"THREE POINT SYSTEM"

© copyright 1998, Chick Goslin

There are three SMR trend/momentum lines. (Trend - 49 day moving average, "dotted line," and "solid
line"). These three lines are "reasonably reliable" indicators of a markets current long term,
intermediate-term and short-term; therefore, whenever the "majority" of these three indicators are
pointing in one direction the "odds" should favor that direction for the immediate future. The "Three
Point System" is designed to quantify what these three lines are showing at any one time. This is done
by assigning aach line a point value of "one" (anywhere from + 1 to "0" to - 1).

The "Trend Line" is awarded points solely based on its current direction: +1 if trend currently up, "0"
if trend sideways and -1 if trend down.

The intermediate-term momentum line (the "dotted line," the "confirming line") is awarded points
based on both direction and location (above or below zero): + 1/2 if pointing up or - 1/2 if pointing
down, and then + 1/2 if currently above zero or - 1/2 if below zero.

The short-term momentum line (the "solid line," the "timing line") is awarded points solely based on
direction: +1 if pointing up, "0" if sideways and -1 if down.

The trading "theory" is that whenever a significant majority of three reasonably reliable
trend/momentum indicators are pointing in the same direction then the odds favor the price moving in
that direction for the next day.
REVIEW

1) The "Trend Line" is a fifty (50) day moving average of the price. It is referred to as the "Direction
Line" in book. Only pay attention to this line's direction, i.e., no "high" or "low" for this line. Award
one (+1) point if currently up, zero (0) points if currently sideways, and minus one (-1) point if
currently down. Give this line a "margin-of-error"of up to ten days (i.e., meaning you may adjust point
value up or down if you see a "realistic" chance line may change direction within the margin-of-error's
time frame, forty to sixty days).

2) The Intermediate-term Momentum Line is an approximately three week moving average of the
short-term momentum line. It is called the"Confirming Line" in book. Both its direction and location
are significant, and therefore measured. Award one-half point according to its direction (+ 1/2 if up,
-1/2 if down); award one-point based on whether line is above or below zero (+1/2 if above zero, -1/2
if below zero). The margin-of-error (adjustment factor) for this line is up to five days - meaning this
line should turn within (plus or minus) five days of virtually all significant intermediate-term price
turning points.

3) The Short-term Momentum Line is an oscillator constructed by subtracting a roughly two week
moving average of the closing price from about a half-week moving average of the price. It is called
the "Timing Line" in book. Only the direction of this line is counted for point purposes (plus one point
if up, minus one if down, zero if sideways); however, it is important for timing of entry and exit of
trades to pay attention to this line's current relative (to recent highs/lows) position. Normally it does
not "pay" to buy when this line is in area of recent highs or sell when it's in area of recent lows, and it
frequently "pays" to sell when it's in area of recent highs and buy when it's in area of recent lows (i.e.,
this is known as anticipating if done before the line changes direction).
TREND RULE: Only count points that are with trend. If trend is up only count pluses, if trend is down
only count minuses. In other words, do NOT "net out" total points by subtracting "minuses" from
"pluses."

Basic Rule - If the trend is up and point total is plus two (+2) or higher, then consider the "Status" of
market to be currently "Bullish" and therefore long positions are justified (think of the Status as a form
of "Position Indicator"). If the point total comes out anywhere between plus one and a half (+1 1/2)
points and minus one and a half (-1 1/2) points, then consider the "Status" of market to be "Neutral"
and therefore indicating sidelines is the preferred poisition. And, if the trend is down and the point total
is minus two (-2) points or lower, then consider the "Status" of market to be "Bearish" and therefore
short positions are justified.

Theory - Anytime trend and at least half of momentum indicators are pointing in same direction then
"odds" favor price moving in that direction the next day or so.

("Wild Card" rule: should have at least one half (1/2) point from Intermediate-term Momentum Line in
order to "confirm" or "qualify" the trade; however, if the trend is "solid" - highly unlikely to change
direction during next few weeks - then this "wild card" exception can be disregarded, i.e., overridden.)

Practical Application of Three Point System:

1) To initiate trades in markets where the trend is solidly up or down but the current Status is Neutral
attempt to anticipate changes in the Status from Neutral to Bullish or Bearish by positioning just before
this occurs (by anticipating changes in the three lines).

2) In markets where Status is already Bullish or Bearish, position anytime price reaches a "good" level
(i.e., price is at a two, three day low if trend up, two, three day high if trend down).

3) The best time to liquidate positions is just before a Bullish or Bearish Status changes back to
Neutral; however, if fail to anticipate this change, then liquidate longs immediately after a Bullish
Status changes to Neutral, and shorts immediately after a Bearish Status changes to Neutral.

VERY IMPORTANT NOTE: The "Status" (or Position Indicator) tells you what the current trend and
momentum indicate the statistically most favorable position is at this specific moment, but we trade
"futures" not "pasts," therefore it is vitally important to be always looking ahead and anticipating what
the Status most likely will be the next day or so (by comparing the most likely numbers will be adding
on to the moving averages to the numbers that will be dropping off over next couple days) and then
attempt to be positioned in accordance with what Status will be tomorrow or next day rather than what
it is today - this is known as "anticipating" changes in the lines and Status.