. ~n lMm," Mkh.d. ,... ding di.ry Ind otlw. m:ord. IUnwed hinl 10 br....
rIO'"
,lid,
nU' of the vicious eyel. in whith m.ny I,.de.. a.., t...ppcd.

Whrn I fir>' ..lied Mlchod l<l scl>cdule our ,,"crvicw, he IOld "'" h. <Iuubltd ~
would v< cnough ml"ri.l-h...... a "",n of row ~ who .""nl ~, nf hi. 'i"", alon.
ill fmnl of!h.......n. I chuckled whi~ odiling hil """pt.r.on. of tho loogtl' in ,he book_
durinll hi. }'<'or:snr",Iilud. he had ACCUn,ul:ut<l I ",,,~m nfid.... And of mur.., Midlacr,
level uf ,llr mcnl:11toug!>""", ",ok.. him .. and ""',. When l'hink of ,n.:.1 ...... JOinc
"fJ".... 'Y Ii"" minultI, I'd probably PUI I hamill" through my mmpulcr. You h."" In fiod
lyIe lhal woru {O, " ' _ Mlch..llw.
m.
111'1 C-/MtJi{ fro/M MichtJcI:

THE TOUGHEST CHALLENGE
I'VE EVER TAKEN

Th. joumq from m.king It'u, lir.. tr.ldc, knowing nothing """'"
Ih. m..lttl.. 10 !h. poinl whe.. )'0'1.", linally malting comi<uftj
pmlits ;s lonS.nd hard. You ~ from f<ding Iikc a g.ni", <HI< "'ylO
complc1c mo,on th. nul. Each lim.)'Uu ,hink )'Uu'", finally Il"I II .nd the moncy is
.oou! l<l tOIl in, the n""Itt,I.ts you know you
loa.., IonS ... y l<l go.
To im.gine thot ynu can Itlll "ul knowing littl" '" nulhing, buy a row bunko, .11...:1
a ...min.., .lId then I }'<'" n' ,,,,,1>t.. ".d. fnr H.iIlS is lil:t !hinking you c.n buy a ...
of goTf clut.. (w!Ictt you'.., ,"'.." plo}'<'d in you' lif~), I.lee f.w 1<Mo,..... and (omprl' >rith
Tig", Wood, in
Look;ng I>.xk OVl'r tlte lall 10 )"<'IrI,l wl.h I had kepi d"Lailrd
(rom the begin.
nlns .nd ,.kr" the >ncq>1 <>f ,..ding ",yd>ul,,!y mn'c ..,;"uoly. Th." I prob>bly"<lllld
"nl have oxptritnd III ",.ny .Y....ling ond difficult)"<'l.... Hm:'s whal I found III br
.,lO
'l"''''
"''''' IIdpful:
"""n!.
Fi'~t, clnn', 4ui,l"'U' day job "nlnl roo hOI''' .""lI"'r mcalll of 'Upro,l. Howc.... 1onf;
rot' ,hink II i. going to Lakr unlil'r.lding for .1i,1,'8< lripl. IhO! tim<.. If you.rt "ndtfpt<>'
.u.. IO 'urn a profit tn p"y ,he bills.)'Uu <:an kiss Ihal cradin! accnunl soodby<-.
Kerp good rccnnb; don'l wall fur r..., }'<'. ... likt: 1did. I"i", "dllll of .,d, trod<; mart
Ih. rnlry .nd <Xi, points, Abo prinl a dI.l1 of wh.1 Ih" S&P did whil~ mu hold ,hal <tQCI:.
11 cool "'" Jatly 10 'urn thai ","" lI<>en fOllow tho O1.IlIttI,.nd 8Ding Ioog in. d<no'D
m.,Itt, is IIoat<land rU.ky way w m.ke m"ney, Allhnd uf n.;' wed< Of m"nth.'~
dO$( look" IU "'''' 'nul.... Starch fnr any tKUJ'r<fIt mi".u.---.,rlt"" Ir.ld.. iII.Y'"
with ,ho m.rk.,? W".. Ihm .ny djW'i""'CI '",,,\;in8 "IP;n,1 }'Ou!
Chapll:rll Michael Brenke

You need a <:llherent lrading system with rules on I~hell to elller, where to place stops,
when to move thelll 10 rrol~t profits, Dnd when lu exit. Duying XYZ b.:caus.c it bounced
olf this level last month, and ZYX because somronc on TV said it Iyas a buy, is not ;I system. When you make different trades for Ji(("rent reasollS, it is hard to figure uut what
fllu're duing wrong wilh your losers.
Alot of people think Ihat paper trading is a waste uf time, bUI they're 111issinlil its most
important point. Pnpcr trading helps ynu k'arn 10 spot the pattern you plan to traJe 35 it
JC''l:lops. It helps you sa;n confidence in your '~Ylitcm so that you ca'l pull the trigger on
rour $CIUp. FiMlly, il helps you see hOlY your system will perform in differenl market conditionS. If )'Uur win/los! ratio for paper Irudes is 70%, amI real trades only 40%, then the
problem is nOI your system, it is your c~eculilJn.
Wilh no emotions I'.dting in the l>'3.y, paper tr3ding is a great way to monitor a S}'St('l1l, Once yOIl know how it works, you can start with real money, \\'hich will make you
learn about th.. psychulogy of trading. You nc:o::d a system that produces more profiu than
Io5SC5 and the psychok1l'.ical conlrol to implemenl it. You need both-thcre is no way to
tollsistently make money with one lind not the otho,>r.
Start Widing small positions. \\Ihen [ was in a rush to Illpke mone)' and traded too
large, Icould make or lose in three hours what t()(lk me twO weeks of working to save. That
w~s \'el)' intimidating. Smaller positions will r..duce the inevitable burn rate on your
KCount while you're learning. It is a lot easier to hang onto a position and watch it phi)'
ilsdfoot when yuur stop limils the potentiallo.ss to only $150 and not $1,000. After winning a trade or two, increase thl" size b)' a small amount.
Market volatility is conslantly increasing or d"crellsing. Different trading SySll'mS
work better under different market conditions. If your s)'stem no 10ngC'r gives you g,)Od
seIUp!, don't throw it out: wait for conditions to c1mnge back, I've never found 0 pallertl
or method thaI gove me the same number of setups l'I'ery month-snme Inunths an:
~hv:lYs busier than others.
Learning to tra,le for u living is prelly similar 10 startinll yuur own business. If)'Ou
know enough about a husiness and have enough c11l'italto gctthrough the first fC"Irs when
you're not making a profit, you stand a chance of making it. There arc only twn big differClIces. The first is tltat in a business ynur emotions do not play such a big part because the
money is not 1ll:ldc or lost so quickly. The olher is that when business takes a turn for the
worse, you have to get in there and work harder, more hour5, n10ke mor.. s.,les calls to
bring the rel'enoe back up. In trading, there arc tilllt:S when the best thing you can do is
sit on your hands and do nothing. nlis "'~s h~rd for me to accept ~t nut. Wh3t seems like
doing tlolhjng is 3ctually doing solllethin8-pr~serving capital.
Learning how ttl trade wn5 b)' far tlte tought:st chalknge I've t:ver taken on, but 1
touldn't im3gine being happy doing anything else.
157
Kerry Lovvorn
Scottsboro, AL
CEO/business owner
Stocks and futures
Since 1995
Medium ($250k-$lm)
TradeStation for trad ing
TC200S for scanning stocks
Traders' Camps: Caribbean Camp 'n 2004; Advanced
Camp in 2005; Spike group member
Na me:
Lives:
Trades:
How long:
Trading account:
Software:
f
CHAPTER 9
KERRY LOVVORN
A
SQl,JEEZE PLAY
lradcr~
met Kerry in the chatroom for

thulllly linn maintains on the Int("Tm:l.' likl
seYl'ral of his comments, cmailed him. and the rol1(1wing Y~;lr ",e mel f<lce to face
when he came 10 our Traders' Camp In the Caribbean. Kerry seemed allentive but shyuntil one night, during a party al 0 local restollrnnt, he let it slip that he liked singing. We
took the microphone away from the band leader and gave ilto him, lhl.' musicians hillhe
chordo;.-and KCIT)' forgol his lyrics. I leased him afterwards that since there sl:l:m~ tu be
no future for him in Ilmfessiomll singin8' he h:.a no alternative but to learn how to tfade.
We continued 10 c-mail e::Jch other after the C:"I1I'. and when Istarted working on this
book, [ invited Kerry to NC\v York for an interview. He camt with his wife and stayed for
several uays in a nice hOld near Central Park. Manhauan is a great city for walking, but
many oUl-of-lOWller~ feel intimidated by its size and pace. Kerry and Karen, coming for
The firs! time from a small town ill Alabama, walkttl tl'l:TY'~here. On Ihe first tvening Kerry
took Ihe subway to my apartment for a campers' meeting and returned the following
morninll for an interview.
Ever since I was a kid I WOlS fOlscinated with numbers, busilless, bill titi~, W~lI
Strtt!l. I was born in Gary, Indiana; my dad worked in the Sled plant~ \'I1hen J
\,rJS ~ix, a new plant slarted up hack home in AI~bama, and the family returned
south. After working al thaI plant for ,1 while, my dll(J starled his own sleel
fabrication business. We all grew up around the steel industry and worked for
my dad.
In 19116 my dad 501.1 his bllsine~. My ambition was to be a business
owner_l wanted to be independent and so in 19811 I sl"rled TELKO. We fabricate structural stccl for buildings, primarily restaurants and ret~il chains. We
hllve grown o~r the ycal"li and have 35 employl'es-working with Ihtm is
probahly ll,e best pari of the business.
All I knew ,vas the steel busineSli, but I had always dreamed that one of
thl'se yl'ars I'd figure out how to in\'I.'sl. I thoughl yuu buught a stock, held if
for 50 years, and accumulated musive wealth-buy-and-hold was all I klli'w
about. My dreams lVere big, Illy expecl"tions f.1irly eXlreme. In lhe 1'J'X1s I
startl'd 3 retirement accounl antllurned ltJ ad,'lsnrs and brokers who had me
159
160
Entries & E:lils

buy mutual funds. The fir.~1 two fumls 1 bought 110 longer e:dst-and Ihey
fund~ ~rc safe. I put n little money in but got e"en 1('M
b:Jck-and that was in Ihe carly '90s hull nwrket!
When -101k cnme out, we createu u factory plan,und in 19971 bouCht my
first imiividual stock, in a company th'1I I"<IS our Inrgest client at the time. The
s(()(k had already quadrupled, anol hought near the tup.lhen watched it slide
from 43 to 9. When it fell to ':I, I suid, u!t's chf.'ap, let's double up."! actually
Iripled up .. n,1 IV.. lched il go from 9 to 2S.1 had no due what I was doing. Even
though I evelilually made a little monel' nn iI, J wailed frum 1997 10 2000 to
m,lke abotll J I % on this investment. After seUing at 2S, I watched it go up (0
40, ami made ~ cornrnilmenl (0 learn this market came.
During Ihis lime, in 1999, the markel was guing sky-high, ami everyone
you came in contacl with was buying stocks. luckll)" did UOI start in 19'9':1_
I was sliIllOQ strapped 10 the daily business, '"orking IS to 16 hours a day. The
year 1m wa.~ prob.ibly my mOSI siressnlll~r-we went through a tOlal m~n
agell1enl change, a large dienl went bankrupt, I was guing through u massil'e
burnout. If at th~t time ~nyun., 113d offered me one dollar for lhal business, 1
would have taken it-but I Iwuld not just get up anri w~lk away. J h~ve 11
plaqu... in my office aboul quitting-I would not quit, wnuld nul stOp, lJnless
il was on my 01.-0 temu.
II was Ihe worsltirn" in my business life. I wllnted OUlllnri stHtcd questioning whall rt"JlIy wanled to do. Thai led me In Ihe markelS, reading honks,
and one of the first mlJ Tmdingforn I.i"j"g, in :,!UOO. As [ kept reading, my passion grew-I felt as if Ihe markers were Illade for me. llol'ed the id~a thai lhe
markets were what you made of lhem; there was no one else on whom 10
dl'p!'nd. J decidtd to rebuild the business, ereille II m'lIHigernent lcam, aud manage thaI team and company I1nances, while diversifyinc into o!.hcr ventUTes.
As lhe markets slnrtcd selling orf in 2000, ! Slarted monitoring stocks,
...~~ting tn find ~Ine good buys. In August 2000,1 opened mr first o"line
brokerage ~C~OUJlt, '"ithoul realizing Iha.1 lhe educational journey W:lS jillt
about to begin. The markelS will teach rou many things aDaut )'Ourself. J had
read ;1 felv book~ vul did not k!loW anything. [ started with a smaU account,
$2S,(KlO, which in Ihe first ninc months simply bobbed up and down belwt'el\
slightly negalive and break-evl'n. I started fecling more comfortable with
trades-vut aliI knew WilS tr.lding long. There we "'ere in one of the fiercest
bear m~rkets ever, al1<:11 was trying to learn trading on the long side! Shurti'lg
seemed lI\e~n and evil, as if )'OU \\'eT(, ag.1inSI ~mething. After 91l1, my
accoulll was down to aboot Si,OOO. I oid not turn on tht' screen anymorejust waited it QUt. The markd buunced back after 9/11, and as 2001 came 10
an end. I closed all my positions and wipc'd th(' slMe clean, to Slart anew. I
thought a fresh start would be good for the mind.
In 2002 the bear market contiml..d, ;Il1d I '''<IS ~lilltrying 10 make long
trades. stTlIggling 10 break <.'''en. running my accoulll down IS to 30% ~nd
then trying 10 make il back.! start~'11 going to some of the trade shows, tl01 into
your c1l1SS in Vegas. [ was slarting to establish a method for mysdf-using
Force Index, mOIjng lIvernges. [ tried e"t'tything, read a bit of everything, go1\'e
my share of mone)' to Mr. MarkeLl would read about a nell' indicalor, apply
it, ml$!l wilh Ihe :lellings.look for lhe golden secret. Now I laugh when J rhink
I used to believtl thae was a secrello this. You IfKlk at a chart, think uf a dozen
different strategies, and they all contradict une anotlll~r; you du nOI know whal
kt"ep telling you mutual
..
Chapter 9 Kerry LOl'Vorn

to do. By th~t time I \oo'~s le~rning to short ~ little bit-~ good time to do it, just
~s th., be~r mllrkl't w....~ coming to on end!
In 2002 I came duser to break-.,vm, ant! ill the latler put of thal y"ar,
started formul~tins a resul~r method. At that time [ felt [ w~s coming along
with my own ideas 011 whllt to dn, not just wpying ~tJlllenn<: elsc. Ynu orc nut
going to reod a book, opt:n an account, and bt: successful. Tlwt's wh"t everyone wamS-PllY $50 for 3 book, prOSr3m it into a computer, and have it spit
out dollar bills while you .~leeJl' In 2003 I started concentrating nn my (lwn sy,~
tem, and that's when my trading turned around. [ still enjoy re"ding otl1t~r
peopl..'s ideas, going to trade shah'S and conferences, and listening to what
others have to 5<1Y. Now if I henr ~Olllenne :lnd it dnes nul make logicol sense
in the first few minutes, I om nm interested.
I read and he~rd a lot-from f~kes to legitim~te people, then put together
whnl made sense TO me, One of Illy trlVoriTe trodes is when 0 stnck is acting very
quiet, boring, in a tight range, with little activity-I try to pusitinn mysclf in it
because it will often explode. The trick is to figure out which way it \\'ill go.
Riding it for a fel~ days is I'ery gratifying-you take what the market offl'rs and
then go elsewhere 10 look for n similnr setup. The questinn is nnt whnt indic,1tor 10 \I.'iC, what lines to draw. The qllcstion is within mysclf: "\Vhat do I want
to do?" It is like going to collegl': "What do I want to do \\'hl'n I grow up?"
What kinds of trades are )'ou going to make! When you look nT the charts
and do nol know Wh;lt you like, how will yt"Iu recognize the trade whell it ;$
\herd And l~orSI of all-when there is no tmdl', you'll find one. People want
10 makl' mane)' but do not knOI~ what the)' want from Th{" markets. If I am
making ~ lrnde, II'h<11 nm [ nper:ting of it? You 13ke a joh-ynu know what
your W:lgeS :lnd benefits are going to be, whaT you'u going to be paid for that
joL\. Having a profit targel works octter for me, although soml'timrs itlcads to
selling too soon.
I nuw put n signnturt' on the bot 10m "f my e-mails: "It is hard e11llUsl,IO
figure wltal the m:lrkel is goillg to do. If you do not know what you arc going
to do, the gamc is lost." How mony times do )'oU put on a position trade, then
an intradoy signal comes in, and rou sell? I hlld 10 figure out what I wonted to
do, what my personalit)' was. Malching your trading to your personlllity is Ihe
criTical part of success. I like quick trades, and find it difficult to ridl' trades for
a long period of time; I do not have the patil'ncl'. If I get in ot 10 and the stock
runs tn IS, r do not like to ride it down to 11, even though the big tl'l'nd might
slill be up.
People talk of being unemotional, but the morket is a sea of emotion-it
is aU about how you control those emotions. lthought sllccessfulnaders had
good tmdc:s all the time-but in lrulh the main fe~turt'ofa good trader is hO\~
hI' boun.:es b:l.:k fmm his mistakes. just look at a great athlete like Michael
Jordan-how many shots did he miss? How did he bouncc hack from his
errors. f~ilurcs, ond mistakes?
Karen is very supportive of my tr:l<ling as well as my hu.~il1eu. SI... has
always shown 100 pt:rccnt faith in wlt:lt I do. She is also my biggest critic-shl'
does not go along just to be supportive. When you're fIXing to do something
that is not good for you, a trul' fril'nd wi1ltell you. When [ om al my worst,
she is at hl'r best. She has nel"l'r cumplained about my tr,1I1ing. She hos alwoys
lold me, "Set your mind ant! KU fur it, you call do il."
16 j
f.ntri~ &
167.
Exits
Iiiim!Im
KERRY'S ENTRY
111 1111)' .
1
II 11 ....
11 1"'1./
{'IJ:IO:J:'"
lilill T.
II ~'''I'I'II.l'flTIIIIII 1 . IHllc~ 'J.""JuJ;.--II
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II
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,,.
".
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/--=.
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Upper pane:
Impulse sysTem (1\-25-8 with 12-EMA). Dotted linn-12.....eek EMA..

solid Une-26-week MA.
U5lI dunl MACD on weeldy chans-two ll<lnes wilh dilflluml M!ttilllls;
midpant 11258, bottom 19-398. Green MACO licks up, '1'111' II
lids down.
,I
lAYN
[callthi, a ~squceze play." We've 1:01 a slock in an uptrend.llonk for a pullback to the fast
EMA, accompanied hy shrink'llle-smaller and smaller ran1:e5 during the puUb<lck,whilc
the Impulse system docs not turn red, stays blue during the puUb;ack. I look for all entry
when the ranges arc the smallcst sinn' lhe pullback began. If the ranges expalld, I become
less interested because the risk becomes higher. This is a very low-risk enlry-}'Ou ha\'t to
get in before the stoek m...ves-you must anticipatc bUlthe risk i.~ minimal.
Thc seTUp involves a reduction in range anc.lllrice resting on support-Ilc:arncd this
frum David Weis in your camp. What is the support level during this pullback? Tht low~st
low wps !3.53--ifthal1:cts bruken,l definitely wnnt to be out of this tl'ildc. f\ b~nk would
teU me thaI this pullback cuuld develop into a tum, nnd 1do nul want those lows violated.
The paltern at lhe right edge is like a coiled sprillll-the Slock is in a tight coil ready
to explude and slrike. I check TO see Ihnl there are no m.1jor divergences of MACD and lhen
go to the d.1ily charts to look fur all entry. VoIhat I want out of this S4:11lp is a very low-risk
trade wilh le5.~ than a dullar stop. [I docs not ahw)'S work; half or breakouts fail.
Chapter 9 Kerry Lovvorn
~J
"r~'I'~I"""""";;'lr
, .
~~Iqii~~j:..:-,,' TI ... ]~.~l~!.l.~~.::.r.~tl.I!.1 1.!"!.J:!'!:i;.I:,:~nr.:.c::(jl:':
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Middlt pan"
Lower pane,
,~oo
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UPPII pallll:
lJGI
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J
,!
oJ
It
Impulse sysl~m (1125-8 WIth 111lay EMAI. Dolled line-9~y EMA. solid line22-day EMA. Grey envelope's" 2.7 slandllrl.l tlt!vialioo channel based on a 22day
EMA, I lurn Dollinger bands on and off to sell how light tho,: I;()iling i$-how wide ....e
BolI!ng bands in comparison La prIce bars.
MACO Unes.md HislOl'""m 11-258
Volume bars lind Force In~~. Volume bars lIl"e grllen if the stock closed up tor th~
day. red if clase<l down. blue If unchanged, Forte Indell wilh IIday EMA lind a zero
line. Purple IIne-63day EMA of volume because thllfll are 63 Iradinil days in a
quarter. and bie funds and brllke.age.:'l dr:al on a quar1e,ly basis.
[ have been wailing for an entry, and Ih", pickup in volume alerls me. AI rhe right edge
\'Olume is abovt' its 6l.r1ny average-il has started picking up in rhe paSI few days. The prke
barely moves Qut of Ihe Bollinger band ranse. With all this vulume, prices do not move, and
so Mn wilh the day dosing down, it appe~~ it was nut sell~r~ who were in charg~, but buytT$, who \'1('1"(' accumulating. The next day I pUI in my buy order. I like to buy atmr bonom of
the range-I do not like buying breakouts, when rhe mov~ is already on. 13.85 and Il.lIB
~re the latal claily lows. I w::Inllo buy dose to that mnlll'. but you n~ver know whether you
will get that entry. It is im~rlant ro grl on Ihe Irain bt:fore it leaves Ihe slation.
J entef 011 May 20 at 14.06, placing u stop using Ihe daily charI. The lowest low Juring
Ihis consolidation period was 13.53-and I like 10 PUI my slop aboul 11 cents lower. I use
this number 10 keep me uul of the noise range. I do not like ev~n numbers-dolJar, 50
IllS, 10 cents. I like 10 put my slop a dime bdow the [ow, and so I add a penny, make
it II cents. If thaI low breaks, it will be: a sign of trouble. I Iry to avoid placing a Slop
where everyone else's stops are going to be.
[ look for a .~quee7.e on Bollinger bands, /lnd then take them out and go to a regular channel. The targel for this trade is al the lup uf the channel. When the bands
squeeze, this baby is ready to C'xplode. Which way? We established rhat on the weekly
chart where we saw an orderly pullback within an uplrend. Meanwhile mustlraders losl
interest in Ihis stQCk-it is lying nat.
163
Entries & E.xit
]
110J
.'
"
--~
.....,.,-
I... " ,... -. --... "
111111,,11111,...,,., "II"
... , ",,, 1111"" 1111111111 ,:.. ,,'"
"
We're in-an e. plosive v lume come in the next day, on May 21. 1 decide to hold il [)Ver
Ih \ eekend. The next trading day, lay 2<1, we ee a continuation 0 enormous v lume,
price lose near the high of the day, hiLling the top of their channel. hal is my target, bUI
I do not want to aUlom;lIically sell, only raise m lop a1 lhis point at ICGst to break eVl?n.
With Sli h :111 uplo ive move, a stop below this day' 1m would protect 0 small profit The
trade I a fre ride from here. This type of mo e can last for severnl da)'.
Th n. t day, May 25, w e eed the top of the eh nnd. and on lhe 26th the entire bar
is au[ of the channel, but prices lIon lower volume-and lhat' when J eU. A narrow
range out <J dHlnllel is a typicaJ sign of weakness. Ther i a sa ring: "Sell when you can,
not when you have to." I decide I 10 e and see ho\ the uJJback ael . And thai's the
be uty of the EMA~ften you see a hreakout, then a pullback 10 the EMA, and th 0 the
or
mov continues.
TRADE SUMMARY
long LAYN
Bought 5/2012004 @ $14.06
Sold 5/26/2004 @ $16.29
. Profit =$2.23 per share
! had a setup, manll~ed the trade, aimed at the lop of the channel.
and got lliittle extra.! risked 50 cents and got '10 d lI11r outofil. Thai
was n 4:1 rewnrd-to-risk ratio. ! elln be wrong three limes wirh a lr.1de
like this. win once, and slill maintain a small profit. This was not the
home run th t many beginners look for-butyou can hit, kltmoTe sin
l'.les and doub! s. I u.'ieclto fall into the trap of thinking, "Let me ee hoW
filr thiscan go." That's where you start lurnir.g wInners into 10 crS. fell'
{IllY: laler this stock WllS back dOWI1 al 13 dollars.
..
..
Chapler 9

1111
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Th~rc aTC many ways to analyze the markets and 10 ITilde them. Only a beginner can ~
arrosant cnllullh tn say that his method is good and others' methods lITC bad. A seasoned
pro surely has lived through enough times when his opinion ,vas proven wrong. This is
why experienced tradeTS arc broad-minded and re.~pettful of Olher,;' opinions.
r would fall ;,sleep walc!linll a tight lrouling range bUI have no argumcn15 ugains!
Kerry's al'prO:lch. His logic is "leganl and consistent, and his method works for him. On
my weckly chart, the Impulse system offers no objections 10 bUying hen'. The wee-kly bars
arc blue, allowing us to go Jong or short. Prices are in "0 U('l!"toO bUI had l,ulle<:llmck l()
value in r~CC:nI weeks. MACD-Histogr:lln is 31 a low level, consistent with price boUom~.
What Is
"Tick"?
You suggested placing an ordE!r onE! tick abOVE! or bt!low thE!

rE!cenl extreme priCE!. What does ~one tick" mean? -Trader
A tick is the smallest price change allowed in any given market. When you trade U.S. stocks, a tick is usually 1 cent. When
you trade grains, it is \Ii of a cent because those markets still
-A
trade in eighths, and so on for any market.
K~rry
Lovvorn
165
166
Entries &. Exits
-!o.
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.l.~
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~Likc watching pain! dry"-(or almost two months the awragc height of it daily ~r
rem:lined under 20 cents, with the total range (or the entire period undcr a dollar. It takes
:t highly disciplined and fucusetl individual to folluw this pamrn day in and da)' Qut, scan.
ning for signs of an upcoming re\'ersal.
The Impulsc system is fairly non-contributory during such tight ranges-up one day,
down the rn:xl. MACD.Histogram is snaking i1round its zern line and is not reall)' ustful
here because it tends to give beller messages when it is far away from its centcrline. Only
Force Index has slarted to show some signs of life in recent da)'s. AI the right edge of 1M
charllhe Impulse system is gn-en, permitting us 10 huy.
,i'
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"'~ ' 11'"'l~"'1I""" . .-",V .
r ,
..
Chapter') Kerry Lovvorn

Kerry's pn!ience h:l~ Imid on: The stock has t'xploded from its chnnnl'l, (CI... ering u greJler
diswncc in three days than it had in the previous three munths. Kerry's system obviously
works for him. AI the righl edge "f the chart, all indicators arc in gear, the Impulse is green,
Ih~ rubber-band ovcrext...nded 10 the upside. You could wail tn see how far the move will
o;3rry before laking profits or you could say that the picture luoks just perf...ct. If it cannot
be imprO,ed, th(' stock should bt" sold, which is what Kerry did.
Notice Kerry'5 calm tOIiC as he gets out of this tradc. There is no gloating or heating his
chest. Nor is tht"re any complaining abOlltlhe money left on the table because: uf selling lOa
soon. The lIlan has his systl'm, follo\\'s ii, and calmly al:ccpls the consequences ofhis netions.
Part-time
I losl about $25K out of $50K capital in day-trading back in

1999. The trading house Insisted we all actively trade, and I
think I was a victim of overtrading without having a plan or system. ( now earn a good living, but eventually want to get back
into trading. Do you feel there is any case for part-time trading
-Trader
smaller amounts while having a flexible career?
I think part-lime trading is a very viable option-if you swinglrade rather than day-trade. Choose a few stocks that swing
well and track Ihem day in and day out, trying to profit from
moves that last several days. You can do that without sitting
in front of the screen all day.
-AE
A Tiny Account
t am a college student, planning 10 invest my saved money in

the stock market. At this point I have saved $8,000. Could
you tell me what is an adequate amount of money with which
-Trader
to start trading?
First of all, congratulations on being a very frugai student!
$8,000 is a goocl amount to invest, bul not enough to trade.
The reason is transaction costs. Let's say you pay $20 commission to buy or sell. A single roundtrip will cost you $40,0(
M% of your account. If you trade once a week, by the end of the
year commissions will eat up 25% of your accOlJnt, creating an
insurmountable barrier to Winning. Invest your money fO( the
longer term and continue to accumulate capital and study the
markets. Also, at your age, you may want to look for a trader
trainee position and learn on someone else's dime.
-AE
J 67
168
Entries &; E"its
Iim'!!ID
KERRY'S ENTRY
or 11111~\,Jlll
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if 1"I.I.'r.'/
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Saarish crossover
~ _..
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----:. ,1111
..
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111111111111111 1111111111
.,:101 ....
~_;:.<I
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m
:~l
KMRT
Too many peopl~ look at a divergence and think aUlomatically Ihal it will re\'e~ the
trcnd-bul it oftell does not. Here on the weekly chari yuu 5t'e 11mt Ihe hack of the bull W3S
broken in August. KMRT h~s been in ~ strong uptrend. ~nd afler thai break, during the
week of SepTember 17, it renched a new high, with very little strength in MACD. It was a
rn:L~sive heari~h divergence. The ImpulK system remained green, so no shorting w~~
allowed the following week, but the stock C3ught my allention. During the '>'eek of
Sepl('mber 24 The Impulse Turned blue as MACD-Hislogranl ticked dOI>,n. Even MACD
Lines showed a lillk neg;Jlive divergence-I fdt this stock was getting ready to roll over.
Give me this setup a hundred times. and I I>'ill take it a hundred times. That is une
major difference between mature traders and beginners-we take nur setups evcr}' time.
As I've heard Alex sa}', ~Jf you do nut take this trade, what arc you going to t~kd"
...
...
Chapler 9 Kerry Lovvorn
>"
1111 ,1 "
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Not only is there a weekly divergence, there is also a daily divergence, and not only
MACD-Hisrogram blll also MACD Lines! Look at thl.' Force Index dlvrrgcocc-all that
Vlliume in Augusl could nOI lll"h KMRT!'Io up-it just wenl n,1I arl/:r that. A ~tuck thai
cannot go up i.just waiting to jump off a t:>11 buildillll_1 had Urn", coming nUl or Illy ears
on this trade, and am glad I did not bet the farm on this one.
I usc the same parameters on my weekly and dally charts. I've sioPllCd trying
(0 ch;Jngc lhcm---evcry UrnI'I try to do Il, I get myself In trouble. Everybody is 51) Lillo SCi
Kmy says:
tings, a~kjnJ( J'Uli what yOltni arc. TIle llucstiull is /lui whallhcy aIT but what l.hcy arc telling
yOll. EM,\13 alllllli\lA-ll :m' 1101 goillg lu tell you very tlirrert'111 things.l usc rl:lrarnelm; I've
btcnme comfortable wllll. and c113Hgullll!Jcm has IIcver dOHe l11e any good. All UlOse c113uges III
jlmmclm. simply gil'c rOll fasfcr or sloll'cr sigoals. Fastcr sclllngs ,!li\'c rOll more false signals.
Siown srflings make lUll gil'c up mull' lime b<'callSC uf sloll'er signals.
INDICATOR
PARAMETERS
169
170
Emries&Exits
IIImmD
KERRY'S EXIT
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II
Even the best selups sontClimes fai1. I wallt 10 prolect myself if my short bT\';lk$ abo\'t' its
highs. On the day I entered, KMRT reached a new high of92.80.I shorled because it closed
down and failed to hold its oc\'" high. The next day it closed up a bit-it made a nel'" daily
10\'" hUI dosed near the top of its range, MACD ticked oock up, turning Ihe <bUy Impulse
system back 10 green. II had not ",iul3too Ihe Slap, ;Iud I was slill in the tr.KIe, bUll did nOI
like that action. That stock should have gone down! The next day it closed up again-two
days of higher closes, and Ihe Impulse system stayed gr~n. The next day, October 27, it hit
Ihe high uf 93.1 K. I covered inlraday, sooner than planned beaJuse of the price action.
My point is: You have a SCtup, and if a trade is not acting as you had e:cpted, you'rt
bener off on the sidelincs. It's like driving-someone givcs you dirc<:tions to get soml'where, and as YOli drivt, you realizt something seems wrong; the signposts in the dirte
tions are not there:. Then it is lime to stop and ask direclions again, rather th;m just blindly
follow something that's not working. ntis tr~"e mighl have been my
best Irndc of the year in terms of risk managemtnl. Iiosl money, but I
avoided being impaled on a spike which ran all the way up to 117.
[ prinled 0111 Ihese charls-Lhey went into my record-bonk as 1
reminder why iI is so important to follow your pl;ln ;lnd know ",hUI you
are going to do.
hilLCf'9
'A
y c-
'
Y l.o 'on
172
Entries & Exils
,"
I'
"
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The daily chart fully cunfinns the message of lhe weekly. The uptrend is becoming I~s
and less aellle. while MACDHislogram exhibils greal Ivcakness; its latest rally, peaking
jusl one day berun: the righl.most bilr. barely poked its hcadllbuve l.ero. MACD lines arc
dearly diverj;ing from Ihe oplreml and headed lown. 'Ii,e force Index has not shown any
serious bullish aelion in more than a monlh. The uptrend appears weak, ri.~ing only OUI of
inertia. The righl-mu~t bar has turnClI blue; Ihe Impulsc Syslem pt"rmils .~horting.
I ....
.~--
--------........
--II
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...""..",I1II,",..."'UI:iiiilllf"""tl,,"111 111"1"""'"'''' ....11111IF'1tI1I1J',IIIII1IIi':.:"h"IIlI,...,,,... ''''''11''-
....y ...
"I.: '1-l... " L ,
po
(.old
d~il'li". iJ;
h.lh"a,k of I .""... full'rG. Kerry h.d lhonrd whIt lo<>kod lil<o In
jd<>1 o<l~r-"Ul I. soon., rho r"'M .,.Nod ",ins .gain" him. h. bang! oul with ""
lfVd...... llt po;nt. nUI,th. >l""k .,.."lu.l1y " .."I up 10 1117, .nd hId he hunS around
fit.< >II .m."u'. "" would ha", .ndod up in hc'j>$ of troublt. Krrry il quid to say
h.
"",,;"uol to lil:< Ihi,l<'Iup and willrrad.;t Ipin whe" h. SftS it in the furu....
Ahighly import.nt '1".111}' Oflh. >Inck m.rket is INII ""'" pnxnoc> in il.rc prob>.
th.,
bilitti< t.me. Iho" <k1.rm;,,;',Oc. In I dcle""i"is,;, pnxm, , Ipific octinn I...dl to
..,.afic KI>"ql><nct: I'u$lI on ,he cIoor. it will 01"'". In I pmb.bm.tic p _ a n oulmmt

,lull"'" 5ttk 15 likely blu no, SU... nteed: Slick fUU' hond in. d.......cr wilh ,I""" whi,e
IO'b .nd It""" bl..k SO<~)'Qu ..., mot< likoly to pullout. bl"k JO<k, bUllhis Oulrom.
iI by "" m..... anain.
Arl"" tir,ht rd~ of th< chart, lh" <bily lmpubc h.. tumed green. II looks Ii"" we'",
dt;llitJa with"'" Hnund "f ,"" ~ m.. r.ign;(] d<:K,i\>td in T"'di/lll /Dr n V.i""
II'l><n' power(ul diW1"!l"l\tt.-.fuoM 10 work. ill~ll.I)'Du Ih>l somtlhing is Nnd.mtllully
dunging blllo.... Ih< ",rf",. of Ih. "'Uk.,. In lh< fo"",u, '10'1' by Sir Anhur Conon Duyk,
lht du. 10 solving a nnmkr ... ",.. from Ih< fOOl rhol'h< r.mily oog did IMlI b.u\; whil. iho
~nl mmnlilted. TIu., w.. ign llul Ih. criminal ....... f.amuy mtmbc.,
bloWlIlO tho dllg-tM .b>on,~ or ignol go"" Ih~ d.,,,,,;"" hi' oign.1. Wh.n lhe mar"'"
0001 not do .... hOl SlfOng I",hnial,ignob ...y it is going 10 do, il is ...... 'ning Ih.ll....., is
Jik,tly 10 be a struns m",,", in 11\,0 mnlr.ry di'eclion.
mlll<' .....
SELF-IMPOSED LIMITATIONS
101'", IOriou, trad.... Iu"". h.ndful of poll.rn.lh., like
100
[(J m,d~. Tho "'~'~I is

hu~
m.ny oigull III
.ve.y mov. SlK'CCU is mm.r of ..pting disci
pline.OO limit.,ion.. You m:ay not fod like running in Ih, morning. b.ll still pul on )'Dur
joging shoosond hud CuI inlo 11>0 drinlo. You moy $0'0 a nk. pio:<~ or ... 1<0 but d.dd, Iu
l'"II il up bau.. of ynur ,.,Iin d<'Cision go,di,,\( _igh! co",rol A ''''dor loob .,.
tl>lflret wh.... 'h<>w.ands of ,'ocks ,is< .nd f.U, lu,lUns .m3l.u inlO Ih.ir I...ndl... ettop
and f.all< b=l<oul.. Am.tculi jump in, dr~.ming of f.t p",lil" A prof...ion.1 docs noI
dwt......-y pie of
he knows lhol only. r.... pon<m' off.. him on I~, and h, do<s
and lloshos
If""
!<In
,m
tIOIlr.I<k unlns he .... IMm.

Who, I"n..... In lrade r. the: pcnon:ol choi of every trodn-. You m.y buy and ..u on
the boas of fundamental de~mcms. l<'Chnictl sig/"'ts. or n..... but in ony.itu.,inn ynu
""'" 10 Slid to your method Am.,eull .... ~"'Iy inn"""ud by oth'r p>pl<-!.h<y he...
p>d ""'ri<s and jump into lroom fQl" ",hkh 11le)' .... lolally unprepared. ProI......nol.l. ""'"
ifihoy bc;u an inl"<>ling ti... t~ it ..,d ....., their own S)'SIcm Ie make. 'guJn~'dtcision.
Ka-ry '11<>w<:d WI!Wbably h... f<"W mo bUI th~ lorol numbcr or p."..n. L<d by ..rinUltr2don ttllds '0
be.1IIIIL Tho"' .... Ihoo oo. of""," .nd doun. of fUlutl!So-lllis hug<' nottlw, of nl..
ktt i""ltum.nl> providn pl.nly or oppotlw,I,in even if)'Ou I..de only. r.... palmn..
Noli WI ... ch poLl..n rcll"," Ktrry', undcrSl.ndins of tM m,rt.l. H. did "'"
como by hi, idOl. Ihrough e<>mpltl....id ,..,ing "f!"'M m.rkl b<hIVior, l"'I,.d, h. h.s
<m.tin oonoopII how Ih..... <bl mo..... nd how LQ Iili :I<I."u'l" of rh.1.
Itmr radily ..knnw1td~thO! "" gol his ide. for l",dinS oq ...... pl.y from D.vid
\\'ria, hi, i/lllnKlO' in tcVn'al T..de Compo. WhOl gon ",ilhoul urIng i' Ih>l " ..ry us!
tlav;<,l', id~. only OS limIng point. For rumpl<, l1.vid ..rdy UIOS Jmpulmud Indi",,
IIlrs (... Chapl... II), whik Knry ...ti", h....ily nn th..... H. "'rlS ",ilh onoth<:r person',
<ornpI, bUldoo...l"l" il.nd impl<mcnll hi. favoril~ lools 10 10:01<0 it hi. own.
or
174
Enlri", $< xiII
Kerry .. id in hil in.orvicw, "I ".:Ir",d ll><t'n.ro'ing on my own $)'$lCm,.nd 'hoi',

when my lrading ,umrd Imund. 1 Slill enjny rucling n.he, people', ideas, goinSlO lrod,
,h<>ws and ronf.... nc.... .:Ind lillCn;ng '0 wh" o,hen h..'"
Now if I he.. klnlconc
.n<! il d.... nno "",I.:< logialse"", in "'" firsl frw minults, l.m no, inlrf'C1lC'd,"
Tn ~Inp your own mtlhnd, il het", m mp gnod ....... ina nolO. Wril.dCrwn Who,
yoo'", Irying In dn. Wri,e down how you pLm 10 .-h 11""" amJs. Wril. down whal boo
h.viors of Ih. ma'Ull"o'n b< lr'l'inS to <aleh. W,i,. down wh.1' 1001$ you'll use .nd bow
ylll,11 Inle,p... ,hoi, .il:"llo. Soriousn<Sl, oca>unbili'Y. Ind ..I(.impnscd Ilml,io", will
8'" l"u fo, "h."" of ,he 00d of di>o<g>.ni..d. &"",dy. ,nd f... rful,r:oW<,,,
""y.
ADAPT YOUR TRADING STYLE

TO YOUR PERSONALITY
Wh.n I "'wl'u pUrllK l!>< pror ion of ,radlng, 1....J d" frw nlOr.
k., boola, "odied ~ Indk..,o and i, looked simple .n"",sh 10
Ill<'. UIlIIo did 1 know 1""'" .mh.tricing On joumoyo(..tfd"".....,..
In ......i<win& my 'r:ldu I lind 'I1:It ,he mu,. p,ufil.bl. 0'''' Ol. ,I""" in which 1 V- wtw
I wol pu,suing. Evm when luch ,.. d~ do no, wo,k ou" 110< Icsscs ore betd '0. minimum
b<cou,", I quickly Inliu thl' wh., I .... loolin8 fo, i, nOllh....nd ",,1'10 p......... pro
00u0 ""pi,.1. On ,h. Aip .i<l<.Ut,.d<> In which lnss<l.re f.:lr 8"'...' ,h.n lheyobould
h.... bttfI h:I... nn< Ihina in ."",mon. Th.y.lI h.", tho i"amli.n' of <onfusion.nd n(II
knn"';ng <Drily wh.ol I """ looking fnr in ,h., ,rad.
Wh..., you dn no' know whot you',. doing.l"'0 I.. ,01.1110.... tn,n intn I.'S" loan
.nd ,h.n .. pi'''Io,. into ..llin!!...I,,, 8'" .id nf ,I.. I'";n. J hoIk"" ,ht .m"" pnlnlall
Irod... lu... Itod ou<h ""["" .....reo: wh., you I<om .!>nut l"utxlf from ,hcm <on pmpd
you forword in ,be lradins prof<JIion. Finding. ,roding styI. thot nl31ch~ you, pmonaI.
ily i. 1M mOIl impnnanl foc,o, in )'IIu, ruccno." f.n"",. I ",mind myself
dar 10
.onl;no~ 10""""'" myself.
1 h~ boon fonun... lu In,n from >tvtr:llsucssfullnd.rs. ~nd th~ mOl' impo,,"'"
1..lOn 1' ~.rnt<I il rh~ iml"'lUIIc~ of finding <D<tIy wh., &-101.1 w.nl'o pl.y. Sorin!
you _nt to ,rode 110< m.rkou i. Hkouring)'llu WOnt,,, boo In .,hllot nd p1.y '1""" ond
,hcn running ""t .nd pby;ng ,h~ fiBI 8""'" int" wbich )')u h,p""n '" "umblt. Th<r< orr
nuny sa-., ..nd r do nOlthink i, "",\1Id boo ,dvi$.tl>k for. horse jockoy to talo< up al/ll'
pcTiti.... wrigh'_lifting. bol,h." "8"in, it is
rh. job of I pow<r lifter 10 ..co. lhuroua!l'
''''''r
no,
brcrl ho......
..
Ch:ll,ter 9 Kerry Lovvorn

I ha..c found lhat kn,,\Yin~ :lml understanding your pt'rsonaltendencies ,,,ill do 11I01\'
(or your success than any indicator or trading n\l~lhod. Yuu II1U5t discover what works and
does nOI work for )'011. For examllle, Michael Jordan is one of the \::reatesl basketball play'
efS ill the history of the go1n"" lml he untlrrperfurml'd as a basd>.lll pla)'C!r and ,"as just
abo'~ lIar as a golfer. Did rna! make him a poor athlete:? Abwlutdy nol! His game is h.l.~
J,:etball, :lnd that dOl'S not tl1lnslate into success in baseOOll. nl~re are maul' gamt'S in the
markctl'lare, ;lnd )~1Ll ue""llo fintllhe one you cnn play welL You also 11tc'd the dedicnlion
and perSl'vcrance to IK"rform to the best of rour ability.
For cxamlllt", [ found thai I do not haw the pa!icnce for riding long-If;'rm Il"f;'nd~. They
simply I<{car me OUI, and [ get tired :lnu rt'lillt'SS. I C:lnnot sland to walch a position go
Dgainst me alld give profits hack, w:titin\:: for thf;' lung-term trend 10 1II0I'e in my favor. By
understanding that, I clIn look for other methods and use uthf;'r lIlols. I came to 1I~ what
IcaU ~ml im'ell1ury mcthud"-building a posilion up and reducing it, trading in :Ind OUI,
3gain and a\::ain, as I atTempl to ride lhe trend. There is no great revelation in this blll :I
sinlple und<.'rstanding of what mah'S the diffcrcllct: b<lwo:<:n winning and losing for me, I
~Jl1 a pcrfe<lionist by nature, \~hich is very stressful ifrou \"3nlt('l make a single entry nnd
cxil-1 always feel I should have dune heuer, Once I understood this, scaling in lind out of
posilions starh:d working belkr for m~. Perfeclinn does nlll exisf in the markets, but with
Ihe "il1v<.'ntory melhod some of my cntries and exits are likely 10 he nearly I'nfect.
I could go un and lin aouut m)'deficiencies as a tmder, bUlthe Illost impnrt:lllt thing
is to und~rstand how yuur pcrsunalhr wurks and adapl your trading sl)'1c to it. In the
bcgilliling, most of us follow the crowd lind doubt our!iCke.~, Illoking fur som~one dsc 10
guide 115. It is hard enough to figure out whal the markets will do: if ynll don't kllUw Wh:ll
you arc guing to un. the game is lnst. 10 succeed rou must kno,,, your unique abilities,
11rcllgths, and weaknesses.
M
175
Name:
Lives:
Trades:
How long:
Trading account:
Software:
Traders' Camp:
Diane Buffalin, PhD

Lathrup Village, MI
eli nical psychologist
Stocks and options
Since 1996
Small $250k)
QCharts
Florida in 1999
CHAPTER 10
DR. DIANE BUFFALIN

DANCING LIKE FRED ASTAIRE, ONLY
GOING BACKWARDS AND IN HIGH HEElS
mel Diane on Sanihellsland in Florida in 1999, at the onlyTr.tders C,mp we have held
in the United Statl'S_ Back in those days it felt a little unusu~llo 5 a worn:," in class
while her husband pJayro golf, although more such couple.~ Cilffie bIer. Diane had made enough
money writing oplions to pay for Groq;c's early retirement. Some men tried to lease him,
bUI he brushed them oIT; :Ifler :llmos! 3O)'Nrs of marriage, I'll' and Di::l.Ile still held hands.
Diane had a PhD in
psy,holo~y.
and in talking we discovc-red that she did htT intern-
ship allhe same lime and in the same hospital where I had done my residency training
in psychbtry_ We must have elll.." in the same dining hall a hundred times but never mel
unlil this Camp. Diane amll hil it off, and whenel'er she visited New York, we had dinner
tntl~ther. One summer she came with George, and I suggested an outdoor restaurant, bUI
he told "'I." th:u after returning home from Vietnam he had made two resolutions--never
again 10 fiy in a helicopter Dr eat under an o~n sl.:y.
When I invited Diane for an imeniew, it look quite a bit or juggling to coordinale our
schedules. I was spending much or the winter Oil a villa in the Caribbean, while Diane kept
going on cruises with George. She evenlually flew to New Yurk, timing her visit to attend
a campers' meeting.
There was this one week in 19\16 during which three different people told Ille
[ should be Ir~ding options on the stocks I owned. 1 had no idea what they
were talking abDUl, but when Iwo brokers and a girlfriend who W~5 an engineer all suggested the same thing. I thought 1 should lislen. My girlfriend, a
n:allifc rocket scientist, wall led to subscribe In a .~ervice that for 55,000 \~ould
lell yuu e.~actly whnt to do. I was not going to do what some man lold me to
do; I do not even dll everything George tells me to do. I s.aid to her. "Let's each
get II book and figure ililul fur ourselves," I bought the thinnest book I Ciluld
find (James Dittman's Optiomfor tile: Srock Jm~tfJr, 1996),and ot first could not
understand how you could sell something you don't own. The languoge and
technical cilneepts continued to baffle Ole no moHer holY much chocolate I
ote, lind after struggling for hours. IlS"ve up by pase 12 (Ialer, I found the book
to he lucid, helpful, and easy).
Finally. I drew a square and divided it in four quarters-huy/sell. calVpul.
In filling Ilut thl! pos~ible scenarios of what Ihe stock would have ro rlo to make
177
178
Enlri~~ &
E.dls
~ prof'il. I rl::l1ilOO Ihal for Ihe money to come in, )'00 h~d lu sell Options. I
G111cd my broker: MI,('I me explain option~ III yuu because if I cannOI explain
Ihem I should nollrade Ihem. He lried 10 talk IIIC OUI of it, but I said, "Ir IItOSt
options bll~~ lose money, whu lIels itr Sellers! lr a][ the boys an.' buying
options. I"m going to do the upposiu:. You know how Ginger nogers ,lanced?
lust as lI"eli as Frw ASlairc, only soing backwards and in high heels!
The day I made my first Irnue, George came hnmc at nighl-I Was in a
purple flamtcl nightgown, had nOI taken a shower, and dinner, cerl~inly not
made. Hc Sllid, "You didn't do much tud:oy." And I said, ~lnmle S'175, let me
take fUll OUI ror dinnerl" After a few weeks of this, George said, "Why don't )'()U
tT:lde more lhan one contT:lct~" I had to lldmil I ,,'as tl'ading five contracts all1.!
the profits were 51.500 a week, but I thought it w~s un1'J<'licvable. I hw.! an old
compUler, dial-"p AOl, it took IWU minut('S to load a fiveminule chart-and
the data was delayed 20 minutes. The bull market was going on. and I wa.~
writing stock symbols lind option prices VII )'ello", lined paper and looking to
rea which moved 111e mOSt, gathering data ror my finilndal experiments.. 10.1)'
goal ",as tu earn enough for my husband to retire,
M
LOOKING FOR TRADES
Diill/l'/lIl1glls:
Most tr.tders are men. and they appru':lI:h l11arkrl.~
II~
\1<lY ml'nlook fur II'OllH'n-
l!U in In a har, srnn ror char.Jclrrislics like CUrvlrll':'l.~ ur hair color. then hit 011 a 11'lIInan, and If
Ihe}' h31'e no 111(11, hllllll 3111llhcr Oill" Men alw3ys ask. "Whcrr do )ou ~I'I ),our Illeksr 1\11 Ihose
scans-Un' right fornl. the rlllilt shajlt', they Ihlnk It Is guln}! Iu wllrk. My COolras!. when you
intrudul"(' a man In a II"Ofll311, hl'r l"irslqlll'sllon Is goiul( In hc. "\11mt docs he do fur a Ih1ng1"
l\len care mort' abont lonk~, 11"(J1I11'1l3bull( fllllll,llllentais.
Men an: luokiJlJl fur a tip and a Stun', and 1lellillem that )'1Il1 (0111 SfOll' Il1th an)' slnrk, as
10nJl as )'UII h:II'(' the rlJlIll mOl'l's. Du('l; she like II'lne. dandng, ur nulI'crs? Ifshe hilS asthma, do
nlll send nOIl'Crs. Get to know )TIur slocks 3ud under what clreumslancrs iile)' arc likcl)' In go
up ordoll'n.1 h31'e a lisl ofslllCks that nHlI'1' wilh the 1113rkeland anuther list Oflh(l!;(' that (}flen
muve againsl it.
I ahl'ays died;, the carnlngs rillemlar. Norrnall)' sluOOigo 11[1 before eantl/lp ami dUII'1I after
Il'ards, no maUer holl' goolll hI' ranllngs, bccause llll' good news Ii already oul. [ kl'<'11 an fJmlnjC;
nlendar ror all my studcs lhc lI'a)' youugl'T llUnlCn kctp menslmal nlendan>. Women an: mnn'
iutllned In 11lanuiu,l( around ctnaln (jail'S, liul men 311: lust lIuI-~I Il'Olntll now. leI's dll it: Dn }'Ou
Il;Iy illlellllon to }'Our stocks' si,l(lI;lls or do you have a ~ingle model and hope 10 Sl'urr 11'11 h It?
Ills not p1dtlnt the 51l1dt., il Is maoagln1l the [KlSIUoll. J look althr nt'II'.~ aud Ihe date tlie
earnings art' I1'lt':lSl,<I, Iht'u dance to tht' mus!t: Ihal's on, nul lu t!ll' music I wish were nn. Wh.lt
Illke ilooUt 0lltlolls Is tbe I/olme Is lIt\crm....r.llten: Is always the nnh quarter-YUlI I'JIl mil
alll! roll.
Nothing in my life prepared me for trading options. I knew nothing and

hadnu aspirations. I nel'er tonk a c1aS!i in cconomic~, My father had 101d Ille 10
Ubuy 10\~. sell high," LillI he never sold bo=llSC stocks mcant security to him.
Then I rt'alize<l everything in m}' life had in fact pn-pared me tn be an options
troOer. I leach stress management ror n living. I 101"" to lhink,10 have fun, 10 be
righi, and to lest h}'potllt'Ses.1 did not know I was a ri~k taker, but found OUI that
I was. I am a chess player, and 01)' ralher taughl me that in chess, when und...r
a!lack. YOII hal'e thrte options-move, aHaek the thrratening Ili~e, or atlack
another piceC'. Options allow )'011 In play ~gainst the market, covcring)'our
Chapter LO Dr.lJi~ne Buffulin
179
positions and C"J.shing in when the rn3rlwt mov~ When lhe Illarket llIUW~
alpinst )"Our position, rou can ""II a call, short the slod,. or huy ~ put 10 offset
your potcnti:IlIO$.
[ was selling puts in tht: bull market and making money. But when the
market turned, ! was able 10 use orlions to make profils from mpidly falling
slocks. r'Or e;'(ampk, by aggrcssivdy selling al-Ihe-money calls, I W'dS able to
earll $120.000 when Y"hw! dropped from 1110 to 90. even thollgh Irw longer
owned the slodt.
Diimr mm'mlll'rr: M}' fatber lvaJllhcsm:lrll'Slman! cvcrmlI.:Il1d 11(' knew how 10 Uve well. IIr
!lad 21 IlaIC.,Is; III' 13u}(lIt 11\1' to t11Ink. 10 IHakc Ih~1slons. The lUOTe ulllil1ll5 }'M] hal1'. Ille
smamr choices rouUl1lakc. [[}'OU think you ha\'e only !lI'n u[lliIJlJS. yllll will not make ~ sman
!k'r1~lon. YOIIT job Is to urate more u[ltiolls. III' learnt'll carl)' []]e iUlIHJrt:IJICl' of hal'lng )'our flIVll
bPllIlICSS. llUtll'orkiug for Slll11C1l11C fisc. III' l1lalk mOlll')' selling hIs Id(';lS. lie laughl me the
I'aloe or Icamlng-a lI}'t hing }'oo learn cannollic I~kl'fl :I1I'i1)' fwm JUO. TItatll'a~ thr Il"SSUll [Win
lIro~c-POSlltSSIOIIS CilIl be ClIlifisGltl'll, bUI skills cannn!. Ill' laugh I me til play dll':5S. He h;1l1 ;1
S\IcCl'SSfHI bllsil1~ ami USl:d to s~y, "I ant rrsponsible for 62 mllrtgage I,a}'ntt'n!s.~ brcausr he
lliId thai man}' rlJll'lu)'t\'li. lie relnal.nrd ph}'slQlly 31K! ml'lIlalJ)' ~ctil"C ulllli his dcalh ~! 83. Iknow
hI' would have enjoyed II':Jlching mr rna kt' 5"~ a month sclllllg 1I1HiollS un his belotctl Kell Slotks.
MOSI oplion playl'rll arc lilw roulelle playrrs on cruise ships-I hey wear
gold jewdry and Ilrop c~sh, The)' ~re noshy, bUI du not havc the money to 11lI)'
[.000 sharI'S of i....licrosoft. only;\ fe\v dollars for calls. The croupier spins the
wiled, none or their numbers comes up, and the dealer scoups (Iff tht' money.
I \l'a.~ selling time ~nd kC<'ping the cash. I::very time I told 3nYO\l~ I was sdling
PUIS, thcy'd say it l'Ia5 Ion risky. But if a stock is;1I 50, and I sell a 45 puI fur 5.
how is illllOre risky th3n huying a slock-as long as I du not fr~e if it SOl'S
against me? And if il does. I have three choices: sell the call, shorl th" stock, or
bu)' the put and get alii of the pru;ilion.
One S:lIurday nighl at 2 AM, while searching CROI: dal~ for the put with
the bi~est open interest, [ met this guy Vinny in a d13troom on America
Onlioe. He knew cverything abolll options but had a tin)' account. I'd been
trading optiuns for marl' than a year. h:ld made Dctween $40,000 and $50.000,
but ne\'er heard of stlpport or resistance, When Vinny had nle dick on the
screen and Bollinger hands ("3me up, I gasped on the phon". I had becn blind;
now [ hod vision. He laught me to use Slochostic, l\'lACD, and intmducc<! me
10 your book. H.. taught me to use 10ng.t..rm chllrls and daily ,ham f(:lr
screening, and 5miIl1l1.. charts for entries and exits. [ was still using a fr~ dala
sCTl'ice wilh II 20minut.. dela}'; he had realtime. 3nd it was as if he had ;\
periscope. Vinny ccrtainly brought me up 10 a professionallevd nf trading,
We wer.. Ir.tding my account, and splilling the profits from the tr;\t!es wc
did together. We had different slyles, but at first wurked remarkably well
tngether. One night. 0112 ,\'\!, Vinny :;lIW on Reuters that someone had died in
a clinicallria[ of;\ stock we were Ir<lcling. HI' 5.lid, ~The bottom will fall ou!."
And [ said, -The worst Ihing that could happen has already happened, so
whe" it gaps down atth" opel!, let's sell puts, And when tht stock rebounds.
let's sdl calls-bet::tuse tht: I'Hbtility i~ high, but the stock can't rebound
Illuch,~ We made $9.000 on each of thu.'ie positions.. We were very successful
MY FATHER'S LESSONS
180
Entries & E.'tits

for a }'ear, but eventually split bl'caUSe of a divl,"rgence in slyle~.1 w3.~ \'ery h:l.ppy
three-month oplions and holding I)n In 3. 100% profit. I [I' was more of
a short-tt'r1n trader. WI' remained mench, and I gm fore\'er grateful to him.
J found a class at CBQE-they talked of wlJllr~ and butterflies, but how
do you make money wilh that? [ I"a~ kl:eping score-testing the hYI'(llhese.~
and keeping good notes. On DELI. alone [ used to make $4,000 per mOnTh,
without nwning the stock. [ooughtthe Yahoo! IPO-both brokers said it I\'as
junk, sell il quick, but I 111ll'e a thins of not ;,Iways listening to malt' l'Oict'S. I
held, madt' $400,000. and bought a cundo in Ihe Virllin Islands, so Gmrge
could play gulf y~ar round.
My spreadsheet for the year 2000 shows Btl trades, 8 of them losses. My
profit for the rear w:a~ S1Rfi,OUO, and 1thought I had figured out how the wurld
worked. My system was to St"U Pllt~ when the slock was lnw, calls I,'hen it W;IS
high. The only thing belter than making money is making the same mOMy
twice. Sell the put~, take profits. then sell puts again. A stock does nI)l hal'e 10
soar-you can do the same tradt' nver and o\'er again. 'vI/hen Vinny first
showell me tht' charts, I said to him, ~[ hal'e sn this herore. This is like my
weight chart-it got's up and down. with a slight upl....J rd bi~s... If I OIn .~e the
lOpS. I can sell call~, :and if [ can recognize oollom5, I OIn ~lIl'uts.
The nmrket 51artl getling IIInre raggl'd in 2001. I was selling puts on
XTND-and one day lost 535,000 on the way to the airport, 20 minutes after
the market closed. We were going to fly Spirit to save $100, and [ had lust
$35,OOO! There was another loss in [NTC when [ hl'ld inlO the earnings
:announ~elllent. J dl!Cidcd never to be in that pnsition again. The 14 da}'s prior
to earnings can be very volatile.
In 2001, I had 31 wins and 8 10:>5es, mad!: $120,000 and losl $64,000. That
was no gooo-I I....J S losing SO% of the money [ Ivas making. 1 began analyz_
ing my 105se and experimenting with stOps. I ~et up a paper account with an
d~tronk broker who religiousJ}' used stops-and [ automatically bought
el'erything he gol stnpped out of. J m;,de lllone}' on all thnse trades-he 1051
50% of hi~ account, I made 20%. My dala says that stops create a guaranteed
1055. I du nUl have an answer tn Ihat. That's whm I am working on now.
In 200) I had 29 wins and 3 losses, made $78,000 and 1051 $15.000. That
showed mt' that I was il11prol'ing as a trader, but my losses were slill too large.
In 2()O.l [ lurned 60 and changed my money managemenl strategy. AI 40 you
Ital'e 20 years to build a retirement account, ;11 nG-this is your retiremenl
acmunt. I had reached my goal in 1998 and paid for my husband's early rclin:~
ment. I pUI tht' hulk Illoney inlo S;lre paper earning 7.5%. and started trading a small SlllO,OOO account. Thai year I produce(] an expn for my wnmen's
group, and the $C(ond half uf 2004 IUroM oul to be lite least active since tl~
start of ml' trading life. Then I sot a call from you for the inter\'iew. "nd startl'd
becominG mon: active. By the end of 20{)4 I had )) wins and 9 losses, made
$35.000 and 1000t S19,000. A yit'ld !If 16% \\';\5 definitely not a "ro level of trading, but at the S<lme time I am nOI addicted to tit is thing.
Today oplions premiums are nOI anywhere ncar as high as they werc during the bull m:arket. 1113t'S I"hy, more ;Illd Jllore often, J trade stodu. The most
yOI1 can make on writing a call or a put is iu price, if it goes down to zero. If a
put i.l; Sl'lling for 50 cents, w"ile the stock looks 1,;,,00 for a 52 move, I ant betler off doing that trade in a Stock. That'~ why both recent trndes ['II show you
lire stock tfades.
,~lIing
ur
..
Chapler 10 Dr. D"I,ll l~ Buffalin
ENTR~Y:==--
--~~----==DIANE'S
Upp~r p~ne:
Mid-paae:
Bnl10m pIn.:
,ystem in
' ~n In nny
[ hal'<:n.'
I read in new
Ihc
b
Iht' Iltws--thal IS onc thing
lIing or
pushmg sloe ks.Ihatlheir
. 0 ut there,hey
I'll exple d t0 annOuncecd on 12J , . b",
This t",de was triggered . ylike gravity
WEN
~,.." "hoc<'
~h"k"
m~"",,,;'~~,;""
'odm, n.." "d'; '''' ''''''0''

I'IOfi"b""
""I' '"'' '0'0' 0
"ow"h"
W"" oi", ,,, b< '"m"do",'y
,m"H"""
d,~...,',~,
"'",',,""
m""
b,d ""<-<I.,,
o"'''m,
'"I' ,,, ,I.,
0, 12/2
d" "'''''''01<, '"
d, b<f"" ,I.,,,
ofi" Th," "0
"'01'0'" i,. '""", "f, ,,,d i, ,how,d ,',,'
"r ,hi.
10 'I< "PI'''
' " N"""
~II
Th, ""k ""
'h:""~,,
h"'~'d b~"
f.",,:o~:,~~
d",
'1' '"' ' "I'1'h"~';,~,,, ",,,d!o ,h, ~'~ hi,h ",d .ndb" , ,"", """0"'0'
"p,Id,. 1"''': : ,: ,m" ,,, I'''''~''~:;~d MACD'H''''';''~~; "p~""o", of
"". W,"dy.,
'"~c""""finned"
Bollins.:r
band. The S'och""""",d
k' IS a new hiSh. T
that
were no","io, "h,"''''
dimb. was n~t ~l~l;'righl a1ge, it Sh~W led befOft the dose.
investors
to
1m, but On 121_ II .

to gCI-;and I s or
thought they were gomg
181
--~D~I~A~N~E~'~S~E~X~I~T~;~======~S":Mrrl'~~
]
I covered f~r the ksimplest

stopped
fe3W
n--ttus stoc
The bar at the
Koin& down" the chart

right edge 0
. Stochastic
hild ium~ up,
TllB
d gOing doWl'1,
II
stoppe. what I expected
lrade die!d then II stopped.
10 do, an
samce
lrllde--
That wanot a 101. of emotion,

clean,
~
no gut-wrenching.
1..1'
rJ \
I'
.f. ,
. V'\.
...., .
''6'~
,.
i."" ........... _
T. .
p
Chapter 10 Dr. Diane Buffnlin
J 83

,fj t1te rl~Jrr edge Df tilt:
I ~ ~~
r
j~1 I
1"11
1I1~
I'l ' I,
\, I
ch4rt WEN Is r(j;I1, (fOUl tts

liIf~r bullfJIlIliNcrtJe'1C<i.
rhc {dJtffVc wccl<Jy bars

$loNe b<:CI! ,(cell, (;ottfl",,(119 #Ie uptrc'Id 1f1'l4 pcrI+llttfl1t} u.s Dnly tD buy Of
stdl1d aside,
,.
IIIIIIIP"..,mlll,..."""
~ot
to 51lort.
The Ilfte5f btlr /5 tlpprotl&i!/~
ffle upper clld~~elli~e,

ffllftffle 5tock /5
5hD1t1/~
k&O""i"g DW:rn1'e~dcdto
"'!ji!
fflc 5~d tOil<:
br;fwr;e~ #k ,""'A5; It 15 1110
#lr; up5/dc. Pr/CC5 tlfe
tlbwe
Ilftc to
buy, fwt "'Y 5y5tClOl
dOC5 'lot pcrlOllt ""c to
51lDrt.
The weekly chart shows that WEN has heen in a trading range between S'll 3ml 526 for
the past two ),COlrs. The tui'S and bottoms uf MAC]) Lines help trace thr tops and bollOllu
of the Ir.lding range, w'hile the bullish and bearish divergences or weekly MACD.llislogram
kp nailing stock reversals. The bearish divergences of ApriHune ZOO] ami November
2OO~larch 2004 have signaled imponanllops. The bullish divergences ofNowmber 2002-
March 2003 and May-Oclobcr 2004 identified signifiCiint bottoms.
Tile ddf/y &Ild~~d W

&Ollfilf"cd 11fc i!rglU ,,~
lo",j V(.ry ,,(uly /~ feccl'ft
""o~tfu. Whc~e:vcr prlec5
f/lrtcd ",trk tile lower

ck41mc1 line, It "'If!" 'Jood
11,"c to buy, ,,11<1I ""kclle:vcr
tiIcy JcrlfCltcd #k: upper

It lI'"j tI ,Dod
'JItJ~IICII{'le,
tflHC
IjIlt""",,,.. IIII III ,.'ltll;" III il~...,
to 5rt.
181
Entries & Exits

The I~st two daily bars look very templing to short. Priees haye rocketed aho ve the
there. A rocket that stall.~ is sl:lteu to fall. MACD-Histogram is slij[
rising 0111 of inertia, but the slighlest downtick willlum II down, crcatins a massive bear_
ish divergence ancJ co"linn;ng the shorting signal
I can ~e hOI>' :I chart-rt3ding troder, looking at a failing ulfside breakout, could he
ll:mptcd to fade it and go shoTl. I would not argue wIlh Diane's logic, but if r am to follow
thl" disciplinl" of my system, I rlll.lst pass up this short, When the Impulse system is iTem
on lh" w.,.,kly antllh" daily charts, I am nOI allowed to shorl. The S}'stelll allows me to
buy-but J certainly have zero intere!il in buying allhis level and will stand aside.
chJnn~'-:IIl(J sl:lll~d
lit "".11.
111ll11 ...... 111 ",
Diane has completed a I'ery professionallmde. She' shorted a mIse breakoul above the
channel and covered when all overvalued stock fdl below value, under iu moving avelllge.
The bcarish divergence on the daily ch"rl says that prices may go even [ower, bUI
Diane had accomplished what she wanteJ alld is off looking for her next trade. A diver
gence mal' well push prices lower; howewr, a spike below the EMA indiCllles a rejection or
[owe. prices and II possible end of this downmoye.
If we squim at fl chort long enough. \\'t' may find the signs telJilll: us to go both long
and short. A professional does nOl squint-$1Le Stes a pattern she likl.'S, trades it. and dosu
her trade as soon as Ihlll plllll:m, in this case a folse upside brcakout, plays it~df Ollt and
dis.'ppe:lrs. This is nOI a tndc I \''Quld have taken-bul r appreciate the quality of Diane's
entry and exit.
p
Chapter 10 Dr.
Di~ne
BufTalin
18S
IImmB DIANE'S ENTRY

=
,~
~~~-~-?"~~--..,-
1:2:\
III'
11
jij
J.,.lll!l"
,~, ,IU -,J
,.)1
21 _" to "
's~
'III,
Ii on:"lo:. l! ",1'1' '1..Jd " ,.
'r."
1$ IHi
";i.,l"~
CECD
This is one of my must vexing reccnt lrndes. I bought CECO following the news-not
loom the company, but aboul the administration in W;l5hinj;lon. President Bush was talking noom Ihe importance of education; the unemployment fillllres came out on the hillh
lide, and he was saying, ~\Ve need to relmin thrsc workers.
M
Rdraining---lhal'S whal this COlTlpany dues. J heard the news, pUI up my ch,lrl, :llll]
~id
this looks like a good elilry point. The stock is moving UI' from its Bollinger b:lnd, the
Stochastic is moving up. 'he MACD is moving up. The stuck is below its SO-day moving
avtrage--l think of thallinc ;'5 Ihespinc orthe slock, and if!he price is below thill tin~, it
Ius so much more space to GO up_ S... [ bought and 5ol! bllck happill'.
.L
10-..' ",. "'"
,i
186
Entrie & Exils
IIii!!!IB
DIANE'S EXIT
I always try to limit my losses in stocks to one point. CE '0 wa - no Ion er dl ing whnt
it was supposed to do. The uptrend of the previous few d;lyS \ broken. Stochastic fUrn~
down. I do not like wntchio 1055c5-1 10 n point. and I am out
Sold
l'hi.. l ck went to 67-1 mi -oed u 20 OlOV which lasled 21 da)'S.1

am 'rill a king myself, "Whal Wll. my mi. rake? What did I nol ce mere?"
Chapler to Dr. Diane Iluffalin
I'Ji!,mD
187
ENTRY COMMENT
I.rr,ry tlOi,ry frOl>l SrO&kJ
tkltt h4vc sllffcred {aTge

viole""- "'DVo:J. rkcy b4dly
hurt ;/1vesrors 4/1dtradCfS,
IOIko te/14 1'0 "",aill s/<Jt1'/S~ tlbour tkltt sroc,," for
~
""""'\I.I~
I,p';"
.,"
t ~
, ,I
,II, I
'~
I'
,.
,.:__~. ~.,~",:-:..:.-:_:.=:.~"~,.~."."~' '~".:".:, ,.:. , :, .=.=.:, ~; : :=.=., ~.,". ."","'''iii~IBUII.II~lIl1hll~''''''1
11'.,1111"
,.
'
The weekly chari, covering lhl: past Ihree years of lmding, shvws a ri~ from below SIn 10
nearly $60. Tlml rise ndminall~d in a double lOp. The severe drop in 2003, precipilated by
rumors of a scand:!l, left a huse t:ill bar that S\\'UII8 frum above the upper channcllinc to
blolow Ihe lower line in one week.
Al the right edse of the chart, the ren line of thc fast EMA is declining, along Wilh
MACD.Hislogr.lm. The Impulse systcm is ret!, prohibitins buying. If I had to lrade this
~Iock, I'd feel templed 10 buy because the long hull market had not been c:lJ1l:elh:d; prices
llad jusl slabbed below value and recoiled. [n IIny event, squint at any chari long enuugh
~nd you'll find some lmdt-not necessnrily the CQrn:'ct one. Here,:l rl!C"nllraUmalic move
lurns me off from lhis slock, and the [mpulse syslem only permits shorling. which docs
IlOllook csjX'cially attractive for the same reason-lhe trauma is 100 fresh.
The daily charI shows lbut lhe move that cut the stock priCI:' from $55 to S3G-n"arly
in h~lf-took only two d~ys. Think of th~ cro\~d of hurt and ;lugry inveslors and traders
jtleft lx:hind. roollowing thnl drop, prices slowly and grudgingly pul1l.'d oock up to\~ard~
555, crenting a massive ht:llrish divergence. and then turm,d down again. The Imllnm of
MACD.Histogram in Febru:!ry is de"per than the one in /nl1lwry, indicating that the heur.~
art becoming stronger and lower prices aTe likely ahead,
ScVcrtll year.! ro COl>le. ",err

priCd 1'elld 1'D bcCD"'e very
iufl.1py, /l1<c II ~i,~ly tr4U"'Mit::ed perso" /s /fl<cly 1'D

rt:fI.1l1i/1 /1ervous fr;r II {O",
11,"c after 111I4CCi4eht.
Jw:~ s1'l1Clu rel1d to have
fCl<lsusrlli"tlble ITcnds,
I+lIIWIfg 1'kc1M difficult
1'0 trtlde.
~"
"188
Entries & E.'tlIS
h,.
I,,'
l,llJi..,
WII
I'
1111l1'~1 ,I
j'
I . III'
[III
'"
HI
IIl
I
~ r.1:
fllllllt"1jL11
Ir'
1111 '
'II"
1'1
I')
fll llll~"
"
~.
~::
"1111,,.. "",",,,- ~~I"'"'' .",,11' Ii,"""..." """'"''11''' '" ,~ ~ I
..""...."
'.
\"
"
~~
At the right tdge or 'hI: daily chort the Impulse syMem is blue. Bulls arc trying to find
traction:1l the $45 kld and lhe indicators;lre boltuming out, Still, with the w....ldy Impulsr
n<lshil1!) a red signal, no buying is permitted.

Witlle I lilt! hDtfflffllc ""/fit
prill!<:'J cll1Ty ItrtD fflij
1711e, 'fi~ ker exlf. JJte
",,/j Dff( OIlfflll flny lOll jfj
JOOh IIJ t'I1c Jt"k Jtl1rful
Jllqql"9. .Ihe IIi Ilbt kilhq
IIrouh'4, /fopillg 4~ IlJlltr-
. ~~IJIJ,~
I't
11 111
1111I~1 .J
I'
II, jill"
1
[+1
11'II
II
III 1Ill'WIl
lit!
II
bll
loJ11
liP" rtl I111 11 '1

1
I'
1'1
rll 11 11,1'"
r",. WJJc" ker Jtock did hot
,,.I'
""riO,. ,J expecre, Jkc
cut If" wttilour dday. SoI.I'

proJ UJC JtopJ b4Jed Oh
tl/01e 4J ""'/I jfj prfU, 1ltey
qlve #telr p(c/U hot ohly 4
price CUJhlOh to pcriorf+t
but "'JD 11 fll<1e CUJhfoh. If
II j10ck tJlocJ /tot lIlDVC
fflclr WilY, tIlcy Cfit it f4Jt.
",,,, ...,,, 1
",iiC~II"'" .::11fii;;;;;:",~
f
'"
"- .,.,
V
'"
'"
{'!'
I:-
I ~
,.
,,~
,.
.-
l-
..
Ch~pler
When Diancusks how to identify major moves. I tUTn to the [mpol~syslcm.lt meas\~ilh a moving UVI.'r.tgl.' as well as the push of the bulls or
bran wilh MACD-Hislogram.111c lmpulsc turns green for every major rally and red fur
ol.'ry major decline. Thj.~ change of oolor identifies every major price move.
The s)'Slcm is not m;lllic-nu ~)'slem is-bul as long us the \~eekly lmpulsl' stays STren,
the Ilptrcncl is on; as long us il Slays red, it confirms the downtrend. Here we see that the
UrtS the inertia of the market
weddy Impulse [Urnl'<i green a few days after Oi.lnc gOl nul uf her !TOId!."; it remained green
until \~cddy prices hlew oul of their channel to the upside. Hud she wanted to reposition
long in CECa, the ImpulSl.' system would have encouragl'd her to do so.
OPTlONS: GET POOR Q!)ICK

EI'tn though Diane showed us 1WO recent stock trades, she had earned the bulk of her profIts writing uptions. In comparing option~ buyers to g~mblen on a cruise ship. she highlighted an imporlaOi point-buyers as a sroup luse muncy. while sellers as a sroup l11a~
money. 10 my experience. till,' situation is (veo harsher. In talking to hundreds of options
buyers over the years. I hav.. never met one who made money in the long run. Of course,
rach UM had some succt'Ssfultr.ldes ur even series of trades--butl have not met a single
person who huih up ~oquity buying options. A few told llle they managed to do ii, but none
~u\,cd any cvidenc..,I":lving me to conclude that buying options is the deadliest same in
the financial markets.
Poor beginners keep telling me they Irade: uptiuns because their C'".lpital is small; they
cannot make <:nough money trading stocks. They 111ink of options as a proxy for 5tOCks-ll1d [ k~p tel1iug them that thnt is a dangerous delusion. Options mnve differently from
~l"cks; a successful stock trader would lo!;C muncy in the long rlln if he Imught calls and
PUt~ inslC"JtI of buying and shorting stocks.
Hl Dr.lJiane IMTaJin
189
190 En,,;tS/!< bl"

Th. m.in .....5On Ih.1 opllon.,..." d..Jly i> 1"'11 Ihey or< w:lltllljl. ....ll. YUIl COn bur
" ...k, .nd If it fi>c,. ,lo,,, 'hon 'Xp<'Clrd, )'OU con hold it lilll. 10"F" ;iving it titn< 10
wo,k OUt. \'ou h.", DO....," hliury in option.. AJ Ih. rxpi...tion dol. "W""'<h.... l!>eit
val". drops IOW.rtb t<f'O. YOll con he righl un the ",.rk<!, ri~1 On dl< 5tOr. ighl on lhr
lAo<k_.nd Jlillll>$< ,nnnry on Ih. option.
T",dlng io ."t....m.1y C<lmpcl;Im:, wilh mosl win...... bunclwd up In lighl JIOCl
Winn....r< jOl uny bi' ~I'" 'han t~.looc...........hoi, nmgin uf .icwry io ..ry fl>rr....
The ,liSlll"" ..t.... I"'.. lon of pcrfo,m.n~. <.0 pUJ'" winn.. down in'o Ihe poc:k
1....'.. The fael thal op'io....re w."Ing....,lI i powerful nl'1:",I... fx,o' Ibn no"",
he o...<rom. in Ih.long run. only In roo..
y,," ....y luI"< hom' ,h...ylns,"Thr.. io moM)' in po...."y.. Th... io monry in ~
oJumlord Or ..!Hog o....'Priced good. in dC'p......d ~" of lowo. Simll.r1y, tlln. il
monry to be mod< in pmmoling oprionsln
ruslom..... Commiio..s >tid up ropidly
n 'huugh mosI "uk)" h.... ,""ir 'b,..... <UI, .oough 0.,,' birtb com< in 'o.kcq.
,he p",. golnS- AJ Inng .. 111. poor drc.m of getting rich quidcly. <01 of loll.ry 'irbb
wW continu.
Whil. buying oplion, .11 bUI KU... ,,'_I~ In tho long run, writing oplio", is "'"
.",h .n "'y ll"me ri,h... 1'1,,, .11 the monry losl by oplions b"Y'" 80ft 10 opliol\S w,i.....
T1w..... rc lwo brokrrs belWl:<n Ih.m, 0.... for Ih. b<>~r .nd .nmh fnr Ih... U.,Kb uk.
ing III. cuI. Oplion, wril<" 1m<! 'ol>c ,,"'rc pru/ilObk whon III
r< lots of beginn.,,;"
,he m.rkct. When now op,lo,,".rc inl""h"ed. Ibry lrod 10 he misp'i<c<;l in 1hc ..,Im'
f........ wllh upliun...lIi"8 for more ,hon I1Iry lhould .cronling 10 llI<ol"Clirol ,..Iuolicm
",odeb.. W1I.n listed IlO(k oplion. wrrc innll<lU<o:tI in lho Unilo:tl SlOtcs in I~' 1~7O" .......
....r< overpriced.nd writ... modr """y mnn~y( ... Chapl.. 71.10 io DO wtprilr III" Oi
mod. Ih. bulk "f h... "",n.y writing oIX'o", in I <"'y bull moM witll ill Irrolionalltlll.
he.. ~. Rem.mber IlIi~ if you liw in counlry wh05l' rona"d.1 m",k"s ..~ jU~l sl ..'in&
10 add oplion~ ..ly op,ionl .rlle.. do lhe bcsll
A ~Innrr h.. DO h...I..... I",ding <>p,Io"'. fo.r IhOi<: "'ho in.ill on buying ..Us. I
M~ on. bil ur a<l.ice-Iw )'Our money 10 La> Vepl or AlI.n'k City in.. cad. Th. out
<om~ will be th. /.Om<, bUI .t 1~0Sl )'Ou'll h.... f_ drink> wllile ...hicYing il.
oi
t""'.
"".11
oo ....
~
.
Illl
.' l!l
. 'II
OPTIONS AND CHESS

I In.. npllo.... Thry ..~ naibl., uci,ing, .nd .n.hl. nle '0 be
, ... tl,~ In .011dl"',lng.nd ~arlin8 10 Ih. "'Irk... StMCG'CS and
polI'l;"n_ Oon I>c a, ... ,ied "' )'Our 'hinking Ind c~a'i.ity. Th. in,ri
cor;., of roml,licoled sp...'" ... nd ;n "ork <on I.... to Ih. d,..",uio:
be,uty of Ih. nlked I'Ul. boidly d.ring Ih. mark.. '0 "pu' ilia "","
to m.k. m. buy. stock.

WMn I Rl"Il $lruggled 10 und<'",.nd Ihe ..,,,,plcxi,lo or "",in"" I drvdoprd lirnplc
10 help me kocp lhe m""", .1t.illhL II ..:ry quio:kJy bram< rvidrnt ,hot buying opo;."u
...... rilky propnsilion. To begin wil1l. my monry would br lc>ving ,he KCOIInt. whic~ ""'
1110 opposi.. of my BO>.1. I roWl! profil only it lhe lluo:k moved by rnur<
II\< price of tho:
op'ion in ICSllh,," tho rim. allowed. No ..... ndcr nlOll buyen ....... oul-buyin opliolU iI.
ch."
,IIa"
p
Chaptcr 10 Dr. Diant' Iluffalin
very efficient wny TO lose money. ~Who do
they lose it In?" I wonderi'd. ~Th"y [night
~eY!ltlllaUUI
as \\'ell lose it to me!" And so ] started
Gain money 11:
Lese money tl:
taking the (lprfl.~ite side of the trade.
._...".
When] sell oplions, money m!1l~ into my
Los. tllOlllly ff:
Gain money~;
account, a much more comfortable pmpo<~ition. And I nlwilys have a ,hoic('-] can
.
dose the posilic!1l, hedge it,ur Id it espire
at 100 pecccnt profiT.
Morie'1 comts In
r dCl'clopt'd a very simple strategy:
Sell
at-the-muney
puts when th ... stock is
Gain
money
II
~emonay~:
....
....
lowllnd scll at-the-money calls when th"
-"""'""
sTock is high. The odds were in OJY favor
Lose money N'
G3In IllOl\I!'f ~:
hccau.'\e I W;lS selling time. Even if the
"""
/IUI
stock remained at the s:lllle IIr;'e, th" time
dIXny gave me a profit. Thus I lkgan
naively taking money from the market,
~fore e"..r learning about Bollinger bands, StnchaSlic.~, fI,-lACD, de..
] was oneo aSW, ~lf this is so simple, why don't more people do it?" My n:sponse:
OptiOn! an: lila: cht:S5. Whl' dun't murt: ?Wple play che:>s? Beginning pla)'Cr5 are intw:stcd
in the ~I,ieces"-[luts and rnlls---;md the ~1110''t'S''-buyiug and selling. Ft'w ha.... the con
,entr~tion and fascination to learn strategy: When to make ;1Il offensive muve (open a
p05ition) or a defensive move (dose a position). Few understand that their opponent is
the market, amllu win \\'1.' must anticipate th" upponent's move up or its move down. It
is beller to unticipate and dOSo:' a profitable positiull after th" market has 0l01't.-d than til be
reactire and open u position uner a movc has taken place. Successful chess plarer5 often use
the tactic ofSilcrifice. offering a major pie<e to g.lin a ("actical advantage on the board. Selling
3 na1.od put is like a daring quecn sacrifice (in chess), when a trader offers to ~ fon:ed to bu)'
IIOCk on a dOl~nturn, but also at a prepaid discount. In both chess and options, success
depends ()n a combination of stratl.'g)', couragl.', and discipline; the idea is to anticipate the
nexl muv!.' and nUl tll f\lld a !)()sition at a loss.
Most new traders invesl too much time in searching and screl.'l1ing for the "right~
stock, lind too little time thinking out a successful strategr for managing tin.' pt"lsition.
With uptinns. It trlUler (an profit from more ambiguous positions, and usc the fourth
dimension-time-to cnlmnce I/Tullts.
--
Money OO/1lU In
'_!JOo""_
.............
................
_-"'
''''
__
-..
.
.
...
-_ --
.................
,"",-......,_ .
....,
,
..-...... """"""""
.- -_.
._~
191
Name:
Lives:
Trades:
How long:
Trading account:
Software:
Traders' Camps:
David Weis
Boston, MA
English teacher
Futures
Since 1971
Large (> $lm)
QCharts
Taught in New Zealand,
Caribbean, and Cyprus Camps
CHAPTER 11
DAVID WEIS
PRICE-VOLUME BEHAVIOR
Is
STEEPED IN REALITY
W~"C
n the early '90s I read David's book on the Ellioll

and GlUed to congralulah.him. I was not a fan of lhe Eltiolt theory, but fclt lhal his honk c.xplaintd it better Ihnn
any olher. He came to leach a seminar for my firm, and we cnjorcd each uth(('s company.
I invited David to teach at my Traders' Cilmps. uUI he did not wmll to be awOl)' from Un:
S(:ft'('n, and I stopped calling. Ycars later hl' called me out of llie bille: "I see you have a urnI'
coming up in New 7.ealand; Karen wanlS to go to NClv ZCaland; whu will be teadling IheR
Ivith you?" "You,ft I said immediately. Once David taught at that Cau1!J' he wanted to come
to more, and in recent years he has he,ol11l' one uf uur mOIl! populnf instructors.
David pulled away from Elliott, calling it "all allempl tu impose:l ~t~lic form on Inc
dynamic structure of lhe morkel,M and focuscd instead on th... pric... ~volume rebtionship.
Every inlclligent person who lak". " <.:lass wilh David is inAuenccd by his superb churlrenrling Icchniques. \\'hen I look 3t charts with my friends, we oAcn say 10 each other,
~Davi<1 would draw aline herd" David is writing;1 new book, moving forward at a glndal
pace. All my ;ltle1ll1'ls to spct.<d him up, including;m offcr of a frec ticket to Eltrup<' if he
finished in time for Christmas, have pru\'en fruitless. SliII, whcn I inviled David for an
imervicw, he hopped on a train from Boslon :lnd (arne to New York 10 talk and havc lulKh.
In the 1%Os, whilesludying for a gradualc degrcc in English lileraturl', r got 01
lC3chingjob and r...cdl...d my firstle.~son in suppl)' and demand-tll;!1 English
teachers were a dime a dozen. I kft and joined a friend wurking in the rC'Search
departmenl of a commodilies firm in Mcmphis, my hUinelowo.! spent days
duing eharls by hand for thnbl analysts, while reading Edwards and Magel'
and R.N. Elliolt. In 1971 the markets wae heating up, Ihe finn made me a
technical analyst, and I also qualifi..d 'IS :L bruker. One of my accounts was
making a fortune lrading large positions, going ufllu the si1.e limit in some
markl!ts. The 11I.m whoS<" aecounl it WllS lold us about the W)'ckoff course
offered by the Stu~k Markel Inslitute, which was Ihen in Chicago. Wyckoff was
one of Ihe carly giants of lI~chnk:t1 :tnalysis and the course he wrote is still
boeing laughlloday.1t led to a great improvemenl in our ability to forecast for
193
] 94
Enlries 1& Exits

th" comp~ny-~nd ultimaldy this m~n hired u.~ away. He !r.lvded the wnrld,
~nd he wnultl CunlaC! us fl'~rding his p,uitions, calling from the Gre~! W<lU
of China or Machu Piethu, k!1l1l~il1g we spoke the S;trne l~ng":1g~_ Deficit
spending W;)S coming home to roost, ~nd the inflatiunary spiral was liftinG
commodities ffUl11their lonl; baso:s ~ml .:reating long-term eapitill gains.
I worked for this dient fur Ihree Yc:1n. Then he gut invoh~t! in oth~r
things. and I I,'en! hack 10 Ihe commodity brokerage huuse alit! became their
direclOr of technical reSl.':lrch. After Ihe firm WilS bought out, I worked fur
Bob Prechter, writing The ElliulI 11"11'<' COlIlIlHldity [clll'r. and shortly :,fter the
crash of t987, started Tedlll;ml For....s--my own newslelter, much morc ori_
enred to Wyckoff. I contributed $Cven,1 "rtides to u'Clmiml AI/(II)'sis ofStocks
11111/ CmmutH{i/ies, which were I:ller im:orporated into a book. I also Wrote a
handhook, TmrlilJg "'itll the til/ioll \I'rll't' Pril/ciple: A Pmctiwl Guide, bUI it is
out of print now. I Slopped my nelYsletter in 1992. Now I just run a f~,v
;,ccounts on a discretionary basis without holding myself out as any kind of
advisor. I consult, occ~sional1y write reports, nnd speak at conftrence~. I keep
trying to I~rilt my houk on W)'CkofT which lms he~n hrewing inside of mc for
m;lI1y y~ani.
My approach to trading has 1:1'01l'ed over tht ~;)f5. l.ike el'~rY(lnl: else, I
weill from pillar 10 post. luoking for a secret automatic method for making
monl'Y. I playe<l with indicators-they did not work for me. although they
work fur other people. I thought thl:)' prol'ided intermittent reinforcement,
jost enough for rOil to come bac:k- ~WilI the rral dil'ergence please stand
lip?" You IWl'e 10 ClJllct'Illr"Jte on what's righl fur you, and for me il W>"IS prkevolumt' belmvillr. I focus on rhnt and :1m trying 10 rid myself of the Ellioll
Wave. As elegant as the El1iolt Wave is, wilh aU its 1l1athemalic~1 Ilualitics. il is
trying to impose a static pattern on Ihe dynamic entity that is price 1ll0l'CI1lenL
Price-volume bt-h;lI'ior is steeped in reality, and appeals to tIlC more than tht
malhematical approach.
In his fJmous book SIlIdk'S ill "Tilpt.' RrtlrlilJg, Wyckoff wrole MSlIcccssful
lapt' reading is a study of (o(ce. It requires an ability!u judge which side has
the greatest pulling puwer and one must have the couT3gi.' to go with that ~ide.
There are critical ?Oints which occur in cach swing just ::ts in lhe Hfe of;, business or an individual. AI these jU1\cture'S it seems as though a fealhds weight
on either side would dctcrmirll' the immediate trend. Anyolli.' who (an spot
these IXlints has much to win and littk to lose.
I apply the principles o( tapt' r~ding to dailr chnrts, blll I dll not likt
cookie-CUller rules. I :lCcepl unly grayness in the world. and IOIrdy s~ black ur
while. The only ..:enain,y is Unctrtainty, antll Irwe living with it. I study price
:Ind vC1lum~, pay a sreat dcal of allenti"l1 10 Ihe height of every price bnr.
whether daily or intradar, and the posilion o( the close, YOll have In be aware
of lite case ofmovcmenl either up or down.
Finding a t"'tle i~ like lindinll fish in a lake. Yuu do not go to the middle
nf the lak( and drop anchor. You work wherl: the lish feed and build nestsaround the edges. You look for t",ding ranges, whcther on weekly, dail)', or
intraday charts. If thert. is a bri!:lkout and no folluw-through, you wait 10 sec
holY it n"s on n pullback.
ft
Chaplt"r 11 David Weis

If you get a leJSilimale br~Jkout, ~lnd laler the lIlarket pulls h~ek into that
area and the ranges become Il:lrmw while lhe c1o~s gravitate 10 the high of the
bur, it is a sign of strength. ConVi.'Tse]y, if aftH a breakdown the markl pulls
up in narrow ranges and doses low, it is il sign of weakness. When the market breaks out on high volume bUI Ihert' is no follow-through, it shows Ihal
a strong effort brings no reward, and it lIIay bt: gearing up for an upthrust-a
false upside breilkou1. Or it can do that on the way down, ~tlit1g lip a potential spring, a false dOl~nside breakolll.
r Iry 10 buy where the reward is high and lhe risk is low. I do llOtlike ,l1ns
illg brt'akoo\.';. I like f:u.ling them after th~y start to fail. Another Ihing I \~Mch
for is what WyckolT CllIctl absorplion. The market is coming up 10 re~ist
ance-------olri longs sell, new shons come in to estahlish positions. You can often
tell when the Ilmrkel underg~ absorption-there is a greal deal of volume,
but not enouBh rewaru as the markcl gets rcady 10 reverse.
Inconsistent Trading
What book or author would you recommend for working

through trading problems? I'm too optimistic about losing
trades, and hoping for them to come back. Initially, I set stoplosses, then loosen!!d them during the trade. By my calculations, I'd be making at least twice as much if I didn't do this.
I continue my behavior, possibly because it works sometimes.
About one-third of the time. when I give a trade more room,
it comes back and becomes a break-even or winning trade.
When it fails, it wipes out the profits from several winning
trades. Of course, I've read the complete works of Dr. Alex
Elder already. And Mark Douglas. And several others. Are
there other books that might benefit me?
- Trader
Instead of recommending a book, I suggest a little competition, Open a small account in addition to your main one.
Continue to play games in your main account (selective reinforcement is a great motivator), but do trades according to
your rules in the tittle account-again, an account so small
that it almost does no! matter. See which account outperforms
the other. Give free enterprise and competition a chance on
the home front.
-A
195
..-,.
196
., .
I;nlri~
& Exits
DAVID'S
ENTRY
"
I~
CASH SUGAR YEARLY
Soml.log SuI.
"
"
M
.__ JffUL..r LrIrr'

~'lllfll~~,r
'"
lilf
~"""'M
If
t '....OIf'll.aIlUQ.ap
f
t ...."\1 11 ~~ .. eyelt _ .
liiJO' .,," It'i1o' ""
h~~o'
I'l ...... "h
... IUllOurve.,smoY('mll~I~'
MItI lna/<ll 1," rlngl 01....
lUI llXlO nn" Mnd or POl<.lI!JIl"l"'

men IllrcelJes. ~ IaJlImlMI
p~r cham plOitUa mtnmum 0116 [e...,
\\llill.ll9tl ~!ltll" ~:zo.25 ,enl t.nql
t
i'" 'Ii.,:,o' '" "11'910'
FI'"
h'9iD
,,~
.,'".
-11010
Sugar
In 2004 J had a long-term bullish p,ersptive on sugar, boiit'd on Ihl' yl';lrly cush charI going
back to 1932. It showed ,Ill I'llormous multiycnr apex. and on long-lI:rm charts I especially
look fur price tightness. It means Ihat forces or supply and demand arc coming 10 the point
of equilibrium, which eventually is gOillg tn be shattered. The long-term study is ~a1J)'
mouth-walering, but it re<Juires ellurmous p;lti('nce.
SUg.1r made a low in 1999, nllicd briskly in 20fX1, and then for four years held within
Iht' rJ.ngt of:WOO. Tob)' CrnbeJ mad(' a 51udyuf narrow bar rnng;;>s-if you ~ Ihrl.'C or four
hars in a row that arc the narroI\'~t of the fa~t 20 bars. it ShOl\'5 a tightening of forces, and
there is going to be an eruption om: way or the other. He did nOl apply this to yearly charu,
but I think il is ;'pprol'riate to do so.
There was also some cyclical evidence of n boUnlll. Thrrc is a 17.S.ycar C)'ele in sugar.
as well as ill rnanyother markets. Sugar had major lows in 1931. 1949, 1967, 1985. and either
2003 or 2004. So 1'Vl" got eyclicol evidence in addition to the tightening of the ranges. Sugar
is a ch",ap m:nk",'-a I',,"ny here. 11 penny the",. but if yOll pil", up contracts, it adds up.
Sugar was in an uptrend coming into june 100,1. On Juue 18 thrre was a sharp sdluff
which thrt'"J.tened to derail the tn:m1, but the market rallied immliatcly.It l>ecame tightly
congested in area B.1thought it represented absorption because the doses in ,1Te:l B \~eK
near the high.~. The buyers kept coming in intraday. and by th", (Ill.! of the dar Ihe bc;Irs
...
Chapler 11 David Weis
------------r -------------IT
etrr[\t \ ~frrr f~r~flr
o
".,
._,
...
~
I----t[fhFI ""
. -_. -. --- -- -_. --"l-i -_.
-f F~r~- ------"
,.
,..
rfB
"- -'P"""
n
,..
--'"1
[w"I/1
..
"
Heavi891 vol slnce 7/1S
'00
'00
,w
(j)
'00
'00
'00
, ,
"
~uu1d c~pilulate.
" "
IIII
,
IIII ,
Upp~r p~n.:
Dalty Dar ella,!
lower pane,
Volume
.~,
III
II
'00
'00
" "
At poinl C, tl~mand ol'ercllmt supply, and sugo! continued upward to

point D. There on luly 15, lI'e had only a slighll\"w high ;lbovc the previous high-it reprtSCntoo the shortening of the upthrust. On thaI day sugar do~ well off its high. making
illogical to e.~~cl a pullback and then n retest of the breakout.
AI point E. there was II [cst of the I,r""inus highs on heal')' volume-that suppt)rt I.rld,
~nd a lnu.ling rnngc formed between kvds D ;Jnd f:'. Sugar wenl back to th" top of the
r.l.ngc at F, but nn AugUSt J, J'Qu can sec that th... daily r.lnge nilrrowtd. There was no case
of upward nlovcmenl, which rili~ the po"ibilill' that Ihc b~akout w~s going to (uiL
Sugar brokC' down on a S<lP and SI:J.rlcd 10 decline.
AI poinl G on August J6, we had Ihe IIe.wicst volumc ~incc thC' high o( lui)' 15, and lhe
markcl went thmugh Ihe low it had e~lablished at poinl E. The ne~llt:J.Y at point H, susar
moved lower bUl wilh a smalll'r range, \~hilC' IhC' volume was still heavy-Ihere was not much
reward (or nllihal effort. In Ihat area, demand overcame supply, and Ihe nexI day Ihe markC'1 jum~d back inlo its rangc. Th.Il's when I was walchint: clOliCly where to rcenler the
sugar m.1rkel_ Al poinl!. the day's range W;l5 very narrow, lh~ \"lJlume low, the bar closed
hi&her and nl.'"Jr lhe lop u(th~l day's mngC'. This retest of !'Oinl H told tile 10 go long. I got
in Jt 8.19 and put a stop al H. In, ilS ir 1"lIing thl" market: ~Provc me WfOllg, sucker!M
197
In July and August of 2004

I was Irading March 2005
sugar to gain more lime. You
need lhal when you trade
lone-tenn. I am nol worried
atlout the rollover c05I-1
wanl to give the market
mOlc time to ~top. I may

reducc 01 expand my position, bul I like 10 sit w,lh tlte
basle core position-gill in
at a l\'OOd level and be ready
10 giYe blIck some profit. I
learned Ihis f,om my mentor, who took large Ions
posItions and Iraveled lne
world-I gUe<5S his Iraln,ng
lett an impr,nt on me. Th,s
Is not how I conduct lhe
bulk 01 my trading, bul

when it happens, It provides
the grealest potential tor
protlt as long as you howe
the discipline to I_lhe
market alone. II Is dillicult
10 hold lolli-term when you
sit 10 front 01 the screen.
198
Entries & Exits
I:iir!!IIII
DAVID'S EXIT
Kit- ..
~J ~.~
111111111\ 11~111[1 ~111(lllliI
~.~
I
[IPIII!
j--------li~iTlliti'4j-:;
H
::
"
"
------------------------,-----{
...
""
,.,.
,.
long on August 25 ~t8.19, all'o;OI I. There Iyas no inslant gratification the ned day,
but I kepi the positiun and the Stop, and then the uptrend resumed. It unfolded in a .series
of higher high~ and higher ~upporl~. 00 September 27 ~l point I, sug~r broke thrv\l~h jl~
July high on very heavy volume-a wide price muve wilh" sirung duse, "s demand oyerc~me supply. This was followed by nint days of laleral movement as the markel absorbed
profit-taking, long liqoidation, and new short selling. On October II al point K, the
uptrend re.;umed, but the volume was quite a bit IOlver than at point J. The ned day,
Octoher 12, the market moved up with a very shurt high-Iuw ran!;!;"" dosing at midrange.
The volume was almOSI as heavy as the day before. Th~t was troubling beh~vior which warranted raising stops, but not getting out. [ raisl.'d my stop to just below the low of bar K.
The next day, Q<:tobl.'r U, the last day on this chart, the market gapp<"d lower, and I got out,
dosed out my positiun.
The reason I gnl nUl of thi~ trade was that in his tape-reading course Wyckoff said you
can identify turning points. You cun tell when the trend is ending by watching the length
of the bHS and thl" volume during buying and selling waves. The dai'
before I exited the price narrowed, but (1J1 Ih~ Iasl day it jumped 10 the
widest level in months. As sugar went up, its daily ranges narrowed,
and then il went down on the biggest downday since June 18. That's
what told me to get out of ffii' long position. This was un!' of seycral
trades 1 made in sug~r in 2004. applying tape-reading methOds to rcading har charts.
J wenl
199

The left side- of the \~l'{'k1y chart shows
the start of a hull lllllV, in sugar. Look al
the bottom of MACD-Hislngr.lm in lilly
2003, when bears still had somc power.
A rew n1t1"lhs Ialet, in the early pari of
2004, they drove sugar 10 3 neW JUlY, bUI
this indicator registered a much morc
shallow bollom. David would probably
call the chart pallem a f.1.1se btarish
..
'.
.-.o~'
--
breakout and a spring. A bullish diverg~nce
of a technical indicator gives the
same messagl'-bears are
e~hausled,
buIll. arc ready to lak.. rontrol. When

different analytic methods give the same
messag'" Ihey rcinfurce one another.
The new high of MACD-Histogram

in July 2004 indicated that bulls wert
extrltmt'ly strong. The neIV peak of the

indicator suggcsteu lhm sugar was likely
,,,.
to risc even higher after its ,urren! pause.
While we can expect higher pricesl1head.

at the right edge of the dmrt the Impulse
systcm prohibiU buying. As long as if slays red, bears are in charge. and buyers must ~il on
their hands and wail.
Still, tiflily ~1I1(,'P-lti.lto,rfl~

/.1 pretty Itcr.rvy, IIItrit fI
~ce~ /lew low porl'ltf"'l to
II' .111
III '~I
'H""III,,,,,., ,'IIIIi" ..... '''''''111111 1'';: ,;,111111,. ,'""" .... ,.Ulll". "",11'''''11'1111
,.
,.
-'"
This daily chari sugg~ts that sugar is gelting dose to the bottom of ia pullback. The FflTce
Index shows hullish dh-ergence. and MACD Lines that have been declining for several
wteks are slarling 10 lum in lhe area previously associatetl with halloms.
tile .Iltorr-terUl .ItTel1qN1

of rile bcflr! /I/l~ 110 !.1'11
rtf
fI b~II{!.1t ~(Vcr,e/lCe. rI1e
IUlp~/.le .Iy.lfelOl 1.1 bruc,
flllowll1'J U.lfO '0 erlker

1011' or !.ltort. SU'J/lr ltaJ
~ 1001< /I"~ feel rtf of b~1f
Itlflr/<,d l1earilf91ke tfll/el1~ of Itl eorreC1"iOI1_b~t
.Ifl/ll1O cl,ar .11'11 rildt ril,
corr,ct/OI1 Ita!. 'l1d,d. rile
",r;r;1<Jy ',..p~lJe fellJ bll'((rJ
to "'/lif uW1"iI if 'JDe.I off rcd.
200
Entries &: Exits

M#lc r/iJrt' cdgc flf 1'flc
cJtllrt, S~ltr (S IIbrNe
i1l
/lpper cktIlllle/ Nile, II

sevcrely wcrbcugltr IIrClt,
"II1lk M,fCll-Hr.tr",rlllll I.t
lIl/lelf /lNCf #!till it /litIS ill
kprclilbcr. T/fc sf/Ptrtsr
dowJtTfc1< wtHIld eren-e II
bcllrf.tlf dlVc:rgcw:<. T/fc
IIa1" 41( pritc.J opclICd
10/lll:r, Iflf/( D,rt14 .toM
his postNfJIII.
,.
"
"
"
/~
.. ."III1I""~,"~"- ..,'llllll'....I.',,,, .....IIII1",. "111"""'11111I1
The rally thai began after David bought sugar quickl)' ran inlo T('Sistancc ncar the upper
channel tinc. Prien turned down again :Inu ktpt ~rinding out burcrs for two more wccks.
In mid-St'ptembtr sug.lr futull..'S stabb<:d bdow value. luwards lJoe I"wer d,alll1",lliIlC. TlMo
nut uay prices rallietl.leavinll behind a beautiful bullish divCfgence. From there on, sugar
wenL stl"Jight up, hitting the upper channel line on convincing new peak!; of MACDIJislogr:lm and Ihe Force Index. Thtse new highs indiealtxl sirength and called for even
higher prices ahead.
In looking al David's sugar tr"de, iL look!; like he entered a little too carly. I would ha\~
\\'llited until the lYcckly Impulse released me 10 go long. David's e)(it, though, is a thing of
beauty-he sold into an upside breakoUl \Vhen tbe market \Vas boiling, and latecomers
were falling o~r e~ch other Irying III buy sUllar fwm him. aBuy low and sell high is much
harder to implelllCll1than it llIay sound!
ft
AVOID THINGS THAT

GIVE YOU COMFORT
Dal'llllIlIlnl: If I could rcroJ1lllleud Olle spcctfic plCCl: of wrHing 10 struggling or l1"1.1uld-br

trJlImi. It Is Jack Sdlllo:lger's Imervirw Il'ltb William Edllarul in 111t Nnl' Alafl.:"/ lI'iz,:IIili". His
appmarh Is rontr;lf}' 10 m}' Inluith....~tylc. Ye!.Il11C Iilllls so I11Udll'l'Ollily aud ro[11l1l0U

scnsc In t:tt.hanll')( \\"oru.~. IIcn: an: smnr llal11111es:
"I'm not sure UI~L 1111~dc any moncy from my Ideas aoom tJ1(, marlieC
"1'00 nnc au C)'l' fur pallcm will find il ~n)w!ll'l\:
"We dun'( look ~t data ncotr-dly."
On buyiu.\! rclfilccnleI1L~: "A1'llid LlIOSC things that 11[I'c roo comfort.; It's llsuall~' f~lse
comfort."
"If )'00 bring nonn~1 hum~n h~blts and tcndcncil'!i (I) (rallinJ!". )'I)u'll gravitate loward lite
sySIIm.~
m:ljnril y ~ Ill! inCl'flahly
IllSl~.~
Chapter J 1 David Weis
201
IIiim!IB DAVID'S ENTRY

In approilChine a market,
T BONOS
II"
114.0
11U
1130
1115
1110
l11.S
111 0
11 C ~
ncc
'lDt'~
____________________________-j.
lelO
IC~~
....
,~
,~
,~
l~lXI
,~
TBonds
J tried to figure out which way the bond market was going to go based on ils trading range.
I was le<ming mun. towards the lxoarish side. as tile rrversal in "rea C weighed he"vily on
my mind. Honds t"n up to a new high <llIlhe Employmellt Reporl on January 7 and Ihen
fell sharply. I thought the evidence was mounting in areas C and E that sdkrs were bcroming dominan!. The market stabilized from its January 7 low and slowly began 10 r~.
I've ~n \vatchins bonds wory inlenSt'ly sina' 1981, and such a =ping rise usually
means llwt huyers arc strung. Bond~ broke out aoow tI~ tr.u.lillK (;lillie. but tIlen on January 14
at point F, re\'t>rsm duwn. That maJe me Ihink that sdlers were fleting their mus<:les and
were about to gain the up!X'r hand. On Janunr)' 19 nl point G, therr was a big effort 10 push
the market up on big volume-bonds moved higher.ool c10-t well offlhe hillh. The very next
dly, lhe market held likt a rock. but I Was slill suspicioU! folluwing the downside revt:rS::lls
C, E, and F. The rally looked like it was struggling-bonds were at a new high ground,
bm not moving wilh alacrity; it could be their last gasp. On the lasl day of this chart, at
poinl H, bonds broke on big volume. and llhoughl it was 01 dm\'nsi~ I'l"worsal on big
supply. IJumls did OUI fall hack inltllheir tnlding muge, bUI Ilhoughlihey were going 10.
J dedded th:ll t','en if I WOIS a little c:lrly, 1would short a minimal amount of June bonds.
I h:lve bn charting the March 2005 future but sold lune at IIJ.OI. I also sold a
minimlll amOUnl of the IO-year nute. I uSt'd no ~lup-I fell cerlain we Wl"re very near
a lnajor"xlremity. Wilh every fiber in my boc:ly 1 knew 1 W:IS righl.
I always begin bY framing

Its trading range. I take the
ruler to the paper. lryina to
~IlC wherll Ihe fish feed,
50 to speak. Mar~h 2005

bonds were in a volatile
3.5poinllradlng IClIlge
hum Sflpllll'nlllll 2004 lu
January 2005. AI point"

they hit resistance......ent
down, and In December
wllShed oul lhe bottom al

poinl /1 before rallying back.
An UPlhruSI occurred on
December 16 at poml C.
and then the market came
down to a low III painf P
on December 28.
7.02
Entries Exits
Im!!III
DAVID'S EXIT
~
J
\lao
.....
1115
111.0
Ihl [1'1'llllp
JI
rl
ll
IH
I/Ir l,fl 'I
.ll t
'1\
t'III'1
til t' ~I t Itt
I,
III
::::
:: ~:~
::::
109,5
1090
6000
5500
5000
45tQ
IIII
11
11'1.\
19
25
III
1
Dec mblr
II
1IIIdlill
3
120
27
III I I I
3
110
2005
18
'000
J5m
30
1500
1000
151JJ
1000
SOD
1 7
Felllill"
1 went short at point H. lhinkin J was g ing to g r eight points on the way down. The
bonds started going up, and at point 1, rh I 01 eel raled to he upside. They moved even
higher and with great force at poinl}. The v lum 1 TWlls hi her. but the range was lower
and the close off the high-so I ligured th y were lIing again.
Al lhe right edge. al point K. I decided ro mak my I 0 ilion bigger. I knew we were at
the top because, for all their high volume. bond wcr lIIilking lillie progress. This lime [
put in II stop because by now bond had hecom a burr in my ie-every day 1 thought
of my open loss. '0 [ figured I'd puL in a stop becau e bond caul nor 0 l1ny higher. [put
in:l top at 116-20 basis June and was stopped out on Ii k blow Ih high.
By tJlen whal had started as a very minor po. iii /I had g llen [ m. Intcll ctunlly 1
knew We? were at a top, but because I had draggc:d il out for a I n nO\, I fclt forced Lo put
in a I p. And then, after I got stopped alit, I did not havt! lhe emoLional flexibility to go back and short "s"in. Thi' wa ;I gOl lesson to
be patient and limit your risk from Lh~ outset-be 'tU e j you don't, iL
bccom big and me.o;ses with your mind.
ChlljJlCT I J
D~vid Wei~
203
_ _ ENTRY COMMENT
This chan reminds me lhAt the main V(lluc of lhe
Impulse system is its censorship role, flashing a "go" or
"no 8n" signal for every trade. Whe.her you base your
lmde on lechnical or fundamental factors. it pOlys 10
gl:lnee al the weekly Impuls" system llefore you put un
your tra..k
The last llar on thi.~ weekly chari is green. lelling us
lhal both tht EMA and MACD-HislOgram are rising.
The inertia and push of the mark'" are in tunt with each
other, lifting prices. The green bar on Ihe weekly chan
Idls even rabid bears 10 sland aside and wail to shor!.

AI some poinl in the fururc. the llulls will stumble and
MACD-Histogram will tick down, turn the Impulse blue,

and permit us loshort. Thissystem \~i11 not catch the top
,.
tick of the upmovc, but then no system would dn Ihal
with any degree of consistency.
Ncar lhe right l'tlge of lhe chart, MACD.'-lislogram
is
rising
from below lero. 'l11is tends to indicate Ih" moSl
dynamic pan of an uprnovt'. DIKe MACD-Histogralll
1IIIIIIlniu h,.,,,"'''
crosses its lero line and slarts rising abovc it, Ihe rally is
likely 10 become more "'geed. While this sign is bullish,
lhere is a very imporlant bearish sigo al a vcry early SI:lge
of developmeru: Considering the age of lhe mill' and lhe level of MACD-HisIOgl1lnl, there
is lil11c chance il ,viii reach irs 2004 peak. Prices :lre ~lr{,Jdy at a new high, whi<:h means that
when MACD does lum down, iT will creale D massive bearish divergence, givillS il Strong
shorting signal. Bonds 3pfl'C'~r 10 b .. building a m:Jjor top, but it is nOl compleled and the
uptrend is nul r"3dy to reVeTSC.
The bonds are moving up
nicely within an orderly ch~n"el.
Ncar the right edge of the daily
chan, Ihey have rallied above
tbeir December peak. A qUt5110n
immetli3teJy arises: Is this a " ..'v
ralty within a health}' uptrend
or R false upside breakout from

which prices are likely to col
lapse! Leins review the evidence.
,.
The Poree Index keeps I"e"Jching .. new high on every upkg of
/
Ihe rally since December. It coo'11l1111i
firms thaI bulls in bonds are becoming more forceful as the mill'
progresses. WiLh evcrything in grar
to the upside, il seems 100 early to
sell bonds short.
'.
'.
--
,.
'.
--
'-
1---"""\
WI1cI1 bDl'Il6 ril/lfcd'tD 11
heR! 111911 (11 )l1l1uilry, I1bove

#fI: level Df #ttlr IlccclHber
~,x. fMCD-IIf!tl)9rdlo<
I1UD frdccd II ~111<, More

1+l11!!fVe 1'kII11 #Ie DIl<: ft 11ft
(11 PcCel+lbcr. Tlfe JIII1/1I1ry
~11 f! I1UT 111,lIcr,
bllt
ft i! broaol alii 'Ca!DMbly

kf,h-tt! totdll1'ed i!
probilfJly,rellter 1ka11
#Ie pCil/< 11\ Dcccl+lbcr. It

dpped'! t1l11t bull! IoIer,
I+ldf9ll1l1l1y -SfrDII9U '"
Jl1l1uary #lalt riley O/Crc
il1 DctclHbcr-#lcrc (! 110
divcr~~,
#Ie upfl'Cl1d
I! coltfirlf:d.
201
Entries & Exits
.'
.
'I
I.
v~
S""-<:l1ll1llh, ...... ,III
ItlO "", ,.,
. - .- ...~
David, along with oth..l"S in this book. has done rt:aders a f.WDr by allowing them into his
trading room on II bad day liS well as 011 a good on.:. His bond tr-.lde re,'eals thai t:WII an
eXI'l.'rt of his c;lliber OCC:Isioll<lJ1y makes mistakes. BeginnCfi who make err0f5 bc-,lllhemselves over Ihe. head and become even mort: anxious,
which does lIot help Iheir trading.. D'lVid calmly
accepts his O\'llTSight, m31res 3 menl:1I note of ii, and
movcs onto the nc.u trade.
A tT3ding luss is seldom caused by II single
error. A lr:lder usually lI1akl$:1 5t'ries of mistakes.
which add up to create a loss, and that's what \\'e set:
here. David shorted all uptrend. did flOt usc a stop,
then remained short e\'en after pric~ bruke OUI to
a new high. He tried 10 aplain aW"JY ("Jch new
upside breakout, r-Jlionalizing his Irad...
There is an old market saying: MRun quickly or
not at all.~ A tmdeT who doe..~ 001 rlln fasl enough

hang~ on to a 10.'15 and finally runs in disgust i,1 the
worst possible time. Ask yourself whether you
would buy bonds at the right edge of the chart. of
courSl.' nOI-Ihey are comple.tely overbought, way
aoove their upper channel linc. But th;\t's what a
~rson with :l losing trade usually does-bl.ll's 10
cover
his shom and stop the paio. It pays 10
."."''',.,,
remembcr:
Mihan tluickly or not ilt all!"
s
..
... i"""
I nvrlllill1y ilVllid ~emntl-glle~~iIlB tTaders. bol
could llot resist showing this weekly chart of bonds.
.......
11I11~1I11"
"III~
,.

[t turrlc{[ out David was right ;\ooUI the coming top ;\nd downside reVerS;![ in bonds. His
timing ,,'as ;\ bit off-he was too early, a typical error of smart people. Right after David
\,'as stopped oUI, bonus tkked down, ucaling a massivt: bt:arish diwrgence. The Impulse
system lUTned blue, permitting shorting-and it was all the way downhill from there for
bOnds, Ivith bears raking in profits. Had David waited to short or exited a losing trade
early, hc'd have been fresh enough II.! jump back inln a short Irade.
A Money Test
I've kept meticulous records of my trades over the past 3

years and have earned a return of just over 30% per year.
Recently, I subscribed 10 TradeStation for one month to see
what would happen if I was able to trade in shorter timeframes. What would be the result if I watched 13-day EMA for
the trend and used hourly MACD-Histogram (my modification
of your system) to find good entry and exit points?
My backtesting seemed too good to be true. I wonder if, in
your ex.perience, these results show a fatal flaw somewhere
in the strategy? Trading 10 stocks, there were 36 positions thai
I could have taken. Following the 2% and 6% Rules, it would
not have been possible to trade all 36. My system generated
winners 72.22% of the time, and losers 27.78% of the time.
My average win was 1.71 % of a hypothetical trading account.
My average loss was 1.33%. My trades lasted an average 5.25
days, and the potential results seem astronomic..I ..... return
of at least 0.5% per trading dayl
In your experience, is this too good to be true? I am
intensely interested because I would love to find a way to
trade full-time for a living. But with limited means I must
seek out trading capital to work with.
-Trader
This is a fairly typicai example of a letter that comes in about
once a month. It differs from others only in that the author
says he has been trading real money for three years. A typical
letter presents great results from papertrading. I usually write
back-"The only test worth doing is a test with real money. I
wonder why you do not trust your data enough to lay even a
bit of your own money on it?" My advice is to start trading a
small account and see whether you can generate your 0.5%
per day with real money.
-AE
205
206
[nt.1e/; &
E>:i'l
THE TRACKS OF BULLS AND BEARS

Th~,..,
IU th"'" groo"," of trod... in """'Y r.1I."e;11 mo,bt. Ilu\ll wlnl l<) bllJ' Il$ d"",ply ..
fIO$S;bl. Ind p",r.. when pricft riot. Ilo:o,.. w.n' to .. II ol apt"Jiodp. I""';blo ."d profit
wh.... pric>el f.lI. Unded<J.d ."ders mO)' .101" clrhcr group. Jrr<nsth~nins i. ~1Id """'iIl~
p.i"", in ill ra....... r... d> 'ick rdI'J. t.."..."io" hc'wun bull .nd I bu" n1fmUodtd by
emwd of ulldidod .mel'S. A .ick is I mome"...y COnk'IUU$ uf ...1"", ..d licks .....
1<><. i"to h..... hoey nute ehm p.1nenu. D~vjd Inr~rpreu Ih~ PlllmU in order to ""'k<
...ding ckci'ion<,
Fo. n:~mpk, Dovid plys I gm.. oicol of otte"tio" '0 .~ ~g!>t of '''''1' bo . A t>ll bar
indkota ...I.a,M "".. or mO",mttl., bu. If i. is follow<tl by I mo.t 'lId "u".od h.... i.
""",,,, 'hll t1~ t,.nod II ,u""i"B in'u ....11...... H.;. ",'y Il'.n.i"" .0 .h. ploct"meo, of the
dooioS lick within n<h bo,. ,elkc.log 'he outeome nf tilt l"'''k between bull ..,<1 bears.
lie ...I;n on thne ond other obl<'fYlI.lom., .rying '0 dide wheth~. ti,e (u, ..nl
~
Ijktty '0 mn,hlU'
roe.
Dovid 01$0 ""YS' B'''' okol or .nenti"" ." ""I"m which ~ linb "'ilh p,lc< d.,ngeo.
Fo' aampl<, 1tc lTIlIy "'fer '0 I ... 'row... ns< <by wi'h high volume OS ",lot "f .ffo,t ror I
",inim.lll"in." H. Kn .ho' .. a lign of ","ista"'" Ind """""II 0 ""'1"$11 of the pt<tling
.rrnd While I ""I"" 11lvid', .pprQ;lCh to eh"ll'nod I..", learned ,10. from him, I Wnk
thof tilt Fo,ce lnde>< provide. ~ cloo,., view of m.rke, :Ktivity thon volume hats.
I ..gorly ,w~i. D...id'. new book, in which he m.y by Out hilenfi" .pp.....h l<) the
n,.,ket. m ..piaJly in~<e$fed in whot he cau. ".p,inS' olld upthrum"-fllie Jowr,.
lid nd upoide b... knull. One of the by diff..."",. belw.... prno and ."",'eurs .. thrir
handling ofbreo1koull. Amlteurs t.nd fo buy u",ide br...koutl .nd lhort dnwruJdc b.....
O"t.. np'ing a new lrrnd fo mok them 10' of ",on.y in I hurry. PrnfcWnn.k ,mel I.
uk< the Oppooil. view-fMy npt mos, breolrnuts In r...lI. oul. I'ros Ire mIlre ~kelr
to f.de bre.kouto-lnclgoilUf th.m.
I o~en uy fO my ItUdenll, only P"~Y tongllC.in....h..k: "Buy new 10.... I"dlhott ......
high.: Yuu cannot do this outo""'ticolly will>t>lI1 thinking, but when you l.n upsldc
b",.koul, it poy. to look fo' .... kI.ne. or ....." ' - .1Id h""ing opportuni'y. When ,....
..... <!own.ide b...b:>ut, il i. import.n. not to ..... 'Iook tho ovidenee uf ...."gth buy.
Ing oppm1unity.
MOOl Ir.di,,! boob ,,!,<".t,he .. me .clvic.-",ho" Ioog, pUt I SlOp bclow I" imp<><
",nl low, .nd wilt" "",,<t, :Ibn...." in'p"rt.nt ',ig!>. When Dovid dr..... wpportlitICI
below 'he lOWland ,Niltlnc~ li"".~ Ih~ high ... il i. notJ'inglhort of .mulny how
ll~.n the ",.,k<t w~1 violol' tho< lin.. by a tiny margin, unly UI "vc... nd COrn< ......
i"8 back. Ono of the ......n. r"" l med from Dovid ,~,,"i"ing in hi. cw... in......,.J
Traders' Compl i. to ""'teh klPP0l"! Ind millo...:.li"",. If. ,upp"t1 Ii". is viobled and
,1><n pOCCl COme blek And clo... ~ iI, they gi"""ll' of th.lIttlngeo' buy wg.nili, with
limited rid<. If pri<.. break.bov< resi""nc. by a .m.1I marpn Ind ,h.... re'U'" to ......
below thotHne, th.y offe, 0 Iow-n..k soo'fi"S oppo'lUnity. I .1.., rely on my indic.IOrs, but
David'. m<!hod Ii.. at th. root n( my .pp"",ch '0 1t.di,,~ '""'l"!oIa. In re;tding,bis book
l"'" .houk! take from it "'hal mok<o ICIUC UI you and blend it with you, of1", m"hocIo-
,,,.o .....
',end
Ch,p,er 11 D.,'K! W~Is
A BATTLE MAp, A TREASURE MAp

II'. odd how ,hillp ~",Iw:, \\~ I1.000od I job wi,II ,I\< lIIni",,1
d"l"'rtrllall of commudi,y brok<m8" I>o.>us<, I pla"..1
(.rId upWh'd) ~l1:",s llI,mU>lly. Thty btcIBK works or or" .."oo,h
p'pa co....
wilh ,,,"".igh,, black linn dmwn wllh fi",,_poin' pen,
You could du.. )'Our .~ ... rub y<.>u, h,nd
Iy mad< ~mrl,
ond ftd tho imprinl of ,h. 'rnld. It I>tc:am b.lIl. 01'1/,' lrC4>tlr. 01'1/,' pic,~",ph
,dling' .1Ory (,am Il,~ poSl,
rom, I Slullit<l Elliot' w.w .nd W4S thr~lod by It< ml"'tlal imp!;n,loII$.
wha
_id lisl.n h rd my di=u.... lin Ih. p",dic,ivr powcro IIf FlI>o.>n:lCCi numbel"J, "'liaS.
,nd rroJll'OClla. 111m lhrough ,h. b<n.r.ccll of, (lie-Ill, I roroned in th. Wyclwff cou.s<.
T1>c ;.ko of L>rg.: IntrreslJ "",,,Ipul.'ing th. m.tIl,1$ from bthlnd 1M Kroes .dokd IIl'M
n1fS1.ry of lh. <h.:o"S. Su~ly, 011 on. h,d 10 do w......d the ("",,,6n'H( 'h... I.'S"
Ofl<1"IOI"J .n<! follow .k'ng lik<
.t1ochc:d Ill. ""ork. Th... foolprint< wid 0 .1ory
of "",,,,ublion .nd dis,ribullon whkh unfolded .<cordlng 10 '!'iii, fomu ofboh.vior,
I'or .boUI 20 ~.rs. r usod Ih. E1lion W..... 10 idtnllfy mork<u thOl ..... 41 nt ""'
..tre",lti... of rying d"lI'NS. .nd I "ulIied priwvnlurM beh.';or for signs of .ndiog
..lion Ih (onfirnw<l 'h~ ""',.., <nunl. YOl, r sow mo", .nd mo Ihol ,,"nf 'l'lIding oppo'lIlIIilir<.""" wllhoo, fining Into. neatly colUttUetcd w..... cOUnt. So 1 drillod furth..... n<!
IiudlC" ow.y from the Wow: Principlr. Similorly, rodin! OC1inn ",rely had Ih. d ....ic "'or
..,.,.;"1",, of l<C\lm"Io'illll ."d dill,;h",,,,n, Inllead, i, w;d m.lIer of ",bll. <h.nges of
bch""io< ,Itol tlp-pcd ,1>< ....1. In f.YO. of 0'" side or 1hr o,h....
I hoi"" diSlilkd ,h. study af prk./volumr behavior Inlo lhe simple clements af prla
ron;r, pwllion of ,h, door, .ffon ""rou. """"d,....., "f m""""..,,', f"lI"w.,h,,,uSh 0'
laclt o( roUow.thruugl" .nd ,I.. into"'<t,"" of ..,.;,,'" Ii ..... The m..krt Is. kol.ldll$COp<,
whc:d of .pp"'r:ln<.... in which tl\< only '"'"inty" uncen.inty. Nothing i, bl.xk or
whit" It j, gl'llY. Every "'u..ian <In be In,erpn:,od in two w.)". <"'~l;ng I con">J1t du.lily
bot n bullish......1Id bro'i""n.... It i, my job to "",kr. ',..e fo, ,h< mo... Jaglal .'ory.
Mi
n ,pl'"""lt-on "'_witl>o.>ul ",I... without j"dicator>, without <ool:.ie <ultcrl.
h ""n be lummod up by th. words ofD.T. Suzuki: "If one ...lIy wish.. ta be. m.ster of
'n .rt, lr<hnic.1 ~nowlrdgr of;, is !I01 enaugh, One h.s'o ,,,,nscrnd lrdlOique 110 IhOllhe
.n breomt$.n '.rtl.....,1' IIO";nl ou, "f the unctmSCious."
In ,h. !>rk1nnlnl' .n unm.rhd dun ...
~,rrh
-.ro
""!$S' ......
An,.,,,.
"'11'1"'"
207
Name:
Lives:
Trades:
How long:
Trading account:
Software:
William Doane
Lexington, MA
Technical analyst
Stocks
Since 1999
Large (> $lm)
TC2005
CHAPTER 12
WILLIAM DOANE
THE BIGGER THE FOUNDATION,
THE TALLER THE BUILDING
drove to Boston In:>t:l: Llill ,II his hOllle. He met nil: al" highway exit, and as he pulled
his Lincoln into:l lwo-car g'lTnge,1 uw that the second ~pa(~ was filla! with ncat
rows of cartftlJly 13bdcd boxes Ivith market materials. tong shell'cs held Slacks of c1mrls,
arranged by year.
Several roollls upsl:lirs hdd more materials; large, well-oiled filing (<lbincts op<'ned to
reveal TOIVS of alphabetized and color-coded foldcl'5. "Aluminum," followed by MAstrology,"
was next 10 MBcrmudu Triangle" ill am: drawer. Another began ,,,ilh "N!,'w Hillhs-Ncw
lows" and procded through "Mexico," "Municipals;' "Nu1Ll;Smalics,M and down to "Oals,"
Still another filing C"Juincl hdd folde~ of n(",>'sku.-r clippings, .~umt' by ("urunt writers,
olhers by Jong-dC"Jd analysts.
"r am a colleclor. a junk collector," joked Bill. but I.is colleclion was neatly organiud.
and he wuld easily fine! anylhing he wanll."d. He had han Ihe head technician or 11.1'
Fidelity orgal1i~ation in Bosmn, whl!re he created a massive chart room. covering 12-roolhigh \V<llls wilh graphs or ever)' tcchnil'ill amJ rundnmentaJ indicator under Ihe 51111. Bill
seemoo a lillie wistful when I Jlointed out there was no lunger the need ror such a mOIll.
A slender laplop in my lr<lve! bag hdd a complet" dalabase. am! a lrader could produc" any
chart by pushing a r~w key~
nilluS('s compUiers. will. four sleek screens on his desk, but he still subsnilws 10 a
chart service. While \\'1' were talking on a SalurrJay mnrning. a fat packnge ofchans arrived
M
by priority mail, lIIulKili grinned: MAn old habit; I like 10 have a Imrd copy in front or me.
After earning his I1l:lS1er's <I111n-e in finance from the University "r lJenver. Bill got a
pari-lime job with an accountin!! firm. The firm w~s underwriting a slock iuue, and paid
him with sham instead of cash. Those shar~ wcre floated ill SI.SO, Bill quickly .rolll.ll 53,
and ncver looked back.. In the days wh"n tc.:hnical analysIs worked wilh India ink and
pens, Bill, the 50/1 of a dT:lftsman, relt right at home in a chart ruom.
The average guy looks lit II daily Ch'lTl, scarcdy al a wldy. I look at Illonth~
lies-and I rcmemDcr lhose pictures. Wh"ll stocks mrne out of Iheir bllSl"S,
they sprint. I look ror lung b<l$CS and trade breakouts. I am mil smart enough
to buy bOllOI1lS; I huy slrenglh. '''is 1lpproach is dull and uninten'Sling, [nil
there is polentialthere.
209
2I0
Entrie-s & ~its

l,onk ~t this slock-it has just deal'ed its 1984 top. No onl.' looks tlw f~r
oock, but if it's cleared its 1984 lOp, it meu11S bu~iness.1 use nlunlhly, weekly, an,1
daily charts, I tried different imlicaturs :md vt)lul!1l", but in thl" end it all came
down to price. I w'as conditioned by Fidelity: The)' do not want a stock that'll
break out tomorrow; thcy no:eel It'vt'ral months ttl ;,CCIl11lu];,te a full position.
Aftl"f I left Fidelity, I started ;In :lIlvi...ury service and SCnt my tOP 151'ic~
each month tn a handful uf dients and friends. I would watch price Icvrls and
wait fOf breakouts. M}' best pick was WurldCom; it had a different name then,
when it started up from that bc:mlifu! base. It was call1..J LDDS Communica_
tions, Inc., and its sidewise moveJllent l.'litended from 1980 to mid-I990!
By I~H and 19991 ran out of bases and could not !5l'ncratc a list of 15 bu}'s
per month. So thl.' service ended in 1999. Unheknowlbt 10 me, we were :It the
lop of the hull markeL No\\", in 2005, I sec plenty of bases, as the cycle repe:lls.
[ think that there is order to the market, and )'OU C1In make moncy buring
stoc~ that peaked at a certain time. We had majllr I'el'ks in the markel, and
afterwards it just lakes.so many years to recycle those stocks, After the reueeumulation l,roees5, they are ready to run again, Some stocks peaked in 19% or
1998, others in 1999, then of course, many peaked in 2000-and ,hal's the
order in which fhey are likely to cume out uf their b:1St.'S onCi: ther've been
reacclllJlulat~ and are ready to go. There will be some late 5lurters and overlupping moves to confuse the picture, but the tl'udency dol'S exist.
A stock erupting from a long base is like a mckd gelting off a launch
pad-it nt"Cds a powerful initial thrust to get going. Some people 5Jy it is o\'o:rIxlUgl,t, but I s:'y it is just the beginning. If a stock pulls back into its base,
OOwl,'ver,9 times out or 10 it will not be a winner-.';omething i.~ wrung with
it. If a stock dies on me, I won'tilluk al il :tgain.
Whenel'er they build a sky,;,.:mper in a city, they dig a dl"Cp hole in Ihe
ground ami then put pilings even further down in order to build a solirl foundation upon which this skysera]X'r is guing 10 sit. The deeper the fuundUlion,
Ihe more floors the)' C:ll1 pili up. II is the same wa)' in the slock markel-if a
stock is guing In lake off, lhe bigger the base, the highl.'r it can go. My gam" is
big bases-that's wli:lt [ would like to be known for,
I prefer lower priced stocks, though thil principle of bases al'l,lies 10 all
price levels nnd supplyfdemuntJ situutiuns, A small price move in a low-prkcd
stock Lranslates inlo a large pereo:ntage gain. A 52 slock going 10 54 has a 100%
gain. You have more stocks, more choices OIl the cheaper end uf the bell CUrIe.
Man}' analysts say il is difficult to make muney in stucks below SS u share; Lhey
abort more oflen, decline, and disappe'.lr. This is 'rue tu an extent, but when
ther cross alltlve $5, Ih,,)' gel dis,m'Cfed by institutionS whkh hav~ the buying
power to push them up substontiall)' higher.
Commodilies---<opper, Sllgo,r, sil.....r-uftcn huild lung baSt:s, Take <I louk ut
sugar in '65-'71, copper in ';5-'79, and, of mursc, look what emcrged from th...
hascs uf sih'er and gllid in 19l:10. There is ahvays:1 profit opportunity somewhere
if )'Ou're smart enough to recognize it. Ht're I~e sit day nfrer day worr),ing abuut
a flat slock market while commlXlities are Illking orr, The prnhlcll1 with mosl
commodify fraders is that money hurns holes in Iheir po.:kets; thc)' ro:elthe),'ve
Chapter 12 William Doane
211
A CONTRARY OPINION CALL

Dill lett llis lJlIdlng room, went oullnto Ihe
h:llhY:lY. and rt'iUnJl"ll wiLh tlle luteSllssuc

or u.s. N~I"s iJlld ll'orM lIe/iorl. ~The
IncfClllb1c Shrinking Dollar~ scfCamed the
((ll'!'r or lIll' l11~g~'Zinc. ~Wc'vt' got HI br
pretty dose 10 the 1Jotlom.~ lSilI grinned.
"TIle only time ther run such stortI'S Is
Whl'll the l11arkl'l is at an cxmme polnl.~
TIle Curti stood :It I.3D UII tile dar nf
ourlntcrvlew In Aprt1200S, and II has hml
l!Uing down l'\'cr sinn'. while the U.S. dollar
1ilp in Euru = HulLom in US $
hasgalnetl sln:ngth.lt takL"i:l1l uncnmmonly
-.long and stcady trend for a clild edllnr nr a
majur magazine to O\'l'rcome his usual cau
tlnn and put u nnanrlal opinion on the cover. Dy the LIme he slal)S his staJIII) of aPIJrUl'll1 nn a tn'nd, It Is Il'ady to m'eISC.
Such striking CIIvers come ou101l1)' nnn- e\'''ry rew yean;. It takes a persun of great experience and sdfa.'I..~uranCl' In rcc:og.
nlze such sIgns.
-AI:
~
_.
got to he in sol11ething. Another group with the same problem is day-lrndef"S, I

do not see what ihey see. It talu.s:l certain pt'rsonality to do whal they do.
When shorting stocks, I look for sideways configurations and hrt~kdowns.
Currently my ~horts arc concentrated in real estnte. [ know people hnve b".. 11
calling for the tOp ill rl.':ll t$t:lll.' for thl' past year or two, but I think the stocks arc
extended nnd vulnerable and fast :lppru;lching thelJOint al which they should be
~horted. Their decline will precede the decline in the aClual properties.
Arter I stopped sending out my ndvisory service, the Bri!llberg hrokerage
firm in New York Sd up a hedge fund for me. I have been running Brimberg
Trend Fund since 1999. In 2000 and 2001 many funds got dohlxral. Typically,
to collect a performancc fec,ll fund manager has to exceed his previous l'qoity
peak. Many advisors incurred substantial losses, dosed their fiJnds, and sturlet.!
new ones in order to collt Tlt.'W {t't$ withoutlHlving (0 recoup the losses. We
got hurl, but nel'cr dosed. I just couldn'l do thaI til th... limited parlnl'rs.
Bill led me 011 ,I 1S1iidetitolir of his office. The windowsills and tops of filing cabinets
supported his mllcrtion of hull figurines-the substantial hl'rd, with just ;[ few bears
among bulls, has spread into several rooms. He pulll.'d oul a folder of charU showing long
periods of nat prices abruptly coming to life with huge voluJllI.' surg~ ~l nm going to go
back and evaluate them to set: whether or nOlthose' spike'S have' meaning.~ He opened morl'
212
EOI,lrs& &iu
f"ldc~ "This is Iht Iluff [was workl~g 00 """r ,he WIOl 10 Flu'ilb. 1 am ~,iokin! of
wrl,lolI" book. S<>lt><thiog .1""8 lhe lin.. of SkyKn'I'<' f>r<IPrs i" ,," S""* M"rke,. 11 wil
d..,.Ih< l>igl>.;e,; in d... ill".j (On!>;" "UIllfiOU. ""fore.nd.ft., =mpl",w illu<I"1<
"""ket mova," He 'h..., showm m...."'" of hi' loNg< fund d.b."1 ~" go "'" of Iho
munlfY with my bph'P 1",1 ,un 1h< fund whil< lIle "ew \"ork rropl< do my b,.k."mc.
1"'p<rWD.k. My wif "d I I""" ll"inll'o 1M G.....k i.l.nd.. Abo, lWt> of our grand""ugh.
1m orr On I WOfld-dou .yn<hroniud kl: ",.linll'"'''' "nd lUU .1>,,1..1 ,",y wo'rr lh.;,.
81<>11I,i... fullowing,hcn, 10 Eu"'IK'" "'mpc'i';.,....
IIml'!mIII
BILL'S ENTRY
55.00
~.OO
i5.00
~.OO
U
~.OO
~.OO
~.OO
---02
15.00
13.00
5.00
SINA
H....,....""k 'hot', ,It...." (,,'m. ""ry high I.."', O\'t'f $55 h.rr. lrar!in8 in luw JinGk
digits. 11 ;1 out "ff..'Orand lIS prke isdeprcswd. but'''''' Y'0I1 h... ~ ai'K. ito tu",
up in the}"u 1000, tlik<
lh.l on: dq".-d. npeciolly when ,h.y h... ,Io"g sid<'''j'$ mo,,""""". builcling .. bast. 51 NA i. tmdl,,~ In lhe lower pan of itl but. and lhe ,.;.l:
"' thi' level i.limiltd.
,'odu
,..
Chnptcr 12 William DO;\Ile
7.13
Risk/Reward
What is widely regarded as lhe minimum risk/reward ratio for
enterins a trade! How do you establish this ralio for stocks
whose prices have broken into historically new price I~els?
-Trader
There is no set number-it depends on your level of conviction about the outcome of the trade. Measuring risk/reward is
not as simple as comparing the distances from the entry price
to the profit target and the slop-loss level. You need to multi
ply each of tho:>e ligures by Um likelihOOd 01 that event-and
hopefully your system gives you more than a 50150 chance of
winning. Still, if the expected profit is less than double the
potential loss, I would pass up the trade.
-AE
55.110
50.110
45.00
41.110
35.00
311.110
15.110
20.110
15.110
10.00
5.110
01
."
co
01
r lVould normally 1:lke a partial position in .. stock like this Ollul add to it as pricn
bq;in to impro\'e. SIN"" huwever, alm... to life ratlt~r ahruptly,
In Octol~r-Novl:mbcr of thai year. SINA muved up 10 five dollars per share, I
hesitatl'clto "dd nn such strength, which in hindsight was a mistake. The stock cuntinued its rise to 10.50 in )allll(lry of the folluwing year. Th... y .~:ly Ihat the first correclion is the mo,t imporL1nt, and ifyoll can ridi.';t uut, then you'!\' prub3bly home free.
I drew a horizontal line on

my chart al 10.60, and
once that level was broken

on the upside, I assumed
lInothe, upleg would begIn.
214-
Entris & Exits
IID!IIII
BILL'S EXIT
I found oul later it was 11

Chinese nlernet stock.
Being a technician. I pay
no i:l~tention to wha the
company does, nd I was
not a yare it was Chinese
until, all 01 a sudden. ev ryone wanted Chinese slocks.
It was a p nect example
of a law-priced stock being
discovered, and I went along
for the ride. It turned out
to be one of the bes percentage gainers I halle eller
experienced.
I
,IllI
II
01
Iant Ir ndlfnes are broken.

Here we see another beautiful technical silualionan outside key reversal to
downside. a throwback rally
into the top pattern. and
lh breaking of a v ry well
defined uptrendline. I had
to take clion based on
that evidence and sold the
balance of my position.
".,
--
_..
j
02
....
__ ~
,,1
r~111
'I'll,f
25,00
20.00
10.00
5.00
,.
.",
03
30.00
,11 Iplll - -
il
35,001
1500
... -..... r _.
I am also a great believer

n trendlines ilnd like to do
some selling When Impor-
1111
1
1
40.00
Boughl
I did some scUilJg in ~eptemuer 2003.1 did Tltlt know whether the recent peak was Ihe
end of the lIpmove, hUll could see n "oulsid reversal" on th b:1r chart. and it scared me
enough to 'e11. I am a reat believer in outside r versal bars. They can oc tlr on daily,
weekly. or monUlIy chart. raking out both the high :lnd lhe low of the previow. bar and
closing in the direction oppa. it to the pn:ceding Lrend. This pattern w rks at hallam and
at rops. often mnd ing the extreme point of the moves.
Sold
~ I
1{'l
I !I
1illll!)Y
IV'
1
TRADE SUMMARY
I~I
l
long SINA
Bought 10125/2002 @ $2.45
Sold first half 9126/03 @ $36.92-profit
$34.47 per shiue

Sold second half 11/1412003 @ $34.7G---profit
$32.25 per share
Average profit = $33.36 per share
II
r\
(II
I I 'LJ'
r'.,....r.f
02
03
1,IIt
/40.00
I 35.00
30.00
25.00
20.00
15.00
10.00
500
.
ChapLer 12 William DO:lne
215

This ,olllpany'~ .~tock was sold Illine U.s. public in the bSl heady months Oflh" hisluric bull market. It went up from th... start, more than tripling within six months.
Back in M:lY 2000,somt.'l'uur soul p;lid more than $58 a share; he must haw really
needed lhe sTock! From Ih:!l lofty perch. SINA cr:lshl!<l and burned, touching the
low of 1.02 a year IOIl~'r. Any stock lhatloses over 98% of ils value earns the right
10 a quiet death, bUI SINA refused [0 die. It lay quietly un the bottom for
almost IwO )'l'3rs, forming one of the big b:l.Si'$ 50 favored by Bill.
I call any slock that falls morc thon 90% off irs lOP ami refuses
n
die~a fallen angcl. Some of the most altrJI:tivc long term buys
come from this gTOUp.
[0
I,
,.,"-\r",~~,.ril:'-t~;.,
~".....,... ~
-..;;::I
.....
'.
Allhc right side of the weekly chart. SINA is coming b~ck III life, and its Imput'le system is grcocn. I take !h~ reOldings of MACD-Hi~togramal a big discount , hen prices Dr~ Sl)
nat. This indicator shines by reneetin!: market psycilology during price ), ings; wht'n prices
are lIat. its llll'SSa1:eI are not that important. What is much more important to me hen: is
that the weekly dosing price Is above both the \J-werk and 26-w\'tk mO\'ing avcT:.lge.~.
8tl/ prr;fcfJ to "I#cll #Ie

~olf#rly /lild "Icckly cl14m
dnd P6y$ little ltttelltiOn
to tile dlli/r'e$. I.DDkrlttJ ITt
#If$ dllily cktJrt, It;$ G'oUy

to $CC #IITt II.; l4!c;#lod
14!1I1;.G'5 5G'~G' fOl'd IOHgTG'fl4l tTldu. .Io14lG'Ol1C'
loo1;.l~ itT the dlJily
cJltJrt
ft'Il,krf,,1 teMpted to Jell
pfef<.lll11lrefy III re$po/Ue

to Jljort-tel'''' 51'jHlJll. Th/tt
"Ioilid be perfG'ctfy fil1C' for
/Ill
derive "ddu, but #lit'5
Hot 8ilr$ 'jlJlHe. He 15 1001<-
,,,
"'l"'-I'~"
~
"
I", for IJ ,..1J;or brul<out

fro", /lloll,-tu,.. bll$G'
",
-....
-'H
,~
/elldill'J to II 5UJtlllll/lb/c
uprrcHd, JO II lilly chart
[J gf little (Mudt to
kl.., Stl/l, thl5 chari' i5 iJll
'}G'/lr IIfffll file lIfCef<Jy; itJ
'",pllisc 15 ,recll, cileourag/1liJ us to buy.
Prices, 11Ie ,lMCPftlst{}'Jrllffl, aild tile fOfce
IlldC): 1;.ccp rCllel1/il9 111911cr
levels; r:VG'ryfflf"9 Is til all
ups"ll.".
Qlmpilre the heigh! of the burs at the It'f! and righ! Iges of the chart. They art'
becoming much taUer, telling us that Ihe public is rliscnvering SINA lifter it lay half-dead
On th... floor for the beller par! of two years.
2.16
Entries & Exits
mmmm
EXIT COMMENT
Bill ~",. tIIrou'Jl11ke flrJf

top III July-a /<4JItj#roo tail
#l.7t Jellt prf~ rlow'" for a
~1E4b/e break. ,ft1ke r(,1tt"
erl,e fJf #1c chArt, #tI:rc I.l d
"
...
I II
bit fIf 11 bearfJl1 rliVer'Jel1ee

ill MACD-HlSt~ralf<.It I~
11M I pure dIVer'jcl1U

beuuJe tIIc lllrlreltor hAj
l'!l:Vcr cro~~clf bc/Doi tero
betJ.,eell ItJ ]/,lly alld
()t;tolxr PCd!<J. ,t J/fb~J,
/1CVCrtkdCll, 1tI.rr b/,lIlJ are
bccoll4l~ IofCI1/(.J:r evCI1 n
prlUJ rlJe kl-gl1cr. Bill, d
e/aJJlc cl1d1Ti~t, idt:llt!flel
#1c I:y revuul pdttcnt
durllf'} #Ie II1Jt Ddr dM
JeflJ I1dlf
-...
.
-...I 11
1III
.~._-._----
.,
P
-'
Itr
I'
rl ill
. ,)'01
./>-.
"'''~:::''''''''::;:'",",,------- ,.c.",,,. .:;~-:::," I10, .,lIlIb,,, ,I ,.
f -:...,
. .. .
of hfJ po~ffioll
OKI/ above VII/ue.
At the right edge of Ih" weekly chart Wi.' sec that the Ul.1lrcnd in SINA i$ ~l~rtins to (un inlo
resistance. This is not surprising afler ils astronomic rise from $1.02 10 over $45. Many
bulls arc: silting on maSliive profits and arc: prone to cash out at any sill" of weakness. aeederatins downdfllfts.
..
1ft #1c rl911tcdge of #Ie

ellar1, prleCj l16ve fl1l1e",
be/DIll ti1clr f,ur 0111, #Ie
Ilf<pul~e syJtclI4 IJ red. Tllis
-'.
IJ 111e firJt rcd bl1r 111
allf<ojr. ye-/r. " lOla'ul'Ve

uptrcl1d il,s ellied, 411r1
#Ie Ilf<pulJc lyftelf< al/o"'J
UJ TO sell short Dr Sll1l1.rI
4J./Ifc, but 1101" to 90 1011'J.
BI//, uJ(Il'} elmie cfltJrtll1'J

IOlcrl1orIJ, rel1ekc1 tile
s.101e verdict I1l1d eXltJ Ills
lOll'} p!Jjltfoll. It Ill101"
UileOlMlolOIl for serious
tee/tllle/.IlS, Ujlil'J dlfferclltfICc111od.l, to .rritle Itt
JIl>llldr cOilc/Uj/o/U.
.,
..
.
,r"
. _ - - - - - - ;-~
r"
" l'
1
~
'''''I''
;;, , .
.~
. .. ,
..,.'
..".;;::;;",~.'''II''tlllllll'''I,,.t
.... \-
-..
SINA h;ld Slopped rising, trn(ed OUI a tOP formalion, and stnrled 10 brtak down. The
third bar from the right look pricc:s to a nt'w recurd hil;h. nnrJ 111~1 false bWlkotll appe~rs
10 have marked tho? lOp of Iht uptrt"nd.
Chapter 11 William Doane
IIii!!'IB BILL'S ENTRY
J~J
W 91
~I I
~
18,00
16,00
14,00
11,00
10,00
8,00
6,00
4,00
1,00
\I~\""'{"I""I~' Jrl~"NJ!J\,J~\\'I/'\jrJ
~
% %D
00
ro
DRAX
1101'c big bascs and this looked like a dassic-nut a two- or three-rear base but a IO-year
base.J felt convinced this was going to he good :Imlnolifietl several of my elienls when the
stock was arnnnd 53.50.
5,00
4.00
3.00
LOO
1.00
,00
..., 00 ... '" "" 01 "" ... ... 02 ... '" -
Q3 ... ...
III January 2004, I felt .I.e slock was :lctiny well and was about to begin an
Ilptrelld of some imparlance. It broke abow: its first dowotrendline and was weU on
its W'Ly tOWllrtb breaking its second.
21 7
218
Entries & Exits
Iim'!m
BILL'S EXIT
....1
00
This stock may still work
-.
".. 01
OJ
DRAX accelerated after it r.Jllied ~bovc its S3.5O-S3.60 breakout level. I entered in
mid-Jannary. and b)' late March, had a dcccnt profit as it gOl up 10 ne... rly six dollars a
~h<lre. lIutl expected much, much more. I luoked at this slock's lO-ycar base :lIld, kl1ow_
ing that the larger the base, the greater the f'Otf'l1tial,1 stayed with the Siock.
oul welt at rome point in

the future. Still, it was a
dl~ppointment to me that
7.00
6.00
5.00
1.00
3.00
ils impressl~e breakout

did not result in an aboVe
average advance. Thi1; l1ade
in DRAA is a Il'mindef that
III
a bIg bilSe 15 oot a guaran

teed road to riches and
thai one must constantly
be aware 01 exceptions. A
perlectly clean breakout
will, on OCCllslon. fail and
pull back into Ihe base frQm
which It emerfed. I had
not anticipated such a
1= of momentum.
7.00
6.00
5.00
1.00
3.00
2.00
1.00
.00
-1.00
tOO
LOO
.00
-.
"" 01 -
..
02 -
"" 03 ..., ...
-LOO
The stuck suddenly aborted and kind of died on me. It SlInk back
toward its bIT;jkout Icvd and then wenl sidel"ays, with a downw... rd
drift. I did not like itsactiun during til<! hrc:lk, as it pulled bad:, and 50
r cut m)' Il).'l.~ and 8"1 uul.
Cll~Jlt~r
12 Willi~m lJo~nl.'
219

If' wt:re to trde till!
~I
o.
',.
1\'\"II~""",~~j -~'~I~IIII~:'::"/"'"">'~-='"--~'
"l
iii
,,"'\J"--'''
\Io.'~~,hlf~t"
DRAX ShllW~ a bemaiful b~se, eilpable of supporting n major upmove. Still, I wnulJ ljk" 10
play d~vil's advoc:llC and pre.~ent n bClIrish ClIse. First of ~lJ, stocks have inl'nia, aud lhal
inertia in DRAX is definitely sideways. S~c()ndly, wh~[1"v~r it rose towards five dollan in
recent yenrs, it gOI clobbered and fcil back inlo the range. Nnw lh"r... is a danger of that
lIappening again.
II
'.
ltD&k, r'd be /MOfe i~clittr;d

to Try IWI !1fofb It below
fWD dOl/offl, wk.:re ft
dcclfJlcI. OJICC .:very few
ye4N. 1llcre It bcCOIMcI. of
fof/kJl'II')CI: dec/iJlfl}
Wet 50f, ffolM bo. Still, I
would Jlottry to t4/k Bill
out rJf klj trtk. f6Cl! jcr(Dftl tr4icf It<u l!i:S Wlr:11lD<lf,
lid Bllrl tlppfo4Ck (j
IJI1"CfJl61/y COJ1j(jtcJlt 411
"10m for kiWI.
220
Entries & Exits

DRAX is accelerating on the I""eddy chon, risinS at an e\-er slee~r :InlSll.'. high above ill
value zone at the right edge of Ihe chHt. Nutice the angle of the uptrend during the fir~t
half of 2003 and cnmpare it with thl.' 'llll!:le orthe second half of the year. Tu me. such accel_
eration tends to mark unsustainable movC'S. Still, this is ".~:tdly wl.al Hal spok" about in his
interview: ~A stock erupting from a long base 1ll.'O:US a charge to go up. Some ~op1c say it
is o\~rlxlu8ht. hut I say il is just a beginning."
The Impulse system is green at the right edge of the daily ch:lrt. 'llIuwing us to huy
or sland aside but not to go short. The moving avo:rago:S teUml.' lhat lhe value of DRAX is
somelvhere between $2.74 and S3.19. whill.' the stock is trading nC:tr four dolJ:lrs.lf I Wanted
to buy DRAX.l'd be waiting for it \...ilh my buy orders within thl.' valliI.' zunI.'. Ag.,in, Bill has
his own methods lhat work for him, and his I.'nlry is fully consislent \...ith his approach.

All serious Iraders have several features in cnmmon. One of tho:m is thatlhc:)' pay just
as much altention to exits as thcy do to "utries and sell when Ihey sec an exit signal. Once
a tradl.' gives them a elear irul;calion that it is nO! working out, they do not h3ng around
1Y00iting fur OIn imprUVClllenl.
Bill likes to buy breakouts from long bas"s. ami wh~n a breakout fiules out, he tiumps
his stock wilhout giving il a Sl.'Cuntl cllance. The Impulse syslem turned red some time
ago. allowing us to sell short or stand asidc but not bc long. Bill gcts out of this trade with
a minimOlI loS!i anti is frce to go looking for bcUcr opporilinilic:s.
1,1
,,1111'
1",1
"II 1I
1 1111
"
"
"
~J!
'
-~~\
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'.
"
,.
'.
~i111 , , ,
(II,
"Il!!?'~'lflul"'::"""'t""I~IHII~tll""."'''''''''''' '.";!!t'I,fii",
'.-
IIII
I
"I.~
J\
!
"-
.IIIIII",IIIIIII,.III",111111111111;1111
~,'.... ~
Ch:llll~r
11 Willi~m Do~ne
Application Rejected
My goal is to build my skill in trading using advanced options techniques to enable me
10 be successful under any market conditions, whelher bear, bull, or sideways. An addilional goal is to generate $250,000 per year minimum. I also seek to meet a minimum
of ID-15%/month ROI trading options. My current capital is $50.000. and I am using
Interactive Brokers as my trading desk. I also signed up for Worden to allow myself to
carefully search trades and to write algorithms for searches-I'm still in learning mode
with this software. I also need software to help track individuallrades allowing me to oplimile the progress of a trade and 'ine-tune my exits while simultaneously balancing risk.
-Trader
Your goal is totally unrealistic, and looks like a recipe for disaster. No Camp can save you
from that. Please be very careful and try not to lose mortgage or rent money. Reaching for
such extreme performance is sure to expose you to risks that are guaranteed to prove suicidal-if not on the first trade, then on the second, or Ihird, or fifth, The fact that you
have not been aware of that shows a dangerous level of naivete.
I am being absolutely straight with you, to the level of being blunt, because when I
see a man about to jump off a cliff, I yell. But I do not like yelling, which takes a lot of
energy, and I have no intention of yelling in the Camp. I wish you well, and please stay
-AE
in touch.
Application Accepted
I am a short-term trader (average holding period of half a day) trading futures for myself
and for a fund on behalf of my company, I am basically trading 2 patterns:
a) a continuation pattern aimed at buying/selling in the direction of the daily trend
based on momentum indicators and envelopes within intraday charts; and
b) a reversal pattern based on buying/selling bUllish/bearish divergences in daily charts
and supported by intraday screens.
I have done over 200 trades in the past eight months, achieving around 65% winning
trades. average win/loss ratio of 1.4, and no negative months. J have improved my consistencya lot but still have discipline issues, especially in terms of taking losses, My objective for the Camp is to be able to live for a week with other traders and have the opportunity
to observe how you deal with your trading and emotions on a daily basis. I am willing 10
Improve my bookkeeping discipline (diary, etc....), which I don't follow as religiously as I
should. I am looking forward to spending some good time with interesting people!!
Saludos, as we say in Spain.
-Trader
It is a pleasure hearing from you, and I will be delighted to see you and work with you in
Cyprus. Your results are very attractive, and both of us will need to work hard and be
inventive to improve them!
Hasta pronto!
-AE
221
222
Elllrie & ~xits
THE ROADS NOT TAKEN

Technical anal)'lits study charts in order to recugni7X price I':IlIerns and profit from them.
E.:J.ch tick reflects a trans,1"ion hctween a bUYl:r and a seller, but it shows more than an
agreement betwcoen (wn im.liviuu~ls. The buyer and the scUer arc surrountled by a cruwd
of other traders who exert a powerful emotional pressure, m:lking ~ll:h Ir:lue reprcsema_
rive of the t'nti ..... market crowd. Price CharlS reflect the behavior of all market p~nicip~ntl.
Academic economists used III view market participants as rational individuals trying
to maximize gains and minimize losses. but that theory is now l<;lsing filvor. Modern schol_
ars acknowlt'dge tht' importance of emotions in trading. This view has percolal...d into thc
onomic mainstream In a surprisingly high degree; rccmtly a Nobel Prize in cconomia
was ulyurded for work on the emotion:ll basis of making eronomic decisiuns.
I've Decn writing about the emotionalism of the m;lrkets for lIl,lIIy years. doing my bit
to clip the wings of the efficient market lheory. While lhe emotional basis of lr.lding is
inerL'llsingly recogni1d. we must focus our attention 011 the market's emotional pull nn us
as analysts and tl"'Jdt'fS.
We tend fO feel calm when other people tell us about their problems and offer tkern
I<ltionlll 5Olmions. Whell we deal wilh our own problems, we often become more emo.
tinn3!. It is C3sier to give advice to others than tn solve our own problems. As the level of
emotion rises, the level of Intelligence declines. This is why so lIIany lraders make hare.
brain~ decisions, buying l0l's ;nul shorting bolloms.
Billl,ruv;t1e~ :1n ~~ample of how a mature money manager goes abnut his work. He
de-.lrly knows his likes and dislikes and looh to trade only in sittwtions IVh~re he feds
comfortable. Ik can analyze a lO-minutc chart just as well as any day-tr~der, but this type
of trading leaves him cold, and he consciously avoids short-term charls. lie loves catching breakouts from Olulti'Ye:lr bases and scans momhly and weekly charts for sllch
opportunities.
There are hundreds of gaml:S in Ihe stock market, and no trader am be comfortable
with all of lh~m. Not eVt:ry girl you sec at the dub wants to dance with you, and not every
lrade will work for you eilher. In a perfect world. every girl ill lhe club wnuld be wild
about you, and every trode \l'Ould be prulilable, butth31 is nOI how the world l>'(Irks. The
sooner you develop a sense of cbrity about your likes and dislikes, the happier you'll he.
You do not have to imitate Bill's approach to trading. although you'd be fortunate to
develop his self-knowledge and disdpline. Out of all the S:lme:i in the financial markets,
you need to find one or a few that appeal to you and concentrate on them. If you're a daytrader, leave breakouts from long bases alone. If you 10\'(' riding long-term trends, slay clear
from catching daily reversals. If you like buying breakouts, forget about barg3ins. r..3ch and
every choice in the markels invol\'cs a trade-nff, a road not taken. A winner is a mature
individual whu can choose his mati and, just 3S importantly, calmly and without regrel
turn away fmlll lhe T03ds In! passes up. There arc many games in the financial markets, and
to become a success, you mUSI choose the one that fil.~ your unique personality.
Chop'" 12 Willam Do....
~11 c-lMoif {(OIM
8if/,
BIG BASE PAITERNS
,h.
I <o",i"... '0 b" f..clno,alby

multitude IJf indk.,o<s 11'10, "'"
.uppoood
identify buY'n& Ind KllinS l"'in'1. S1ill. aft.r "udy;ng
Ih."" I p",f.r oimplr, d n d,... wall nOlhin; bu,th. pricc :w:Iil.bl. (01 .".Iyoio.'t is ...... y Iml"'''.n' '0"'" ,ll" ,h.long-I.,m picIu", Iooleo lik< wh.. I h.W' in ,t.< hack or my mind. Fo,
I Iii:< 10 It.w<. IOftw.", pKUI" WI.UOWl "'" 10 mct ITom monthly d"" (ltIng-l.rm).
10 wcd.ly pk'u", (int.,.m."ia,.... ,mn), '0 1M doily ou,look (ohon'.rm).
AtI)'O<'< """ lpol.
bu, ,110 "ick is '0 .dju.' YUUt lncI,im<o. Fo, <Unlpk, I
work<:d fo, .......1 dad<s wi,h mUIlIOl fund ponfolio .... llIflt1'S. l:I:Iu"" uf tho ...., IIf
thoi, (unds, 'h.,. ""nno! buy In kou'" If ,hq nd ,"'" 10 1/\1 momh, 10 build. posi
riM, ,hon 'M ad.iso.
.diu'"
'huush'
~i'Y'
In ....""ging I hrdg. fund.l ""n oII,,".n my tim. hlKilon. It ""'" my .... ,t s""" to
1ft' alioo:k btxin.n upm.,.", wilhin. W<rt1O 10 do)'> after I buy it Tho ru.h iimi!>r '"
hirdying. hol<o'" golf or .inking. Ih .....po;.;nt... ln blskrtl>all.
Nol all bUll ....ull in winuinS 'rad<a. I doHly .... leh the J>CfCI'nll3' pin 0' loss fo,
IndNidu.1 i
ill nlr ponr"lio.lliU 10 cu, my lo.sco .ltUrl .,ldl<l my pmAts occumu_
10". It'. no, un ual ,a _ 10..... pin. in lho ponfolia la Ih, tune of I~ 2OO'Mo, ar
.100"-0, high.
$Om' I;m ' 'm quick Ind 1I'I<'<h.1"ialabnu, dildling Ilocleo wi,h
los5n IJf 4, 5, 0' "'. For this ,......" my ,unla"", is p'<I'y high. I hI'" found ,hal if. Ilock
i$ ming Iu be go<>d, il willlOl<lll< oUlll>o"ly .lk, I purchase: iL If;, hangs lroUnd .nd ",n
M! glil't" on lb. h"rimn.
5loclco 0' <W'lI groups of IlOCIeo will ofton &il oul on< bull cycle.nd he r-ty 'n ll" in
tht n'" On'. I ""lIlh" ",ocyclin,," and il may I."" six to """'" ","II from ,he pm"'us
price .... k In ,h. nul bre.kou' n( i",pm"""', Prinr '0 buyi~g. I ""n, '0 S" decli"" oJ'
yc.. 0' lWO 10 I d<p1U<al. downlndoul 1........ Th.n I wanl '" _ (our 10
l""" o(
sickwoyJ lTIIIW'm". oflw< dovdopmrn'. lOll"" aft... ,he ."",k brcokl ."" a sipiflC:lnl
....... ~ ;"""1, ~"n oulSldo n'\'\'rIIl bI'5 o~
WffkIy or ~n monthly cliorl, Of when
~. r<I.,i"" price perform."u impruvn, "I'""'i.lly "'\lin~
<lli".. of your ll';Jdi_
.....,1 o..........".._foor_ya.. bnr
BoIlQm line Aft., "udy;ng "'ff)'Ihing undor Ill, sun, I ~Idod I" .nd lI:o..... a spc
cialist in I""ply "IliS flu< Pon.",.,"
'0
,hi. "'."'"
"""'!<OU,.
,m,.,
h"
1''''''"' '" ,hi.
A"""
sa
,h.
"tuu...
LoI"",,,,
223
Name:
Lives:
Trades:
How long:
Trading account:
Software:
Peter Tatarnikov
Moscow, Russia
Com puter tech support
Forex
Since 1999
Medium ($250k-$lm)
Rumus
CHAPTER 13
PETER TATARNIKOV
WE ANALYZE PEOPLE
WHO ANALYZE MARKETS
n~w
n April 2005 I
[0 MOKOW \0 l;onduc( master classes in three Russian cities for the
country's largest Fore>: firm. J hoped lhal my emphasis ull the nc~'(j for discipline and
money management would help their clients. I enjoyed louring fl:ll1ott.' ('ilit'll and visiting
historicalsiles I'd never seen hefore. Al the company's Moscow hl'adquartcT5, I met its chief
dealer; Petcr ~s in\'Olved in day-ta-day trading and lmJ the brisk air of a man who lives
by pracliCOlI dt<:isions rnther than markNing. I callle to his trading room behind a lockl-d
dour which he shnred wilh two olher dealers and a secretary.
',,,as born in Vladivostok, in Ihe Russial1 F:1T Easl, un Sel'!t'mber I, 198Q.-we
call it "The Day of Knowlrogc~in our country, the first day of 5I:hool. I starlL-d
workins for thi.~ fQra firm al 11, hdpin~ wilh computers, doing the night
shift. Our cli"nls lr:ul" around II,,, clock. and our software was JUSt being
devtlopcd (Rumus, which [ found very I't'rs:Jti1~ and robuSl). In 19911 rhe: company moved to Moscow, lind the)' inviled me to come and tryout 10 l~ a
de:lf"r. [ n",v 10 Moscow. bUI after testing me. they said I wasn't ready. and put
me into tech suppurt. Six l11uJlth~ lal"r, in 1999, one of our de:alers Icfl, lind
they promoted me, with a one-month trial period. fI.ly job was lu lake ortkrs
from clients and manage our firm's position.
I remember my first shifts as a deall"r vl"ry ",tiL I was working nights,
Japanese yen was going Cr;J~Y. the: Bank of Japan 1Y;1.~ inl"rvcning. Su much was
happening that son\Ctime$ I'd call my (olh::agues with qutsli~m~, waking th"m
up in the middle of the night. Everything I know today Ilearn..d from S"rg.:y
KOl'zharol', who was our second deo1!"r at Ihal lime. Bl' 2003 hI.' bcramc our
chief dealer. and aftn helefl, the linll promnl~l me 10 this job. Serge)' and
I remain in touch, and I can still call him with any qucslions.
As a deakr. [ t3k... orders from clients-they pl:!cc orders through nur suftware or by c;llIing us. Then we lurn around and place a cumulative order
in the intcroonk lIlarket; for a lar~ client, \\"e may go there immediately. If
the order is small, say und... r $100.000, IV< tak.- it uunelVdi. hut we monitor the
225
226
Entries & Exits

company's total exposure. We have a limit, and when wc reach it, ,,'C go to the
int<:rh~llk llmrkc:t 10 lily
Ihe e:xcess.
We truck not only the size but also Ihe volatility, things like the AI'erage
True Range- of currency pairs. Wt lire- the largest fore... firm in the country, and
as leaders, we usually do things first. Our competitors keep copying us; the)'
lag behind, butl:;ctthe benefit orleal'lling from our mistakes. As Ihe leaders in
the field, "'c'w mad... our sharc of crrors. During the 1998 Asian crisis, our s}s.
tem ullowed clients to dellll.t prict'S tlmt were more than a minute: old, lind the
firm lost money. Our system has been improvcd, and now it combint'S quotes
from about 70 different banks and dealers. SOmt banks arc belter for SlIme
currencies, lind the sy~tcm knuws Ihllt, looking fur cerlllin banks. If we get a
bad quote-we c,,11 such out-of-the-range quotcs "boogers" in Ilussbn-our
system querics the dealer who provided i1.
Clients' urders gu through Ihe In1<:roel Dealing System. We were tht' first
cOlllpany in I~us.~ia tn show dients how our dealing St'lflw;lre wor~. We also
developed an artilicial intelligence system to handle rouline orders. The maximum margin we offer traders is 100:1, but we recommend limitinll it to 10:1.
Wt: issue mllr!lin calls buIl,\IUIY d,,,"ts to tr"dt: ulltiltheir equity falls to 7<'ro.
Sitting at the dealing desk for months and yc~rs, you begin to nutice thilt
almost everybody docs prelly much the sallie thinr" repeats the same mistakts
uver and uver again. Tht:rt: are wt:ll-knuwn rult:s thai tT3dt:rs ket:p breaking.
First of all, tht:y ding to losing positions and kt:ep adding to them untillhey
get hil with a margin call. "''hen people have a loss, they tend to hold, but
when they have a profit, they cut quickly. In our trading, we do the opposite.
Other traders take a position, and if the market goes against them, they
not only take a loss but also reverse. Then the markettuTlls again, and they los.:
for the second time. They were right the first time, but instead of winning,
took 1\'10 losses. This happens in every center-in Moscow, VladivostOk, or
Yerevan. People are t~ Silme ..verywh..re. Traders ,...ork in difft:rt:nl dtit:s, but
they all move at OlKe, like an avalanche.
The markel reverses II'h..n the mass of traders starts giving up. 'eoI'll'
place stops at obvious supportlll1<1 resistance 1t:"e1s. The market keeps violaling those levek, triBbering their StopS :llId rcvt:rsing, JUSt a_~ yuu shll\~d in yunr
master class. The market approochcs a resistlnce level and there, 10 ticks abovc
the previous high, is a mass of buy orders. The mllrkct triggers them and then
goes down. It does thoe s..,me :ltthe luwll, l't'uetrJting them by a few ticks btfufl!
turning up. I used to wonder why it does that. The market doesn't knuw where
our clients have their stops. This means thl: same stops are placed all ovt:r thc
world. It is some kind of unh'ersal human tr.Jil.
When ps)'chology kicks in. the amount uf money a trader has in his
account dot:s not mauer-the)' feel they must aClnuw, this mument! Ikller
capitalized traders simply put on bigger positions. They rna)' usc MACD, or
Ellintt, or RSI, or ~strologr, bUI u"d~r stress, when support or resislance l~"el$
are being tested. th~y;lll tr;lde Ihe same way, regardless n( their mt'thod. Peuple
in the crowd usc different anal)'scs, but :til behave the S:tmc ,,'ay. Their problem is not anal)'sis, but psychology. Tht' mlljority of markct participants :tel
with the crowd, not JUSl in Fort'x bill in any market. A sudden cvent occasionally allows II CTuwl! tu win, hut in Ihe IO!l!\ rUI1, the cruwd always lu:iCs. When
urr
Chapt~r 13 Peter Tatarnikuv
I ,all my friends ill olher tmding desks or banks, and lhey nil tell me their
clients ,In: long lh~ cum, I know the cum must fall.
One of our clients is a famous surgeon. He has been losin!! money for
years, trading a smull accounl I.,.ithout ,I clue. Once he doubled his mone), and
Wi\5 very surprisell, but then Inst it all ag,lill, He doesn't have the Internet,
dOdn'tlOl'lk at charts, Once he called Inc and said, "Peter, I want 10 do something, whal should I buy or selJ~ Quick, I need to run 10 the operating room,
will call you fvr H 1iI1 :lftn sllrg~ry," I:lsked him about ii, illid he said, "1\'ly wllrk
is to CUI people, hut in the markeu I rclax:' A llllder without a SyslCI11 will lose,
aud if you Inldc against him, YOlI'Jlwin.
SlIccc.>5fuJ tradcr5 'lhv;IY~ act differelltly frol11 the 'rowd, We hml i' tmdcr
who slarkJ with a SI11;,1I ''':COUllt alld ill less th;ln two years made more thall
a million dollars, I show\.'d him III\.' indicator I del'e1oped for measurins sroup
O\.'hal'ior (~ bu,\). Hc found that most ur hi~ losing trade~ occurred when
he tr:,dcd in the 5:lnlC dir~'CtiOll as Ihe Illass of traders, He found that when he
uccasionally lraded with the crowd, hl.' lost 1110n\.'y.
""Il'f says: Tradrrs all OI'er the 1I'0rld look for Indlrators or tile mood of tll~ markel croll'rl.
1110sc ladic~lu~ n:nl't:llhc f;Klllml lIIuSl e((lwl11l11'l1Iocrs tltiJik alikl." 3nd ;In' \\'wul( Illuch uf
Ihe tilll~. Dllf l!u:11 is lu Ir:ll'k till' crowd :11111 do Ihe f)lllll1.~lle of whal II dl)(.'<;. Thr~ I~ why WI' del'rI,
url'd our Indlcaror for measurIng the mood of fom trnders-Fon:x Club Sl.'IItlmcnl ludex, or
FCSI. We (.O:Jll:ul~ Ie It un tIle basis of Uptll Ir~dl'!l' by Un' Ihull~-dUds uf difllis uf our Furl''\" Club,
TIll' i1111 il~llor's fonuula is 1'1.(1)' Shullre:
FCSI;o (UT) x 100
L'" the number uf long positiuns in ;IIlY Cllfn'lllY
T the nu IIIher uf allllDSillullS iJl anl' CUmllC}'
;0
FeSI reflects the pereentage oflong positions In any rumney amung the cllems ofour nno,
Im:itl;rtlng [Wl1\'l'Cn 0 and tOO. Whl'n il rise; a!JllI'c 70, il hl'l-TIllIl'S ll\'lTIKJUj/hl. When it falls
below ](J, It bemmrs OI'crsold. Values betwttn )0 and 70 a~ neutr.ll. Dur next SII'P was to
dl'velop a mechanlral trading system based on FCSI.
We arc a r.:lail (Qll1panr-w(' cao analyzl' a large numb('f of trad('S by r('al

peopJr. On the basis of our data, we CJ"C\Iled an indicalor of l11as.~ bch;lVior and
call... J il FC:iI-Fore); Club Sentiment Imle!c II refleclS lraders' heha\'ior
Ivorldwide, eV<."ll though it is based on our dcakrs' data, FCSI is somewhat
similar to what Ihe Commodity Futures Trading Commission docs in lhe
United Statl'S, publishing summaries of track'rs' posilions in diffcll;'nl markets.
The differencl' is lhal CFTC publishes its data wee:kl)'-we: do il online: aJld ill
real-time.
We ha\'C built a trading s)'stem based on FeSt Trading against tm. crowd
is not new, but \\'e inl'cnted 01lT own sysll'm. In dl'l"t'loping it, we had no preconcei,~ id~wc did nOl know in advance how it would work.. Ir lurned
out to be an automalic system-wI' go short, enterins the market on cJoS!' if
FOREX CLUB
SENTIMENT INDEX
227
228
Entrll's & EXits
Screening Software
I am writing my own software for daily preliminary stock selection. I am looking for an inexpensive Internet data feed for
-Trader
daily stock updates.
Do not waste your time trying to reinvent the wheel. For sorting and filtering, look at the inexpensive, but very effective,
TC2005. Spend your time analyzing data, making decisions,
and documenting them.
-AE
Fe'>l rises abo... l:' 70. We go long, rn~rkt'l (111 close, if I'CSt falls bdow 30. WI'
cover shorts when it drops below 60 and selllon!;s when it rises above '10. Our
analysis takes 10 minutes per day, we trade on close only and do not look at
the computer intraday. We have been testing this system for hvo years and now
we trade it with real money. We ~re up 12% for the first quarter of:!OoS. We
have clients who usc this data, and they trade differently, but this approach
works well for us.
WI:: dn nnt analY7.e money; we analY-lt' the number nf trading decisions.
We do not look at any individual account while calculating our indicator, only
the number of all positions. For us, a $10,000 order to buy the curo and a
SIOO,OOO order are the same--tngether they represent two orders to buy the
eum. Y".tenl1y, fur example, we hau 2,000 ul""" pu.itiulls ill the eurn--aml
most clients were long. The euro went out at 1.2917 last night, but now as we
speak, it trades at 1.287S-it fell, and thai's how it should be. In trading this
system, I am not interested in the pric" of the euro nr lhe yen. WI' do nol ;lllaIyze markets; w~ analyze peopk who analyze markelS.
I lold Peter about John Maynard Keyn~s--th~ famous English economist was a canny
stock picker, .'t1ecessfully managing the wdowfTlent of the University of Cambridge.
Writing in the days before politic~1 correctness, he compared profilablt" stock-picking lO
forecasting the rewlts of a beauty contest. To win you did not have to pick the prettiest girl;
y<Ju ],;"Ilo tlt-termine which girl was most Iikdy to be picked by the jury.
l'elt"r spoke aboul his all-consuming passion for the market: His only nlher interesl is
his family, "[married early, over Illree years ~go, and I have no regrets. My wire is a big help.
I anl always here, in the trading room, away from home. She totally took over our day-today lives. our child. She i.~ totally loyal. I can work nights and she does not g~l angry, 1
always look forward to going hnme after work." WiLb two assistant dealers pulling up lrade
records and charts, Peter selected two trades he wanted to show me and printed them out.
229
Chapter 13 Peter Tatarnikuv
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Oail~ bar chart

Daily FCSI with a five-day simple
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Euro
At th~ right edge the euro is rising, and we can see in the lower pane of the chart that the
crowd likes it The rising FCSI shows that the crowd is buying ioto this rally. A few minUTes beforl: Ihe c1osc, resr rns~ abov~ !I0. My system call~ for shorting when Fcsr dme.~
above 70, and J followed my system-shorted the fUro lll:lrket on close.
10 ..
230 Entries & hils
~ PETER'S EXIT
]
Sheri
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Cover
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Tbe clIra went up for a few days after I shorted. It kept milking marginal new highs, but I
never covered. According to my syslcm. I have to hold shorts until FCSI falls belQW 60 percent. It never went below t"nallevel; on the contrary, it kept rallying. even rising above 80
on several occasions.
Ar. the euro began to slide, the crowd of tracler.s became le.s.s and less bullish. At the
right edge of Ibe chart FCSI fell belcnv 600/0, nearing 50% just bl:!fore lhe close. My system tells me to cover wht:11 FCSI penetrates 60%, and r exited market on close-purely
mechan icaJ.
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Chapter 13 i'et"r"["larnikov
J
keep wUlchillS my system, meusuring its performance, and analyzing its parameters.
I allow myself to think about my system, but not violate il. Of course I feel a Iiule more
ccrl'lil1 if u simil;1r signal emerges at the SUlll!: till1e ill S/::veral currencies am] nusses, but J
luke every signal with the same level of determination. The only thing thaI can keep me
oul of a trarll' is a low number of milrkct participants. If there are fewer than 10 positions
in ;' currenq, thut signal bel:umes suspect.
,1''Jl'!!I~
jV" . 'W"l"'r;rn
...
'.
The weekly chart rdlcets an ongoing bull market in the emu. This chart goes frum th.
lower left ,orner lu the upper right-you du not hav" to I"", a tedll1ician tu recogni'l." u"
uptrend. lillie wonder Ih3t public seliliment, measured by Peter's index, is overwhelmingly bullish.
A health)' bull market usually ineludes several corrections. Some of them are quite
deep, knucking out weak holders and allowing the pros to add to long pmiliuns at lower
levds. The two moving averages reflect the average consensus of value. Occasionally prices
rise far above value, but then snap back into the value lOne between the two MAs or el'en
lower before resuming their advance. This happened in lilly 2002, lanuary 200], May 2003.
and October 20m.
Another snapback began in December 2003, and the question noll' is whether it has
run its course and a new rally is under wa)', or whethcr thc snapback is stj[] continuing. If
the firs! is lrue, we should be going long, hut if'he sccond, shorl-this is" miljor choice.
Tho: right-must hilr on tho: eh"rt is "hove bnt!' MAs, in d,e <)vo:rv"lu"tl 'lOll". l1u?
MACD lineS are high aud turning nat in the zone 3ssodated with lops, while MACDHistugram is declining from3bove zero. The Impulse system is blue, permitting both buying "nd shorting. Shorting appears much more attractive than buying, considering prices
are above value and the MACD behaviur.
231
232
Entries & E:Uts
1Jl,: d#11y M"Cll-Hf.1toqr",",

!JwoIt:d" be#rl!k d;vt:rgellce
~II m. NDVcu-tbcr "lid
]6I1u"ry PC6/tl. Tile Il1dl~
Cilfor rt:tu/'IIIt:"d "bwt: cero
11111lc: P4!t 1)10 d4y! "lid
I! 110111 ill tlfc 6re6 !uft4ble
for I1I1D#rer dO/lll!lII"rd
rCVer!d/. Tkt: ddily Ilftpu/!t:
I! ,recl! 6f' #lc: rr,1rr cd,c.
I ",ould kole( lfty ffllger Oil
11lc: 1"ri~r kcre, ft:ddy
to !lIorr II! !001! d..l:
#Ie:
lu-tpul!e ,De! off ,reel1.
~-~
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""."tlIIUltlUHlIllI",,,,. "'II"""'llllllll","~,':j'U"""""""'~"""""11It"'!I~'
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The daily chari shows that the euro has relllained essentially nat after bumping its
he:Jd against the ceiling in the first days o( 2004. All that volatilily. <111 that volume (or a
month--and no progress! When prices go nat at a high level, it is usually a sign lhatthey
have run into resistance and a downturn is coming sooner mther lhan later.
/r-- -""
L--<~\_ _
,~
1111111111'11""'IIU''''''111l1l1W'111Il1'''''''lOll''""" .... """""IIIIIIIIIIIIIT":':','I'j""'11II111
Chapter 13 Peter Tatarnikov

#ltr Peter shorted lhe cum, il slru~led 10 SO hisher for a few rbys.like;l bull in a bulllight with 3 sworcllhrough ilS heart, slilIlTying Il.J rUIl, nnt ~t knowing it is dead. Prices
poked briefly above their upper channelljllt: and took Ollt their lanunry peak by ~ few
ticks. dl.'aninjo\ out slupS on shorll'Ositiolls and slH:king in amilleurs \"ho placed buy SlOpS
above the January peak. Prices stallm there, 'he MACD-Histogram turned down, turning
lhe Impulse blue, and 'he eum plunged 10 a new low for the year.
At the right mge of the chart. the t:uro is below ill> lower channd lint:, d....ply oversold.
It is trading ncar the lows orthe ytar, btars are in conlrul, hut;l few rainl bullish signs are
slMting 10 emerge. MACD.llistngram, MACU lint'S, and Force [nde;\: are at le\l<!ls nnr
mally associaTed with bottoms. Prices aN below the lower channel lin.. ami so vaslly over
sold thai it would take a disaster to carry Ihem lower. That would b.. an extraordinary
event-something lhal amateurs look for, whiie professionals btl on probabilities. When
prices ore overbought and near the upper channel line, the pros look 10 short; wilh prices
o('ar or below the lower channel line, they look to cover, jusl as Peler did.
Iii!i!!IB
PETER'S ENTRY
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BPound
The Brilish pound has been in a trDding r~nge. At th~ rillht "dEC hullishnel>S sudd('nl)'
dmpped 10 allllosll0 prrcenl. Since the syst~lII trlls me to buy when FCSI falls below
30 p..r(Cnl, I went lonll GilI' market on dose.
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233
234
Entries & Exits
I::ii!!!IB
PETER'S EXIT
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::::Lj ,'!'.., .~
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::::: ....::l .....,.....l.... :!:.:::1.... ::1::::::r::::r.:::::r:::::r::::.,I.... :J:... ::i: ... ::i.. ::::1::~::::::l::::::i::::~: ::
The rally had no ruIlOw-lhrnugh, hUl :IS price.~ hUllg nnt, be:lrislin6s bl::g.m 10 decrea5e.
When FCSJ rose abol'e '10 percent, I sold, tnking a loss. My buy signallurn~ OUllo be ral~
in this case. Other lraders made money here; I lust muncy.
t r.
;
.
.
,
.
;
.
.
_
._.
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.- --+
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[t is impo$Siblc to make money nil ev"ry lrade. I keep

putting on trades and watching the markets, always trying
to c1evdop something n~w. I practically live hell', in lhis
office.
Ch~pter]} Peter'I;1f~rnjkov
The weekly chari shows an uptrend. with prices marching rrolll th~ low~r lert to the upper
right corner. This bull market is less orderly than the one in the euro, but the general pattern is the $lIllie. The level or v~lue.trackedby the EMAs, keeps rising. Pekes oc(;lsion~lly
spring above value hut then return. as ir pulled back by an invisible robber band.
Near the risht Nlge or the chart. the pound had rallied above value. then pulled b~ck
and Sp'''rll thr~ wl'Cb in its value ZOlle. The rightmost bar is rallying out or the vallk ZUlU::.
MACD-Hislogrnlll is slill declining. but ir the rally continues ror another week. it willmm
up, creating a shnllow hollum. Notitc thai its past three bottoms-May and September
2004 and the current one-are becoming more and JIlore shallmv. This is not a diVt:'rgence
because prices are also gelling higher, but it is a sign that bears arc growing weaker. The
Impulse system has lurned bluc at lhe rillht-m(l.~t bar-hy going off red, it removed a prohibition against buying.
The daily chart shows a nice rall}' that began two weeks ago. ['rices rel1 rrnm lheir
December peak ani)' to find support in the 1.86 area. MACD-Histogram docs nOt shaw a
divergence, which would have been perreet, hut other buy signals arc present. MACD Lines
are lurning up, and the Force lnde:\: has (raced out a hull ish dhergence. Eilch downward
stab or pric~s since Jnnuary was accompanied by a more shallow hot tom of Ih~ furce lndu.
showing lhat bears were runninG OUI or Sleam.
235
236
Entries & Exits
~--
~/
'--. !lll !.'~" II~'''''' '~I!!LI:':'~~L'!Jfii 11111,1, ",, ,.... ,., ,1111111 ,'"
I'
"IIIIIIIIIIIII~~'
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".1
At the right edge of the chart, the Impulse system is green. Buying at this point means
chasing prices a bit, but they are not too far away from v"lue.
Over~optimizing
a System
I recently started using TradeStation to rigorously backtest

and optimize the various parameters of a system I believe to
have a sound basis. I am concerned that, going forward, the
results may not be as good as the tests because of tile "curve
fitting" issue. How do you backtest properly without curve
fitting?
-Trader
The only testing that seems to work for me is manual testing,

I open my analytic software and Excel, scroll my stock data to
the extreme left, and then look at the right edge, clIcking forward one day at a time. When I notice a signal, I write down
my orders for the next day and cl ick again, keepi ng good notes
in Excel all along. This is a slow process, but the only one tllat
imitates the surprises and uncertainties of trading.
-AE

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SITS TO SIXTEEN TRADING ROOM

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Septelllber 11. 2001,

tIle Wor1rll'rnde Center

nlld vanished FOII'I o/lr lives.

A lQgical Way of lu<>king It Thinll"

un Do the lhd;ng for Me

Andrea Perola Si",,,I. eh..l., d .... r and Um:!ullc",d

Sohail Rabban; Th. Discipline of Loss Contml

A Suc=ful Engi""". Has.

Looking for Favorabl. I'mhahilitio:$

""rry Loworn A Squuu Play

Dancing Like Fred

Only Going Rackwards

Price-Volume Behavior [s Steeped in Reality

The Rigger tbe Found;llion, the Taller the Building

We Analyze Peuple Who Anal}7.c Markets

Technical Signals in the Fundamental Cuntext

Du It Right the Next Time Around

ENTRIES & ExITS

Enlries & Exits

Afle, "",ding my boob.

HOW THIS BOOK IS ORGANIZED

' lor.lIt ..... pI...- .. """".... ,"" I

Entries & Exits

WARNING: OBJECTS IN THE MIRROR

..In & Ir.~.'

ba don t e TTl' Sa en I:r 'ding systcm thllt I clevet()~d in

I lik. ",inS "..n pon.",i,lmoi"s ...,,.S<o (EMA.) on my eh..",

MACD LINES AND MACD-HISTOGRAM

10 Entrit'S & Exits

THE IMPULSE SYSTEM

green" before shorting and off r~d" before buying.

wri~ing thi.~ ch3ptl"r~f1~sl

met with S.herri. twice while

Looks OK 001 AOX IUlned_n

Chapter 1 Sherri Haskell

~ ,Ii I~ :dI' III ~ n-IIIi JII

Enlrie. & E.~t

Chapter 1 Sherr! Ha l<eLl

TRADE 1-ENTRY COMMENT

kiNe not .seen

Entries & ExilS