Steve Copan - Nexus - Simple Trading Techniques 2009.c

Simple Trading Techniques

By Steve Copan

Copyright

Copyright

@ 1997-2009

-

Steve Gopan. All rights reserved.

No part of this publication may be reproduced,

stored in a retrieval system of any kind or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the written consent of the author. This book may not be lent, hired out or othenvise disposed of by way of trade in any form of binding or cover other than that in which it is published without the prior consent of the author.

Acknowledgements -

Special thanks to Robert G. Miner, the president of Dynamic Traders Group Inc, for his invaluable

help over the past few years and especially in enabling the Market Matrix, Matrix GyclesrM templates and Nexus tools to be implemented directly into the Dynamic Trader charting software.

Disclaimer

-

all the information contained in this book has

been prepared solely for informational and educational purposes only, and should not be taken as an offer to buy or sell any investments of any kind. Therefore the author and publisher will not accept any responsibility for any loss incurred as a result of using or misusing any of the information in this book.

Published by -

Financial Matrix Ltd

www.th e ma rketmatrix. co. u k

Printed by - fingfisher Press Ltd www. kin gfisher-press. com

Cover design by - Aarter Barrett Design Agency www. barterbarrett. co. u k

Foreword Back in 1996, which seems like a long time ago now, lstarted work on a method to predict stock market movements. Unlike a lot of people I considered that it must be possible to predict future market turns accurately in both Price and Time using simple mathematics and logic. It was not long before I had discovered a way to do this and over

the next few years I developed this into a structured logical method and called it the Market Matrix. I then released this method to the general public on a video cd set in 2004.

The Market Matrix video set had a number of future predictions

on them I had made using this method, all of which have

occurred on time as predicted. One of the predictions I included in the cd's was for a major collapse of the Markets to start in the year 2008 and this prediction as you well know has now also come true but is only a fraction of what is still to come.

At the beginning of 2008 as the markets had just begun their spiral down I decided to update the Market Matrix method in a special limited edition book with more explanation and examples

as well as some special rules and logic that were not on the original video set. This was subsequently published in June 2008. Even though to me the Market Matrix method was simple, logical and very easy to understand, I neglected to consider that what had regarded as easy might not be the case for the average trader. let alone someone who is totally new to trading. I

So I decided the best way to help people to get started in trading and more importantly to make a profit, was to produce this book of simple trading techniques and to make it as simple as possible to help the beginner start trading with confidence and even give

something to existing traders to think about who have failed to consider these profitable opportunities. Although I have made this book as simple as I think is possible, it will still require you to spend a little time and effort to fully get to grips with the techniques, so a little effort on your behalf is needed as nothing in life is free.

I suggest you read this book slowly and thoroughly from the beginning regardless of how mundane some things may seem as the way I use the indicators and tools is totally different to what some other traders would expect. There are thousands of indicators and trading methods that are in use around the world today all having their own merits and problems but rather than produce book full of different indicators that will overload your brain and confuse you to the point of tearing your hair out I shall be using just a couple that are easy to understand and implement as well as being available in almost every charting package and free from some brokers.

a

At the beginning of this book I will be going through a couple of simple tools and indicators that we will be using that I personally use to determine when the best and most advantageous place would be to enter a trade and place exit positions. Once you have understood this first part the rest should be a breeze and over time should become second nature. Regardless of how simple the methods I show you are, nothing in life is perfect, so it is important to remember that you will never be able to win every trade and therefore you will make a few losses on the way, although these should be limited by trading stops that we place with every trade.

It is worth noting that some very successful traders lose on 60%

of their trades while the other 40% make large profits that outweigh the loss trades by a big margin making overall consistent profit, so the odd loss here and there is part of trading and should be expected. To become successful in trading, first you have to have a method that works and second, being just as important, you need selfdiscipline. Far too many people do not have the discipline to stick to a fixed method of trading and are constantly switching from one method to another looking for one that is better or trying the latest method their friend has told them about. This is one of the most common reasons for a trader to fail in this business.

So many times I have seen a trader place a trade correctly that then fails, which some will do, and then try to be clever by placing another trade based on some other irrational logic or trading method because they got annoyed that the first trade lost, and can not wait for the next proper trade entry set-up, only to see that trade also fail.

These people will never succeed because they do not have the patience or discipline to follow a method and wait for the next proper set-up. Please do not be one of these people or it will cost you dearly. Take your time with every trade you are going to place and consider all possibilities before you place it. You will find lots of information on our website including brokers we recommend that have the charts. indicators and tools for free to their clients. Good luck with your trading. Steve Copan.

Gontents Page

The Basics

1

Daily / Hourly Bar Gharts

1

Fibonacci

5

I

Retracements Extensions

11

Stochastics Setup Patterns

13 19

Buy set-up Buy divergence Buy divergence Sell set-up Sell divergence Sell divergence Recap

pnce Stochastic

24, 42 25, 43 31, 44

price Stochastic

27, 45 30, 46 34, 47

ISD

- Triangles

Recap

Final words

41

49 72

73

Ghapterl-TheBasics Throughout this book I will be showing and using various bar charts that almost every typical charting package uses or has available in its chart display mode.

Bar charts are very common and this type of chart is available from many brokers as well as on the Internet for free, so there is no need for you to purchase any special or expensive software to initially start trading.

As time goes on and you start trading more markets then you will most likely want to purchase a professional charting software package so that you can keep all your charts in one location on your computer. This will also enable you to display multiple charts at the same time and allow you to apply the analysis tools and indicators in this book to your charts with ease.

You can find more information about the professional charting package Dynamic Trader that I personally use and recommend, which is used for all the charts in this book, from the website at www.them a rketm atrix. co. u k.

As explained, the main type of chart we will be using for the patterns and analysis will be the daily bar chart like the bars shown in (Ghart-l), these are OHLG bars. OHLG stands for Open, High, Low and Glose, and represents the main four parts of a days trading. Each one of the bars in (Ghart-1) represents one single day so in that chart you can see there are 8 individual bars representing B complete traded days.

Page

1

GBP-USD D-D 1.4900 1.4800 1.4736 | .rt

I vt

1.4600 1.4500 1.4400 1.4300 1.4200

27f

30m 31t

Anil92tTrader 3f (c) 6m 7t 1996-2009

Chart created

(Ghart-1) Looking at any single bar covering a single day you will notice a little notc to the left side of the bar and also a notch to the right side of t e bar.

The notch to the left of the bar represents the opening price of the day (Open).

The top of the bar is the highest price that market traded at during the day so represents the (High)

The bottom of the bar is the lowest price that market traded at during t e day so represents the (Low) The notch to the right of the bar represents the closing price of the day (Close) making one complete OHLC daily bar as shown in the chart (Chart-2).

Page 2

High

Open

Low (Chart-2)

Bar charts are not only used to represent a singe day's traded range, they are also used for any time range, and are often used in hourly bar format for intra-day charts as well as bigger time frames like weeks, months and years, some of which I will be showing later.

The construct of a bar is always the same regardless of the time period and will always represent the Open, High, Low and Close of the time period that it is covering.

In the hourly bar chart (Chart-3) you can see clearly in each of the 24 individual hourly bars for the day, with each bar constructed of the Open, High, Low and Glose for that specific traded hour.

Page 3

ng ofthe day

Iltr

1.4700 1.4650

End ofthe day

1.4600 1.4550

rll 2t

1.4500

Chart created bv Dvnamic Trader (c) 1995-2009

3f

(Ghart-3)

The daily bar is the most important because it represents

a

complete traded day.

Differen markets around the world trade over different amounts of time during the day so can have a different amount of hourly bars or other intra-day time bars in a full traded day.

For example the UK FTSE-100 cash index trades from 08:00 to 16:30 being 8 and a half hours while in the USA the S&P-500 cash index and Dow trade for only 6 and a half hours.

Regardless of how many hours, half hours or any other time frame a market trades for intra-day, every market in the world wil: still have one time frame equal with each other and that being one complete day.

Page 4

Fibonacci The sequence of numbers 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on to infinity is known today as the Fibonacci sequence. The sum of any two adjacent numbers in this sequence forms the next higher number in the sequence, 1 plus 1 equals 2, 1 plus 2 equals 3, 2 plus 3 equals 5, 3 plus 5 equals 8, and so on to infinity.

The Fibonacci sequence is in fact involved in almost everything in life including planet movement and structure, plants, animals and even your body structure For example if you look at the sequence you will note that these numbers relate to you as follows. You have 5 limbs on each of your 2 hands and each hand has 4 fingers and 1 thumb. That makes 8 fingers and 2 thumbs and each finger has 3 joints and each thumb has 2 joints

Golden Mean. Nature uses the Golden Ratio in its most intimate building blocks and in its most advanced patterns, in forms as minuscule as atomic structure and DNA molecules to those as large as planetary orbits and galaxies. lt is involved in such diverse phenomena as quasi crystal arrangements, planetary distances and periods, reflections of light beams on glass, the brain and neryous system, musical arrangement, and the structures of plants and animals.

near perfect to the next number in the sequence and by taking previous number in the Fibonacci sequence.

Page 5

Not only do you have the various limbs of your body in exact Fibonacci amounts but also your entire body is built upon the Fibonacci sequence and the ratios of these numbers, specifically the 0.618 Golden Ratio.

As in (Picture-1) if you raise your arm and point your fingers to the sky the distance from your fingertips to your shoulder is approx. 0.618% of the distance from your shoulder to the ground. That is the Golden Ratio.

0.618ryo

(Picture-l)

The stock Market also has this same Mathematical base at its core and all movements in both price and time are based on the Fibonacci number sequence and I or Fibonacci percentage ratios.

Page 6

By taking the Fibonacci percentage 0.6 and multiplying it by itself we get 0.382 and any Fibonacci number from the number sequence multiplied by .382 will give you another Fibonacci number two places before it in the Fibonacci sequence.

Each Fibonacci number in the sequence is 1.618 from the previous number and 0.618 from the one after it.

The Fibonacci percentage ratios listed in in (Picture-21 are derived from a simple process of dividing a Fibonacci number by another Fibonacci number. 13 21

34 55

89 144 233 377 S10

1

2 3 5

I

17.923 11.095 6.854 4.236 2.6

13 21

34 55 89 144 233 377 610 987

1.

1.00 0.618

0.382 0.236

(Picture-2)

You can start with any Fibonacci number but for the example here I have started with the Fibonacci number 233. We divide 233 by 987 to get the ratio of 0.236. Divide 233 by 377 and you get 0.618 being the Golden ratio, this is because 377 is the next Fibonacci number up in the sequence from the number 233 we started with.

Page 7

There are four other Fibonacci percentage ratios to take into account and these are 0.50 being a half or 50o/o, 0.786, 0.886 and 0.941. 0.786. 0.886 and 0.941 are derived from taking the square root of the Fibonacci 0.382 and then square rooting that number. The square root of 0.382 = 0.618, the square root of 0.618 = 0.786, the square root of 0.7 6 = 0.886 and the square root of 0.886 = 0.94

The 0.886 and 0.941 Numbers are very special and we will be spending some time on these later as, if used correctly, these

numbers

can provide you with some incredible trading

opportunities

3.6% 38.2% 50% 61.8% 8.6%

Square Root numbers

0.382 Square root = 0.618

.618% 2.618%

0.786

4.236o/s

0.886 Square root = 0.941

quare root = 0.886

6.854% 1.095% 17.923%

(Picture-3) The table in (Picture-3) shows all the main Fibonacci percentage ratio numbers and the square root numbers that we will be usinE to produce price targets from our set-up patterns.

Page

I

Fi bonacci

Retracements

When a market has moved up or down over whatever time period be it a few hours, days, weeks or months it will eventually retrace some of that initial move. Once a move has occurred we can use Fibonacci retracement percentages to work out levels at which the market could retrace to.

In the daily bar chart (Chart-a) the market has moved up in 8 days from the LOW bar at the bottom left of the chart to the HIGH in the middle of the chart, then retraced back down to the 0.618 retracement level being 61.8% of the up move.

HIGH

1400.00 1390.00 1380.00

1366.24 Ret 0.236

I{

1347.fi6 Ret 0.382

1350.00

1333.00 Ret 0.500

134[.00 133[.00

1318.1,1 Ret 0.618

1320.00

1310.[0 1236.99 Ret Il.7B6

LOW ,o II

25

Feh

Chart created

1300.00 1290.00 12S0.00 1270.00

B

c Trader (c 1996-2009

(Ghart-4)

You can see all the Fibonacci retracement percentages that are normally used on the right of the chart from the 0. to the 0.941 from the table in (Picture-3).

Page 9

In the next chart (Chart-s) we are using the same Fibonacci retracement levels as used in (Chart-4) but measuring in reverse as this time we are measuring a retracement of the market moving down instead of up.

HIGH .00

913.99 Ret 0.786

.00 .00

ff9t1.54 Ret tI.618

874.07 Ret 0.500

t

B5I.El Ret tl.3BZ

.00 .00

837.23 Ret 0.236

12

19 26 Jan

I

LOW

16

Chart created

23

30 1996-2009

(Chart-s) You can see the market moved down from the HIGH at the top ot the chart to the LOW at the bottom middle of the chart, it then retraced back up to the 0. 00 position or 50% of that initial down move, efore then starting to drop down again.

Throu hout, this book will only require one of these retrac,? numbers and that will be the 0.618 Fibonacci retrace so as to make

i as simple as possible for you.

This 0.618 will be used for one purpose and that is a trading Stop. A trading Stop is very important and every trade we enter into will always have a Stop.

Page 10

Fibonacci Extensions Fibonacci retracements are used for measuring a retracement of a market move, while Fibonacci extensions are measurements of how far the market should extend to on its next move. In the chart (Chart-O) you will see an up moving market where I have measured from the LOW to the HIGH of the initial up move.

I have then taken a Fibonacci 38.2% and 61.8% percent of that initial up move in price and then added it to the top of the HIGH point. This gives us a price level of 944. 3 at the 38.2o/o level and 960.57 at the 61.8% level.

7[ .[0 SEtl.57 LHexp 0.61S

Extensions

S44.63 LHexp 0.382

H{l GH

I

I

50 .00 40 .00 30 .00 20 .00 1[ .00

.0[ .00 .00

l"ll

.00

.[0

LOW 12

fi[ .ill

.00

19 26

Jan Trader {c 1996-2009

Charl created

(Chart-6)

The software always considers the initial measurement as 1 rather than 100% so it will display on the chart 0.38 as being

Page

11

We will be using the same Fibonacci extension process but in reverse when measuring a Fibonacci extension of a market that is moving down.

ln the next chart (Ghart-7) you can see the market is moving down overall and I have measured from the HIGH to the LOW of the initial down move.

I have then taken a Fibonacci 38.2% and 61.8% percent of that initial down move in price and then subtracted it from the bottom 38.2% level and 718.33 at

the 1.8% level. s&P 500 D-D 850.00

HIGH

900.00

s5[.00

I 800.00

LOW .75rl nn

Extenr 700.00

0S

Feh

Chart created by Dynamic Trader (c) 1996-20[9

(Chart-7)

There are other ways of calculating and producing Fibonacci

price extension levels and other percentage numbers but in this book, with the set-ups we are going to use, there is no need for any method or numbers other than those I am showing you here; thus I am aiming to make this as simple as possible.

Page 12

Stochastics Stochastics is an indicator we will be using to give an idea of when a top or bottom in a market is likely to occur. A Stochastic is a simple mathematical formula of 100 times (last close price less the lowest price over a set period of time) divided by the (highest price over the period less the lowest price over the period). You do not need to understand the maths to use this. There are various versions of Stochastics but the version we will be using is the Slow Stochastic. This you can see in the bottom of (Ghart-8) as two solid lines moving up and down together.

.0[ .00 .00 .00

.0[

.ilI

780.0[ 760.00

9%

5toch 13,3,3 (90%-10%)

10% Chart created by Dynamic Trader (c) 1996-2009

(Ghart-8)

The first of the two lines is a moving average of the original Stochastic called

a

and the other of the two lines is a moving average of the %K called a o/oD. The settings I use for this Stochastic you can see on the chart are 13,3,3 with the horizontal

Page 13

We do not need to be concerned about the settings or the construct of the Stochastic only the position of the actual two %K

and %D lines relative to the high and low 10% and

90%

horizontal lines.

Looking at the chart (Chart-9) you can see marked with the BLUE arrows that when one of the two Stochastics lines reaches the bottom horizontal line, being the 10% line, it tends to mark a bottom in the market. The same in reverse when one of the Stochastics two lines reach the top horizontal line being the 90% it tends to mark a top in the market.

.00 .00 .00 .00

1./

.[0 .00

18[.00 750.00 3 (90?o-l0o/"

Chart created

1996-2009

(Ghart-9)

You will also notice the RED arrows marking a high and low i,r the market, but this time without the two Stochastic lines reaching the high or low. What the Stochastics did do was change direction as the market itself changed direction and I will explain a little more about this later.

Page 14

The way we will use the Stochastics here is different to the way

most other people will use them. Most traders will only be concerned when one of the two o/oD or %K lines cross over the other which is the most common use, while here we are only looking at the position the lines are compared to the upper and lower 10o/o and 90o/o horizontal lines.

Other than giving us an indication that a high or low in the markets is likely to occur, Stochastics also provide an indication to possible bigger moves and higher probability trades by what we call a divergence.

A divergence is when there is a discrepancy between the price a market is making, being either a new high or a new low, and the position of the Stochastic lines not making new highs or lows. In (Ghart-9) | marked

with

LUE arrows the market turning down from a high point as the Stochastics hit the top 90% line and when the market turned up from a low point as the Stochastics hit the bottom 10% line, this is what we will be looking for most of the time, but from time to time a divergence or discrepancy will occur as shown by the RED arrows in (Ghart-10)

From the first RED arrow marked with a letter A the market turned down from a high point as the Stochastics hit the 90% line, then the price went slightly higher at point B but the Stochastics did not go as high as they did at point A. That is a divergence.

A divergence will usually result in the market responding with a larger or faster move in the opposite direction especially when the price goes a lot higher and the Stochastics remain lower.

Page 15

A

.00 .00 .0lr

B

.0[ .00 .00

780.00 760.00

5toch 13,3,3 (90%-10%

Chart created

Trader {c) 1996-2009

(Chart-10)

At point C the market went a lot higher in price than at point A as shown with the horizontal BLUE line but the Stochastic did not go any higher than it did at point A making a bigger divergence and as you can see the market then responded with a drop that was much bigger than at either point A or point B.

The same method is used in reverse for divergence from a low point around the 10% level and will usually cause the same result with a bigger up move from the new low price.

The Stochastics can easily hit 0% or 100% and there is nothin(I wrong with that but you will tend to find most of the market turns will happen around the 10% and 90% positions. A Stoc astic can also make a new high or low without the market price doing so.This is also a divergence and again can result in large moves as shown in (Chart-11).

Page 16

.00

.0[ .00 .00 .00

Ilft

.0[ .[[ 7BIl.00

5toch 13,3,3 {90%-10%

Trader {c} 1996-2008

Chart created

(Ghart-11) The Stochastic was at the low 10% line and then started to move up in line with the price to point A on the chart.

After a few days the price retraced down part of the up move from point A and then moved up again to point B. Although point B was not as high as point A in price as shown by the line, the Stochastic went a lot higher than it did as point A. As you can see the resulting move back down from point B was indeed quite large and is common from this type of divergence.

This is exactly the same but in reverse, again most of the time resulting in a large move. Later I will be showing you ways you can take advantage of this pattern even though the Stochastic is not at the 10% or 90% position.

Page 17

Stochastic Set-up Patterns The first thing I am going to start with is the Stochastic and simple set-ups that will enable you to enter a trade with confidence as well as a high probability of success. The Stochastic is one of the easiest indicators to use as you can see with your eyes if a set-up to trade is available.

As explained earlier the way I use the Stochastic is very simple as I am only interested in when the Stochastic reaches the top 90% or the bottom 10% position or produces one of the two main types of buy or sell divergence. Regardless of where you think the market will move to once you

are in the trade, it is very hard to be exact unless you are prepared to spend a lot of time analysing the market using other analytical tools and methods. So the easy way to look at this is to ask the question (what is the minimum the market should move)? This is where the Fibonacci Extensions come into play.

As explained in the Fibonacci section, everything in life is built upon Fibonacci numbers and percentages in some way or another, so each move in the market should move according to at least one of the Fibonacci ratios.

lf you remember, the golden ratio number was 61.8% and the difference between 100% and 61.8To is 38.2%. So for any change in direction in the market we will be looking for a minimum movement of 38.2o/o of the prior move. Looking at (Chart-12) using the lowest daily bar coloured RED, I have measured from the low of that bar to the high of the bar (marked with RED horizontal lines at the top and bottom of the bar) and added to the top of the bar both 38.2% and 61 .$oh of that bar's size.

Page 19

38.2% of the bar is displayed on the chart as 0.382 and 61.8% is displayed as 0.618 because instead of a percentage of 100% most software use percentages in relation to 1, so 0.618 of the bar we measured is in reality 61.8% of it.

s&p 500 D-D 858.56 LHexp 0.ElB 849.94 LHexp 0.382

860.0[ t50.00 30.00 20.00

813.44 LHexp{1.618

10.00 00.00

5toch 13,3,3 (90o/a-10o/o)

Chart created

Trader (c) 1996-2[09

(Ghart-12)

This basically gives us two simple price targets of which thc market moves a lot higher we have still hit our first price target.

When using this method we also need to consider a Stop position to protect our money just in case the markrrt unexpectedly reverses on us. We will always use a Stop and this will be placed at 61 .8o/o retrace of the bar we measured €s marked on the chart as -0.618 in RED.

As explained before these are normal Fibonacci percentages so

are built into most charting packages, so there are calculations for you to do manually.

Page 20

tto

The reason we are using both .382 and 0.618 targets

is

because we are going to place 2 trades each time we trade with this Stochastic set-up method, one for the 0.382 target and one for the 0.618 target, but both will have a Stop at the -0.618 position. The whole idea of these 2 trades is if the market hits the 0.382 target and then turns and hits our Stop without hitting our 0.618 target then we will have only made a small loss overall.

Rather than be selective and show you pre-selected charts that have worked with this method, I would prefer to be honest with you and show you it being used in the real world, so (Ghart-13) is of the S&P-500 for the past 6-7 months and we will go through it day by day on every available set-up it produces.

|-1100.0[

fl050.0[

f10[0.[[ p50.00

lonn nn 866.50

lnoo:m i750.00

r00.00 5toch 13,3,3 (9rJe/o-10!o

Chart created

Trader (c) 1996-2009

(Chart-13) We will start by zooming in to the start at the far left of the chart (Ghart-13) in October 2008 where the Stochastics are below the bottom 10% line. (Chart-14)

Page 21

You need to allow a little movement on the 10o/o and 90% lines depending on the direction of the main trend the market is in.

For example the market was moving down overall to the lows in October so we look for the Stochastic to hit the 10% line, but if the market is moving up over all then for a Buy set-up we would be looking for the Stochastic to be within 4% of the 10% line.

The same applies in reverse if the market is moving up overall then a Sell set-up would be when the Stochastic hits the 90% line or when the market is down overall then a Sell set-up would be within

4o/o

of the 90% line.

tlr

s&p-500 D-D

Bar Opened at high of day - no trade

1160.0[ 1140.[0 1120.00 1100.00 1080.00 1060.00

1040.[0 1020.00

1000.0[ 980.25 5toch 13,3,3 (90%-10%)-

-

Chart created

Trader {c) 1996-2009

(Chart-14) Because the overall market was down and the Stochastic has hit the 10% line then we place a B Y trade on the market just abov,;

of

above the high of the bar with a target .618. We also place a Stop for both trades at the -0.618 retrace position of that bar.

Page 22

The reason we place the entry for any trade just above the high getting falsely triggered into a trade when the market matches the high or low and does not breach it.

market in RED (Ghart-14) with the RED arrow, but we will never point of the day and in reverse we never place a Sell trade if the bar closes at the lowest point of the day. So on this occasion we would wait for another day or trade set-up.

the price targets and Stop's as shown on the chart (Chart-15).

t

12m.0[

I'l r

1t50.0[ 1100.ilr lUZg.4$ LHexp{1.618

1050.00

10[[.00 .00

912.75 5toch 13,3,3 {80%-10%)

Chart crealed

Trader [c 1996-2009

(Chart-15)

As you can see the market continued down to new lows so the trade was not triggered. What you now do is delete the trade and

Page 23

Every time the market goes down to new lows you will delete the old Buy trade and place a new Buy trade again on the new low day until you are triggered into the trade.

After 3 more days of new lows and moving your Buy trades the market finally activates the Buy trades (Ghart-16). s&p-500 D-D

I

13,3,3 {90%-10%)-

Chart created

Trader {cl 1996-2009

(Chart-16)

You can see the result of what happened as the market not only put you in both Buy trades but the market hit both price targetr without hitting your stop making you a good profit on both trades. Now you do nothing until there is another set-up trade.

The next set-up trade happened a couple of weeks later aroun J the 24th with a divergence (Ghart-171. lf the market main tren'l was up then it would also have been a Buy trade because the Stochastic was within 4oh of the 10% line, but the market trenC was down so a divergence is all we had.

Page 24

You can see the divergence clearly, as the price went lower than

the last low that we had our

last uy trade from and the

Stochastic was not as low as it was back then.

we place the Buy trades for this divergence trade on the lowest bar in the same way as before.

I

1050.00 1000.00

Irl

.00 .00

otn nfi 835.50 stoch 1313,3 (90%-10%)-

fhart created

Trader (t11996-2009

(Ghart-17)

lf the market goes lower again than we wiil derete the Buy trade and place a new Buy trade on the new low daily bar. As you can see in (Ghart-18) the market put us into both the Buy trades the very next day and again hit both the 0.3g2 and 0.61b price targets for another nice profit. There was no set-up trade for another week until the stochastics got to within 4o/o of the 90% line where we praced a sell trade on the highest daily bar (Ghart-l9) because the main trend was overall still down.

Page 25

1050.00

t

10u0.00

Il

q5n.nn 927.50

lt

fi51.36 LHexp{1.6lff

l€00.m l{50.00

5toch 13,3,3 {90%-10%)

Chart created

1996-2008

(Chart-18)

s&p-500 D-D - SSll..tZ HLexp{1.818

100u.50 80.00

60.ilt

I

40.0[ 20.00

00.ilI 80.0[ 60.00

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----

Chart created by Dvnami' : Trader {c) 1996-?009

(chart-19)

Page 26

The result from the Sell trade was the market went down putting us in to the Sell trades and the same day hit our first price target of 0.382 but then stopped. At this point the market could have reversed and hit our -0.618 Stop but if it did the loss would not be

so bad because the first trade, the 0.382, had completed

correctly making a profit, thus off-setting part of the possible loss on the other 0.618 target trade

As you can see there was no reason to worry because the very next day the market went down and hit the 0. 18 price target closing that trade for yet another nice profit.

$90..12

It+

HLexp{l.ElB

l-100[.00 t{t80.00

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F80.00

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(90"/o-10"/"; ----

(hart created

Trader (c 1996-2009

(Ghart-20)

Now I hope you can see why we trade using two trades. lf you wish only to trade with one trade at a time then it has to be the 0.618 target trade as with the stop also at -0.618 then one loss target would require you to make 2 profits for 1 loss so would put the odds of making profit totally against you.

Page 27

The next trade set-up occurred a few weeks later as a Buy trade when the Stochastics hit the 10% line (Chart-21).

Again we placed the Buy trades. This Buy trade did not get triggered as the market made another new low the next day, so we deleted the trade and placed a new Buy trade on the new lower daily bar.

s&p-500 D-D t+fzu.uI 1400.00

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- 841.34 LHexn 0.618 - 826..11 LHex jr 0.382

nn

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F780.00 F760.00 t-740.00

stoch 13,3,3 (90Y"-10"/o)

Chart created

Trader {c) 19S6-2009

(Chart-21).

and on the same day hitting both our 0.382 and 0.618 targets for yet another nice profit.

The market then moves up and so do the Stochastics until the r again get to within 4oh of the 90% line. Once again we place a Sell trade against the low of the bar with the usual price target; and Stops in place. (Chart-221.

Page 28

This time the market spent the next few days going sideways until eventually going down putting us into the Sell trades and again hitting the 0.382 and 0.618 targets for yet another profit.

t-{t1[.00

8g$.4fi HLexp{.818

I{

t-900.00

885.50 Iur^r.uu t€70.00

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t{60.00 t{50.00 F4o.oo ls30.00 t{20.00

13,3,3 (90%-10%)

Chart created

Trader (c 1996-2009

(Chart-221.

Here you can also see that once the market had hit the 0.618 target and went a little through it the market then turned and ran all the way back up to close at the high of the day. So although the market closed higher than the close of the previous day, you had still taken your profit. Looking back at the high around the 28th you may have been thinking it would have been nice to have also caught the big drop that occurred there as well. Listen carefully and note that the Stochastics were not within 4oh of the 90% line so you did not get a Sell trade so there was no trade. You cannot get every move on every market so only concern yourself with a proper set-up, because rules are there to be followed and to protect you.

Page 29

The next trade was again a Sell trade but it was on a price divergence Sell set-up (Chart-23). S&P-sOO D-D

8r1.50

Chart created

Trader (cJ 1996-2009

(Chart-23) After the last Sell trade the market then went all the way back up to make an exact match in price with our last Sell trade but the Stochastics did not go as high, making a divergence. The Sell trades were placed on the low of the daily bar as shown and as you can see yet again the market entered us into the Se I trades and after 2 days hit both our 0.382 and 0.618 price targets for another nice profit. Note - an exact match in price is as good as a new high in pric e but it must be exact or greater for a Sell trade and exact or lower for a Buy trade.

Page 30

it in position until either the price target is hit or your Stop

is

triggered unless a new higher or lower daily bar occurs for you to

The next trade set-up (Chart-24) was immediately after the last Stochastic divergence trade set-up.

10.00 .00

1r

.0[

80.0[ BEI.55 Ll-lexp{1.81fi

70.00 .00

.ilI .00 .ilt

.[0 5toch 13,3,3 (90%-lD%)

Chart created

Trader (c 1996-2rlrl9

(Chart-241

Look closely at the price on the chart (Chart-24). lt did not go lower than the last low of a few days before but the Stochastics did go lower causing a divergence.

price target to make another profit on both trades.

Page 31

Both the Sell and uy Stochastic divergence trades are a lot harder to spot than the normal Buy and Sell price divergence because your eyes are drawn to the Daily bars or the 10% and 90% lines while the Stochastic divergence can only be spotted by looking at the Stochastic lines themselves. s&p-500 D-D

[-

si5.4tl

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Chart crealed

Trader (cJ 1996-2009

(Ghart-25) After the market moved down from our last Sell trade the market then decide to move back up again to a new high (Chart-25) anu the Stochastics to within 4oh of the 90% line giving us yet anothe" Sell trade set-up opportunity.

This time although it was a new high in price the Stochastics were also very close to creating another divergence set-up. Once again as you can see the market then dropped down belor,v the entry point putting us in the Sell trade and yet again hitting the 0.382 and 0.61 price targets for another nice profit.

Page 32

At this point you see that we have had 14 trades from 7 set-ups with all of them hitting our price targets and making profit, but as I have said, life is not perfect, as the-next chart snoris (Ghart-26). S&P-sOO D-D .00 .00

rl**l,th[tt

.00

fiEH:$8

lilEIIifl:5fr$

.0[ .00 .00

BlE.Stl LHexp{l.litB

825.75

E;;:;; 131313 (90o/q-1OYo

Chart created

Trader {c 1996-2009

(Chart-26)

The market made a low around the 1Sth but the stochastics did not hit the 10o/o line. Remember the main market trend overall was down so we need to see a hit of the 10% rine before we place a Bu trade. The market then came down lower around the 20rh and although technically the stochastics again did not hit the 10% line we will not be picky here as they were as near as you can get so no one could blame you for placing a Buy trade there.

target and then dropped to hit the -0.61g stop position, crosing

Page 33

out one of the trades for a loss. As I have already said and will say again that's life, you cannot win them all.

The next set-up is a Sell trade and was a Sell Stochastic divergence. You will see in (Chart-271 the Stochastics went higher than the last high but the price did not, creating a divergence and therefore a Sell set-up.

Blis.2E HLexp{l.li1S

.00 .00 .00

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I

.00

826 .75 .UU

fnzu .[0 fn10

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5toch 13,3,3 (90%-10o/')

Chart created

1996-2009

(Charr-271

The market then entered us into the Sell trade and on the same: day again hit both our 0.382 and 0.618 price targets for another nice profit.

Note - The only difference with this type of divergence trade is if the next day the price went higher than the last high then you will delete the old Sell trade but will not enter a new Sell trad; because there is not one as the divergence will now not exist, so you will then have to wait for another normal set-up to occur.

Page 34

I hope by now you are grasping this simpre method and can see

how easy it is to implement.

The. only thing you must remember is to consider the main market trend, so that you rook only for a hit of the 10% line for a Buy if the main market trend is dbwn and 90% for a Sell if the trend is up, elsewithin 4%of the 10% linewith the main trend up and within 4% of the 90% line if the main trend is down. The easiest way to decide if the main market trend is up or down is to look and see if the rowest price in the last 3 months is lower than the lowest price in the previous 3 months. The reverse is applicable, if the highest price in the last 3 months is higher than the highest price in ihe previous 3 months then the main trend is up.

From time to time you will find the highest price of the last 3

months has not gone higher than the highest price

of

the

previous 3 months and the lowest price for the last i months has also not gone lower than the prior 3 months meaning it is in a sideways market.

In the case of a sideways market you need to err on the side of I of either the 10% or 90% tines ru will get false signals and end

The next set-up was a totar failure (Ghart-2g) as the price did not of our price targets and crosed both trades out on the for a loss. Again you need to understand that a ross now and then is part of trading so accept it.

The next trade was the very next day (chart-29) and was a set-up that resulted with the price hitting both the target

another good profit again.

Page 35

Il{:51

IHEUF H:$flE

658.BI LHexp{l.ti18 688.50

H?il:ilil 5loch 13,3,3 {90%-10%)-*-

-

Chart created

(Chart-28)

s&p-soo D-D .00 .00

:fft .00

:[ff

67fi.55 LHexpJl.61fi

5toch 13,3,3 (900/"-10%)

-

*- -

Chart created

(Chart-29)

Page 36

715 .75 f?du :uil tf90 .00

Ftfi :flfl

The next set-up (Ghart-30) was a Sell trade that was very close to not being a Sell at all because the bar closed very close to the bottom of the day. Again this trade resulted in both our price targets being hit for another profit.

791[.1.1

}I

fl rl

.00

HLexp{1.618

f6$'$d HtenF H,frt$

l-780 .00

763 .75

ftno i720

.00 .00

[00 .00 .00

ruo Stoch 13,3,3 (90%-1tl%

Charl created

Trader {c 1996-2009

(Ghart-30) On occasions like this where the close is within 1% of the low for a Sef l trade or 1o/o of a high for a Buy trade it is better to be cautious than make a trade for the sake of trading unless the Stochastics are up higher than the 90% or lower than the 10%

After the last Sell trade the market went back up again to new highs but so did the Stochastics so another Sell trade set-up was available (Ghart-31). Again the Sell trade was triggered and the market hit both price targets for a profit.

The next Sell trade (Chart-32) again hit both price targets for another profit but the next Sell trade (Chart-33) only hit the 0.3 2 price target and failed with the 0.618 for a small loss.

Page 37

fr22.18 HLexp{1.818

l

.00 fB10 fB00

.00 .t10

L7{ln nn

785 .0[ ou .uu

fl

.00

ir70 F60 .00 Stoch 13,3,3 {90%-10%) ---'a-

Chart created

Trader (c 1996-2009

(Chart-31)

s&P-500 D-D .00

fi3ti.l9 HLexp{} ElB

.00

II

8Z?

f-;;

'II .[0

ffi00 .00

frso i7B0 5toch 13,3,3 (90%-10%

Chart created

(Ghart-32)

Page 38

.ill

.00

861.25

853.71 HLe*p{1.618 |s50.00

F40.00 F30.00 Ir20.00

f8r0.0r 5t

Charl created

Trader {c) 1996-200S

(Chart-33)

tr

.00

865.03 HLexp{1.61S

.00

.0[ .00

833 :T9

ffi; .0[ F'o 5t

Chart created

Trader (c) 1996-2009

(Chart-34)

Page 39

.00

Finally the last trade for the past 6 months (Ghart-34) was a Sell trade that yet again resulted in both price targets being met for another profit.

The results for the last 6 and a half months was a total of 16 trade set-ups making a total of 32 trades of which, 28 were winning trades and 4losing trades.

When

a trade fails it is usually the bigger 0.618 trade, but

because the market generally has already hit the first price target of 0.382 for a profit then that would be offset against the 0.618 loss trade, meaning the total loss would be a lot smaller. Now we have worked through this method on the last 6 months of data you can see how simple and effective this method is and how easy it is to use.

Page 40

Recap Stochastic Set-up trades The Buy set-up is: when the Stochastic reaches the 10% line you place a Bu trade on the high of the daily bar unless the close of that bar is within 1o/o of the highest point - Page 42

The Buy divergence with price at new low set-up is: when the price goes lower than the last low but the Stochastics do not go lower than the they were at the last low - Page 43

The Bu divergence with Stochastic at new low set-up is: when the Stochastic goes lower than the last low but the price does not go lower than it was at the last low - Page 44 The Sell set-up is: when the Stochastics reach the 90% line you place the Sell trade on the low of the daily bar unless the close of that bar is within 1o/o of the lowest point - Page 45 The Sell divergence with price at new high set-up is: when the price goes higher than the last high but the Stochastics do not go higher than they were at the last high - Page 46

The Sell divergence with Stochastic at new high set-up

is:

when the Stochastic goes higher than the last high but the price does not go higher than it was at the last high - Page 47 Both a Buy and a Sell trade require you to place two trades, one of 0.618 with both trades having a stop at the -0.618 position.

As

explained before, both the Sell and Buy Stochastic divergence trades are a lot harder to spot than the normal Buy and Sell price divergence so take care with these specific setups and if in doubt leave them as it is better to miss out on the

trade rather than make a wrong decision and make a loss.

Page 41

The Buy Stochastic set-up When the Stochastic reaches the 10% line you place two Bu trades on the high of the daily bar unless the close of that bar is within 1% of the highest point.

You need to measure from the bottom of the daily bar to the high of the daily bar and add 38.2% of that bar to the top of that bar to get the target price for the first trade, which is 983.49 in this example on the chart below. Then place a Stop at61.8% retrace of that bar which is 877.49 on the chart below. Then measure again from the bottom of the bar to the top of the bar and add 61. of that bar to the top of that bar to get the

1008. 1 in this example on the chart below. Then place a Stop at 61.8o/o retrace

target price for the second trade, which

is

of that bar which is 877.49 on the chart below.

s&P-500 D-D

I

l-1r50.0[

ltl

fl100.0r

t-1050.00 1016.25 r rruu,uu

I

F50.00

87I.4$ LHexp{l.ElS 5loch 13,3,3 (90o/o-10%)-

Chart rreated

Trader (t 1996-2009

Page 42

P00.00 F50.00

The Buy divergence - price set-up When the price goes lower than the last low but the Stochastics do not go lower than they were at the last low then you place two Buy trades on the high of the daily bar.

You need to measure from the bottom of the daily bar to the high of the daily bar and add 3 .2% of that bar to the top of that bar to get the target price for the first trade, which is 20.36 in this example on the chart below. Then place a Stop at 61.8% retrace of that barwhich is 851.36 on the chart below. Then measure again from the bottom of the bar to the top of the target price for the second trade, which is 936.64 in this example on the chart below. Then place a Stop at 61.87o retrace of that bar which is 851.36 on the chart below.

t

105[.00 1000.00

Ilr

.00 .00

otal alal 835.50 5toch 13,3,3 (90o/o-l0o/o)--

Chart created

Trader (tl1996-?009

Page 43

The Buy divergence - Stochastic set-up When the Stochastic goes lower than the last low but the price does not go lower than it was at the last low then you place two uy trades on the high of the daily bar. You need to measure from the bottom of the daily bar to the high of the daily bar and add 38.2% of that bar to the top of that bar to get the target price for the first trade, which is 90 .30 in this example on the chart below. Then place a Stop at61.8o/o retrace of that bar which is 867.55 on the chart below. Then measure again from the bottom of the bar to the top of the bar and add 61. of that bar to the top of that bar to get the target price for the second trade, which is 915.45 in this example on the chart below. Then place a Stop at 61.8% retrace of that bar which is 867.55 on the chart below.

I

tl

10 .[[ .00

.m .[0

BEL55 LHexp{1.618

.[[

.0[ .00

.[0 .00

.[0 Stoch 13,3,3 (90%-10%)

Chart created

1996-2009

Page 44

The Sell Stochastic set-up When the Stochastics reach the 90% line you place two Sell trades on the low of the daily bar unless the close of that bar is within

1o/o

of the lowest point.

You need to measure from the high of the daily bar to the low of the daily bar and subtract 38. Yo of that bar from the bottom of that bar to get the target price for the first trade, which is 947.67 in this example on the chart below. Then place a Stop at61.8% retrace of that bar which is 990.42 on the chart below. Then measure again from the top of the bar to the bottom of the bar and subtract 61.8% of that bar from the bottom of that bar to example on the chart below. Then place a Stop at 61.8% retrace of that bar which is 990.42 on the chart below.

gstl.,l2 HLexp{1.818

fl00u.00 feB0.00

It+

l:$

p60.00 F40.00

H?n_nn 904.75

F80.00

F6r.00 P4r.00

Chart crealed

c Trader (c 1996-?009

Page 45

The Sell divergence - price set-up When the price goes higher than the last high but the Stochastics do not go higher than they were at the last high then you place two Sell trades on the low of the daily bar.

You need to measure from the high of the daily bar to the low of in this example on the chart below. Then place a Stop at61.8% retrace of that bar which is 907.12 on the chart below.

Then measure again from the top of the bar to the bottom of the example on the chart below. Then place a Stop at61.8% retrace of that bar which is 907.12 on the chart below.

s&p-500 D-D g[7.12 HLexp{1.618

I

10.00

.[0 .[0 .nfl 871.50

60.0[

50.ilI 40.ilI 30.00 20.00 5toch 13,3p{80%-10%}

Chart created

19S6-2009

Page 46

The Sell divergence - Stochastic set-up When the Stochastic goes higher than the last high but the price does not go higher than it was at the last high then you place two Sell trades on the low of the daily bar.

You need to measure from the high of the daily bar to the low of the daily bar and subtract 38.2% of that bar from the bottom of that bar to get the target price for the first trade, which is 845.01 in this example on the chart below. Then place a Stop at 61.8% retrace of that bar which is 865.26 on the chart below. Then measure again from the top of the bar to the bottom of the bar and subtract 61.8 of that bar from the bottom of that bar to example on the chart below. Then place a Stop at 61.8% retrace of that bar which is 865.26 on the chart below.

.00 .00

81i5.26 HLexp-tl.618

.00

l

.00

826 .75

fszu

I

Chart created

.UU

fB10 .00 fnoo .00

Trader (c 1996-2009

Page 47

ISD

- Triangle Bar Set-up

ISD stands for In Side Day. What this means is the high of a daily bar did not go higher than the high of the bar the day before and the low of the daily bar did not go lower than the low of the day before. You can see this ISD bar in (Chart-35) that I have coloured in RED and will be coloured RED on all charts from here on. The daily bar before the ISD bar I shall call the triangle bar and it will be coloured in BLUE on the charts from here on.

This ISD bar with the triangle bar before it in BLUE forms

a

triangle shape or arrow head as marked with the RED lines and is also referred to as a consolidation pattern, as the market is neither going up, nor is it going down at that point.

.00 .00

.[0 .00 .00 .00

.ill 10.00

5f

Bm Chart created

$r

lllw

Trader (c 1996-2009

(Chart-35)

We do not need the Stochastics on the chart for this section so have removed them from here on for clarity.

Page 49

I

At some point in time the market will eventually move

either

higher or lower than the triangle bar and that is referred to as a break out.

This pattern is very common and tends to happen on average 2 or 3 times a month on most major stock Indices as you can see in the next chart (Chart-36). This is the same chart of the S&P as we used for the Stochastics section. I have coloured the ISD bar RED on all the days it has occurred over the past 7 months.

1000.00 .00 .00

.00

750.0[ 700.00

Hov

Dec

tl9

Feh

lltlar

Chart created by Dynamic Trader (c) 1995-2009

Apr

(Chart-36) We can trade these bars even though we do not know for certain which way the market will break out from this triangle. First there are a couple of simple rules and Fibonacci extensions

that we need to go through before getting started. We will be using the same Fibonacci percentage numbers, .382 and 0.618, as targets and the -0.618 Stop that we used in the Stochastics section.

Page 50

ln the chart (Chart-37) | have measured from the low of the ISD bar marked with a letter A to the high of the previous triangle bar marked with a letter B and added 38.2% and 61.8% of that distance to the high of the bar at point B making two target prices of 27.19 and 834.56 at the BLUE horizontal lines.

The Stop point for this trade is in exactly the same place as before at the -0.618 position.

834.56 LHexp 0.618 .00

827.19 LHexp 0.382

.00 .00 .00

795.94 LHexp{}.618

[lI

nn 786 .75 .00

['-' z7

Apr

Chart created by Dynamic Trader (c) 1996-2009

(Ghart-37)

You then need to do the same process but to the down side of this triangle by measuring from the high of the ISD to the low of the triangle bar using the same setting. This is shown in (Chart-38). I have measured from the high of the ISD at point G down to the low at point D and subtracted 38.2% and 6 .8o/o of that distance from the low at point D, giving the

Page 51

Again the Stop position for this trade is at the -0.618 position. Because the ISD was almost perfectly central to the previous day

then the -0.618 for both up and down trades are almost

in

exactly the same place, so they look a bit messy on the chart.

827.19 LHexp 0.382

.00

.0[ 10.0[

.[0 7nn nar 786.75

780.[[ 770.00

763.47 Hlexp tl.3BZ 158.03 Hlexp 0.618

Chart created

760.00

1996-2009

(Chart-38) Now this all looks simple enough but as would be expected there are a couple of rules to make this work as effectively as possible.

We need to see the direction of the market prior to the triangle daily bar to determine which trade has the greater probability o= hitting the price targets we have set because commonly a market will break out in the direction of the original move.

triangle, but we then need to remove 1 of the 0.618 trades from the direction that the market was not moving in when entering the triangle as it is less likely to be met and could result in a loss.

Page 52

lf the market was moving down into the triangle then the Sell trade has a greater probability of working so we would then lf the market was moving up into the triangle then the Buy trade has the greater probability of working so we would then remove the 0.6 8 target Sell trade. We only need to consider the bar that enters the triangle and not the bigger market trend. To some people this will seem strange but this method works well on trading small time frames. In the following chart (Ghart-39) you can see the bar that entered the ISD triangle being the daily bar marked with a letter B.

AB 827.19 LHexp tl.3Bl

.00 .00

10.00

lgfl,Ft HHcxp{l,B'lB

.00 Tarn fiar

786.75 780.00 770.00

Hlexp tl.3BZ 756.03 Hlexp 0.618 7fi3.47

2[

2t

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fhart created by D

Trader [c 1996-2009

(Chart-39)

As the price for the daily bar B moved down from a higher point than the triangle bar C then the market was moving down into the triangle so the Sell trade has the greater probability of working,

Page 53

therefore I have removed from the chart the .618 price target from the Buy trade leaving 2 Sell trades and 1 Buy trade in place and of course their appropriate Stops. Whenever we place a Moving on you can see in (Ghart-4O) that after another day the and hitting the

0.38

price target making a nice profit.

otn 827.19 LHexp 0.382

nn

836.75 30.00 20.00 10.00

00.00 790.00 780.00 770.00

783.47 HLexp tl.3B2 756.03 Hlexp 0.618 27

760.00

Anr

Chart created

1996-2009

(Chart-40) Once a trade has been executed and the day has finished then you will need to delete the trades in the opposite direction. Sc here for example once the market had hit our Buy targets and the day has finished then we need to delete the Sell trades.

At the end of the traded day if any trade had been entered into and had not hit target so it was still active, then we leave that trade alone until it either hits target or hits the Stop but you stili delete all the opposite trades.

Page 54

Now we have the logic to the ISD triangle set-up we shall now go through each of the trades individually that we highlighted from the chart (Chart-36) over the past 6 months.

To make things clearer on the charts I have coloured the ISD bar in RED and the triangle bar in BLU In chart (Chart-41) the market had moved up into the triangle so

Sell trade. s&p-500 D-D 998.75 s88.25

1000.00 .00

966.50

{$,fg trfrerF{,81fr

.;; .00

893.53 Hlexp 0.382

.[0 .00 .00

.[0 Hov

31 Chart created

Trader (c 1996-2009

(Chart-41)

As you can see the market opened and came down during the day and then broke the triangle upwards and triggered us into both the two Buy trades. At the end of the traded day we are now in the two uy trades so we need to delete the Sell trades.

The next day the market produced yet another ISD bar as shown in (Chart-421 and so again we need to look at the direction the market was going into the new triangle.

Page 55

Because the market was moving up into the new triangle this time from the first triangle again coloured BL then again we need to place both the 0.382 and 0.618 Buy trades but only the 0.382 Sell trade. s&p-500 D-D 9flfl$$1ffif;H'H$Ff;-

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Chart created

(Ghart-42)

The chart is getting a bit messy here with all these lines but we now have 4 Buy trades in place. 2 Buy trades we have already been triggered into from the previous day and waiting for them to hit target with another 2 Bu trades waiting to be triggered.

We also have 1 Sell trade in place and of course 5 Stops covering each of the 5 trades.

The next day the market broke out of the second triangle upwards and triggered us into the other 2 Buy trades.

Page 56

As you can see from the chart (Chart-43) not only did the next day trigger us into the other 2 Bu trades but the market then went a lot higher during that day and hit all 4 Buy trade price targets making a very nice profit on all 4 trades. S&P-SOO D-D 1002.50 .00 .00 .00 .00 .00

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Trader fc) 1996-2009

(Ghart-43)

Now the Bu trades have triggered and hit target you need to delete the Sell trade that was still there from the second triangle Sell trade.

lf the market had triggered you into the second triangle

uy

trades but had not hit the second triangle Buy targets by the end of the day, then you would have still deleted the Sell trade for the second triangle.

The only time the Sell trade for the second triangle would not have been deleted was if the market had not triggered the second triangle Buy trades. A trade once placed is left alone

Page 57

The next ISD triangle trade was just a couple of days after the last one as shown on (Chart-44).

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(Ghart-44)

Note - Although as explained at the beginning of this section we market was moving into the triangle, there is one exception to this rule as follows:-

trade on a trianqle that opens at the lowest point of the dav.

With that in mind as the triangle bar

in

!

opened at the

it which is why there is not one marked on the chart.

As the market was moving down into the triangle bar then we would still place both Sell trades as shown on the chart.

Page 58

As you can see from what happened in chart (Ghart-45) the market moved up the day after the RED ISD bar and would have triggered us into a Buy trade if a Buy trade was there then it would have dropped and hit our -0.618 Stop for a loss. There was no Buy trade there because we had not placed it, due to the fact the triangle bar in B UE opened at the high of the day.

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(Ghart-45)

The next day the market went down and entered us into the two price targets for a nice profit.

The next available trade was a few weeks later around the 28th in (Chart-46) but did nothing because the triangle bar as shown in BLUE on the chart opened at the high of the day so no Buy trade could be placed.

Page 59

Even though a Sell trade was placed it was deleted by us a few days later because as the market went higher than the triangle uy if one was there and we bar it would have triggered us into would then have deleted the Sell trade, so we deleted it.

a

The next available trade is marked on the chart on the right. The bar before the triangle bar was moving up into this triangle so we placed a Bu trade for both 0.382 and 0.618 target prices but only a single .382 Sell trade. s&p-500 D-D 94t1.73 LHer+p 0.618 932.52 LHexp tl.3BZ

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(Chart-46)

lf you look closely, the day after the RED ISD bar the market

again had an ISD but this time I have not placed any Buy or Sell trade. Why?

Note

- lf a new ISD triangle pattern occurs after an existing

triangle that you already have trades in place for but none of those trades you have in place have been triggered yet, then you do not place any new trades on the new ISD triangle until you are triggered into or out of the original ISD triangle trade.

Page 60

lf you remember back from earlier in (Ghart-43) we had a new ISD triangle form while we were already in an existing ISD a position to place another trade on the new lSD. Following on from the previous chart (Chart-46) the market then moved down and entered us into the Sell trades. (Ghart-47). trades because we had been entered into the Sell trade. price target for a good profit.

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(Ghart-47)

lf you notice the market then moved fast back up to close higher than where it started.

Page 61

You will find this happens a lot because once a market has broken out of a triangle it will tend to have a good move in that direction even if it then returns back to its original direction.

The next trade was only a week later. (Ghart-48).

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Trader (c 1996-?009

(Ghart-48)

You can see the market moved down into the triangle bar so we Buy trade.

The next day after the ISD bar the market dropped and hit both our price targets, closing them for another nice profit. Do not forget to delete the Buy trade. The next trade was only two days later (Ghart-4g) and was one of those patterns that you need to remember the rules for.

Page 62

We had

a normal

ISD bar triangle formation where the market

had moved Sell trades s&p-500 D-D 905.35 LHexp 0.382

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Charl created by Dynamic Trader (c) 199r5-Zrl09

(Chart-a9) The next day after the ISD bar the market made another ISD bar. Remember this happened earlier, in (Chart-46), and the rule: lf a new ISD triangle pattern occurs after an existing triangle that you already have trades in place for and none of those trades you have in place have been triggered yet, then you do not place any new trades on the new ISD triangle. As the market had not triggered us into any of the original triangle

The market then bounced around for another 2 days and almost put us into the Sell trade, but then a few more days later went up

Page 63

The next available trade with the ISD triangle was a few weeks later on 21"t January 2009. Again the market moved down into

The market messed around again for a few days like the last trade we had on (Ghart-49) but eventually broke out of the

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Trader (c) 1996-2009

(Chart-50) market then produced yet another ISD triangle. Because we had

new ISD triangle.

As the market had moved up into the new ISD triangle then we

Page 64

So we now have a similar situation as we had with (Ghart-42) where we now have multiple trades together, being 3 Buy trades and 1 Sell trade on the market at the same time.

The very next day (chart-S1) the market moved up breaking

through the second triangle and putting us into the oiher 2 Buj trades, then on the same day the market moved up far enough to hit all 3 Buy trade price targets making a very nice profit Again at this point you need to delete the Sell trade. s&p-500 D-D 871.50 .00

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Trader (c) 1996-2009

(Chart-s1) The very next day the market made another lsD triangle for us to place a trade on (Chart-52).

This time the market moved up into the triangle so we need to place both 0.382 and 0.618 Buy trades on the market and only the .382 Sell trade.

Page 65

The next day the market moved down breaking out of the triangle and putting us into the Sell trade. On the same day the market for yet another profit.

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(Ghart-52)

The next available ISD triangle trade was about 2 weeks later (Chart-S3). The market, although going up overall, still entered into the triangle going down as you can see by the bar just before

the

triangle bar.

Because it was down into the triangle then we place both the

The very next day, after the RED lSD, bar the market dropped down through the triangle bottom triggering us into both the Sell another profit.

Page 66

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(Chart-53)

The next ISD triangle trade was about another 2 weeks later (Chart-54) on February 24th, so you can see these ISD triangle trades are available on average 2 to 3 times every month and this is common on most markets. This time the bar before the triangle bar was not higher or lower than the triangle bar, so we have to look at the bar before that bar to determine the direction into the triangle.

As you can see the bar was moving down into the triangle so we trade.

The market then went sideways for two more days before dropping down through the bottom of the triangle and entering us into the 2 Sell trades.

Page 67

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(Chart-Sa)

At the end of the traded day, since the Sell trades have been triggered then remember that you need to delete the Buy trade.

The next day the market then dropped down again and hit both The next available ISD triangle trade was once again about two weeks later on March gth lGtrart-ss;. As you can see the market moved down into the LUE triangle bar so we need to place the 0.382 and 0.618 Sell trades on the market but only the 0.382 Buy trade. This was a nice and clean trade as the very next day after the RED ISD bar the market shot up entering us into the Buy trade and hitting our 0.382 price target at the same time for another profit. Again you need to remember to delete the Sell trades.

Page 68

S&P-SOO D-D

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(Chart-s5) It may all seem great up to this point with no losing trades but as I have said before you can never win them all and that is exactly what happened to our next ISD triangle trade (Ghart-56).

The market was moving up into the triangle so we placed both Sell trade.

The very next day the market moved up breaking out of the the same day and came all the way back down hitting the Stop point you must delete the Sell trade.

the very next day the market went back up and hit the point were

Page 69

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(Chart-56)

This was unfortunate but does happen, but looking at what happened next you would see that even though it would have hit

trade, so it would have resulted in a loss anyway.

Stops are there for a reason. The reason is to protect you from losing large amounts of money. Always use these stops on every trade regardless of what you think.

The last ISD triangle trade for the last 6 months was 31"t March as shown in the next chart (Chart-57). The market moved down into the triangle so we placed both the

Page 70

5&p-500 D-D

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(Chart-57)

As you can see the market went sideways the next day after the ISD bar, then the following day moved up breaking out of the triangle and entering us into the moved up far enough to hit our good profit.

At the end of this 6 month period we have had a total of 16 ISD triangles available of which 1 was not possible because of the open position of the triangle being at the high of the day so 15 possible ISD triangles.

Out of those 15 ISD triangles, we had 14 winning ISD triangles that had a total of 21 profit trades, and 1 loss ISD triangle that had 2loss trades.

Page 71

Recap ISD Triangle Trade Rules trades and two Sell trades with Stops at the 0.618 retrace position.

highest point of the day and we will not place any Sell trade on a triangle that opens at the lowest point of the day.

We only need to consider the bar that enters the triangle for the direction and not the bigger market trend. lf the market was moving down into the triangle then we remove lf the market was moving up into the triangle then we remove the

Once a trade has been executed and the day has finished then you need to delete the trades in the opposite direction, so if the

At the end of the traded day if any trade had been entered into and had not hit target so it was still active, then we leave that trade alone until it either hits target or hits the Stop but you still delete all the opposite trades.

lf a new ISD triangle pattern occurs after an existing triangle that you already have trades in place for but none of those trades you have in place have been triggered yet, then you do not place any new trades on any new ISD triangle until you are triggered into or out of the original ISD triangle trade.

Page 72

Final Words You now have two simple, logical and easy to follow trading strategies for the S&P with the ability to make very good profits for you to use to trade the markets with. Please follow the rules for each of the strategies fully and do not try to bend these rules as they were designed to make the probability of a profitable trade as high as possible.

lf you try to modify or bend the rules then it is likely you will end up losing more trades than the techniques would otheru,uise do.

Never ever forget to place a Stop on every trade you place regardless of how confident you are. You are human so you can and you will make mistakes. The Stop is there to protect you so you can live to trade another day.

Do not rush your trading

-

be patient. lf there is no trade

available, then there is no trade available, so do not try to make one that does not exist.

lf you are not sure about a trade leave it alone, as it is better to leave it than to make a mistake and lose. Now that you have this information it is up to you to decide if you wish to use it or sit back and do nothing, Best wishes. Steve.

Page 73